REDWOOD MORTGAGE INVESTORS VI (a California Limited Partnership) Index to Form 10-K December 31, 2002 Part I Page No. ------------ Item 1 - Business 3 Item 2 - Properties 6 Item 3 - Legal Proceedings 6 Item 4 - Submission of Matters to a Vote of Security Holders (Partners) 6 Part II Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 7 Item 6 - Selected Financial Data 7 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 7a - Quantitative and Qualitative Disclosures About Market Risk 16 Item 8 - Financial Statements and Supplementary Data 17 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 38 Part III Item 10 - Directors and Executive Officers of the Registrant 38 Item 11 - Executive Compensation 38 Item 12 - Security Ownership of Certain Beneficial Owners and Management 39 Item 13 - Certain Relationships and Related Transactions 39 Item 14 - Controls and Procedures 39 Part IV Item 15 - Exhibits, Financial Statements and Schedules, and Reports of Form 8-K 40 Signatures 41 Certifications 42 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the year ended December 31, 2002 Commission File number 33-12519 - -------------------------------------------------------------------------------- REDWOOD MORTGAGE INVESTORS VI - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 94-3031211 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification) incorporation or organization) 900 Veterans Blvd., Suite 500, Redwood City, CA 94063 - -------------------------------------------------------------------------------- (address of principal executive offices) (zip code) Registrant's telephone number including area code (650) 365-5341 - -------------------------------------------------------------------------------- Securities registered pursuant to Section 12 (b) of the Act: None Title of each class Name of each exchange on which registered - -------------------------------------------------------------------------------- None None - -------------------------------------------------------------------------------- Securities registered pursuant to Section 12 (g) of the Act: Limited Partnership Units Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES XX NO --------------- ------------- At the close of the sale of Units in 1989, the limited partnership Units purchased by non-affiliates was 97,725.94 Units computed at $100.00 a Unit for $9,772,594, excluding general partners' contribution of $9,772. Documents incorporated by reference: Portions of the Prospectus for Redwood Mortgage Investors VI, included as part of the form S-11 Registration Statement, SEC File No. 33-12519 dated September 3, 1987 and Supplement No. 6 dated May 16, 1989, incorporated in Parts II, III, and IV. 2 Part I Item 1 - Business Redwood Mortgage Investors VI is a California Limited Partnership (the "Partnership"). Michael R. Burwell, an individual, and Gymno Corporation, a California corporation, are the general partners. The address of the general partners is 900 Veterans Blvd., Suite 500, Redwood City, California 94063. The Partnership's primary purpose is to invest its capital in first and second deeds of trust secured by Northern California properties. Loans are arranged and serviced by Redwood Mortgage Corp., an affiliate of the general partners. The Partnership's objectives are to make investments which will: (i) provide the maximum possible cash returns which limited partners may elect to (a) receive as monthly, quarterly or annual cash distributions or (b) have earnings credited to their capital accounts and used to invest in Partnership activities; and (ii) preserve and protect the Partnership's capital. The Partnership's general business is more fully described under the section entitled "Investment Objectives and Criteria", pages 23-26 of the Prospectus, a part of the above-referenced Registration Statement, which is incorporated by reference. The Partnership was formed in September 1987, with an approved 120,000 Units of $100 each ($12,000,000). The Units were offered on a "best efforts" basis through broker/dealer member firms of the National Association of Securities Dealers, Inc. It immediately began issuing Units and began investing in loans in October 1987. The offering terminated in September 1989, and as of that date 97,725.94 Units were sold realizing proceeds of $9,772,594. At December 31, 2002, the Partnership had a balance of loans totaling $5,183,100 with interest rates thereon ranging from 6.50% to 14.75%. Currently First Trust Deeds comprise 84.74% of the total amount of secured loan portfolio. Second Mortgage Trust Deeds comprise 15.26% of the secured loan portfolio. Owner-occupied homes, combined with non-owner occupied homes, total 15.91% of the secured loans. Secured loans to apartments make up 10.93% of the total secured loans portfolio. Commercial secured loan origination increased from last year, now comprising 73.16% of the portfolio, an increase of 3.04% from 2001. The major concentration of secured loans, comprising 88.52% of the total loans, are in five counties of the San Francisco Bay Area. The balance, as stated on page 5 of this report, are primarily in Northern California. Currently secured loan size is averaging $235,595 per loan. Some of the secured loans are fractionalized between affiliated partnerships with objectives similar to those of the Partnership to further reduce risk. Average equity per loan transaction, which is our loan plus any senior loans, divided by the property's appraised value, subtracted from 100%, stood at 20.32%. Generally, the more equity, the more protection for the lender. The Partnership's loan portfolio had no properties in foreclosure as of the end of December 2002. Delinquencies are discussed under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. The Partnership's revenues decreased from $477,929 in 2000 to $426,651 in 2001 and to $369,983 in 2002. This was due largely to the decline in the Partnership's secured loan portfolio from $5,570,576 to $4,970,433 to $5,183,100 for the years 2000, 2001 and 2002, respectively, and an overall lowering of interest rates on loans. Cash flow the Partnership generated from income, mortgage interest and loan pay-offs was used primarily to meet limited partner capital and earnings liquidations. For the three years ended December 31, 2002 withdrawals by limited partners were $1,079,696 in 2000, $836,749 in 2001 and $602,753 in 2002. During the year 2002, the Partnership's annualized yield on compounding accounts was 5.40% and on monthly distributing accounts it was 5.30%. Competition and General Economic Conditions. The Partnership's major competitors in providing mortgage loans are banks, savings and loan associates, thrifts, conduit lenders, mortgage brokers, and other entities both larger and smaller than the Partnership. The Partnership is competitive in large part because the general partners generate all of their loans. The general partners have been in the business of making or investing in mortgage loans in Northern California since 1978 and have developed a quality reputation and recognition within the field. 3 Mortgage interest rates have fallen during the last 18 to 24 months. This has been partially due to actions by the Federal Reserve Bank to reduce the discount rate on borrowings charged to member banks, a slowing economy and low inflation rates. Although the general trend for interest rates has been down, many lenders have tightened their credit and reduced their lending exposure in various markets and property types. This credit tightening from competing lenders would generally provide the Partnership with additional lending opportunities at attractive rates. However, as a result of the slowing economy, there are now fewer transactions in the marketplace, which could potentially reduce the number of lending opportunities to the Partnership. Continued rate reductions by the Federal Reserve Bank, a continued slowing economy, and continued low inflation rates could have the effect of reducing mortgage yields. In the future, when cash flow permits, currently existing loans with relatively high yields could be replaced with loans with lower yields as they pay-off, which in turn could reduce the net yield paid to the limited partners. In addition, if there is less demand by borrowers for loans and, thus, fewer loans for the Partnership to invest in, it will invest its excess cash in shorter-term alternative investments yielding considerably less than the current investment portfolio. Loan Portfolio As of December 31, 2002, a summary of the Partnership's secured loan portfolio is set forth below. Loans as a Percentage of Appraised Value First Trust Deeds $4,392,120 Second Trust Deed Loans 790,980 ---------------- Total loans $5,183,100 Priority Positions due other Lenders 2,779,170 Total Debt $7,962,270 ================ Appraised Property Value at time of loan $9,992,743 Total Investments as a % of Appraisal 79.68% Number of Secured Loans Outstanding 22 Average Investment 235,595 Average Investment as a % of Net Assets 3.48% Largest Investment Outstanding 2,103,300 Largest Investment as a % of Net Assets 31.05% Secured Loans as a Percentage of Total Loans Percent ----------------------------------------------------- ------------- First Trust Deeds 84.74% Second Trust Deeds 15.26% ------------- Total 100.00% Secured Loans by Type of Property Amount Percent ----------------------------------------- ------------- ------------- Owner Occupied Homes $ 49,707 14.47% Non-Owner Occupied Homes 74,674 1.44% Apartments 566,600 10.93% Commercial 3,792,119 73.16% ------------- ------------- Total $5,183,100 100.00% ============= ============= 4 The following is a distribution of secured loans outstanding as of December 31, 2002 by Counties. Total Mortgage County Investments Percent -------------------------- ----------------- ----------------- Santa Clara $2,211,565 42.67% Alameda 1,203,972 23.23% San Francisco 660,937 12.75% San Mateo 406,549 7.84% Sacramento 243,067 4.69% Stanislaus 176,558 3.41% Marin 105,000 2.03% Shasta 77,485 1.49% San Joaquin 76,250 1.47% Sonoma 21,717 0.42% ----------------- ----------------- Total $5,183,100 100.00% ================= ================= Statement of Condition of loans: Number of Loans in Foreclosure 0 Scheduled maturity dates of secured loans as of December 31, 2002 are as follows: Year Ending December 31, ------------------- 2003 $ 681,176 2004 844,706 2005 145,125 2006 96,716 2007 3,259,940 Thereafter 155,437 --------------- $5,183,100 =============== The scheduled maturities for 2003 include one loan for $175,656, representing 3.39% of the portfolio, was past maturity at December 31, 2002. Two loans totaling $207,648 (4.01% of the secured loan portfolio) were categorized as delinquent over 90 days. Several of these borrowers were in the process of selling their property or refinancing the loans through other institutions, as this was an opportune time for them to do so and take advantage of lower interest rates. The Partnership allows borrowers to occasionally continue to make the regular interest payments on debt past maturity for periods of time. Interest payments on one of these loans were delinquent. 