REDWOOD MORTGAGE INVESTORS VI
(a California Limited Partnership)
Index to Form 10-K
December 31, 2004
Part I
Page No.
------------
Item 1 - Business 3
Item 2 - Properties 7
Item 3 - Legal Proceedings 7
Item 4 - Submission of Matters to a Vote of Security Holders (Partners) 7
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 8
Item 6 - Selected Financial Data 8
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 7a - Quantitative and Qualitative Disclosures About Market Risk 18
Item 8 - Financial Statements and Supplementary Data 20
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 41
Item 9a - Controls and Procedures 41
Item 9b - Other Information 41
Part III
Item 10 - Directors and Executive Officers of the Registrant 41
Item 11 - Executive Compensation 42
Item 12 - Security Ownership of Certain Beneficial Owners and Management 43
Item 13 - Certain Relationships and Related Transactions 43
Item 14 - Principal Accountant Fees and Services 43
Part IV
Item 15 - Exhibits, Financial Statements and Schedules 44
Signatures 45
Certifications 46
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 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 Identification)
or organization)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063
(address of principal executive offices) (zip code)
(650) 365-5341
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g)
of the Act: Limited Partnership Units
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 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
-------------- -------------
As of June 30, 2004, the aggregate value of limited partnership Units held
by non-affiliates was $6,473,257. This calculation is based on the capital
account balance of the limited partners and excludes limited partnership Units
held by the general partners.
Documents incorporated by reference:
Portions of the Prospectus for Redwood Mortgage Investors VI, included as
part of the form S-11 Registration Statement, SEC File No. 33-12519 dated
September 3, 1987 and Supplement No. 6 dated May 16, 1989, are incorporated in
Parts II, III, and IV.
2
Part I
Item 1 - Business
Redwood Mortgage Investors VI is a California Limited Partnership (the
"Partnership"). Michael R. Burwell, an individual, and Gymno Corporation, a
California corporation, are the general partners. The address of the general
partners is 900 Veterans Blvd., Suite 500, Redwood City, California 94063. The
Partnership's primary purpose is to invest its capital in first and second deeds
of trust secured primarily by Northern California properties. Loans are arranged
and serviced by Redwood Mortgage Corp., an affiliate of the general partners.
The Partnership's objectives are to make investments which will: (i) provide the
maximum possible cash returns which limited partners may elect to (a) receive as
monthly, quarterly or annual cash distributions or (b) have earnings credited to
their capital accounts and used to invest in Partnership activities; and (ii)
preserve and protect the Partnership's capital. The Partnership's general
business is more fully described under the section entitled "Investment
Objectives and Criteria", pages 23-26 of the Prospectus, a part of the
above-referenced Registration Statement, which is incorporated by reference.
The Partnership was formed in September 1987, with an approved 120,000
Units of $100 each ($12,000,000). The Units were offered on a "best efforts"
basis through broker/dealer member firms of the National Association of
Securities Dealers, Inc. It immediately began issuing Units and began investing
in loans in October 1987. The offering terminated in September 1989, and as of
that date 97,725.94 limited partner Units were sold realizing proceeds of
$9,772,594. At December 31, 2004, the Partnership had a balance of loans
totaling $5,225,128 with interest rates thereon ranging from 6.50% to 10.50%.
Currently first mortgage loans comprise 80.63% of the total amount of
secured loan portfolio. Second mortgage loans comprise 19.37% of the secured
loan portfolio. Owner-occupied homes, combined with non-owner occupied homes,
total 25.20% of the secured mortgage loans. Secured mortgage loans to apartments
make up 1.85% of the total secured loans portfolio. Commercial secured loans
increased from last year, now comprising 72.95% of the portfolio, an increase of
4.20% from 2003. The major concentration of secured loans, comprising 88.67% of
the total secured loans, are in four counties of the San Francisco Bay Area. The
balance is primarily in Northern California. Currently secured loan size is
averaging $373,223 per loan. Some of the secured loans are fractionalized
between affiliated partnerships with objectives similar to those of the
Partnership to further reduce risk. Average equity per loan transaction, which
is our loan plus any senior loans, divided by the property's appraised value,
subtracted from 100%, stood at 20.33%, based on senior loans and appraised
values at the inception of our loan. Generally, the more equity, the more
protection for the lender. The Partnership's loan portfolio had no properties in
foreclosure as of the end of December 2004.
