UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
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 incorporation (I.R.S. Employer
or organization) Identification No.)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063-1743
(Address of principal executive offices) (Zip Code)
(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 such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes XX No
-------------- --------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No XX
-------------- -------------
1
Part I - Item I. FINANCIAL STATEMENTS
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
BALANCE SHEETS
JUNE 30, 2004 and DECEMBER 31, 2003 (unaudited)
ASSETS
June 30, December 31,
2004 2003
---------------- ---------------
Cash $ 579,831 $ 32,160
---------------- ---------------
Loans
Loans, secured by deeds of trust 5,044,151 5,255,620
Loans, unsecured, net discount of $103,205 and $112,588 for
June 30, 2004 and December 31, 2003, respectively 251,845 242,462
---------------- ---------------
5,295,996 5,498,082
Less allowance for loan losses (295,165) (279,865)
---------------- ---------------
Net loans 5,000,831 5,218,217
---------------- ---------------
Interest and other receivables
Accrued interest and late fees 65,409 54,562
Advances on loans 4,103 4,091
---------------- ---------------
Total interest and other receivables 69,512 58,653
---------------- ---------------
Real estate held for sale, net 862,288 1,312,773
---------------- ---------------
Total assets $ 6,512,462 $ 6,621,803
================ ===============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable $ 16,122 $ 13,064
Payable to affiliate 13,322 12,496
---------------- ---------------
Total liabilities 29,444 25,560
---------------- ---------------
Partners' capital
Limited partners' capital, subject to redemption 6,473,257 6,586,482
General partners' capital 9,761 9,761
---------------- ---------------
Total partners' capital 6,483,018 6,596,243
---------------- ---------------
Total liabilities and partners' capital $ 6,512,462 $ 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 AND SIX MONTHS ENDED JUNE 30, 2004 and 2003 (unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2004 2003 2004 2003
------------- ------------ ------------- ------------
Revenues
Interest on loans $ 124,749 $ 131,106 $ 241,152 $ 243,443
Interest - interest bearing accounts 1,509 754 1,771 1,734
Late charges, prepayment penalties, and fees 13,863 22,446 27,404 24,274
------------- ------------ ------------- ------------
140,121 154,306 270,327 269,451
------------- ------------ ------------- ------------
Expenses
Loan servicing fees 16,238 12,399 25,168 24,657
Asset management fees 2,046 2,111 4,112 4,232
Clerical costs through Redwood Mortgage Corp. 6,825 4,397 6,825 9,243
Provisions for losses on loans and real estate 8,813 25,759 15,300 31,017
Professional services 8,805 14,096 26,340 27,484
Other 16,510 3,653 30,082 5,515
------------- ------------ ------------- ------------
59,237 62,415 107,827 102,148
------------- ------------ ------------- ------------
Net income $ 80,884 $ 91,891 $ 162,500 $ 167,303
============= ============ ============= ============
Net income
General partners (1%) $ 809 $ 919 $ 1,625 $ 1,673
Limited partners (99%) 80,075 90,972 160,875 165,630
------------- ------------ ------------- ------------
$ 80,884 $ 91,891 $ 162,500 $ 167,303
============= ============ ============= ============
Net income per $1,000 invested by limited partners
for entire period:
-where income is reinvested and compounded $12.28 $12.28 $24.71 $24.71
============= ============ ============= ============
-where partner receives income in monthly
distributions $12.23 $12.23 $24.46 $24.46
============= ============ ============= ============
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 SIX MONTHS ENDED JUNE 30, 2004 and 2003 (unaudited)
SIX MONTHS ENDED JUNE 30,
-----------------------------------
2004 2003
------------- -------------
Cash flows from operating activities
Net income $ 162,500 $ 167,303
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses 15,300 21,634
Early withdrawal penalties credited to income (7,493) (1,246)
Amortization of discount on unsecured loans (9,383) (9,383)
Imputed interest income 9,383 9,383
Loss on disposition of real estate held for sale 1,048 -
Change in operating assets and liabilities
Accrued interest and advances on loans (11,911) 34,084
Accounts payable and payable to affiliate 3,884 (1,042)
------------- -------------
Net cash provided by operating activities 163,328 220,733
------------- -------------
Cash flows from investing activities
Principal collected on loans 202,273 682,853
Loans originated (187) (221,579)
Payments for real estate held for sale (1,203) (78,161)
Proceeds from disposition of real estate 451,688 -
------------- -------------
Net cash provided by investing activities 652,571 383,113
------------- -------------
Cash flows from financing activities partners' withdrawals (268,228) (216,741)
------------- -------------
Net cash used in financing activities (268,228) (216,741)
------------- -------------
Net increase in cash 547,671 387,105
Cash - beginning of year 32,160 341,127
------------- -------------
Cash - end of period $ 579,831 $ 728,232
============= =============
The accompanying notes are an integral part of these financial statements.