5 Item 2 - Properties During 2002, the Partnership acquired one piece of real estate through foreclosure. The Partnership, together with other partnerships, all affiliates of the general partners, own the property. It is a 4 unit condominium complex. Currently, renovation work is being carried out and the property is expected to be put on the market by June 2003. As of December 31, 2002, balance outstanding was $377,000. The general partners have examined the property with real estate professionals, reviewed the appraisal and concluded the collateral appears adequate to collect the amounts due. The Partnership also owns two other properties; a commercial property and the other land. The land is located in East Palo Alto. The land is owned with two other affiliated partnerships. The Partnership's net investment at December 31, 2002 is $130,215. Currently there is not an active market for land sale. The general partners are offering the property for sale but there has been little activity, although some negotiations have ensued. The general partners believe that the property is worth considerably more than its net investment. Our final property is a commercial property located in Walnut Creek, California. The property is currently for sale, but the market is soft and a sale is not anticipated soon. Management has set aside loss reserves, which they believe are adequate in amount to cover anticipated losses. Item 3 - Legal Proceedings In the normal course of business the Partnership may become involved in various types of legal proceedings such as assignments of rents, bankruptcy proceedings, appointments of receivers, unlawful detainers, judicial foreclosures, etc., to enforce the provisions of the deeds of trust, collect the debt owed under promissory notes or to protect/recoup its investment from the real property secured by the deeds. The Partnership is a defendant along with numerous defendants, including a developer, contractor, and other lenders, in a lawsuit involving the Partnership's attempt to recover its investment in real estate acquired through foreclosure. The plaintiff has not actively pursued the case for some time and the statute of limitations will expire next year. The general partners believe that the outcome of this litigation will have no effect on the earnings of the Partnership. Item 4 - Submission of Matters to a Vote of Security Holders (Partners) No matters have been submitted to a vote of the Partnership. 6 Part II Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 120,000 Units at $100 each (minimum 20 Units) were offered through broker-dealer member firms of the National Association of Securities Dealers on a "best efforts" basis (as indicated in Part I item 1). All Units were sold to California residents. Investors have the option of withdrawing earnings on a monthly, quarterly or annual basis or having their earnings retained in the Partnership. Limited partners may withdraw from the Partnership in accordance with the terms of the partnership agreement subject to early withdrawal penalties. There is no established public trading market for the Units. A description of the Partnership's Units, transfer restrictions, and withdrawal provisions is more fully described under the section entitled "Description of Units" and "Summary of the Limited Partnership Agreement", pages 38042 of the Prospectus, a part of the above-referenced Registration Statement, which is incorporated by reference. Item 6 - Selected Financial Data Redwood Mortgage Investors VI began operations in October, 1987. Its financial condition and results of operation for the five years ended December 31, 2002 were: Balance Sheets December 31, ----------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 -------------- ------------- ------------- ------------ -------------- Cash $341,127 $190,414 $354,860 $1,120,295 $299,775 Loans Loans, secured by deeds of trust 5,183,100 4,970,433 5,570,576 5,282,773 7,969,735 Loans, unsecured 223,697 82,362 82,362 - 23,775 Interest and other receivables Accrued interest on loans 61,384 797,105 664,292 706,841 717,719 Advances on loans 31,007 197,946 133,647 137,930 162,083 Less allowances for loan losses (275,294) (370,612) (261,452) (303,249) (202,344) Note receivable - Redwood Mortgage Corp - 178,200 125,000 300,000 - Real estate owned (REO), net 1,234,541 1,093,503 767,583 133,300 169,922 Real estate owned in process - - - 668,132 - -------------- ------------- ------------- ------------ -------------- Total assets $6,799,562 $7,139,351 $7,436,868 $8,046,022 $9,140,665 ------------ ============== ============= ============= ============ ============== 7 Liabilities and Partners' Capital December 31, ----------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------- ------------- ------------- ------------- ------------- Liabilities Notes payable - bank line of credit $ - $ - $ - $ - $ 390,000 Accounts payable 11,953 20,261 13,068 - 22,668 Deferred interest on loans - 74,022 - 15,676 20,463 Payable to affiliates 14,643 35,632 - - - ------------- ------------- ------------- ------------- ------------- Total liabilities 26,596 129,915 13,068 15,676 433,131 ------------- ------------- ------------- ------------- ------------- Partners' capital Limited partners' capital, subject to redemption 6,763,200 6,999,670 7,414,034 8,020,580 8,697,768 General partners' capital 9,766 9,766 9,766 9,766 9,766 ------------- ------------- ------------- ------------- ------------- Total partners' capital 6,772,966 7,009,436 7,423,800 8,030,346 8,707,534 ------------- ------------- ------------- ------------- ------------- Total liabilities and partners' capital $6,799,562 $7,139,351 $7,436,868 $8,046,022 $9,140,665 ============= ============= ============= ============= ============= Statements of Income Gross revenue $ 574,171 $ 735,900 $ 785,209 $1,086,317 $ 871,861 Expenses 204,188 309,249 307,280 565,408 359,356 ------------- ------------- ------------- ------------- ------------- Net income $ 369,983 $ 426,651 $ 477,929 $ 520,909 $ 512,505 ============= ============= ============= ============= ============= Net income: to general partners (1%) $ 3,700 $ 4,266 $ 4,779 $ 5,209 $ 5,125 to limited partners (99%) 366,283 422,385 473,150 515,700 507,380 ------------- ------------- ------------- ------------- ------------- $ 369,983 $ 426,651 $ 477,929 $ 520,909 $ 512,505 ============= ============= ============= ============= ============= Net income per $1,000 invested by limited partners for entire period: - where income is reinvested and compounded $54 $59 $62 $62 $56 ============= ============= ============= ============= ============= - where partner receives income in monthly distributions $53 $58 $61 $61 $55 ============= ============= ============= ============= ============= The annualized yield for 1999 was 6.24%, for 2000 the annualized yield was 6.22%, for 2001 the annualized yield was 5.95%, and for 2002 the annualized yield was 5.40%. The average annualized yield from inception through December 31, 2002 was 7.04%. 8 Item 7 - Management Discussion and Analysis of Financial Condition and Results of Operations 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. At December 31, 2002, there were three Real Estate Owned properties all acquired through foreclosure, one in 2002 and the other two in prior years. 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. Delinquencies are determined based upon contractual terms. 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 values, 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 collectibility of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances, including accrued interest and advances. Recent trends in the economy have been taken into consideration in the aforementioned process of arriving at the allowance for loan losses. Actual results could vary from the aforementioned provisions for losses. Forward Looking Statements. Some of the information in the Form 10-K may contain forward looking statements. Uses of words such as "will", "may", "anticipate", "estimate", "continue" or other forward looking words, discuss future expectations or predictions. The foregoing analysis of 2002 includes forward looking statements and predictions about the possibility of future events, results of operations and financial condition. As such, this analysis may prove to be inaccurate because of assumptions made by the general partners or the actual development of the future events. No assurance can be given that any of these statements or predictions will ultimately prove to be correct or substantially correct. Related Parties. The general partners of the Partnership are Gymno Corporation and Michael R. Burwell. Most Partnership business is conducted through Redwood Mortgage Corp., an affiliate of the general partner, which arranges, services and maintains the loan portfolio for the benefit of the Partnership. The fees received by the affiliate are paid pursuant to the partnership agreement and are determined at the sole discretion of the affiliate. In the past the affiliate has elected not to take the maximum compensation. The following is a list of various Partnership activities for which related parties are compensated. 9 o Mortgage Brokerage Commissions For fees in connection with the review, selection, evaluation, negotiation and extension of loans, the Partnership may collect an amount equivalent to 12% of the loaned amount until 6 months after the termination date of the offering. Thereafter, the loan brokerage commissions (points) will be limited to an amount not to exceed 4% of the total Partnership assets per year. The loan brokerage commissions are paid by the borrowers, and thus, are not an expense of the Partnership. For the years ended December 31, 2000, 2001 and 2002, loan brokerage commissions paid by the borrowers were $45,164, $46,581 and $22,611, respectively. o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% on an annual basis) of the unpaid principal of the Partnership's loans are 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 $48,556, $41,406 and $138,851 were incurred for the years ended December 31, 2000, 2001 and 2002, respectively. o Asset Management Fees The general partners receive monthly fees for managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net asset value' (3/8 of 1% on an annual basis). Management fees to the general partners of $9,780, $9,115 and 8,677 were incurred by the Partnership for the years ended December 31, 2000, 2001 and 2002, respectively. o Other Fees The Partnership agreement provides that the general partners may receive other fees such as reconveyance, mortgage assumption and mortgage extension fees. Such fees are incurred by the borrowers and are paid to the general partners. o Income and Losses All income and losses are credited or charged to partners in relation to their respective Partnership interests. The allocation to the general partners (combined) shall be a total of 1%. o Operating Expenses An affiliate of the Partnership, Redwood Mortgage Corp., is reimbursed by the Partnership for all operating expenses actually incurred by it on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners. o Contributed Capital The general partners jointly and severally were to contribute 1/10 of 1% in cash contributions as proceeds from the offerings are received from the limited partners. As of December 31, 2001 and 2002, a general partner, Gymno Corporation, had contributed $9,772 and $9,772 respectively, as capital in accordance with Section 4.02(a) of the partnership agreement. Results of Operations - For the years ended December 31, 2000, 2001 and 2002 The net income decrease of $42,980 (8%) for the year ended December 31, 2000 versus December 31, 1999 was due primarily to a decrease in interest earned on loans of $145,323, an increase in interest-interest bearing accounts of $2,935, an increase in interest on promissory note of $16,091, a decrease in mortgage servicer subsidy of $175,000; offset by significant expense increases or (decreases) for the year ended December 31, 2000 included a decrease in interest and credit line costs of ($14,714), and a decrease in the provision for losses on loans and real estate acquired through foreclosure of ($244,131). The net income decrease of $51,278 (11%) for the year ended December 31, 2001 versus December 31, 2000 was due primarily to a decrease in interest earned on loans of $85,613, a decrease in late charges of $4,094, a decrease in interest on promissory note of $11,179, and an increase of mortgage servicer subsidy of $53,200; offset by significant expense increases or (decreases) for the year ended December 31, 2001 versus December 31, 2000 of lower mortgage servicing fees of ($7,150), and an increase in the provision for losses on loans and real estate acquired through foreclosure of $7,609. 