Delinquencies are discussed under Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
For the year ended December 31, 2004 the Partnership did not take back any
collateral from defaulted borrowers. During the year 2002, the Partnership
acquired a piece of real estate property through foreclosure. This property
consisted of four townhouses. The Partnership commenced refurbishment of the
units and concluded a sale of the units in March 2004. A second property,
acquired in 2000, was a commercial property located in Walnut Creek, California.
The property was sold during the fourth quarter of 2004. The Partnership
realized a loss upon the sale of both of these properties totaling approximately
$783,000, which had previously been reserved for.
The Partnership also owns (through previous foreclosure in April, 1993) one
other property; undeveloped land. The land is located in East Palo Alto. The
land is owned with two other affiliated partnerships. Currently the property is
on the market for sale. The Partnership's net investment of $128,902 is 2.00% of
Partnership assets. The general partners believe that the property is worth
considerably more than its net investment, but it may take a considerable amount
of additional time to sell the property and realize its full potential. The
property is unique in that it may only be utilized for commercial or industrial
uses. Until recently, land sales activity had been slow, but interest in land
sales for commercial sites has been increasing.
3
The Partnership's revenues decreased from $574,171 in 2002 to $491,640 in
2003, but increased to $538,737 in 2004. The decline from 2002 to 2003 was due
largely to the decline in the average interest rate on loans, which was 8.16% in
2002 and 7.80% in 2003, and an increase in the average interest rate in 2004,
which was 8.41%. Cash flow the Partnership generated from mortgage interest and
loan pay-downs and pay-offs was used primarily to meet limited partner capital
and earnings liquidations. For the three years ended December 31, 2004
withdrawals by limited partners were $602,753 in 2002, $506,503 in 2003 and
$510,115 in 2004.
During the year 2004, the Partnership's annualized yield on compounding
accounts was 5.40% and on monthly distributing accounts it was 5.27%.
Competition and General Economic Conditions.
The Partnership's major competitors in providing mortgage loans are banks,
savings and loan associates, thrifts, conduit lenders, mortgage brokers, and
other entities both larger and smaller than the Partnership. The Partnership is
competitive in large part because the general partners generate all of their
loans. The general partners have been in the business of making or investing in
mortgage loans in Northern California since 1978 and have developed a quality
reputation and recognition within the field.
Beginning in July of 2004, the Federal Reserve changed its interest rate
policy from one of three years of continuously lowered interest rates, which hit
a 40 year historic interest rate low, to one of tempered but gradual interest
rate increases. In keeping with this new policy since July 2004, the Federal
Reserve has increased the Federal Funds Rate by one quarter percentage point
(1/4 of one percent) at each of its last five meetings to 2.25% as of March 22,
2005. This deliberate upward change in the Federal Funds Rate has caused short
term interest rates to rise, and to a lesser degree, pushed longer term rates up
as well. Nationally and more specifically in Northern California, the location
of the majority of our lending activities, the economies are recovering from the
economic downturn from 2000 to 2003. Employment and job creation is improving
but is still lower than desirable. During 2004, the residential and commercial
real estate markets in Northern California enjoyed a solid year of price
appreciation. With the prospect of solid real estate values, low interest rates,
and an improving economy, lenders of all types are anxious to lend money to
borrowers secured by their real estate. Competition for loans is fierce.
Additionally, those borrowers that had waited hoping to find the bottom of the
interest rate cycle, have decided that the time has come to refinance their
existing higher rate loans. This has caused a significant amount of loan runoff
to lower interest rate lenders than the partnership. These two factors have made
it difficult, particularly in the final quarter of the year 2004, to stay as
fully invested as is optimum. It is anticipated that significant competition for
loans will continue. Excess cash will be invested in short-term alternative
investments, such as money market funds yielding considerably less than the
current loan investment portfolio.
4
Secured Loan Portfolio
As of December 31, 2004, a summary of the Partnership's secured loan
portfolio is set forth below.