4
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
JUNE 30, 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 six month period ended June 30,
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 June 30, 2004 and December 31, 2003, the Partnership had one loan
categorized as impaired totaling $96,716, with a reduction in the carrying value
of the impaired loan of $14,596. The reduction in the carrying value of the
impaired loan is included in the allowance for loan losses. The impaired loan
has accrued interest, late charges and advances totaling $10,973 at June 30,
2004 and December 31, 2003. The average recorded investment in the impaired loan
was $96,716 for the six month period ended June 30, 2004 and for the year ended
December 31, 2003.
At June 30, 2004 and December 31, 2003, the Partnership had one loan past
due 90 days or more in interest payments totaling $144,349 (2.86% of the secured
loan portfolio at June 30, 2004 and 2.75% of the secured loan portfolio at
December 31, 2003). This loan is also past its maturity date (see Note 6). The
Partnership does not consider this loan to be impaired because there is
sufficient collateral to cover the amount outstanding to the Partnership, and
the Partnership is still accruing interest on this loan.
Allowance for loan losses
The composition of the allowance for loan losses as of June 30, 2004 and
December 31, 2003 was as follows:
June 30, December 31,
2004 2003
--------------- ----------------
Impaired loans $ 14,596 $ 14,596
Specified loans 28,750 28,750
Unsecured loans 251,819 236,519
--------------- ----------------
$ 295,165 $ 279,865
=============== ================
Activity in the allowance for loan losses is as follows for the six months
ended June 30, 2004 and the year ended December 31, 2003:
June 30, December 31,
2004 2003
-------------- ----------------
Beginning balance $ 279,865 $ 275,294
Provision for loan losses 15,300 4,585
Write-offs - (14)
-------------- ----------------
$ 295,165 $ 279,865
============== ================
5
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
JUNE 30, 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 dates 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 year classification.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
note 3 - General Partners and Related Parties
The following are commissions and fees 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, Redwood Mortgage Corp., an affiliate of the general
partners, 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
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
JUNE 30, 2004 (unaudited)
note 3 - 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., an affiliate of the general
partners, 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 servicing
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 June 30, 2004 and December 31, 2003:
June 30, December 31,
2004 2003
---------------- ----------------
Costs of properties $ 1,642,102 $ 2,096,964
Reduction in value (779,814) (784,191)
---------------- ----------------
Real estate held for sale $ 862,288 $ 1,312,773
================ ================
7
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
JUNE 30, 2004 (unaudited)
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 $5,044,151 and $5,255,620 at June 30, 2004
and December 31, 2003, respectively. The fair value of these loans of $4,898,970
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.
note 6 - Asset Concentrations and Characteristics
Loans are secured by recorded deeds of trust. At June 30, 2004 and December
31, 2003, there were 14 and 16 secured loans outstanding respectively, with the
following characteristics:
June 30, December 31,
2004 2003
---------------- ---------------
Number of secured loans outstanding 14 16
Total secured loans outstanding $ 5,044,151 $ 5,255,620
Average secured loan outstanding $ 360,296 $ 328,476
Average secured loan as percent of total 7.14% 6.25%
Average secured loan as percent of partners' capital 5.56% 4.98%
Largest secured loan outstanding $ 2,103,300 $ 2,103,300
Largest secured loan as percent of total 41.70% 40.02%
Largest secured loan as percent of Partnership assets 32.30% * 31.77% *
Number of counties where security is located (all California) 9 8
Largest percentage of secured loans in one county 43.81% 42.06%
Average secured loan to appraised value of security based on appraised
values and senior liens(1) at inception of loan 81.33% 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.