10 The income decrease of $56,668 (13%) for the year ended December 31, 2002 versus December 2001 was due primarily to an increase in interest earned on loans of $40,515, a decrease in late charges of $18,480, and a decrease in mortgage servicer subsidy of $178,200; offset by significant expense increases or (decreases) for the year ended December 31, 2002 versus December 31, 2001 of higher mortgage servicing fees of $97,445, a decrease in the provision for losses on loans and real estate acquired through foreclosure of ($206,900), and an increase in professional fees of $11,594. The decrease in interest on loans of $145,323 and $85,613 for the years ended December 31, 2000 and 2001 was due to less loans outstanding. The increase in interest on loans of $40,515 for the year ended December 31, 2002 was due to a higher average loan portfolio balance; offset by a lower average loan portfolio interest rate. The increase in interest-interest bearing accounts of $2,936 for the year ended December 31, 2000 versus December 31, 1999 is due to increased cash during 2000 held in interest bearing accounts. The decrease in interest-interest bearing accounts of $4,094 and $7,780 for the years ended December 31, 2001 and 2002 is due to lower interest rates being earned on interest bearing accounts. The increase of $16,091 in interest on promissory note for 2000 versus 1999 is due to no promissory note being held in 1999. The decrease in interest on promissory note of $11,179 for 2001 versus 2000 is due to a lower outstanding balance in 2001 versus 2000. The increase in interest on promissory note for 2002 versus 2001 is due to a higher average balance outstanding in 2002 versus 2001. The decrease in mortgage servicer subsidy of $175,000 for 2000 versus 1999 was due to lower subsidies by the mortgage servicer. The increase in mortgage servicer subsidy of $53,200 in 2001 versus 2000 is due to an increased subsidy by the mortgage servicer in 2001. The decrease in mortgage servicer subsidy of $178,200 in 2002 versus 2001 is due to no subsidy being provided by mortgage servicer in 2002. The increase in late charge revenue of $189 for the year ended December 31, 2000 versus 1999 is reflective of more loans delinquent. The decrease in late charge revenue of $1,623 and $18,480 for the year ended December 31, 2001 and 2002 reflects greater collection of past due borrower payments and less delinquency. Professional fees paid were $25,462, $19,866 and $31,460 for the years 2000, 2001 and 2002, respectively. The fluctuations relate mainly to the increased costs and timing of services for audits, financial report writing and tax filing. The decrease in mortgage servicing fees of $1,594 and $7,150 for the years ended December 31, 2000 and December 31, 2001 is primarily attributable to the lower average loan portfolio balances during 2000 and 2001. The increase in mortgage servicing fees of $97,445 in 2002 is due to the collection of previously past due payments on impaired loans, which were collected in 2002. The Partnership does not accrue servicing fees to Redwood Mortgage Corp. on impaired loans. Rather, servicing fees are incurred as borrower payments are received. The decrease of $244,131 in provision for losses on loans and real estate acquired through foreclosure for the year ended December 31, 2000 versus December 31, 1999 reflects the general partners' estimate of an appropriate allowance for anticipated losses. The increase of $7,609 in provision for losses on loans and real estate acquired through foreclosure for the year ended December 31, 2001 versus 2000 reflect the general partners' estimate that reserves needed to be slightly increased to cover anticipated losses. The decrease of $206,900 in provision for losses on loans and real estate acquired through foreclosure for the year ended December 31, 2002 versus 2001 reflects the general partners' estimate that the existing reserves are adequate as complemented by a guarantee received from Redwood Mortgage Corp. relating to the collectibility of certain Partnership loans. As of September 2, 1989, the Partnership had sold 97,725.94 Units and its contributed capital totaled $9,772,594 of the approved $12,000,000 issue, in Units of $100 each. As of that date the offering was formally closed. On December 31, 2002, the Partnership's net capital totaled $6,772,966. 11 The Partnership began funding loans in October 1987. The Partnership's secured loans outstanding for the years ended December 31, 2000, 2001, and 2002 were $5,570,576, $4,970,433, and $5,183,100, respectively. The overall decrease in loans outstanding from December 31, 2000 to December 31, 2002, was due primarily to the Partnership utilizing loan payoffs to meet limited partner capital liquidations, and an increase in Real Estate Owned or in process. During the years 2000, 2001, and 2002, loan principal collections exceeded limited partner liquidations. Since January 2001, the Federal Reserve has been dramatically cutting its core interest rates with eleven successive cuts, ranging from .25% to .50%. The latest cut of .50% was made on November 7, 2002, which reduced the Federal Funds Rate to 1.25% and the prime rate to 4.25%. The effect of the cuts has greatly reduced short-term interest rates and to a lesser extent reduced long-term interest rates. New loans will be originated at then existing interest rates. In the future, the general partners anticipate that interest rates likely will change from their current levels. The general partners cannot at this time predict at what levels interest rates will be in the future. The general partners anticipate that new loans will be placed at rates approximately 1% lower than similar loans during 2002. The lowering of interest rates has encouraged those borrowers that hold higher interest rate loans than those currently available to seek refinancing of their existing obligations to take advantage of these lower rates. 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, we expect to replace these 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 .25% to .50% over the year 2003. Nevertheless, based upon the rates expected 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 for compounding limited partners will range between 4.75% and 5.00% for the year 2003. The Partnership's operating results and delinquencies are within the normal range of the general partners expectations, based upon their experience in managing similar partnerships over the last twenty-four years. Foreclosures are a normal aspect of Partnership operations and the general partners anticipate that they will not have a material effect on liquidity. As of December 31, 2002, there were no properties in foreclosure. As of December 31, 2000, 2001 and 2002, the Partnership's real estate owned account balance was $767,583, $1,093,503 and $1,234,541, respectively. The increase was due to the acquisition of security on delinquent loans. The Partnership intends to sell these properties. Cash is continually being generated from interest earnings, late charges, prepayment penalties, and amortization of principal and loan pay-offs. Currently, this amount exceeds Partnership expenses and earnings and partner liquidation requirements. As loan opportunities become available, excess cash and available funds are invested in new loans. Allowance for Losses. The general partners regularly review the loan portfolio, examining the status of delinquencies, the underlying collateral securing these loans, REO expenses, sales activities, and borrower's payment records and other data relating to the loan portfolio. Data on the local real estate market, and on the national and local economy are studied. Based upon this information and more, loan loss reserves are increased or decreased. Borrower foreclosures are a normal aspect of Partnership operations. The Partnership is not a credit based lender and hence while it reviews the credit history and income of borrowers, and if applicable, the income from income producing properties, the general partners expect that we will on occasion take back real estate security. During 2001, and continuing in 2002, the Northern California real estate market slowed and the national and local economies have slipped into recession. As of December 31, 2002, no notices of default were filed. 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 $176,560 (3.41% of the loan portfolio) as of December 31, 2002. Typically, a workout agreement allows the borrower to extend the maturity date of the balloon payment and allows the borrower to make current monthly payments while deferring for periods of time, past due payments, or allows time to pay the loan in full. These workout agreements and foreclosures generally exist within our loan portfolio to greater or lesser degrees, depending primarily on the health of the economy. The number of foreclosures and workout agreements will rise during difficult times and conversely fall during good economic times. The number and amount of foreclosures existing at December 31, 2002, in management's opinion, does not have a material effect on our results of operations or liquidity. These workouts have been considered when management arrived at 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 possible swings and the general partners inability to 12 control many of these factors, actual results may and do sometimes differ significantly from estimates made by the general partners. Management provided $193,427, $201,036, and ($5,864) as provision for loan losses for the years ended December 31, 2000, 2001, and 2002, respectively. The increase in allowance for 2000 and 2001 was to build up reserve for any potential loss in the future. During 2002, the Partnership restructured four previously impaired loans into two new loans with a lower interest rate. The amount restructured was $3,060,100. Had the loans been current in accordance with their original terms and had they been outstanding throughout the entire year, the Partnership would have recognized gross interest income of $267,946 for 2002. The Partnership recognized $172,131 of interest income on the restructured loans for 2002. As of December 31, 2002, there is a collateral shortfall on the restructured loans ranging from approximately $194,000 to $337,000 that has not been reserved for. Redwood Mortgage Corp. has guaranteed to cover any losses sustained by the Partnership related to these restructured loans. Management believes that reserves previously set aside are adequate. As of December 31, 2002, there is a collateral shortfall on the certain loans ranging from approximately $194,000 to $337,000 that has not been reserved for. Redwood Mortgage Corp. has guaranteed to cover any losses sustained by the Partnership related to these loans. Borrower Liquidity and Capital Resources. At