Loans as a Percentage of Appraised Value
First Trust Deed Loans $ 4,212,912
Second Trust Deed Loans 1,012,216
---------------
Total loans $ 5,225,128
Priority Positions due other Lenders at Time of Loan 3,026,354
Total Debt $ 8,251,482
===============
Appraised Property Value at time of loan $ 10,356,549
Total Secured Loans as a % of Appraisal based on
appraisals and prior liens at date of loan 79.67%
Number of Secured Loans Outstanding 14
Average Secured Loan 373,223
Average Secured Loan as a % of Net Assets 5.80%
Largest Secured Loan Outstanding 2,103,300
Largest Secured Loan as a % of Net Assets 32.71%
Largest secured Loan as a % of Assets 32.59%
Secured Loans as a Percentage of Total Loans Percent
----------------------------------------------------- ---------------
First Trust Deeds 80.63%
Second Trust Deeds 19.37%
---------------
Total 100.00%
===============
Secured Loans by Type of Property Amount Percent
----------------------------------------------------- --------------- -------------
Owner Occupied Homes $ 627,579 12.01%
Non-Owner Occupied Homes 689,017 13.19%
Apartments 96,716 1.85%
Commercial 3,811,816 72.95%
--------------- -------------
Total $ 5,225,128 100.00%
=============== =============
5
The following is a distribution of secured loans outstanding as of December
31, 2003 by Counties:
Total
California County Secured Loans Percent
---------------------------------------------- -------------- -----------
San Francisco Bay Area Counties
Santa Clara $ 2,209,045 42.28%
Alameda 1,953,623 37.39%
San Francisco 325,000 6.22%
San Mateo 145,106 2.78%
-------------- -----------
4,632,774 88.67%
San Francisco Bay Area Adjacent Counties
Monterey 200,000 3.83%
Stanislaus 175,865 3.36%
-------------- -----------
375,865 7.19%
Other California Counties
Colusa 119,773 2.29%
Sacramento 96,716 1.85%
-------------- -----------
216,489 4.14%
Total $ 5,225,128 100.00%
============== ===========
Statement of Condition of loans:
Number of Loans in Foreclosure 0
Scheduled maturity dates of secured loans as of December 31, 2004 are as
follows:
Year Ending
December 31,
--------------------------
2005 $ 664,882
2006 621,716
2007 3,205,206
2008 0
2009 627,579
Thereafter 105,745
-------------
$ 5,225,128
=============
The Partnership's largest loan in the principal amount of $2,103,300
represents 40.25% of outstanding secured loans and 32.59% 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 December 31, 2004 and 2003. The borrower accounted for
approximately 59% and 58% of the loan balances at such dates. This borrower has
two loans secured by separate properties in the principal amounts of $2,103,000
and $956,800 as of December 31, 2004.
6
The scheduled maturities for 2005 include two loans for $175,865,
representing 3.37% of the secured loan portfolio, past maturity at December 31,
2004. Additionally, one loan for $96,716 (1.85% of the secured loan portfolio)
was categorized as impaired. A loan is categorized as impaired when events
and/or changes in circumstances cause the management to have serious doubts
about the collectibility of the contractual payments, and interest is no longer
accrued. The Partnership occasionally allows borrowers to continue to make the
regular interest payments on debt past maturity for periods of time. In many
instances the interest rate on these past maturity loans is higher than
currently existing interest rates. Interest payments on these loans were
current, except for the one impaired loan where repayment was delinquent over 90
days. The borrowers on this impaired loan made a number of payments in 2004 and
have reduced the advances on loans balance by $1,041 to $2,287 as of December
31, 2004.
Item 2 - Properties
The Partnership did not take back any collateral security from borrowers in
2004 or 2003. 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, owned 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. As of December 31,
2003, the carrying value of this property was $454,862. A second property,
acquired in 2000, was a commercial property located in Walnut Creek, California.
The property was sold in October, 2004. The Partnership realized a loss upon the
sale of both of these properties totaling approximately $783,000, which had been
anticipated and the loss was offset against reserve previously set aside for
these properties.
The Partnership also owns, through previous foreclosures, one other
property; undeveloped 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 December 31, 2004 is $128,902. Currently the property is on the
market for sale. The general partners believe that the property is worth
considerably more than its net investment, but it may take a considerable amount
of additional time to sell the property and realize its full potential. The
property is unique in that it may only be utilized for commercial or industrial
uses. Until recently, land sales activity had been slow, but interest in land
sales for commercial sites has been increasing.
Item 3 - Legal Proceedings
In the normal course of business, the Partnership may become involved in
various types of legal proceedings such as assignment of rents, bankruptcy
proceedings, appointment of receivers, unlawful detainers, judicial foreclosure,
etc., to enforce the provisions of the deeds of trust, collect the debt owed
under the promissory notes, or to protect, or recoup its investment from the
real property secured by the deeds of trust. None of these actions would
typically be of any material importance. As of the date hereof, the Partnership
is not involved in any legal proceedings other than those that would be
considered part of the normal course of business.
Item 4 - Submission of Matters to a Vote of Security Holders (Partners)
No matters have been submitted to a vote of the Partnership.
