UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended March 31, 2004
- --------------------------------------------------------------------------------
Commission file number 33-12519
- --------------------------------------------------------------------------------
REDWOOD MORTGAGE INVESTORS VI, a California Limited Partnership
(exact name of registrant as specified in its charter)
California 94-3031211
- --------------------------------------------------------------------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
900 Veterans Blvd., Suite 500, Redwood City, CA 94063
- --------------------------------------------------------------------------------
(address of principal executive office)
(650) 365-5341
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES XX NO
---------------- ----------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO NOT APPLICABLE XX
--------------- --------------- ---------------
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest date.
NOT APPLICABLE
1
Part I - Item 1. Financial Statements
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
BALANCE SHEETS
MARCH 31, 2004 and DECEMBER 31, 2003 (unaudited)
ASSETS
March 31, December 31,
2004 2003
--------------- ----------
Cash $ 567,438 $ 32,160
--------------- ----------
Loans
Loans, secured by deeds of trust 5,095,908 5,255,620
Loans, unsecured, net discount of
$107,896 and $112,587 for 2004
and 2003, respectively 247,154 242,462
--------------- ----------
5,343,062 5,498,082
Less allowance for loan losses (282,777) (279,865)
--------------- ----------
Net loans 5,060,285 5,218,217
--------------- ----------
Interest and other receivables
Accrued interest and late fees 66,522 54,562
Advances on loans 4,103 4,091
Receivable from affiliate 7,337 -
--------------- ----------
Total interest and other receivables 77,962 58,653
--------------- ----------
Real estate held for sale, net 857,911 1,312,773
Prepaid expenses 2,722 -
--------------- ----------
Total assets $ 6,566,318 $ 6,621,803
=============== ==========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable $ 17,156 $ 13,064
Payable to affiliate 13,293 12,496
-------------- ----------
Total liabilities 30,449 25,560
-------------- ----------
Partners' capital
Limited partners' capital, subject
to redemption 6,526,108 6,586,482
General partners' capital 9,761 9,761
-------------- ----------
Total partners' capital 6,535,869 6,596,243
-------------- ----------
Total liabilities and partners' capital $ 6,566,318 $ 6,621,803
============== ==========
The accompanying notes are an integral part of these financial statements.
2
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
STATEMENTS OF INCOME
FOR THREE MONTHS ENDED MARCH 31, 2004 and 2003 (unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------------------------
2004 2003
-------------- --------------
Revenues
Interest on loans $ 116,403 $ 107,645
Interest - interest bearing accounts 262 980
Late charges 56 881
Other 13,485 947
-------------- --------------
130,206 110,453
-------------- --------------
Expenses
Loan servicing fees 8,930 12,258
Asset management fees 2,066 2,121
Clerical costs through Redwood Mortgage Corp. - 4,846
Provisions for losses on loans and real estate 6,487 566
Professional services 17,535 13,388
Other 13,572 1,862
-------------- --------------
48,590 35,041
-------------- --------------
Net income $ 81,616 $ 75,412
============== ==============
Net income
General partners (1%) 816 754
Limited partners (99%) 80,800 74,658
-------------- --------------
$ 81,616 $ 75,412
============== ==============
Net income per $1,000 invested by limited
partners for entire period:
-where income is reinvested and compounded $ 12 $ 12
============== ==============
-where partner receives income in monthly
distributions $ 12 $ 12
============== ==============
The accompanying notes are an integral part of these financial statements.
3
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 and 2003 (unaudited)
THREE MONTHS ENDED MARCH 31,
--------------------------------
2004 2003
-------------- --------------
Cash flows from operating activities
Net income $ 81,616 $ 75,412
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for losses on loans and real estate 6,487 566
Early withdrawal penalties credited to income (3,693) (684)
Amortization of discount on unsecured loans (4,692) -
Change in operating assets and liabilities
Accrued interest and advances on loans (11,972) (7,091)
Receivable from affiliate (7,337) -
Accounts payable and payable to affiliate 4,889 1,246
Prepaid expense (2,722) -
-------------- --------------
Net cash provided by operating activities 62,576 69,449
-------------- --------------
Cash flows from investing activities
Principal collected on loans 159,899 235,994
Loans originated (187) (46,578)
Payments for real estate (770) (46,162)
Proceeds from disposition of real estate 452,056 -
-------------- --------------
Net cash provided by investing activities 610,998 143,254
-------------- --------------
Cash flows from financing activities
Partners' withdrawals (138,296) (110,169)
-------------- --------------
Net cash used in financing activities (138,296) (110,169)
-------------- --------------
Net increase in cash 535,278 102,534
Cash - beginning of year 32,160 341,127
-------------- --------------
Cash - end of period $ 567,438 $ 443,661
============== ==============
The accompanying notes are an integral part of these financial statements.