the time of subscription to the Partnership, limited partners made an irrevocable decision to either take distributions of earnings monthly, quarterly or annually or to compound earnings in their capital account. For the years ended December 31, 2000, 2001, and 2002, the Partnership made distributions of earnings to limited partners after allocation of syndication costs of $192,356, $164,787, and $130,296, respectively. Distribution of earnings to limited partners for the years ended December 31, 2000, 2001, and 2002, to limited partners' capital accounts and not withdrawn, was $280,794, $257,598, and $235,987, respectively. As of December 31, 2000, 2001, and 2002, limited partners electing to withdraw earnings represented 37%, 37%, and 35%, respectively, of the limited partners outstanding capital accounts. The Partnership also allows the limited partners to withdraw their capital account subject to certain limitations (see liquidation provisions of Partnership Agreement). For the years ended December 31, 2000, 2001, and 2002, $200,417, $187,804, and $78,674, respectively, were liquidated subject to the 10% and/or 8% 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% and/or 8% 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 investments to raise cash. The demand the Partnership is experiencing in withdrawals by limited partners electing a one year liquidation program represents a small percentage of limited partner capital as of December 31, 2000, 2001, and 2002, respectively, and is expected by the general partners to commonly occur at these levels. Additionally, for the years ended December 31, 2000, 2001, and 2002, $686,923, $484,158, and $393,784, respectively, were liquidated by limited partners who have elected a liquidation program over a period of five years or longer. Once the initial five-year hold period has passed, the general partners expect to see an increase in liquidations due to the ability of limited partners to withdraw without penalty. 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, at which time the bulk of those limited partners who have sought withdrawal will have been liquidated. After year eleven, liquidation generally subsides and the Partnership capital again tends to increase. 13 Actual liquidation of both capital and earnings from year five (1992) through year fourteen (2002), is shown hereunder: Years ended December 31, 1992 1993 1994 1995 1996 1997 -------------- -------------- ------------- --------------- ---------------- -------------- Earnings $ 323,037 $ 377,712 $ 303,014 $ 303,098 $ 294,678 $ 257,670 Capital *232,370 *528,737 *729,449 *892,953 *1,183,099 *1,297,410 -------------- -------------- ------------- --------------- ---------------- -------------- Total $ 555,407 $ 906,449 $1,032,463 $1,196,051 $1,477,777 $1,555,080 ============== ============== ============= =============== ================ ============== 1998 1999 2000 2001 2002 -------------- ------------- ------------- --------------- --------------- Earnings $ 235,837 $ 217,526 $ 192,356 $ 164,787 $ 130,296 Capital *1,060,109 *975,362 *887,340 *671,962 *472,457 -------------- ------------- ------------- --------------- --------------- Total $1,295,946 $1,192,888 $1,079,696 $ 836,749 $ 602,753 ============== ============= ============= =============== =============== *These amounts represent gross of early withdrawal penalties. In some cases in order to satisfy Broker Dealers and other reporting requirements, the general partners have valued the limited partners' interest in the Partnership on a basis which utilizes a per Unit system of calculation, rather than based upon the investors' capital account. This information has been reported in this manner in order to allow the Partnership to integrate with certain software used by the Broker Dealers and other reporting entities. In those cases, the Partnership will report to Broker Dealers, Trust Companies and others a "reporting" number of Units based upon a $1.00 per Unit calculation. The number of reporting Units provided will be calculated based upon the limited partner's capital account value divided by $1.00. Each investor's capital account balance is set forth periodically on the Partnership account statement provided to investors. The reporting Units are solely for Broker Dealers requiring such information for their software programs and do not reflect actual Units owned by a limited partner or the limited partners' right or interest in cash flow or any other economic benefit in the Partnership. Each investor's capital account balance is set forth periodically on the Partnership account statement provided to investors. The amount of Partnership earnings each investor is entitled to receive is determined by the ratio that each investor's capital account bears to the total amount of all investor capital accounts then outstanding. The capital account balance of each investor should be included on any NASD member client account statement in providing a per Unit estimated value of the client's investment in the Partnership in accordance with NASD Rule 2340. While the general partners have set an estimated value for the Partnership Units, such determination may not be representative of the ultimate price realized by an investor for such Units upon sale. No public trading market exists for the Partnership's Units and none is likely to develop. Thus, there is no certainty that the Units can be sold at a price equal to the stated value of the capital account. Furthermore, the ability of an investor to liquidate his or her investment is limited subject to certain liquidation rights provided by the Partnership, which may include early withdrawal penalties (See the section of the Prospectus entitled "Risk Factors - Purchase of Units is a long term investment"). Current Economic Conditions. The Partnership makes loans primarily in Northern California. As of December 31, 2002, approximately 88.52%, ($4,588,023) of the loans held by the Partnership were in five 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 also 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 contained in a collection of real estate statistics listed in the San Francisco Chronicle dated December 20, 2002 Bay Area home prices rose again in November 2002. The article states, "Despite a struggling economy, the median home price in the Bay Area in November rose 13% on a year-over-year basis, though the price has leveled since its all-time high this summer, a real estate information firm reported Thursday. Driven by historically low interest rates, 14 the number of homes sold increased 24.4% between November 2001 and November 2002; however, that comparison is somewhat skewed given that sales plunged after September 11, 2001. The median home price in the nine Bay Area counties was $416,000 in November, compared with $368,000 last November, said DataQuick Information Systems in La Jolla (San Diego County). Compared with October, the median rose 2%, and the number of sales fell 12.8%. In July and August, the Bay Area median hit a record high $417,000. Last fall, in the wake of a sagging economy and the terrorist attacks, home prices and sales cooled considerably. But beginning in January, prices and sales shot up around the country as interest rates plummeted and consumers looked for an alternative to the gyrating stock market. At the same time, many economists have suggested a housing bubble is brewing and predict home prices may fall, particularly in expensive markets such as San Francisco and Boston. The median price of a single-family home nationwide is $159,600, according to the National Association of Realtors. (DataQuick's figures include both single-family homes and condos.) `The days of rapid appreciation have ended,' said Ken Rosen, a real estate and economics professor at UC Berkeley. He noted that home prices have appreciated far faster than personal income in the Bay Area in recent years. `Next year, we may see a small rise (in home prices), but there could be some significant weakness if interest rates go up and the economy gets worse,' Rosen said. On the other hand, DataQuick researcher John Karevoll said he sees no evidence of a major price dip in the Bay Area despite an uptick in the number of notices of default, the first step in the foreclosure process. `Housing is in a fairly good state,' Karevoll said. `Default activity would have to double for it to be a concern.' The typical monthly mortgage payment Bay Area residents committed to in November was $1,843. The peak was $2,124 in May 2000. Marin County posted the highest median home price - $602,000 - in November. Solano County had the lowest median price - $291,000 - but it experienced the biggest year-over-year percentage price increase. In November 2001, the county's median was $247,000. The median is the price at which half of sales are above and half are below. Sales in Santa Clara County, where the high-tech tumble has pushed unemployment to 7.8%, showed the largest jump, from 1,284 last November to 1,894 last month. But that falls short of the county's typical November sales count of between 1,900 and 2,300. Re/Max real estate agent Bruce Scheer in Cupertino said DataQuick's numbers don't tell the whole story. Although sales in the county are up nearly 48% year over year, the number of homes on the market is up more than 60%. `There's a lot more inventory, and sales have slowed,' Scheer said, `I think people are worried that the economy is going to get worse, and they think that if they wait to sell their home, they'll get less for it.'" The San Francisco Chronicle dated December 20, 2002 further analyzed the home sale price by county comparing sales of November 2001 versus November 2002 as follows: Homes sold Percent Median* Percent County Nov. `01 Nov. `02 Change Nov. `01 Nov. `02 Change - -------------------- ----------- ---------- ------------- ----------- ------------- ------------ Alameda 1,309 1,771 35.3% $352 $407 15.6% Contra Costa 1,464 1,599 9.2 308 352 4.3 Marin 309 334 8.1 513 602 17.3 Napa 159 171 7.5 341 398 16.7 San Francisco 355 493 38.9 492 568 15.4 San Mateo 531 620 16.8 490 522 6.5 Santa Clara 1,284 1,894 47.5 421 446 5.9 Solano 635 733 15.4 247 291 17.8 Sonoma 598 650 8.7 319 342 7.2 =========== ========== ============= =========== ============= ============ Bay Area 6,644 8,265 24.4% $368 $416 13.0% *in thousands For the Partnership, these statistics imply that the values of homes secured by mortgages should remain firm and assist in reducing losses if the take back of collateral through the foreclosure process should eventuate. 