7
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and
Related Unitholder Matters
120,000 Units at $100 each (minimum 20 Units) were offered through
broker-dealer member firms of the National Association of Securities Dealers on
a "best efforts" basis (as indicated in Part I item 1). All Units were sold to
California residents. Investors have the option of withdrawing earnings on a
monthly, quarterly or annual basis or having their earnings retained in the
Partnership. Limited partners may withdraw from the Partnership in accordance
with the terms of the partnership agreement subject to early withdrawal
penalties. There is no established public trading market for the Units. As of
December 31, 2004, 389 limited partners had a capital balance of $6,420,047.
A description of the Partnership's Units, transfer restrictions, and
withdrawal provisions is more fully described under the section entitled
"Description of Units" and "Summary of the Limited Partnership Agreement", pages
38-42 of the Prospectus, a part of the above-referenced Registration Statement,
which is incorporated by reference.
Item 6 - Selected Financial Data
Redwood Mortgage Investors VI began operations in October, 1987. Its
financial condition and results of operation as of and for the five years ended
December 31, 2004 were:
Balance Sheets
December 31,
------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------- ------------ ------------ ------------ ------------
Cash $ 1,090,027 $ 32,160 $ 341,127 $ 190,414 $ 354,860
Loans
Loans, secured by deeds of trust 5,225,128 5,255,620 5,183,100 4,970,433 5,570,576
Loans, unsecured 261,276 242,462 223,697 82,362 82,362
Interest and other receivables
Accrued interest and late fees 61,364 54,562 61,384 797,105 664,292
Advances on loans 2,890 4,091 31,007 197,946 133,647
Less allowances for loan losses (315,751) (279,865) (275,294) (370,612) (261,452)
Note receivable - Redwood Mortgage Corp. - - - 178,200 125,000
Real estate held for sale, net 128,902 1,312,773 1,234,541 1,093,503 767,583
------------- ------------ ------------ ------------ ------------
Total assets $ 6,453,836 $6,621,803 $6,799,562 $7,139,351 $7,436,868
------------
============= ============ ============ ============ ============
8
Liabilities and Partners' Capital
December 31,
----------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------- ------------- ------------- ------------- ------------
Liabilities
Accounts payable $ 11,487 $ 13,064 $ 11,953 $ 20,261 $ 13,068
Deferred interest on loans - - - 74,022 -
Payable to affiliates 12,541 12,496 14,643 35,632 -
------------- ------------- ------------- ------------- ------------
Total liabilities 24,028 25,560 26,596 129,915 13,068
------------- ------------- ------------- ------------- ------------
Partners' capital
Limited partners' capital, subject to
Redemption 6,420,047 6,586,482 6,763,200 6,999,670 7,414,034
General partners' capital 9,761 9,761 9,766 9,766 9,766
------------- ------------- ------------- ------------- ------------
Total partners' capital 6,429,808 6,596,243 6,772,966 7,009,436 7,423,800
------------- ------------- ------------- ------------- ------------
Total liabilities and partners' capital $ 6,453,836 $ 6,621,803 $ 6,799,562 $ 7,139,351 $7,436,868
============= ============= ============= ============= ============
Statements of Income
2004 2003 2002 2001 2000
------------- ------------- ------------- ------------- ------------
Gross revenue $ 538,737 $ 491,640 $ 574,171 $ 735,900 $ 785,209
Expenses 191,585 158,524 204,188 309,249 307,280
------------- ------------- ------------- ------------- ------------
Net income $ 347,152 $ 333,116 $ 369,983 $ 426,651 $ 477,929
============= ============= ============= ============= ============
Net income: to general partners (1%) $ 3,472 $ 3,331 $ 3,700 $ 4,266 $ 4,779
to limited partners (99%) 343,680 329,785 366,283 422,385 473,150
------------- ------------- ------------- ------------- ------------
$ 347,152 $ 333,116 $ 369,983 $ 426,651 $ 477,929
============= ============= ============= ============= ============
Net income per $1,000 invested by
limited partners for entire period:
- where income is compounded $ 54 $ 50 $ 54 $ 59 $ 62
============= ============= ============= ============= ============
- where partner receives income in
monthly distributions $ 53 $ 49 $ 53 $ 58 $ 61
============= ============= ============= ============= ============
Annualized yields when income is compounded or distributed monthly for the
years 2000 through 2004 are outlined in the table below:
Compounded Distributed
--------------- ---------------
2000 6.22% 6.05%
2001 5.95% 5.79%
2002 5.40% 5.27%
2003 5.00% 4.89%
2004 5.40% 5.27%
The average annualized yield, when income is compounded from inception
through December 31, 2004 was 6.84%. The average annualized yield, when income
is distributed monthly, from inception through December 31, 2004 was 6.63%.