- -----------------------
(1) A senior lien (s) is a recorded encumbrance that is senior in right of
payment and priority to the Partnership's loan.
8
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
JUNE 30, 2004 (unaudited)
note 6 - Asset Concentrations and Characteristics (continued)
The following categories of secured loans were held at June 30, 2004 and
December 31, 2003:
June 30, December 31,
2004 2003
------------- -------------
First trust deeds $ 3,818,217 $ 3,983,032
Second trust deeds 1,225,934 1,272,588
------------- -------------
Total loans 5,044,151 5,255,620
Senior liens due other lenders 2,190,725 2,377,041
------------- -------------
Total debt $ 7,234,876 $ 7,632,661
============= =============
Appraised property value at inception of loan $ 8,895,188 $ 9,677,215
------------- -------------
Total secured loans as a percent of appraisals 81.33% 78.87%
------------- -------------
Secured loans by type of property
Owner occupied homes $ 639,337 $ 640,000
Non-owner occupied homes 702,475 865,710
Apartments 136,841 136,841
Commercial 3,565,498 3,613,069
------------- -------------
$ 5,044,151 $ 5,255,620
============= =============
Scheduled maturity dates of secured loans as of June 30, 2004 are as follows:
Year Ending December 31,
-----------------------------------
2004 $ 503,432
2005 795,125
2006 96,716
2007 3,258,118
2008 -
Thereafter 390,760
---------------
$ 5,044,151
===============
The remaining scheduled maturities for 2004 include three loans totaling
$253,432, which were past maturity at June 30, 2004. Interest payments on one of
these loans with a principal balance of $144,349 were categorized as delinquent
over 90 days.
At times, the Partnership's cash deposits exceeded federally insured
limits. Management believes deposits are maintained in financially secure
financial institutions.
9
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
JUNE 30, 2004 (unaudited)
note 6 - Asset Concentrations and Characteristics (continued)
The Partnership has a substantial amount of its loan receivable balance
from one borrower at June 30, 2004 and December 31, 2003. This borrower
accounted for approximately 61% and 58% of the loan balances at such dates,
respectively. This borrower accounted for approximately 47% and 50% of interest
revenue for the six month period ended June 30, 2004 and year ended December 31,
2003, respectively. At June 30, 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 of 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.
note 7 - Commitments and Contingencies
Workout agreements
The Partnership has negotiated various contractual workout agreements with
borrowers. Under the terms of these workout agreements the Partnership is not
obligated to make any additional monetary advances for the maintenance or repair
of the collateral securing the loans as of June 30, 2004 and December 31, 2003.
There are two loans totaling $175,967 and $176,085 in workout agreements as of
June 30, 2004 and December 31, 2003, respectively.
Legal proceedings
The Partnership is involved in various legal actions arising in the normal
course of business. In the opinion of management, such matters will not have a
material effect upon the financial position of the Partnership.
10
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 dates and revenues and expenses
for the reporting periods. 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
held for sale. At June 30, 2004, there were two real estate properties held for
sale, acquired through foreclosure in prior years.
Loans and the related accrued interest, late fees and advances are analyzed
on a regular 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 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 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. Michael R.
Burwell is President and Chief Financial Officer of Redwood Mortgage Corp. and
Gymno Corporation. 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.
11
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, Redwood Mortgage
Corp. 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. Loan
brokerage commissions paid by the borrowers were $0 and $6,414 for the six month
periods ended June 30, 2004 and 2003, and $0 and $5,250 for the three month
periods ended June 30, 2004 and 2003, 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 $25,168 and $24,657 were incurred for the
six month periods ended June 30, 2004 and 2003, and $16,238 and $12,399 were
incurred for the three month periods ended June 30, 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 $4,112 and $4,232 were incurred by the Partnership for the six month
periods ended June 30, 2004 and 2003, and $2,046 and $2,111 were incurred for
the three month periods ended June 30, 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 are
received from the limited partners. As of June 30, 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.