4
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
MARCH 31, 2004 (unaudited)
NOTE 1 - General
In the opinion of the management of the Partnership, the accompanying
unaudited financial statements contain all adjustments, consisting of normal,
recurring adjustments, necessary to present fairly the financial information
included therein. These financial statements should be read in conjunction with
the audited financial statements included in the Partnership's Form 10-K for the
fiscal year ended December 31, 2003 filed with the Securities and Exchange
Commission. The results of operations for the three month period ended March 31,
2004 are not necessarily indicative of the operating results to be expected for
the full year.
NOTE 2 - Summary of Significant Accounting Policies
Loans, secured by deeds of trust
At March 31, 2004 and December 31, 2003, loans categorized as impaired by
the Partnership were $96,716 with a reduction in the carrying value of the
impaired loans of $14,596. 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 at March 31, 2004
and December 31, 2003. The average recorded investment in the impaired loans was
$96,716 for the three months ended March 31, 2004 and $96,716 for the year ended
December 31, 2003, respectively.
At March 31, 2004 and December 31, 2003, the Partnership had one loan past
due 90 days or more totaling $144,349 (2.83% and 2.75% of the secured loan
portfolio), respectively. The Partnership does not consider this loan to be
impaired because there is sufficient collateral to cover the amount outstanding
to the Partnership, and is still accruing interest on this loan.
Allowance for loan losses
The composition of the allowance for loan losses as of March 31, 2004 and
December 31, 2003 was as follows:
March 31, December 31,
2004 2003
---------------- ----------------
Impaired loans $ 14,596 $ 14,596
Specified loans 28,750 28,750
Unsecured loans 239,431 236,519
---------------- ----------------
$ 282,777 $ 279,865
================ ================
Activity in the allowance for loan losses is as follows for the three
months ended March 31, 2004 and December 31, 2003:
March 31, December 31,
2004 2003
----------------- ------------------
Beginning balance $ 279,865 $ 275,294
Provision for loan losses 6,487 4,585
Recoveries - -
Restructures/transfers (3,575) -
Write-offs - (14)
----------------- ------------------
$ 282,777 $ 279,865
================= ==================
5
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
MARCH 31, 2004 (unaudited)
NOTE 2 - Summary of Significant Accounting Policies (continued)
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.
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 periods. 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.
Reclassifications
Certain reclassifications, not affecting previously reported net income or
total partners' capital, have been made to the previously issued financial
statements to conform to the current period classification.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
NOTE 3 - General Partners and Related Parties
The following are commissions and fees 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.
6
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.
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).
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.
NOTE 4 - Real Estate Held for Sale
The following schedule reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, including
estimated costs to sell, as of March 31, 2004 and December 31, 2003:
March 31, December 31,
2004 2003
--------------- ---------------
Costs of properties $1,642,102 $2,096,964
Reduction in value (784,191) (784,191)
--------------- ---------------
Real estate held for sale $ 857,911 $1,312,773
=============== ===============
NOTE 5 - Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Secured loans carrying value was $5,095,908 and $5,255,620 at March 31,
2004 and December 31, 2003, respectively. The fair value of these loans of
$5,027,446 and $5,019,338, 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.
7
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
MARCH 31, 2004 (unaudited)
NOTE 6 - Asset Concentrations and Characteristics
Most loans are secured by recorded deeds of trust. At March 31, 2004 and
December 31, 2003, there were 16 and 16 secured loans outstanding respectively,
with the following characteristics:
March 31, December 31,
2004 2003
-------------- ---------------
Number of secured loans outstanding 16 16
Total secured loans outstanding $ 5,095,908 $ 5,255,620
Average secured loan outstanding $ 318,494 $ 328,476
Average secured loan as percent of total 6.25% 6.25%
Average secured loan as percent of partners' capital 4.87% 4.98%
Largest secured loan outstanding $ 2,103,300 $ 2,103,300
Largest secured loan as percent of total 41.27% 40.02%
Largest secured loan as percent of
partnership assets 32.07% * 31.76% *
Number of counties where security is
located (all California) 8 8
Largest percentage of secured loans in one county 43.37% 42.06%
Average secured loan to appraised value of
security based upon appraisals and prior liens
at time loan was consummated 80.96% 78.87%
Number of secured loans in foreclosure None None
Amounts of secured loans in foreclosure None None
* At loan inception this loan represented 8.8% of outstanding loans and
8.7% of partners' capital
Over time, loans may increase above 10% of the secured loan portfolio or
Partnership assets as the loan portfolio and assets of the Partnership decrease
due to limited partner withdrawals and/or loan payoffs.