9
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP
Critical Accounting Policies.
In preparing the financial statements, management is required to make
estimates based on the information available that affect the reported amounts of
assets and liabilities as of the balance sheet dates and revenues and expenses
during 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
acquired through foreclosure. At December 31, 2004, we owned one real property
that we had acquired through foreclosure in a prior year.
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 investment
shall be reduced to the present value of future cash flows discounted at the
loan's effective interest rate. If a loan is collateral dependent, it is valued
at the estimated fair value of the related collateral.
If events and or changes in circumstances cause management to have serious
doubts about the collectibility of the contractual payments, a loan may be
categorized as impaired and interest is no longer accrued. Any subsequent
payments on impaired loans are applied to reduce the outstanding loan balances,
including accrued interest and advances.
Recent trends in the economy have been taken into consideration in the
aforementioned process of arriving at the allowance for loan losses. Actual
results could vary from the aforementioned provisions for losses.
Forward Looking Statements.
Certain statements in this Report on Form 10-K which are not historical
facts may be considered forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended, including statements regarding the
Company's expectations, hopes, intentions, beliefs and strategies regarding the
future. Forward-looking statements include statements regarding future interest
rates and economic conditions and their effect on the Partnership and its
assets, trends in the California real estate market, estimates as to the
allowance for loan losses, estimates of future limited partner withdrawals and
2005 annualized yield estimates. Actual results may be materially different from
what is projected by such forward-looking statements. Factors that might cause
such a difference include unexpected changes in economic conditions and interest
rates, the impact of competition and competitive pricing and downturns in the
real estate markets in which the Company has made loans. All forward-looking
statements and reasons why results may differ included in this Form 10-K are
made as of the date hereof, and we assume no obligation to update any such
forward-looking statement or reason why actual results may differ.
10
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 partners, 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, 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, the loan
brokerage commissions (points) will be limited to an amount not to exceed 4% of
the total Partnership assets per year. The loan brokerage commissions are paid
by the borrowers, and thus, are not an expense of the Partnership. For the years
ended December 31, 2004, 2003 and 2002, loan brokerage commissions paid by the
borrowers were $24,156, $42,407 and $22,611, respectively.
o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of
1% (1.5% on an annual basis) of the unpaid principal of the Partnership's loans
are paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and
customary in the geographic area where the property securing the mortgage is
located. Mortgage servicing fees of $50,160, $48,759 and $138,851 were incurred
for the years ended December 31, 2004, 2003 and 2002, respectively.
These servicing fees were charged at 1%, on an annual basis, of the
outstanding principal balances. If the maximum mortgage servicing fee of 1.5%,
on an annual basis, had been charged to the Partnership, then net income would
have been reduced by approximately $25,000 in 2004. Reducing net income reduces
the annualized yields. An increase or decrease in this fee within the limits set
by the Partnership's agreement directly impacts the yield to the limited
partners.
o Asset Management Fees The general partners receive monthly fees for
managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net
asset value' (3/8 of 1% on an annual basis). Management fees to the general
partners of $8,160, $8,427 and $8,677, were incurred by the Partnership for the
years ended December 31, 2004, 2003 and 2002, respectively.
o Other Fees The Partnership agreement provides that the general partners
may receive other fees such as reconveyance, mortgage assumption and mortgage
extension fees. Such fees are incurred by the borrowers and are paid to the
general partners.
o Income and Losses All income and losses are credited or charged to
partners in relation to their respective Partnership interests. The allocation
to the general partners (combined) shall be a total of 1%.
o Operating Expenses An affiliate of the Partnership, Redwood Mortgage
Corp., is reimbursed by the Partnership for all operating expenses actually
incurred by it on behalf of the Partnership, including without limitation,
out-of-pocket general and administration expenses of the Partnership, accounting
and audit fees, legal fees and expenses, postage and preparation of reports to
limited partners.
o Contributed Capital The general partners jointly and severally were to
contribute 1/10 of 1% in cash contributions as proceeds from the offerings are
received from the limited partners. As of December 31, 2003 and 2004, a general
partner, Gymno Corporation, had contributed $9,772 as capital in accordance with
Section 4.02(a) of the partnership agreement.
11
Results of Operations - For the years ended December 31, 2004, 2003 and
2002
Changes in the Partnership's operating results for the years ended December
31, 2004 and 2003 are discussed below.