12
Results of Operations - For the six and three months ended June 30, 2004
and 2003
The following increases/(decreases) took place in the Partnership's
operating results for the six and three month periods ended June 30, 2004 versus
2003 and are summarized hereunder:
Changes during the Changes during the
six months ended three months ended
June 30, 2004 versus 2003 June 30, 2004 versus 2003
----------------------------- -----------------------------
Net income increase/(decrease) $ (4,803) $ (11,007)
=============== ===============
Revenue
Interest on loans (2,291) (6,357)
Interest - bank 37 755
Late charges, prepayment penalties and fees 3,130 (8,583)
--------------- ---------------
$ 876 $ (14,185)
--------------- ---------------
Expenses
Loan servicing fees $ 511 $ 3,839
Asset management fees (120) (65)
Clerical costs (2,418) 2,428
Provision for losses on loans and real estate (15,717) (16,946)
Professional services (1,144) (5,291)
Other 24,567 12,857
--------------- ---------------
$ 5,679 $ (3,178)
--------------- ---------------
Net income increase/(decrease) $ (4,803) $ (11,007)
=============== ===============
The decrease in interest on loans of $2,291 for the six month period ended
June 30, 2004 versus June 30, 2003 was due to a non-recurring adjustment to
increase interest on loans in relation to two previously impaired loans on June
30, 2003. Had the Partnership not had this adjustment during the first half of
2003, interest income on loans would have been $226,867 and there would have
been an increase in interest on loans for the first half of 2004 of $14,285.
This adjustment had a similar impact for the decrease in interest on loans of
$6,357 for the second quarter of 2004. Had this adjustment not occurred on June
30, 2003 interest earnings for the second quarter of 2004 would have had an
increase of $10,219.
The increase in late charge revenue and other fees of $3,130 for the six
month period ended June 30, 2004 versus June 30, 2003 is due to the receipt of
non-refundable option payments, which are not deductible from any eventual
purchase price of real estate held for sale of $19,286; offset by a decrease in
late fees and miscellaneous income of $16,156. The decrease in late charge
revenue and other fees of $8,583 for the three month period ended June 30, 2004
versus June 30, 2003, represents a reduction in late charges and fee income of
$4,451, and a reduction in miscellaneous income of $4,132. These two net
decreases in revenue during the second quarter of 2004 occurred through
collection of additional late charges and interest on advances on two delinquent
loans that paid off during the second quarter of 2003.
The increase in loan servicing fees of $511 for the six month period and
$3,839 for the three month period ended June 30, 2004 versus June 30, 2003 is
primarily attributable to the higher average loan portfolio balances of
$5,044,151 and $4,721,826 during 2004 and 2003. During the three month period
ended June 30, 2003, the Partnership had a non-recurring adjustment to loan
servicing fees in relation to two loans. Had the Partnership not had this
adjustment during the second quarter of 2003, loan servicing fees would have
been $9,849, and there would have been an increase in loan servicing fees for
the second quarter of 2004 compared to 2003 of $6,389, as expected.
The decrease in the provision for losses on loans and real estate held for
sale of $6,334 for the six month period and $12,255 for the three month period
ended June 30, 2004 versus June 30, 2003 reflects the general partners' estimate
that the existing reserves are adequate as supplemented by a guarantee received
from Redwood Mortgage Corp. relating to the collectibility of certain
Partnership loans.
13
The decrease in professional services of $1,144 for the six month period,
and $5,291 for the three month period ended June 30, 2004, was due to timing of
services provided in 2004 compared to 2003 in relation to its audit and tax
return processing.
The increase in other expenses of $24,567 for the six month period and
$12,857 for the three month period ended June 30, 2004 was related to the costs
associated with the upkeep of existing real estate properties held for sale.
Partnership capital decreased from $6,596,243 at December 31, 2003 to
$6,483,018 at June 30, 2004. The decrease is attributable to continued earnings
and capital liquidations.
The Partnership began funding loans in October 1987. The Partnership's
secured loans outstanding as of June 30, 2004 and December 31, 2003 were
$5,044,151 and $5,255,620, respectively. The overall decrease in loans
outstanding at June 30, 2004 from December 31, 2003, was due primarily to few
loans written in the first half of 2004 and pay-offs on loans. The Partnership
also has a significant amount of cash, which it may use to make additional
loans. If loan investments are made with this cash the Partnership would receive
additional interest income.