8
The following categories of secured loans were held at March 31, 2004 and
December 31, 2003:
March 31, December 31,
2004 2003
-------------- ---------------
First trust deeds $3,823,499 $3,983,032
Second trust deeds 1,272,409 1,272,588
-------------- ---------------
Total loans 5,095,908 5,255,620
Prior liens due other lenders at time of loan 2,377,041 2,377,041
-------------- ---------------
Total debt $7,472,949 $7,632,661
============== ===============
Appraised property value at time of loan $9,230,542 $9,677,215
============== ===============
Total loans as a percent of appraisals based
upon appraisals and prior liens at date of loan 80.96% 78.87%
Investments by type of property
Owner occupied homes $ 639,671 $ 640,000
Non-owner occupied homes 706,958 865,710
Apartments 136,841 136,841
Commercial 3,612,438 3,613,069
-------------- ---------------
$5,095,908 $5,255,620
============== ===============
Scheduled maturity dates of secured loans as of March 31, 2004 are as follows:
Year Ending December 31,
-------------------------------------
2004 $ 503,515
2005 799,533
2006 96,716
2007 3,258,403
2008 46,320
Thereafter 391,421
-----------------
$5,095,908
=================
The scheduled maturities for 2004 include three loans totaling $253,515
(4.97%), which were past maturity at March 31, 2004. One of these loans with a
principal balance of $144,349 was categorized as delinquent over 90 days and is
included in the total loans 90 days or more delinquent presented in Note 2.
Cash deposits at March 31, 2004 of $675,236 were in two banks. The balances
exceeded FDIC insurance limits (up to $100,000 per bank) by $549,637. As and
when deposits in the Partnership's bank accounts increase significantly beyond
the insured limit, the funds are typically either placed on new loans when
available or held as cash.
The Partnership has a substantial amount of its loan receivable balance
from one borrower at March 31, 2004 and December 31, 2003. This borrower
accounted for approximately 60% and 61% of the loan balances at such dates. This
borrower also accounted for approximately 44% and 50% of interest revenue for
the three months ended March 31, 2004 and year ended December 31, 2003,
respectively. At March 31, 2004 and December 31, 2003, the collateral securing
these loans was less than the principal balance due under the loans. Redwood
Mortgage Corp. has provided an indemnity to the Partnership whereby it has
agreed to indemnify and hold harmless, the Partnership from any expenses or
losses incurred by the Partnership by reason the Partnership's inability to
collect all principal due under the loans after the Partnership has exhausted
all reserves set aside for these loans and all remedies available to it
including foreclosure of the underlying collateral. Therefore, these loans are
not considered impaired solely because the value of the collateral securing the
loans is less than the principal due to the Partnership.
9
NOTE 7 - Commitments and Contingencies
Workout agreements
There are two loans totaling $176,046 in workout agreements as of March 31,
2004 and December 31, 2003. The Partnership is not obligated to fund additional
money as of March 31, 2004 and December 31, 2003.
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.
Part I - Item 2. 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 March 31, 2004, there were two
properties held for sale acquired through foreclosure 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.
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 loan is
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-Q may contain forward looking
statements. Uses of words such as "will", "may", "anticipate", "estimate",
"continue" or other forward looking words, discuss future expectations or
predictions. The foregoing analysis of 2004 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
10
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.
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, the Partnership may
collect an amount equivalent to 12% of the loaned amount until 6 months after
the termination date of the offering. Thereafter, the loan brokerage commissions
(points) will be limited to an amount not to exceed 4% of the total Partnership
assets per year. The loan brokerage commissions are paid by the borrowers, and
thus, are not an expense of the Partnership. For the three months ended March
31, 2004 and 2003, loan brokerage commissions paid by the borrowers were $0 and
$1,164, 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 $8,930 and $12,258 were incurred for the
three months ended March 31, 2004 and 2003, 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 $2,066 and $2,121 were incurred by the Partnership for the three
months ended March 31, 2004 and 2003, 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 were
received from the limited partners. As of March 31, 2004 and December 31, 2003,
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 three months ended March 31, 2004 and 2003
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 March
31, 2004, the Partnership's net capital totaled $6,535,869.
The net income increase of $6,204 (8%) for the three months ended March 31,
2004 versus March 31, 2003 was due primarily to an increase in interest earned
on loans of $8,758, a decrease in interest earned - bank of $718, an increase in
11
late charges and other fees of $11,713; and decreases in loan servicing fees of
$3,328. These were offset by significant expense increases for the three months
ended March 31, 2004 including a provision for losses on loans and real estate
acquired through foreclosure of $5,921, other expenses of $11,710, increases in
professional services of $4,147, and a decrease in clerical costs of $4,846.