Changes during the year ended December 31,
2004 2003
------------ ------------
Net income increase/(decrease) $ 14,036 $ (36,867)
============ ============
Revenue
Interest on loans 34,936 (97,048)
Interest-interest bearing accounts 2,435 (2,067)
Late charges and other fees 9,726 23,712
Interest on promissory note - (7,128)
Mortgage servicer subsidy - -
------------ ------------
$ 47,096 $ (82,531)
------------ ------------
Expenses
Mortgage servicing fees $ 1,401 $ (90,092)
Asset management fees (267) (250)
Clerical costs from Redwood Mortgage Corp. (4,232) (5,833)
Provision for losses on loans and real estate 31,301 10,449
Professional services 7,153 6,143
Other (2,295) 33,919
------------ ------------
$ 33,061 $ (45,664)
------------ ------------
Net income increase/(decrease) $ 14,036 $ (36,867)
============ =============
The increase in interest on loans of $34,936 for the year ended December
31, 2004 versus December 31, 2003 was due primarily to an interest rate increase
on two loans totaling $3,060,100 in 2004. This increase alone generated
additional interest income of $32,514 to the Partnership. The decrease in
interest on loans of $97,048 for the year ended December 31, 2003 versus
December 31, 2002 was due primarily to the collection of interest of $58,051 on
two past due, impaired loans in 2002. Interest income was $490,786, $455,850 and
$552,898 for the years ended December 31, 2004, 2003 and 2002, respectively. The
average interest rate in 2004 was 9.37% versus 8.73% for 2003 and 10.89% for
2002. The higher average interest rate in 2004 helped increase interest on
loans.
The increase in late charge revenue and other fees of $9,726 for the year
ended December 31, 2004 versus December 31, 2003 was due to the receipt of
non-refundable option payments, on real estate held for sale of $28,929; offset
by a decrease in late fees and miscellaneous income of $19,203. The increase in
late charge revenue and other fees of $23,712 for the year ended December 31,
2003 versus December 31, 2002, represents an increase of $5,436 in late charge
revenue and $18,280 in other income.
The increase in interest-interest bearing accounts of $2,435 for the year
ended December 31, 2004 versus December 31, 2003 and a decrease of $2,067 for
the year ended December 31, 2003 versus December 31, 2002, represents interest
earned on an average balance deposit of $561,094, $186,644 and $452,414 in the
interest bearing accounts for the years ended December 31, 2004, 2003 and 2002,
respectively.
The increase in loan servicing fees of $1,401 for the year ended December
31, 2004 versus December 31, 2003 was due to an overall higher average loan
portfolio balance of $5,240,374 in 2004 versus $5,219,360 in 2003; offset by the
collection of delinquent interest from a loan that paid off in 2003. The
decrease in loan servicing fees of $90,092 for the year ended December 31, 2003
versus December 31, 2002 was due to the collection of interest on past due
impaired loans in 2002 and hence the related receipt of servicing fees as
discussed above.
The decrease in asset management fees of $267 and $250 for the years ended
December 31, 2004 and 2003, respectively, was primarily attributable to
declining balances of limited partners' capital, which were $6,763,200,
$6,586,482, and $6,420,047 at December 31, 2002, 2003 and 2004, respectively.
12
The increase in the provision for losses on loans and real estate held for
sale of $31,301 and $10,449 for the years ended December 31, 2004 and 2003,
respectively, was a result of increased reserves for a slightly increased
average loan portfolio balance to a level deemed appropriate by Partnership's
management.
The increase in professional services of $7,153 and $6,143 for the years
ended December 31, 2004 and 2003, respectively, was primarily attributable to
general accounting cost increases.
The decrease in other expenses of $2,295 for the year ended December 31,
2004 versus December 31, 2003 was primarily attributable to the reduction in
costs associated with the upkeep of existing real estate properties held for
sale. The increase of $33,919 for the year ended December 31, 2003 versus
December 31, 2002 was primarily a result of the Partnership's commencement in
2003 of the expensing of the upkeep costs of real estate held for sale as
refurbishment of properties had been completed.
The reduction in clerical costs of $4,232 and $5,833 for the years ended
December 31, 2004 and 2003, respectively, was primarily attributable to reduced
clerical costs in servicing this Partnership.
As of September 2, 1989, the date the offering of the Partnership's limited
partner Units was formally closed, the Partnership had sold 97,725.94 limited
partner Units and its contributed capital totaled $9,772,594 of the approved
$12,000,000 issue, in Units of $100 each. On December 31, 2004 the Partnership's
net capital totaled $6,429,808.