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 June 30, 2004,
there were no properties in foreclosure. As of June 30, 2004 and 2003, the
Partnership's real estate held for sale account balance was $862,288 and
$1,312,702, respectively. The decrease was due to the disposition of one of the
properties through sale in the first quarter of 2004. The Partnership intends to
sell the remaining real estate held for sale and has contracted with prospective
buyers for the sale of one of the two remaining properties.
Cash is continually being generated from interest earnings, late charges,
prepayment penalties, amortization of principal, proceeds from sale of real
estate held 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, the allowance for loan losses is 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. During 2004 the economy and the
Northern California real estate market has strengthened. At June 30, 2004 the
Partnership had one loan past due 90 days or more totaling $144,349. 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 $109,083. One of these loans paid off in July, 2004. 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 June 30, 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 $175,967
(3.49% of the secured loan portfolio) as of June 30, 2004. These borrowers in
workout agreements are included in the delinquent and/or 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
14
agreements will rise during difficult times and conversely fall during good
economic times. The delinquency and workout agreements existing at June 30,
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 an appropriate allowance for loan losses 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 June 30, 2004 and 2003, the Partnership's real estate held for sale
balance was $862,288 and $1,312,702, respectively. The decrease in real estate
held for sale balance by $450,414 as of June 30, 2004 is due to the sale of one
of the 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 was 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 has not taken back any collateral security from
borrowers in 2004.
The Partnership also owns, through previous foreclosures, two other
properties; a commercial property and other undeveloped land. The land is
located in East Palo Alto, California. The land is owned with two other
affiliated partnerships. The Partnership's net investment in the land at June
30, 2004 is $130,215. Currently, the Partnership is not in contract or
negotiating with any interested parties for the sale of this property. 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 June 30, 2004, the basis of this property was $1,511,887. The
property is currently pending sale. Management has set aside loss reserves of
$783,389, which they believe are adequate in amount to cover anticipated losses.
Management provided $15,300 and $8,813 as provision for loan losses for the
six and three month periods ended June 30, 2004. The amount of the provision for
loan losses is to build up for the allowance for potential losses in the future
based on management's estimates. 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.
Since January, 2001 and continuing through June, 2004, the Federal Reserve
reduced interest rates significantly by cutting the Federal Funds Rate to one
percent. These interest rate cuts significantly lowered long and short term
interest rates. On July 1, 2004, the Federal Reserve increased the Federal Funds
Rate by one quarter percentage point (1/4 of one percent) to 1.25%. This was the
first Federal Funds Rate increase in more than three years and may indicate that
the Federal Reserve has changed its interest rate policy to increased rates for
the foreseeable future. A 1/4 of one percent upward shift in the Federal Funds
Rate will have an almost negligible effect upon the interest rates the
Partnership charges borrowers. If, however, there are future interest rate
increases or if they remain at their current levels, borrowers will no longer be
encouraged through continually declining interest rates to prepay their debts
through refinancing of their obligations. This could mean that the Partnership
may begin experiencing less prepayments by borrowers in its portfolio. This
would reduce the need for the Partnership to replace these prepaid loans with
new loans at lower interest rates. Additionally, the overall real estate
marketplace has become much more active in the last six months, particularly in
Northern California. The general partners believe that the average loan
portfolio interest rate may decline as some remaining borrowers that did not
refinance their loans to lower interest rates take advantage of the current low
rates of interest available. Based upon existing note rates in the portfolio and
the Partnership's expectations of stable interest rates in the near future, the
Partnership anticipates that the average loan portfolio interest rate will
decline approximately 0.25% over the remainder of 2004. From the general
partners' experience, we anticipate that the annualized yield for 2004 will
range between 4.75% and 5.00%.
15
PORTFOLIO REVIEW - For the six months ended June 30, 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 June 30, 2004 and
2003 the Partnership's loans secured by real property collateral in the six San
Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda,
Contra Costa, and Marin) represented $4,694,002 (93%) and $4,349,833 (92%) of
the outstanding loan portfolio. The remainder of the portfolio represented loans
secured by real estate located primarily in Northern California.