15 Opportunities exist which the Partnership may advantage itself of. Office vacancy is very high. The San Francisco Business Times dated October 10, 2002 states "Grubb & Ellis has reported a slight decrease in office vacancy in San Francisco for the third quarter, breaking a two-year losing streak. The commercial real estate firm said vacancy dropped to 21.9% with 127,000 square feet of positive absorption. Colin Yasukochi, research director of Grubb & Ellis' San Francisco office, said office demand has turned positive for the first time in two years. He reported 1.3 million square feet of gross leasing activity in the quarter. The five biggest deals of the quarter: o Zurich Insurance took 77,000 square feet at 560 Mission street; o Gensler Architecture signed a 57,000-square-foot lease at 2 Harrison Street; o Law firm Clifford Chance opening its Bay Area headquarters at One market with 47,000 square feet; o Bank of the West and PayMap each signed leases of at least 50,000 square feet. `The sustained gross leasing activity bodes well for more positive news in the fourth quarter,' Yasukochi said. `However, over 650,000 square feet of mostly vacant new space scheduled for delivery in that same quarter will likely cause vacancy to rise.' He predicts a sustained recovery is two to three years away." To the Partnership, stabilizing vacancy rates may mean we are at the vacancy rate bottom. High levels of space exist and as tenants leases expire they may be able to negotiate lower rental rates. This could lead to lower cash flows for owners, which may mean we could experience higher delinquencies or foreclosures on commercial properties. On or about March 19, 2003, the United States entered into an armed conflict with Iraq. While the general partners do not anticipate that this conflict will affect the real estate market in Northern California, a prolonged military conflict could have adverse effects on the economy of the Untied States, which could eventually impact the local real estate market. For Partnership loans outstanding, as of December 31, 2002, the Partnership had an average loan to value ratio computed as of the date the loan was made of 79.68%. 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. Item 7a - Quantitative and Qualitative Disclosures About Market Risk The following table contains information about the cash held in money market accounts, and secured loans held in the Partnership's portfolio as of December 31, 2002. The presentation, for each category of information, aggregates the assets and liabilities by their maturity dates for maturities occurring in each of the years 2003 through 2007 and separately aggregates the information for all maturities arising after 2007. The carrying values of these assets and liabilities approximate their fair market values as of December 31, 2002: 2003 2004 2005 2006 2007 Thereafter Total ------------ ----------- ------------ ----------- ------------ ------------ ------------- Interest earning assets: Money market accounts $322,722 $ 322,722 Average interest rate 1.00% 1.00% Loans secured by deeds of trust $681,176 844,706 145,125 96,716 3,259,940 155,437 $5,183,100 Average interest rate 10.69% 10.66% 9.35% 6.50% 7.68% 10.61% 8.68% Market Risk. The Partnership's primary market risk in terms of its profitability is the exposure to fluctuations in earnings resulting from fluctuations in general interest rates. The majority of the Partnership's mortgage loans (100% as of December 31, 2002) earn interest at fixed rates. Changes in interest rates may also affect the value of the Partnership's investment in mortgage loans and the rates at which the Partnership reinvests funds obtained from loan repayments and new capital contributions from limited partners. If interest rates increase, the interest rates the Partnership obtains from reinvested funds will generally increase, but the value of the Partnership's existing loans at fixed rates will generally tend to decrease. The risk is mitigated by the fact that the 16 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. Item 8 - Financial Statements and Supplementary Data A - Financial Statements The following financial statements of Redwood Mortgage Investors VI are included in Item 8: o Independent Auditors' Report o Balance Sheets - December 31, 2002, and December 31, 2001 o Statements of Income for the years ended December 31, 2002, 2001 and 2000 o Statements of Changes in Partners' Capital for the years ended December 31, 2002, 2001 and 2000 o Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 o Notes to Financial Statements B - Financial Statement Schedules The following financial statement schedules of Redwood Mortgage Investors VI are included in Item 8: o Schedule II Valuation and Qualifying Accounts o Schedule IV Mortgage Loans on Real Estate All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 17 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002 AND 2001 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002 18 ARMANINO McKENNA LLP CERTIFIED PUBLIC ACCOUNTANTS 12667 Alcosta Boulevard, Suite 500 San Ramon, CA 94583 (925) 790-2600 INDEPENDENT AUDITORS' REPORT To the Partners Redwood Mortgage Investors VI Redwood City, California We have audited the accompanying balance sheets of Redwood Mortgage Investors VI (a California limited partnership) as of December 31, 2002 and 2001 and the related statements of income, changes in partners' capital and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Redwood Mortgage Investors VI as of December 31, 2002 and 2001, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedules II and IV are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARMANINO McKENNA LLP San Ramon, California February 21, 2003 19 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) BALANCE SHEETS DECEMBER 31, 2002 AND 2001 ASSETS 2002 2001 ----------- ----------- Cash and cash equivalents $ 341,127 $ 190,414 ----------- ----------- Loans Loans, secured by deeds of trust 5,183,100 4,970,433 Loans, unsecured, net discount of $131,352 in 2002 223,697 82,362 Allowance for loan losses (275,294) (370,612) ----------- ----------- Net loans 5,131,503 4,682,183 ----------- ----------- Interest and advances Accrued interest and late fees 61,384 797,105 Advances on loans 31,007 197,946 ----------- ----------- 92,391 995,051 ----------- ----------- Note receivable - Redwood Mortgage Corp. - 178,200 Real estate held for sale, net 1,234,541 1,093,503 ----------- ----------- Total assets $ 6,799,562 $ 7,139,351 =========== =========== LIABILITIES AND PARTNERS' CAPITAL Liabilities Accounts payable $ 11,953 $ 20,261 Payable to affiliate 14,643 35,632 Deferred interest - 74,022 ----------- ----------- Total liabilities 26,596 129,915 ----------- ----------- Partners' capital Limited partners' capital, subject to redemption 120,000 Units authorized in 2002 and 2001, 97,725.94 Units outstanding in 2002 and 2001 6,763,200 6,999,670 General partners' capital 9,766 9,766 ----------- ----------- Total partners' capital 6,772,966 7,009,436 ----------- ----------- Total liabilities and partners' capital $ 6,799,562 $ 7,139,351 =========== =========== The accompanying notes are an integral part of these financial statements. 20 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 YEARS ENDED DECEMBER 31, ------------------------------------------------ 2002 2001 2000 --------------- ---------------- --------------- Revenues Interest on loans $ 552,898 $ 512,383 $ 597,996 Interest - interest bearing accounts 5,147 12,927 17,021 Interest on promissory note 7,128 4,912 16,091 Late fees, prepayment penalties, and fees 8,998 27,478 29,101 Mortgage servicer subsidy - 178,200 125,000 --------------- ---------------- --------------- 574,171 735,900 785,209 --------------- ---------------- --------------- Expenses Mortgage servicing fees 138,851 41,406 48,556 Asset management fees 8,677 9,115 9,780 Clerical costs from Redwood Mortgage Corp. 22,872 28,156 19,647 Provisions for (recovery of) losses on loans and real estate (5,864) 201,036 193,427 Professional services 31,460 19,866 25,462 Other 8,192 9,670 10,408 --------------- ---------------- --------------- 204,188 309,249 307,280 --------------- ---------------- --------------- Net income $ 369,983 $ 426,651 $ 477,929 =============== ================ =============== Net income General partners (1%) $ 3,700 $ 4,266 $ 4,779 Limited partners (99%) 366,283 422,385 473,150 --------------- ---------------- --------------- $ 369,983 $ 426,651 $ 477,929 =============== ================ =============== Net income per $1,000 invested by limited partners for entire period Where income is reinvested and compounded $ 54 $ 59 $ 62 =============== ================ =============== Where partner receives income in monthly distributions $ 53 $ 58 $ 61 =============== ================ =============== The accompanying notes are an integral part of these financial statements. 21 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 Limited General Partners Partners Total ------------------- ------------------ ------------------ Balances at December 31, 1999 $ 8,020,580 $ 9,766 $ 8,030,346 Net income 473,150 4,779 477,929 Early withdrawal penalties (16,335) - (16,335) Partners' withdrawals (1,063,361) (4,779) (1,068,140) ------------------- ------------------ ------------------ Balances at December 31, 2000 7,414,034 9,766 7,423,800 Net income 422,385 4,266 426,651 Early withdrawal penalties (15,024) - (15,024) Partners' withdrawals (821,725) (4,266) (825,991) ------------------- ------------------ ------------------ Balances at December 31, 2001 6,999,670 9,766 7,009,436 Net income 366,283 3,700 369,983 Early withdrawal penalties (6,287) - (6,287) Partners' withdrawals (596,466) (3,700) (600,166) ------------------- ------------------ ------------------ Balances at December 31, 2002 $ 6,763,200 $ 9,766 $ 6,772,966 =================== ================== ================== The accompanying notes are an integral part of these financial statements. 22 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED December 31, 2002, 2001 AND 2000 2002 2001 2000 ------------------ ------------------ ------------------ Cash flows from operating activities Net income $ 369,983 $ 426,651 $ 477,929 Adjustments to reconcile net income to net cash provided by operating activities Provision (recovery) for loan losses and real estate (5,864) 201,036 193,427 Early withdrawal penalties credited to income (6,287) (15,024) (16,335) Mortgage servicer subsidy - (178,200) (125,000) Change in operating assets and liabilities Loans, unsecured 82,362 - (82,362) Accrued interest and late fees (162,674) (168,444) 42,549 Advances on loans 74,251 (28,667) (67,318) Accounts payable (8,308) 7,192 13,068 Payable to affiliate (20,989) 35,632 - Deferred interest (74,022) 74,022 (15,676) ------------------ ------------------ ------------------ Net cash provided by operating activities 248,452 354,198 420,282 ------------------ ------------------ ------------------ Cash flows from investing activities Principal collected on loans 1,265,798 2,548,178 2,058,681 Loans originated (900,418) (1,838,265) (2,352,060) Note receivable payments 178,200 125,000 300,000 Payments on real estate (41,153) 60,872 (129,557) Proceeds from disposition of real estate - (588,438) 5,359 ------------------ ------------------ ------------------ Net cash provided by (used in) investing activities 502,427 307,347 (117,577) ------------------ ------------------ ------------------ Cash flows from financing activities Partners' withdrawals (600,166) (825,991) (1,068,140) ------------------ ------------------ ------------------ Net cash used in financing activities (600,166) (825,991) (1,068,140) ------------------ ------------------ ------------------ Net increase (decrease) in cash and cash equivalents 150,713 (164,446) (765,435) Cash and cash equivalents at beginning of year 190,414 354,860 1,120,295 ------------------ ------------------ ------------------ Cash and cash equivalents at end of year $ 341,127 $ 190,414 $ 354,860 ================== ================== ================== The accompanying notes are an integral part of these financial statements. 