The Partnership began funding loans in October 1987. The Partnership's
secured loans outstanding as of December 31, 2004, 2003 and 2002 were
$5,225,128, $5,255,620 and $5,183,100, respectively. The average loan balances
over this time period have remained relatively stable as the Partnership
utilized income, loan pay offs and proceeds from the sale of real estate held
for sale properties to meet limited partner capital liquidations and make
additional loans. During the years ended December 31, 2004, 2003 and 2002 loan
principal collections and sale proceeds of the properties exceeded limited
partner liquidations.
In 2004 the Partnership funded $869,415 in new loans versus pay-offs of
$899,907. This lower loan activity in 2004 was largely due to lack of attractive
loans. Loan balances decreased by $30,492 (0.58%) in 2004, but increased by
$72,520 (1.40%) in 2003 and by $212,667 (4.28%) in 2002. The increases were due
to the availability of loans in the market and the Partnership's ability to fund
during 2003 and 2002. The Partnership funded $1,637,342 and $900,418 in new
loans as against loan pay-offs of $1,564,808 and $1,265,798 in 2003 and 2002,
respectively.
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 years. Foreclosures are a
normal aspect of Partnership operations and the general partners anticipate that
they will not have a material effect on liquidity.
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 and
other information, 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 California economy has stabilized. During 2004 the
economy and the Northern California real estate market has strengthened. At
December 31, 2004 the Partnership had one loan past due 90 days or more in
interest payments totaling $96,718. As of December 31, 2004 the Partnership has
two loans which are making current monthly payments but are past maturity. These
past maturity loans have a principal balance of $175,865. The Partnership
considers one loan in the principal amount of $96,718, which is past due 90 days
13
or more in interest payments, 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
Partnership does not have any filed notices of default, which would begin the
foreclosure process at December 31, 2004. The Partnership may enter into workout
agreements with borrowers who are past maturity or delinquent in their regular
payments. The Partnership had workout agreements on three loans totaling
$272,581 (5.22% of the secured loan portfolio) as of December 31, 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 agreements will rise during difficult times and conversely fall during
good economic times. The delinquency and workout agreements existing at December
31, 2004, in management's opinion, do not have a material effect on our results
of operations or liquidity. These workouts and delinquencies 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 December 31, 2004, 2003 and 2002, the Partnership's real estate held
for sale balance was $128,902, $1,312,773 and $1,234,541, respectively. The
decrease in the real estate held for sale balance of $1,183,871 from December
31, 2003 to December 31, 2004 was due to the sale of two 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, owned 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 $5,800, which had been anticipated and reserved for. In October
2004, the Partnership sold another real estate held for sale property at a loss
of approximately $778,500 which was previously fully reserved for. The
Partnership has not taken back any collateral security from borrowers in 2004.
The Partnership's real estate held for sale inventory was reduced to one
property. This remaining property is an undeveloped piece of land. The land is
located in East Palo Alto, California. The Partnership has held its interest in
this land since April, 1993. The land is owned with two other affiliated
partnerships. 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,
but it may take a considerable amount of additional time to sell the property
and realize its full potential. The property is unique in that it may only be
utilized for commercial or industrial uses. Until recently, land sales activity
had been slow, but interest in land sales for commercial sites has been
increasing.
Management provided $35,886 and $4,585 as provision for loan losses for the
years ended December 31, 2004 and 2003, respectively. The amount of the
provision for loan losses is to build up the allowance for potential losses as
the Partnership's average loan portfolio increases. The Partnership may
restructure loans. This is done through the modification of an existing loan or
by re-writing a whole new loan. It could involve, among other changes, an
extension in maturity date, a reduction in repayment amount, a reduction in
interest rate, or granting an additional loan. In 2002, the Partnership
restructured four previously impaired loans into two new loans with a lower
interest rate. The amount restructured was $3,060,100. As of December 31, 2004,
there was a collateral shortfall on the restructured loans, ranging from
approximately $194,000 to $337,000, that has not been reserved for. 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.
14
Borrower Liquidity and Capital Resources.
The Partnership relies upon loan payoffs and borrowers' mortgage payments
for the source of funds for loans. Over the past several years, 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 historically
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.
At the time of subscription to the Partnership, limited partners must elect
either to receive monthly, quarterly or annual cash distributions from the
Partnership, or to compound earnings in their capital account. If one initially
elects to receive monthly, quarterly or annual distributions, such election,
once made, is irrevocable. Earnings allocable to limited partners who elect to
compound earnings in their capital account, will be retained by the Partnership
for making further loans or for other proper Partnership purposes, and such
amounts will be added to such limited partners' capital accounts.