The increase in interest on loans of $8,758 for the three months ended
March 31, 2004 versus the three months ended March 31, 2003, was due to a higher
average loan portfolio of $5,147,037 in 2004 as compared to $5,056,758 in 2003.
The decrease in late charge revenue of $825 for the three months ended
March 31, 2004 versus 2003 is reflective of more loans being current.
The increase in other income of $12,538 for the three months ended March
31, 2004 versus March 31, 2003 was due to the receipt of $9,643 as a
non-refundable payment which was not deductible from the purchase price of a
real estate held for sale.
The increase in professional fees of $4,147 for the three months ended
March 31, 2004 versus 2003 relates mainly to the timing of services for audits,
financial report writing and tax filing.
The decrease in loan servicing fees of $3,328 for the three months ended
March 31, 2004 versus March 31, 2003 is due to the loan servicing agent waiving
a portion of the loan servicing fee during the first quarter of 2004.
The increase of $5,921 in provision for losses on loans and real estate
owned through foreclosure for the three months ended March 31, 2004 versus 2003
is to provide for a small loss sustained upon sale of one of the real estate
properties held for sale. Otherwise, the general partners' are of the opinion
that the existing reserves and the supporting guarantee from Redwood Mortgage
Corp. relating to the collectibility of certain Partnership loans are adequate.
Increases in other expenses of $11,710 for the three months ended March
31,2004 versus the corresponding three months ended March 31, 2003 relate to the
costs relating to the upkeep of existing real estate owned properties.
The decrease in clerical costs of $4,846 for the three months ended March
31, 2004 versus March 31, 2003 is due to a waiver of such fees by Redwood
Mortgage Corp. for the current quarter.
The decrease in limited partners' capital of $201,735 from $6,727,843 as of
March 31, 2003 to $6,526,108 as of March 31, 2004 is due to the withdrawal of
earnings and capital by the limited partners.
Foreclosures decreased from 1 ($176,656) at March 31, 2003 to none as of
March 31, 2004. This loan was paid off by the borrower in June, 2003.
The Partnership began funding loans in October 1987. The Partnership's
secured loans outstanding as of March 31, 2004 and 2003 were $5,095,908 and
$4,993,686, respectively. The overall increase in loans outstanding to March 31,
2004 from March 31, 2003, was due primarily to the Partnership reinvesting loan
payoffs into new loans. During this period, loan principal collections exceeded
limited partner liquidations.
Since January, 2001, and through March 31, 2004, the Federal Reserve
reduced interest rates significantly by cutting the Federal Funds Rate to 1.00%.
The effect of the previous 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 during 2004 at rates similar to those that prevailed in 2003. The
lowering of interest rates has encouraged those borrowers that have mortgages
with higher interest rates than those currently available to seek refinancing of
their obligations. The partnership may face prepayments in the existing
portfolio from borrowers taking advantage of these lower rates. However, demand
for loans from qualified borrowers continues to be strong and as prepayments
occur, the general partners expect to replace paid off loans with loans at
somewhat lower interest rates. At this time, the general partners believe that
the average loan portfolio interest rate will decline approximately .50% over
the year 2004. Based upon the rates payable in connection with the existing
loans, and anticipated interest rates to be charged by the partnership and the
12
general partners' experience, the general partners anticipate but do not
guarantee that the annualized yield for compounding limited partners will range
between 4.75% and 5.00% in 2004.
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-five 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 March 31, 2004,
there were no properties in foreclosure. As of March 31, 2004 and 2003, the
Partnership's real estate owned account balance was $857,911 and $1,280,702,
respectively. The decrease was due to the disposition of one of the properties
through sale. The Partnership intends to sell the remaining real estate owned
properties and has contracted with prospective buyers.
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, real
estate held for sale 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, the Northern California real estate market slowed
and the national and local economies slipped into recession. During 2002 and
2003 the economy has stabilized, but is still stagnant. At March 31, 2004 the
Partnership had one loan past due 90 days or more totaling $144,335. This loan
past due 90 days or more is also past maturity. In addition to the one 90 day or
more delinquent loan the Partnership has two loans which are making current
monthly payments but are past maturity. These two loans past maturity have
principal balances of $109,166. In addition to the above, the Partnership
considers one loan to be impaired, which means that interest is no longer being
accrued and that payments received will be applied to reduce the outstanding
loan balances, including accrued interest and advances. The principal balance of
the impaired loan is $96,716. The Partnership does not have any filed notices of
default, which would begin the foreclosure process at March 31, 2004. The
Partnership entered into workout agreements with borrowers who are past maturity
or delinquent in their regular payments. The Partnership had workout agreements
on two loans totaling $176,046 (3.45% of the loan portfolio) as of March 31,
2004. These borrowers in workout agreements are included in the delinquent and
past matured loans. Typically, a workout agreement allows the borrower to extend
the maturity date of the balloon payment and/or 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 delinquency and workout
agreements existing at March 31, 2004, in management's opinion, do not have a
material effect on our results of operations or liquidity. These workouts and
delinquency 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 control many of these
factors, actual results may and do sometimes differ significantly from estimates
made by the general partners.