23 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 1 - organization and General Redwood Mortgage Investors VI (the "Partnership"), a California limited partnership, was organized in 1987. The general partners are Michael R. Burwell, an individual, and Gymno Corporation, a California corporation owned and operated on an equal 50/50% basis by Michael R. Burwell and Russell Burwell, a former general partner. The Partnership was organized to engage in business as a mortgage lender for the primary purpose of making loans secured by deeds of trust on California real estate. Loans are being arranged and serviced by Redwood Mortgage Corp., an affiliate of the general partners. The offering of Partnership Units was closed in 1989, with contributed capital totaling $9,772,594. The Partnership is scheduled to terminate on December 31, 2027, unless sooner terminated as provided. note 2 - Summary of Significant Accounting Policies Management estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Such estimates relate principally to the determination of the allowance for loan losses, including the valuation of impaired loans and the valuation of real estate held for sale. Actual results could differ significantly from these estimates. Loans, secured by deeds of trust Loans generally are stated at their outstanding unpaid principal balance with interest thereon being accrued by the effective interest method. Statement of Financial Accounting Standards Nos. 114 and 118 provide that if the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement and the shortfall in the amounts due are not insignificant, the carrying amount of the investment shall be reduced to the present value of future cash flows discounted at the loan's effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral. If events and or changes in circumstances cause management to have serious doubts about the collectibility of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances, including accrued interest and advances. At December 31, 2002 and 2001, loans categorized as impaired by the Partnership were $96,716 and $2,467,891, respectively, with a reduction in the carrying value of the impaired loans of $6,620, and $287,985, respectively. The reduction in the carrying value of the impaired loans is included in the allowance for loan losses. The impaired loans have accrued interest, late charges and advances totaling $10,973 and $828,967 at December 31, 2002 and 2001. The average recorded investment in the impaired loans was $1,282,304, $2,468,698 and $2,470,686 for the three years ended 2002, 2001 and 2000, respectively. 24 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 2 - Summary of Significant Accounting Policies (continued) Loans, secured by deeds of trust (continued) At December 31, 2002 and 2001, the Partnership had two loans past due 90 days or more totaling $207,648 and $144,916 (4.01% and 2.92% of the secured loan portfolio), respectively. The Partnership does not consider these loans to be impaired because there is sufficient collateral to cover the amount outstanding to the Partnership, and is still accruing interest on these loans. At December 31, 2002 and 2001, as presented in Note 10, the average loan to appraised value of security at the time the loans were consummated was 79.68% and 75.20%, respectively. When loans are considered impaired, the allowance for loan losses is updated to reflect the change in the valuation of collateral security. However, a low loan to value ratio tends to minimize reductions for impairment. During 2002, the Partnership restructured four previously impaired loans into two new loans with a lower interest rate. The amount restructured was $3,060,100. Had the loans been current in accordance with their original terms and had they been outstanding throughout the entire year, the Partnership would have recognized gross interest income of $267,946 for 2002. The Partnership recognized $172,131 of interest income on the restructured loans for 2002. As of December 31, 2002, there is a collateral shortfall on the certain loans ranging from approximately $194,000 to $337,000 that has not been reserved for. Redwood Mortgage Corp. has guaranteed to cover any losses sustained by the Partnership related to these loans. Allowance for loan losses Loans and the related accrued interest, late fees and advances are analyzed on a continuous basis for recoverability. Delinquencies are identified and followed as part of the loan system. Delinquencies are determined based upon contractual terms. 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 values, to provide for unrecoverable loans and receivables, including impaired loans, other loans, accrued interest, late fees and advances on loans and other accounts receivable (unsecured). The Partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined that the full amount is not collectible. The composition of the allowance for loan losses as of December 31, 2002 and 2001 was as follows: 2002 2001 --------------- -------------- Impaired loans $ 6,620 $ 287,985 Specified loans 44,977 - General - 265 Unsecured loans 223,697 82,362 --------------- -------------- $ 275,294 $ 370,612 =============== ============== 25 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 2 - Summary of Significant Accounting Policies (continued) Allowance for loan losses (continued) Activity in the allowance for loan losses is as follows for the years ended December 31: 2002 2001 2000 ------------ ------------ ----------- Beginning balance $ 370,612 $ 261,452 $ 303,249 Provision for loan losses 3,083 109,160 34,738 Recoveries (8,947) - - Restructures (48,009) - - Write-offs (41,445) - (76,535) ------------ ------------ ----------- $ 275,294 $ 370,612 $ 261,452 ============ ============ =========== Cash and cash equivalents The Partnership considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be cash equivalents. Real estate held for sale Real estate held for sale, includes real estate acquired through foreclosure and is stated at the lower of the recorded investment in the property, plus any senior indebtedness, or at the property's estimated fair value, less estimated costs to sell. In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposition of Long Lived Assets," the Partnership periodically compares the carrying value of real estate to expected future undiscounted cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to estimated fair value. During 2002, the Partnership transferred $249,999 from the allowance for loan losses to the allowance for losses on real estate held for sale. Income taxes No provision for federal and state income taxes, except for a minimum state tax of $800, is made in the financial statements since income taxes are the obligation of the partners if and when income taxes apply. Net income per $1,000 invested Amounts reflected in the statements of income as net income per $1,000 invested by limited partners for the entire period are amounts allocated to limited partners who held their investment throughout the period and have elected to either leave their earnings to compound or have elected to receive periodic distributions of their net income. Individual income is allocated each month based on the limited partners' pro rata share of partners' capital. Because the net income percentage varies from month to month, amounts per $1,000 will vary for those individuals who made or withdrew investments during the period, or select other options. 26 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 2 - Summary of Significant Accounting Policies (continued) Late fee revenue Late fees are generally charged at 6% of the monthly installment payment past due. During 2002, 2001 and 2000, late fee revenue of $1,947, $10,959, and $5,219, respectively, was recorded. The Partnership has a late fee receivable at December 31, 2002 and 2001 of $968 and $9,800, respectively. Reclassification Certain reclassifications, not affecting previously reported net income or total partners' capital, have been made to the previously issued financial statements to conform to the current year classification. Recently issued accounting pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 46 "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46). FIN 46 is effective immediately for any variable interest entities created after January 31, 2003 and is effective beginning in the third quarter of 2002 to any variable interest entities created prior to the issuance of the interpretation. FIN 46 provides a new framework to identify variable interest entities and to determine when an entity should include the assets, liabilities, non-controlling interests and the results of activities of a variable interest entity in its financial statements. The implementation of FIN 46 is not anticipated to have any significant effect on the Partnership. note 3 - Other Partnership Provisions The Partnership is a California limited partnership. The rights, duties and powers of the general and limited partners of the Partnership are governed by the limited partnership agreement and Sections 15611 et seq. of the California Corporations Code. The general partners are in complete control of the Partnership business, subject to the voting rights of the limited partners on specified matters. Any one of the general partners acting alone has the power and authority to act for and bind the Partnership. A majority of the outstanding limited partnership interests may, without the permission of the general partners, vote to: (i) terminate the Partnership, (ii) amend the limited partnership agreement, (iii) approve or disapprove the sale of all or substantially all of the assets of the Partnership and (iv) remove or replace one or all of the general partners. The approval of all limited partners is required to elect a new general partner to continue the Partnership business where there is no remaining general partner after a general partner ceases to be a general partner other than by removal. Election to receive monthly, quarterly or annual distributions At subscription, investors elected to receive monthly, quarterly or annual distributions of earnings allocations, or to allow earnings to compound. Subject to certain limitations, a compounding investor may subsequently change his election, but an investor's election to have cash distributions is irrevocable. 27 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 3 - Other Partnership Provisions (continued) Profits and losses Profits and losses are allocated among the limited partners according to their respective capital accounts monthly after 1% of the profits and losses are allocated to the general partners. Liquidity, capital withdrawals and early withdrawals There are substantial restrictions on transferability of Partnership Units and accordingly an investment in the Partnership is non-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 Partnership Units, which in all instances had occurred as of December 31, 2002. In order to provide a certain degree of liquidity to the limited partners after the one-year period, limited partners may withdraw all or part of their capital accounts from the Partnership in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given, subject to a 10% early withdrawal penalty. The 10% penalty is applicable to the amount withdrawn as stated in the notice of withdrawal and will be deducted from the capital account. After five years from the date of purchase of the Units, limited partners have the right to withdraw from the Partnership, on an installment basis. Generally, this is done over a five-year period in twenty quarterly installments. Once a limited partner has been in the Partnership for the minimum five-year period, no penalty will be imposed if withdrawal is made in twenty quarterly installments or longer. Notwithstanding the five-year (or longer) withdrawal period, the general partners may liquidate all or part of a limited partner's capital account in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given. This withdrawal is subject to a 10% early withdrawal penalty applicable to any sums withdrawn prior to the time when such sums could have been withdrawn without penalty. The Partnership will not establish a reserve from which to fund withdrawals and, accordingly, the Partnership's capacity to return a limited partner's capital account is restricted to the availability of Partnership cash flow. Furthermore, no more than 20% of the total limited partners' capital accounts outstanding at the beginning of any year shall be liquidated during any calendar year. note 4 - General Partners and Related Parties The following are commissions and fees that are paid to the general partners and affiliates. 