As of June 30, 2004 and June 30, 2003, the Partnership held 14 and 17 loans
respectively in the following categories:
June 30, June 30,
2004 2003
---------------------------- -----------------------------
Single family residence (1-4 units) $ 1,341,812 26.60% $ 792,765 16.79%
Multiple family dwellings (5+ units) 136,841 2.71% 139,797 2.96%
Commercial 3,565,498 70.69% 3,789,264 80.25%
------------- ------------ ------------- ------------
Total $ 5,044,151 100.00% $ 4,721,826 100.00%
============= ============ ============= ============
As of June 30, 2004, the Partnership held 14 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 June 30, 2004:
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of June 30, 2004
# of Loans Amount Percent
------------ -------------- -------------
1st Mortgages 7 $ 3,818,217 76%
2nd Mortgages 7 1,225,934 24%
============ ============== =============
Total 14 $ 5,044,151 100%
Maturing 12/31/04 and prior 4 $ 503,432 10%
Maturing prior to 12/31/05 3 795,125 16%
Maturing prior to 12/31/06 1 96,716 2%
Maturing after 12/31/06 6 3,648,878 72%
============ ============== =============
Total 14 $ 5,044,151 100%
Average Loan $ 360,296 7%
Largest Loan 2,103,300 42%
Smallest Loan 31,618 0.63%
Average Loan-to-Value, based upon appraisals
and senior liens at date of inception of loan 81.33%
The Partnership's largest loan in the principal amount of $2,103,300
represents 41.70% of outstanding secured loans and 32.30% 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.
16
The Partnership has a substantial amount of its loan receivable balance
from one borrower at June 30, 2004 and 2003. The borrower accounted for
approximately 61% and 65% 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 June 30, 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 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 six and
three month periods ended June 30, 2004 and 2003, the Partnership made
distributions of earnings to limited partners of $54,973 and $55,409 for the six
month periods and $27,187 and $27,630 for the three month periods, respectively.
Distribution of earnings to limited partners for the six and three month periods
ended June 30, 2004 and 2003, to limited partners' capital accounts and not
withdrawn, was $105,902 and $110,221 for the six month periods and $52,888 and
$63,342 for the three month periods, respectively. As of June 30, 2004 and 2003,
limited partners electing to withdraw earnings represented 35% 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 six and three month periods ended June 30, 2004
and 2003, $103,036 and $15,534 for the six month periods and $46,829 and $6,987
for the three month periods, 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 June 30, 2004 and
2003, respectively, and is expected by the general partners to commonly occur at
these levels.
Additionally, for the six and three month periods ended June 30, 2004 and
2003, $116,087 and $145,368 for the six month periods and $58,910 and $71,683
for the three month periods, 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.
17
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 June
30, 2004, approximately 93%, ($4,694,002) of the loans held by the Partnership
were in six San Francisco Bay Area Counties. The remainder of the loans held was
secured primarily by Northern California real estate outside the San Francisco
Bay Area. Like the rest of the nation, the San Francisco Bay Area has felt the
recession and accompanying slow down in economic growth and increasing
unemployment.
In 2004 the Northern California economy has begun to rebound. Unemployment
is still a concern as job creation is an important aspect of continued economic
expansion. The unemployment rate in California was 6.3% as of June, 2004 as
compared to an unemployment rate of 6.9% in June, 2003. This decrease in
unemployment indicates improvement but is still higher than many economists
would like. The Labor Department reported that the consumer price index rose
0.3% in June, 2004 and for the first six months of this year, consumer prices
went up at an annual rate of 4.9%, compared with a rate of 1.9% for all of 2003.