As of March 31, 2004 and 2003, the Partnership's real estate held for sale
balance was $875,911 and $1,280,702, , respectively. The decrease in REO balance
by $422,791 as of March 31, 2004 is due to the disposition of one of the REO
properties. During 2002, the Partnership took back one piece of real estate
collateral through foreclosure. The Partnership, together with other
partnerships, all affiliates of the general partners, own the property. The
property is a 4 unit condominium complex. During the year 2003, renovation work
was completed and the property was placed on the market for sale. A purchase
offer was accepted and the escrow closed in March, 2004. The Partnership
sustained a loss of approximately $13,702, which had been anticipated and
reserved. The Partnership did not take back any collateral security from
borrowers in 2004.
13
The Partnership also owns, through previous foreclosures, 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 in the land at March 31, 2004 is $130,215.
Currently the Partnership is negotiating a sale with an interested buyer. The
general partners believe that the property is worth considerably more than its
net investment.
The second property is a commercial property located in Walnut Creek,
California. At March 31, 2004, the cost of this property was $1,511,887. The
property is currently pending sale. Management has set aside loss reserves of
$784,191, which they believe are adequate in amount to cover anticipated losses.
Management provided $6,487 and $566 as provision for loan losses for the
three months ended March 31, 2004 and 2003, respectively. The increase in the
provision for loan losses was to build up for the allowance for potential losses
in the future. During 2002, Redwood Mortgage Corp. provided an indemnity to the
Partnership whereby it has agreed to indemnify and hold harmless, the
Partnership from any expenses or losses incurred by the Partnership by reason of
the Partnership's inability to collect all principal due under certain loans
after the Partnership has exhausted all reserves set aside for these loans and
all remedies available to it including foreclosure of the underlying collateral.
Therefore, these loans are not considered impaired solely because the value of
the collateral securing the loans is less than the principal due to the
Partnership.
PORTFOLIO REVIEW - For the three months ended March 31, 2004 and 2003.
Loan Portfolio
The Partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of March 31, 2004 and
2003, the Partnership's loans secured by real property collateral in the five
San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda,
and Marin) represented $4,745,676 (93.13%) and $4,399,817 (88.11%) of the
outstanding secured loan portfolio. The remainder of the portfolio represented
loans secured by real estate located primarily in Northern California.
As of March 31, 2004 and March 31,2003, the Partnership held 16 and 20
loans respectively in the following categories:
March 31, March 31,
2004 2003
---------------- ---------------
Single family residence (1-4 units) $1,346,629 26.42% $793,077 15.88%
Multiple family dwellings (5+ units) 136,841 2.69% 363,696 7.28%
Commercial 3,612,438 70.89% 3,836,913 76.84%
--------- ------- --------- -------
Total $5,095,908 100.0% $4,993,686 100.0%
========= ======= ========= =======
14
As of March 31, 2004, the Partnership held 16 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the loans held by the Partnership as of March 31, 2004:
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of March 31, 2004
# of Loans Amount Percent
------------- ------------- ------------
1st Mortgages 8 $3,823,499 75.03%
2nd Mortgages 8 1,272,409 24.97%
============= ============= ============
Total 16 $5,095,908 100%
Maturing 12/31/04 and prior 4 $503,515 9.88%
Maturing prior to 12/31/05 4 799,533 15.69%
Maturing prior to 12/31/06 1 96,716 1.90%
Maturing after 12/31/06 7 3,696,144 72.53%
============= ============= ============
Total 16 $5,095,908 100%
Average Loan $ 318,494 6.25%
Largest Loan 2,103,300 41.27%
Smallest Loan 4,407 0.09%
Average Loan-to-Value 80.96%
The Partnership's largest loan in the principal amount of $2,103,300
represents 41.27% of outstanding secured loans and 32.07% of Partnership assets.