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. In 2002, 2001 and 2000, loan brokerage commissions paid by the borrowers were $22,611, $46,581, and $45,164, respectively. 28 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 4 - General Partners and Related Parties (continued) 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 $138,851, $41,406, and $48,556, were incurred for 2002, 2001 and 2000, respectively. The Partnership has a payable to Redwood Mortgage Corp. for servicing fees of $14,643 and $35,632 at December 31, 2002 and 2001, respectively. Asset management fee The general partners receive monthly fees for managing the Partnership's loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8 of 1% annually). Asset management fees of $8,677, $9,115, and $9,780 were incurred for 2002, 2001 and 2000, respectively. Other fees The partnership agreement provides for other fees such as reconveyance, mortgage assumption and mortgage extension fees. These fees are incurred by the borrowers and paid to the general partners. Operating expenses The general partners or their affiliate, Redwood Mortgage Corp., are reimbursed by the Partnership for all operating expenses incurred by them on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners. During 2002, 2001 and 2000, operating expenses totaling $22,872, $28,156 and $19,647, respectively, were reimbursed to Redwood Mortgage Corp. note 5 - Real Estate Held for Sale The following schedule reflects the costs of real estate acquired through foreclosure and the recorded reductions to estimated fair values, including estimated costs to sell, as of December 31, 2002 and 2001: 2002 2001 ---------------- ---------------- Costs of properties $2,018,732 $1,627,696 Reduction in value (784,191) (534,193) ---------------- ---------------- Real estate held for sale $1,234,541 $1,093,503 ================ ================ 29 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 6 - Note Receivable - Redwood Mortgage Corp. In 2001 and 2000, Redwood Mortgage Corp., an affiliate of the general partners, which arranges and services the loans of the Partnership, committed to subsidize certain loan losses of the Partnership. At December 31, 2001, this commitment was evidenced by a note receivable of $178,200. The note bears interest at 8% and was repaid in 2002. Mortgage servicer subsidies for 2001 and 2000, were $178,200 and $125,000, respectively. There was no subsidy in 2002; however, Redwood Mortgage Corp. has guaranteed the recoverability of certain loan amounts to the Partnership as of December 31, 2002 (see Note 2). note 7 - Income Taxes The following reflects a reconciliation of partners' capital reflected in the financial statements to the tax basis of Partnership capital: 2002 2001 -------------- -------------- Partners' capital per financial statements $6,772,966 $7,009,436 Allowance for loan losses and real estate 1,059,485 904,804 -------------- -------------- Partners' capital tax basis $7,832,451 $7,914,240 ============== ============== In 2002 and 2001, approximately 73% of taxable income was allocated to tax-exempt organizations (e.g., retirement plans). Such organizations generally do not have to file income tax returns. note 8 - 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 accounts are subject to immediate withdrawal. (b) Secured loans carrying value was $5,183,100 and $4,970,433 at December 31, 2002 and 2001, respectively. The fair value of these loans of $4,862,646 and $5,036,556, 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. 30 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 9 - Non-cash Transactions During 2002, the Partnership restructured four loans that resulted in an increase to loans receivable of $920,346 and a decrease to the allowance for loan losses, accrued interest and advances of $21,707, $849,365 and $92,688, respectively. During 2002, the Partnership foreclosed on a property that resulted in an increase to real estate held for sale of $349,883 and a decrease to loans receivable and accrued interest of $300,853 and $49,030, respectively. During 2002, the Partnership originated two unsecured, non-interest bearing loans, which resulted in an increase to unsecured loans and the allowance for loan losses of $355,049 and $223,697, respectively. The Partnership imputed interest on these loans at 10.5% per annum, which resulted in a decrease to unsecured loans of $131,352 and an increase to discount on loans of $131,352. note 10 - Asset Concentrations and Characteristics Most loans are secured by recorded deeds of trust. At December 31, 2002 and 2001, there were 22 and 27 secured loans outstanding respectively, with the following characteristics: 2002 2001 --------------- ---------------- Number of secured loans outstanding 22 27 Total secured loans outstanding $5,183,100 $4,970,433 Average secured loan outstanding $ 235,595 $ 184,090 Average secured loan as percent of total 4.55% 3.70% Average secured loan as percent of partners' capital 3.48% 2.63% Largest secured loan outstanding $2,103,300 $1,376,117 Largest secured loan as percent of total 40.58% 27.69% Largest secured loan as percent of partners' capital 31.05% 19.63% Number of counties where security is located (all California) 10 10 Largest percentage of secured loans in one county 42.67% 40.75% Average secured loan to appraised value of security at time loan was consummated 79.68% 71.27% Number of secured loans in foreclosure - 3 Amounts of secured loans in foreclosure $ - $ 439,311 31 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 10 - Asset Concentrations and Characteristics (continued) The following categories of secured loans were held at December 31, 2002 and 2001: 2002 2001 --------------- ---------------- First trust deeds $ 4,392,120 $ 3,770,088 Second trust deeds 790,979 1,136,481 Third trust deeds 63,864 - --------------- ---------------- Total loans 5,183,100 4,970,433 Prior liens due other lenders 2,779,170 5,627,002 --------------- ---------------- Total debt $ 7,962,270 $10,597,435 =============== ================ Appraised property value at time of loan $ 9,992,743 $14,868,548 =============== ================ Total investments as a percent of appraisals 79.68% 71.27% =============== ================ Investments by type of property Owner occupied homes $ 749,707 $ 741,154 Non-owner occupied homes 74,674 181,952 Apartments 566,600 562,015 Commercial 3,792,119 3,485,312 --------------- ---------------- $ 5,183,100 $ 4,970,433 =============== ================ Scheduled maturity dates of secured loans as of December 31, 2002 are as follows: Year Ending December 31, ------------------------------------- 2003 $ 681,176 2004 844,706 2005 145,125 2006 96,716 2007 3,259,940 Thereafter 155,437 ------------------ $5,183,100 ================== The remaining scheduled maturities for 2003 include one loan totaling $175,656 (3.39%), which was past maturity at December 31, 2002. This loan was categorized as delinquent over 90 days. Cash deposits at December 31, 2002 of $563,965, before clearing deposits in transit and outstanding checks, were in one bank. The balances exceeded FDIC insurance limits (up to $100,000 per bank) by $463,965. The Partnership has a substantial amount of its loan receivable balance from one borrower at December 31, 2002 and 2001. This borrower accounted for approximately 62% and 42% of the loan balances at such dates. This borrower accounted for approximately 31%, 35% and 21% of interest revenue for the years ended December 31, 2002, 2001 and 2000, respectively. 32 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 note 11 - Commitments and Contingencies Workout agreements The Partnership has negotiated various contractual workout agreements with borrowers. The Partnership is not obligated to fund additional money as of December 31, 2002. There are approximately two loans totaling $176,560 in workout agreements as of December 31, 2002. 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. 33 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2002, 2001 and 2000 Note 12 - Selected Financial Information (Unaudited) Calendar Quarter --------------------------------------------------------------------- First Second Third Fourth Annual -------------- --------------- --------------- -------------- ------------- Revenues 2002 as previously stated $275,176 $120,559 $125,341 $113,750 $634,826 Adjustment (60,655) - - - (60,655) -------------- --------------- --------------- -------------- ------------- 2002 restated 214,521 120,559 125,341 113,750 574,171 2001 143,077 142,581 134,603 315,639 735,900 2000 150,583 172,579 158,243 303,804 785,209 Expenses 2002 as previously stated 177,383 26,094 34,988 26,378 264,843 Adjustment (60,655) - - - (60,655) ------------- --------------- --------------- -------------- ------------- 2002 restated 116,728 26,094 34,988 26,378 204,188 2001 30,562 34,253 29,249 215,185 309,249 2000 25,204 52,044 41,218 188,814 307,280 Net income allocated to general partners 2002 978 945 903 874 3,700 2001 1,125 1,083 1,054 1,004 4,266 2000 1,254 1,205 1,170 1,150 4,779 Net income allocated to limited partners 2002 96,815 93,520 89,450 86,498 366,283 2001 111,390 107,245 104,300 99,450 422,385 2000 124,125 119,330 115,855 113,840 473,150 Net income per $1,000 invested Where income is reinvested 2002 14 13 13 19 59 2001 15 15 14 15 59 2000 15 15 15 17 62 Where income is withdrawn 2002 14 13 13 18 58 2001 15 15 14 14 58 2000 15 15 15 16 61 The adjustments above represent correction of amounts missposted to interest revenue and the provision for loan losses in the first quarter of 2002. 34 SCHEDULE II REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) VALUATION AND QUALIFYING ACCOUNTS December 31, 2002 Col A Col B Col. C Col. D Col E. Description Balance at Additions Deductions Balance at --------------------------------- Beginning Charged Charged End of Period of Period to to Costs & Other Expenses Accounts - -------------------------------------------------------------------------------------------------------------------- Year ended 12/31/02 Deducted from asset accounts Allowance for loan losses $ 370,612 $ (5,864) $ (48,009)(a) $ (41,445)(b) $ 275,294 Cumulative write-down of real estate held for sale (REO) 534,193 - 249,998(a) - 784,191 --------------- -------------- ---------------- ----------------- ----------------- $ 904,805 $ (5,864) $ 210,936 $ (41,445) (b) $1,059,485 =============== ============== ================ ================= ================= Note (a) - Represents restructuring of loans. Note (b) - Represents write-offs of loans. 