Core prices have risen at a more moderate 2.6% rate so far this year. In July,
2004, the Federal Reserve, after more than three years of lowering its core
interest rates, raised its core interest rate .25% to 1.25%. This marks a
dramatic change in policy from lowering interest rates to a probable policy of
raising interest rates over the foreseeable future. Real estate prices are, in
part, directly impacted by the cost of money. The value of real estate is
important to the Partnership as real estate collateral is backing each of our
loans. At current interest rates, demand for residential real estate is at all
time highs. DataQuick Information Systems reported all time high numbers in
June, 2004 for many tracked California real estate categories. These included a
record $382,000 median sales price for a California home, a record 14,184 house
and condominium sales in the nine county San Francisco Bay Area marketplace, and
a record $545,000 median home sales price in the San Francisco Bay Area. Home
affordability in the San Francisco Bay Area, as measured by the affordability
index, has declined from 32% to 22% as both real estate prices and interest
rates have risen in the year ended May, 2004. A lower number of households being
able to afford homes will serve to mitigate future price increases in
residential real estate particularly if interest rates continue to rise. Freddie
Mac, which has said it expects 30-year mortgages to range between 6% and 7% in
2004, said the housing market should remain buoyant for at least the rest of the
year. For the Partnership, stable and rising residential real estate values are
good as the Partnership is more collateral dependent than credit dependent in
its loan underwriting decisions. A strong and active real estate marketplace
also serves to produce a substantial number of real estate financing
opportunities which the Partnership may compete for.
18
The San Francisco Bay Area commercial real estate marketplace is improving.
Vacancy in office buildings declined to 18.2% in the second quarter of 2004 as
reported by Colliers International. Cushman Wakefield reported office vacancy of
20.5% in 2004 versus 22.9% in 2003. These reduced vacancies continue a trend
which began in the third quarter of 2003. Improved occupancies in commercial
properties will assist the owners of those properties in handling their debt
payments. Improved occupancies will help stabilize commercial real estate
values, which is a benefit to the Partnership.
For Partnership loans outstanding as of June 30, 2004, the Partnership had
an average loan to value ratio of 81.33%, computed based on appraised values and
senior liens as of the date the loan was made. 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 on senior indebtedness
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.
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 June 30,
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 June 30, 2004:
2004 2005 2006 2007 2008 Thereafter Total
------------------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $ 560,870 $ 560,870
Average interest rate 0.59% 0.59%
Unsecured loans $ 251,045 $ 251,045
Loans secured by deeds
of trust $ 503,432 795,125 96,716 3,258,118 - 390,760 $ 5,044,151
Average interest rate 10.24% 9.88% 6.50% 9.09% - 9.09% 9.28%
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
June 30, 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.
19
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 June 30, 2004 the general partners have determined that the
allowance for loan losses and real estate owned of $1,074,979 (16.58% 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 June 30, 2004, one loan was
delinquent over 90 days in interest payments amounting to $144,349. Two loans,
including the delinquent loan, totaling $175,967 were subject to workout
agreements, which require the borrower to make regular monthly loan payments.
The Partnership also owns (through previous foreclosure) two properties; a
commercial property and other undeveloped land. The land is located in East Palo
Alto, California. The land is owned with two other affiliated Partnerships. The
Partnership's net investment in the land at June 30, 2004 is $130,215. The
Partnership's net investment of $130,215 is 2% of Partnership assets. The
general partners believe that the property is worth considerably more than its
net investment. There are no ongoing negotiations for the sale of this property.
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 $783,191, which they believe are adequate in amount to cover
anticipated losses.
Part I - Item 4. CONTROLS AND PROCEDURES
As of June 30, 2004, the general partners 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-15. 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.
20
Part II - 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 six months ended June 30, 2004. 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.............................$25,168
General Partners
&/or Affiliates Asset Management Fee for managing assets............................$4,112
General Partners 1% interest in profits..............................................$1,625
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........................................................$72
III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN
EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE
STATEMENT OF INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,825
21
Part III 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 June
30, 2004.
22
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 16th day of August
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 16th day of August 2004.
Signature Title Date
/S/ Michael R. Burwell
- ----------------------
Michael R. Burwell General Partner August 16, 2004
/S/ Michael R. Burwell
- ----------------------
Michael R. Burwell President, Secretary/Treasurer & August 16, 2004
CFO of Gymno Corporation
(Principal Financial and
Accounting Officer);
Director of Gymno Corporation
23
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 June 30, 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
August 16, 2004
24
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 June 30, 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
August 16, 2004
25
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 June 30, 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
August 16, 2004
26
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 June 30, 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
August 16, 2004
27