Larger loans sometimes increase above 10% of the secured loan portfolio or
Partnership assets as these amounts decrease due to limited partner withdrawals
and loan payoffs and due to restructuring of existing loans. In this instance
all of these factors affected this loan. Chief among them was a restructure of
two loans with outstanding principal plus accrued interest, late fees and
advances into one new loan with an outstanding balance of $2,103,300.
The Partnership has a substantial amount of its loan receivable balance
from one borrower at March 31, 2004 and 2003. The borrower accounted for
approximately 60% and 61% of the loan balances at such dates. This borrower has
two loans secured by separate properties in the principal amounts of $2,103,300
and $956,800 as of March 31, 2004.
Borrower Liquidity and Capital Resources.
The Partnership relies upon loan payoffs and borrowers' mortgage payments
for the source of funds for loans. Recently, mortgage interest rates have
decreased somewhat from those available at the inception of the Partnership. If
interest rates were to increase substantially, the yield of the Partnership's
loans may provide lower yields than other comparable debt-related investments.
Additionally, since the Partnership has made primarily fixed rate loans, if
interest rates were to rise, the likely result would be a slower prepayment rate
for the Partnership. This could cause a lower degree of liquidity as well as a
slowdown in the ability of the Partnership to invest in loans at the then
current interest rates. Conversely, in the event interest rates were to decline,
the Partnership could see significant borrower prepayments, which, if the
Partnership can only obtain the then existing lower rates of interest may cause
a dilution of the Partnership's yield on loans, thereby lowering the
Partnership's overall yield to the limited partners. Cash is constantly being
generated from borrower payments of interest, principal and loan payoffs.
Currently, cash flow exceeds Partnership expenses and earnings requirements.
Cash is constantly being generated from borrower interest payments, late
charges, amortization of loan principal and loan payoffs. Currently, cash flow
exceeds Partnership expenses, earnings and limited partner capital payout
requirements. Excess cash flow will be invested in new loan opportunities, when
available, and in other Partnership business.
At the time of subscription to the Partnership, limited partners made an
irrevocable decision to either take distributions of earnings monthly, quarterly
or annually or to compound earnings in their capital account. For the three
15
months ended March 31, 2004 and 2003, the Partnership made distributions of
earnings to limited partners of $27,786 and $27,780, respectively. Distribution
of earnings to limited partners for the quarters ended March 31, 2004 and 2003,
to limited partners' capital accounts and not withdrawn, was $53,014 and
$55,210, respectively. As of March 31, 2004 and 2003, limited partners electing
to withdraw earnings represented 34% 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 three months ended March 31, 2004 and 2003,
$56,207 and $8,548, 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 March 31, 2004 and 2003, respectively, and is expected by
the general partners to commonly occur at these levels.
Additionally, for the three months ended March 31, 2004 and 2003, $57,177
and $73,684, 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.
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 March
31, 2004, approximately 93.13%, ($4,745,676) 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
16
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.
Recently the national and the Northern California economies seem to be
improving. Job creation remains a concern, as little job creation seems to be
evident. The partnership makes loans primarily in Northern California and real
estate values of residential, commercial, multi-family properties and land are
of particular interest to the partnership. Real estate is the primary security
for the partnership's loans.
The residential real estate market in California continues to appreciate.
The San Francisco Business Times of March 19, 2004 states "Robust February for
Bay Area home sales." "Bay Area home prices rose at their fastest rate in nearly
three years and sales were at near-record levels last month, the result of
continued demand and an accommodating mortgage finance environment, according to
DataQuick Information Systems of La Jolla, a real estate information service. A
total of 7,412 new and resale houses and condos were sold in the nine-county
region in February. That was up 4.4 percent from 7,102 the month before and 10.6
percent from 6,704 for February last year, according to DataQuick". "Last month
was the second strongest February DataQuick has in its records, which go back to
1988." "The median price paid for a Bay Area home was $457,000 last month, near
December's record $458,000. Last month's median was up 3.2 percent from $443,000
in January and up 13.4 percent from $403,000 for February last year. The
year-over-year increase was the highest since March 2001 when the median was
$386,000, up 17.3 percent from $329,000 a year earlier. Santa Clara County had
the lion's share of home sales --25%-- with 1,865 homes sold in February
compared to 1,450 in February 2003, according to DataQuick, which compiles its
figures from public records of all sales. The Median Price in the county,
according to DataQuick, was $490,000, up 7.5% in a year's time." "Indicators of
market distress are still largely absent, in DataQuick's opinion. It said
foreclosure rates are low, flipping rates are low, down payment sizes are stable
and there have been no significant shifts in market mix."