35 SCHEDULE IV REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) mortgage loans on real estate rule 12-29 loans on real estate December 31, 2002 Col. A Col. B Col. C Col. D Col. E Col. F Col. G Col. H Col. I Col. J Desc. Interest Final Period Prior Face Amt. Carry Amt. Principal Type Geographic Rate Maturity Payment Liens Mortgage Mortgage or interest Lien Location Amount Delinquent - -------------------------------------------------------------------------------------------------------------------- Apts 7.00% 08/01/03 $ 1,022 $ - $ 153,660 $ 146,029 $ - 1st Sacramento Apts. 10.50% 06/01/03 667 - 76,250 76,250 1st San Joaquin Apts. 10.50% 12/01/04 1,750 - 200,000 200,000 1st Alameda Apts. 6.50% 05/01/06 541 89,904 100,000 96,716 34,072 2nd Sacramento Apts. 7.00% 02/10/05 234 80,250 40,125 40,125 2nd San Francisco Apts. 9.00% 02/01/99 38 153,534 5,122 322 2nd Sacramento Apts. 13.00% 11/01/03 759 341,094 60,000 7,158 2nd San Francisco Comm. 9.00% 05/10/02 671 - 83,333 77,485 1st Shasta Comm. 10.00% 12/01/03 1,276 - 145,455 144,566 1st Stanislaus Comm. 10.00% 07/01/11 997 - 109,769 108,265 1st Santa Clara Comm. 7.50% 02/28/07 13,146 - 2,103,300 2,103,300 1st Santa Clara Comm. 7.50% 02/28/07 5,980 - 956,800 956,800 1st Alameda Comm. 10.50% 10/01/07 1,345 - 147,000 146,883 1st San Mateo Comm. 12.00% 02/01/11 756 - 63,000 47,172 1st Alameda Comm. 14.75% 09/01/95 2,242 250,000 185,000 175,656 189,108 2nd San Mateo Comm. 10.00% 12/01/01 284 208,012 32,323 31,992 1,986 2nd Stanislaus Res. 8.00% 09/30/03 171 - 23,259 21,716 1st Sonoma Res. 11.00% 02/01/04 3,380 - 363,700 363,654 1st San Francisco Res. 11.00% 11/01/04 485 394,955 285,000 31,053 2nd San Mateo Res. 10.25% 08/01/04 2,135 714,286 250,000 250,000 2nd San Francisco Res. 10.50% 10/01/07 485 81,786 53,000 52,958 2nd San Mateo Res. 10.25% 12/01/05 897 465,349 105,000 105,000 2nd Marin --------------------------------------------------------------- Total $39,262 $2,779,170 $5,541,096 $5,183,100 $225,166 =============================================================== Notes: Loans classified as impaired had principal balances totaling $96,716. Impaired loans are defined as loans where the costs of related balances exceeds the anticipated fair value less costs to collect. Interest is no longer accrued thereon. Amounts reflected in column G (carrying amount of loans) represent both costs and the tax basis of the loans. 36 Schedule IV REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) mortgage loans on real estate rule 12-29 loans on real estate (continued) December 31, 2002 Reconciliation of carrying amount (cost) of loans at close of periods Year ended December 31, ------------------------------------------------------------------- 2002 2001 2000 ------------------ ------------------ ------------------- Balance at beginning of year $4,970,433 $5,570,576 $5,282,773 ------------------ ------------------ ------------------- Additions during period: New loans 900,418 1,838,265 2,352,060 Other 920,346 109,770 82,362 ------------------ ------------------ ------------------- Total Additions 1,820,764 1,948,035 2,434,422 ------------------ ------------------ ------------------- Deductions during period: Collections of principal 1,265,798 2,548,178 2,058,681 Foreclosures 300,854 - - Cost of loans sold - - - Amortization of Premium - - - Other 41,445 - 87,938 ------------------ ------------------ ------------------- Total Deductions 1,608,097 2,548,178 2,146,619 ------------------ ------------------ ------------------- Balance at close of year $5,183,100 $4,970,433 $5,570,576 ================== ================== =================== 37 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Part III Item 10 - Directors and Executive Officers of the Registrant The Partnership has no Officers or Directors. Rather, the activities of the Partnership are managed by the two general partners, one of whom is an individual, is Michael R. Burwell. The second general partner is Gymno Corporation, a California corporation, formed in 1986. Mr. Burwell is one of the two shareholders of Gymno Corporation, a California corporation, and has a 50% interest in the corporation. Item 11 - Executive Compensation COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP As indicated above in item 10, the Partnership has no officers or directors. The Partnership is managed by the general partners. There are certain fees and other items paid to management and related parties. A more complete description of management compensation is found in the Prospectus, pages 11-12, under the section "Compensation of the General Partners and the Affiliates", which is incorporated by reference. Such compensation is summarized below. The following compensation has been paid to the general partners and affiliates for services rendered during the year ended December 31, 2002. All such compensation is in compliance with the guidelines and limitations set forth in the Prospectus. Entity Receiving Compensation Description of Compensation and Services Rendered Amount ---------------------------------------------------------------------------------------------------------- I. Redwood Mortgage Corp. Loan Servicing Fee for servicing loans..........................$138,851 General Partners &/or Affiliates Asset Management Fee for managing assets..........................$8,677 General Partners 1% interest in profits............................................$3,700 II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY COMPANIES RELATED TO THE GENERAL PARTNERS (EXPENSES OF BORROWERS NOT OF THE PARTNERSHIP) Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in connection with the review, selection, evaluation, negotiation, and extension extension of the loans paid by the borrowers and not by the Partnership..............................................................$22,611 Redwood Mortgage Corp. Processing and Escrow Fees for services in connection with notary, document preparation, credit investigation, and escrow fees payable by the borrowers and not by the Partnership..................$1,389 Gymno Corporation Reconveyance Fee............................................................$288 38 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 . . . . . . . . . . . . . . . . . . . . . . . . . . $22,872 Item 12 - Security Ownership of Certain Beneficial Owners and Management The general partners receive a combined total of a 1% interest in Partnership income and losses and distributions of cash available for distribution. Item 13 - Certain Relationships and Related Transactions Refer to footnotes 3 and 4 of the Notes to Financial Statements in Part II item 8, which describes related party fees and data. Also refer to sections of the Prospectus "Compensation of General Partners and Affiliates", page 11, and "Conflicts of Interest", page 13, as part of the above-referenced Registration Statement, which is incorporated by reference. Item 14 - Controls and Procedures Based on their evaluation of the effectiveness of the Partnership's disclosure controls and procedures, as of a date within 90 days prior to the date of the filing of this report, the President and Chief Financial Officer of Gymno Corporation, the Partnership's corporate general partner, has concluded that the Partnership's disclosure controls and procedures are effective and sufficient to ensure that the Partnership record, process, summarize, and report information required to be disclosed in its periodic reports filed under the Securities Exchange Act within the time periods specified by the Securities and Exchange Commission's rules and forms. Subsequent to the date of such evaluation, there have not been any significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls, including any corrective action with regard to significant deficiencies and material weaknesses. 39 Part IV Item 15 - Exhibits, Financial Statements Schedules, and Reports on Form 8-K (A) Documents filed as part of this report: 1. The Financial Statements are listed in Part II, Item 8 under A-Financial Statements. 2. The Financial Statement Schedules are listed in Part II, Item 8 under B-Financial Statement Schedules. 3. Exhibits. Exhibit No. Description of Exhibits 3.1 Limited Partnership Agreement 3.2 Form of Certificate of Limited Partnership Interest 3.3 Certificate of Limited Partnership 10.1 Escrow Agreement (1) 10.2 Servicing Agreement (1) 10.3 (a) Form of Note secured by Deed of Trust which provides for principal and interest payments (1) (b) Form of Note secured by Deed of Trust which provides principal and interest payments and right of assumption (1) (c) Form of Note secured by Deed of Trust which provides for interest only payments (1) (d) Form of Note (1) 10.4 (a) Deed of Trust and Assignment of Rents to accompany Exhibits 10.3 (a) and (c) (1) (b) Deed of Trust and Assignment of Rents to accompany Exhibits 10.3 (b) (1) (c) Deed of Trust to accompany Exhibit 10.3 (d) (1) 10.5 Promissory Note for Formation Loan (1) 10.6 Agreement to Seek a Lender (1) All of these exhibits were previously filed as the exhibits to Registrant's Statement on Form S-11 (Registration No. 33-12519) and incorporated by reference herein. (B) Reports on form 8-K No reports on Form 8-K have been filed during the last quarter of the period covered by this report. (C) See (A) 3 above (D) See (A) 2 above. Additional reference is made to prospectus (S-11) dated September 3, 1987 to pages 56 through 59 and supplement #6 dated May 16, 1989 pages 16-18, for financial data related to Gymno Corporation, a general partner. 40 Signatures Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized on the 31st day of March, 2003. REDWOOD MORTGAGE INVESTORS VI By: /S/ Michael R. Burwell ----------------------------------- Michael R. Burwell, General Partner By: Gymno Corporation, General Partner By: /S/ Michael R. Burwell ------------------------------------------- Michael R. Burwell, President, Secretary & Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacity indicated on the 31st day of March, 2003. Signature Title Date /S/ Michael R. Burwell - ------------------------------- Michael R. Burwell General Partner March 31, 2003 /S/ Michael R. Burwell - ------------------------------- Michael R. Burwell President, Secretary & Chief March 31, 2003 Financial Officer of Gymno Corporation (Principal Financial and Accounting Officer); Director of Gymno Corporation 41 Exhibit 99.1 GENERAL PARTNER CERTIFICATION I, Michael R. Burwell, General Partner, certify that: 1. I have reviewed this annual report on Form 10-K of Redwood Mortgage Investors VI, a California Limited Partnership (the "Registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls. 6. The Registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Michael R. Burwell - ----------------------------------- Michael R. Burwell, General Partner March 31, 2003 42 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Redwood Mortgage Investors VI (the "Partnership") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the Partnership, certify that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ Michael R. Burwell - ----------------------------------- Michael R. Burwell, General Partner March 31, 2003 43 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 annual report on Form 10-K of Redwood Mortgage Investors VI, a California Limited Partnership (the "Registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls. 6. The Registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Michael R. Burwell - --------------------------------- Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner March 31, 2003 44 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Redwood Mortgage Investors VI (the "Partnership") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner of the Partnership, certify that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ Michael R. Burwell - --------------------------------- Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner March 31, 2003 45