On the commercial scene, the SF Business Times of March 26-April 1, 2004
stated "City's real estate market creeps toward recovery." "San Francisco's
commercial real estate industry clawed forward in the first quarter, as office
vacancy moved downward, rents remained flat or moved up slightly, and sales
surged. Colliers International reported 221,347 square feet of downtown office
absorption, while preliminary numbers from Grubb & Ellis indicated around
140,000 square feet of absorption. The firms put the office vacancy rate at 16.9
percent and 22 percent, respectively. "We're trending back toward a favorable
market," said Scott Harper, managing director of Collier's San Francisco office.
"It's the third consecutive quarter, and fourth of the last five quarters, of
positive absorption." The pace of absorption did slow from the fourth quarter,
however. Collier's reported 360,631 square feet of positive absorption during
the final three months of 2003, while Grubb saw 365,000 square feet. "As
recovery starts, the pace usually picks up initially and then starts to
moderate," said Colin Yasukochi, regional manager of research and client
services for California at Grubb & Ellis. "We've always projected that
performance will be uneven in the first year of the recovery." Also on the plus
side, sublease space is steadily decreasing. After hitting a peak of around 8
million square feet in 2002, total San Francisco sublease space is now around 4
million square feet, Grubb & Ellis reported."
A strong, appreciating residential market is good for primarily equity
based lenders as it allows borrowers to sell or refinance if they become unable
to make their mortgage payments. Appreciation assists lenders if they must take
back the real estate security on a loan mitigating potential loan losses.
Recovering commercial vacancies and stable to increasing rental rates will
assist landlords in debt service coverage, cash flow, and property values. All
are good for the real estate collateral securing the Partnership's commercial
loans.
For Partnership loans outstanding, as of March 31, 2004, the Partnership
had an average loan to value ratio computed based upon appraisals and prior
liens as of the date the loan was made of 80.96%. This percentage does not
account for any increases or decreases in property values since the date the
loan was made, nor does it include any reductions in principal through
amortization of payments after the loan was made. This loan to value ratio will
assist the Partnership in weathering loan delinquencies and foreclosures should
they eventuate.
17
Part I - Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------
The following table contains information about the cash held in money
market accounts, and loans held in the Partnership's portfolio as of March 31,
2004. The presentation, for each category of information, aggregates the assets
and liabilities by their maturity dates for maturities occurring in each of the
years 2004 through 2008 and separately aggregates the information for all
maturities arising after 2008. The carrying values of these assets and
liabilities approximate their fair market values as of March 31, 2004:
2004 2005 2006 2007 2008 Thereafter Total
---------------- ----------- ---------- ----------- ------------- ------------- -------------
Interest earning assets:
Money market accounts $502,680 $ 502,680
Average interest rate 0.96% 0.96%
Loans secured by deeds
of trust $503,515 799,533 96,716 3,258,403 46,320 391,421 $5,095,908
Average interest rate 10.24% 9.88% 6.50% 9.09% 10.00% 9.09% 9.29%
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
March 31, 2004) earn interest at fixed rates. Changes in interest rates may also
affect the value of the Partnership's investment in mortgage loans and the rates
at which the Partnership reinvests funds obtained from loan repayments and new
capital contributions from limited partners. If interest rates increase, the
interest rates the Partnership obtains from reinvested funds will generally
increase, but the value of the Partnership's existing loans at fixed rates will
generally tend to decrease. The risk is mitigated by the fact that the
Partnership does not intend to sell its loan portfolio, rather such loans are
held until they are paid off. If interest rates decrease, the amounts becoming
available to the Partnership for investment due to repayment of Partnership
loans may be reinvested at lower rates than the Partnership had been able to
obtain in prior investments, or than the rates on the repaid loans. In addition,
interest rate decreases may encourage borrowers to refinance their loans with
the Partnership at a time where the Partnership is unable to reinvest in loans
of comparable value.
The Partnership does not hedge or otherwise seek to manage interest rate
risk. The Partnership does not enter into risk sensitive instruments for trading
purposes.
ASSET QUALITY
A consequence of lending activities is that occasionally losses will be
experienced and that the amount of such losses will vary from time to time,
depending upon the risk characteristics of the loan portfolio as affected by
economic conditions and the financial experiences of borrowers. Many of these
factors are beyond the control of the general partners. There is no precise
method of predicting specific losses or amounts that ultimately may be charged
off on particular segments of the loan portfolio, especially in light of the
current economic environment.
The conclusion that a loan may become uncollectible, in whole or in part,
is a matter of judgment. Although institutional lenders are subject to
requirements and regulations that, among other things, require them to perform
ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and
to obtain and maintain current information regarding their borrowers and the
securing properties, the Partnership is not subject to these regulations and has
not adopted certain of these practices. Rather, the general partners, in
connection with the periodic closing of the accounting records of the
Partnership and the preparation of the financial statements, determine whether
the allowance for loan losses is adequate to cover potential loan losses of the
Partnership. As of March 31, 2004 the general partners have determined that the
allowance for loan losses and real estate owned of $1,066,968 (16.32% of net
assets) is adequate in amount. Because of the number of variables involved, the
magnitude of the swings possible and the general partners' inability to control
many of these factors, actual results may and do sometimes differ significantly
from estimates made by the general partners. As of March 31, 2004, one loan was
delinquent over 90 days amounting to $144,349. Two loans, including the
delinquent loan, totaling $176,046 were subject to workout agreements, which
require the borrower to make regular monthly loan payments and/or payments plus
additional catch up amounts.
18
The Partnership also owns (through previous foreclosure) two other
properties; a commercial property and the other land. The land is located in
East Palo Alto. The land is owned with two other affiliated partnerships. The
Partnership's net investment in the land at March 31, 2004 is $130,215.
Currently the Partnership is in the process of negotiating a sale with an
interested buyer. The Partnership's net investment of $130,215 is less than 1%
of Partnership assets. The general partners believe that the property is worth
considerably more than its net investment.The second property is a commercial
property located in Walnut Creek, California. The property is currently pending
sale. We anticipate that the sale will occur in the last quarter of 2004.
Management has set aside loss reserves in the amount of $784,191, which they
believe are adequate in amount to cover anticipated losses. Part I - Item 4.
Controls and Procedures.
As of March 31, 2004, the general partner of the Partnership carried out an
evaluation, under the supervision and with the participation of the general
partner's management, including the general partner's President and Chief
Financial Officer, of the effectiveness of the design and operation of the
Partnership's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the President and Chief Financial Officer of
the general partner concluded that the Partnership's disclosure controls and
procedures are effective. There were no significant changes in the Partnership's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
19
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP
The Partnership has no officers or directors. The Partnership is managed by
the general partners. There are certain fees and other items paid to management
and related parties. A more complete description of management compensation is
found in the Prospectus, part of the Form S-11 and subsequent amendments related
to the offering of Partnership investments, 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 their
affiliates for services rendered during the three months ended March 31, 2004.
All such compensation is in compliance with the guidelines and limitations set
forth in the Prospectus.
Entity Receiving Description of Compensation
Compensation and Services Rendered Amount
- ------------------ ----------------------------------------- -----------------
I. Redwood Mortgage
Corp. Loan Servicing Fee for servicing loans.............$8,930
General Partners
&/or Affiliates Asset Management Fee for managing assets...........$2,066
General Partners 1% interest in profits...............................$816
II. FEES PAID BY BORROWERS ON LOANS PLACED BY COMPANIES RELATED TO THE GENERAL
PARTNERS WITH THE PARTNERSHIP (EXPENSES OF BORROWERS NOT OF THE PARTNERSHIP):
Redwood Mortgage
Corp. Mortgage Brokerage Commissions for services in connection
with the review, selection, evaluation, negotiation, and
extension of the loans paid by the borrowers and not by
the Partnership.........................................0
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.............................................0
Gymno Corporation Reconveyance Fee......................................$60
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0
20
PART 2
OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership periodically is a defendant in
various legal actions. Please refer to note (7)
of financial statements.
Item 2. Changes in the Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(99.1) Certification of Michael R. Burwell, General Partner
(99.2) Certification of Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of
Gymno Corporation, General Partner
(b) Form 8-K
There were no 8-K filings in the quarter ended March 31, 2004.
21
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized on the 14th day of May
2004.
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/Treasurer & Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacity indicated on the 14th day of May 2004.
Signature Title Date
/S/ Michael R. Burwell
- -----------------------------
Michael R. Burwell General Partner May 14, 2004
/S/ Michael R. Burwell
- -----------------------------
Michael R. Burwell President, Secretary/Treasurer & May 14, 2004
CFO of Gymno Corporation
(Principal Financial and
Accounting Officer);
Director of Gymno Corporation
22
Exhibit 99.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VI, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is made known to us,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of March 31, 2004 (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, General Partner
May 14, 2004
23
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VI
(the "Partnership") on Form 10-Q for the period ending March 31, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the
Partnership, certify, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, General Partner
May 14, 2004
24
Exhibit 99.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VI, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is made known to us,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of March 31, 2004 (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, President and
Chief Financial Officer, of Gymno
Corporation, General Partner
May 14, 2004
25
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VI
(the "Partnership") on Form 10-Q for the period ending March 31, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General
Partner of the Partnership, certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial
Officer of Gymno Corporation, General Partner
May 14, 2004
26