For the years ended December 31, 2004, 2003 and 2002, the Partnership made
distributions of earnings to limited partners of $120,015, $115,254 and
$130,296, respectively. Distribution of earnings to limited partners for the
years ended December 31, 2004, 2003 and 2002, to limited partners' capital
accounts and not withdrawn, was $223,665, $214,531 and $235,987, respectively.
As of December 31, 2004, 2003 and 2002, limited partners electing to withdraw
earnings represented 34%, 35% and 35%, respectively, of the limited partners
outstanding capital accounts. This percentage range has remained relatively
stable.
The Partnership also allows the limited partners to withdraw their capital
account subject to certain limitations and penalties (see liquidation provisions
of Partnership Agreement). For the years ended December 31, 2004, 2003 and 2002,
$142,997, $93,770 and $78,674, respectively, were liquidated subject to the 10%
and/or 8% penalty for early withdrawal. These withdrawals are within the
normally anticipated range that the general partners would expect in their
experience in this and other partnerships. The general partners expect that a
small percentage of limited partners will elect to liquidate their capital
accounts over one year with a 10% and/or 8% early withdrawal penalty. In
originally conceiving the Partnership, the general partners wanted to provide
limited partners needing their capital returned a degree of liquidity.
Generally, limited partners electing to withdraw over one year need to liquidate
investments to raise cash. The demand the Partnership is experiencing in
withdrawals by limited partners electing a one year liquidation program
represents a small percentage of limited partner capital as of December 31,
2004, 2003 and 2002, respectively, and is expected by the general partners to
commonly occur at these levels.
Additionally, for the years ended December 31, 2004, 2003 and 2002,
$247,103, $297,479 and $393,784, respectively, were liquidated by limited
partners who have elected a liquidation program over a period of five years or
longer. Once the initial five-year hold period has passed, the general partners
expect to see an increase in liquidations due to the ability of limited partners
to withdraw without penalty. This ability to withdraw after five years by
limited partners has the effect of providing limited partner liquidity. The
general partners expect a portion of the limited partners to take advantage of
this provision. This has the anticipated effect of the Partnership growing,
primarily through reinvestment of earnings in years one through five. The
general partners expect to see increasing numbers of limited partner withdrawals
in years five through eleven, at which time the bulk of those limited partners
who have sought withdrawal will have been liquidated. After year eleven,
liquidation generally subsides.
15
Actual liquidation of both capital and earnings for the three years ended
December 31, 2004 was:
Years ended December 31,
----------------------------------------------
2004 2003 2002
------------ ------------ ------------
Earnings $ 120,015 $ 115,254 $ 130,296
Capital 390,100 391,249 472,457
------------ ------------ ------------
Total $ 510,115 $ 506,503 $ 602,753
============ ============ ============
*These amounts represent gross of early withdrawal penalties.
In some cases in order to satisfy Broker Dealers and other reporting
requirements, the general partners have valued the limited partners' interest in
the Partnership on a basis which utilizes a per Unit system of calculation,
rather than based upon the investors' capital account. This information has been
reported in this manner in order to allow the Partnership to integrate with
certain software used by the Broker Dealers and other reporting entities. In
those cases, the Partnership will report to Broker Dealers, Trust Companies and
others a "reporting" number of Units based upon a $1.00 per Unit calculation.
The number of reporting Units provided will be calculated based upon the limited
partner's capital account value divided by $1.00. Each investor's capital
account balance is set forth periodically on the Partnership account statement
provided to investors. The reporting Units are solely for Broker Dealers
requiring such information for their software programs and do not reflect actual
Units owned by a limited partner or the limited partners' right or interest in
cash flow or any other economic benefit in the Partnership. Each investor's
capital account balance is set forth periodically on the Partnership account
statement provided to investors. The amount of Partnership earnings each
investor is entitled to receive is determined by the ratio that each investor's
capital account bears to the total amount of all investor capital accounts then
outstanding. The capital account balance of each investor should be included on
any NASD member client account statement in providing a per Unit estimated value
of the client's investment in the Partnership in accordance with NASD Rule 2340.
While the general partners have set an estimated value for the Partnership
Units, such determination may not be representative of the ultimate price
realized by an investor for such Units upon sale. No public trading market
exists for the Partnership's Units and none is likely to develop. Thus, there is
no certainty that the Units can be sold at a price equal to the stated value of
the capital account. Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain liquidation rights provided by the
Partnership, which may include early withdrawal penalties (See the section of
the Prospectus entitled "Risk Factors - Purchase of Units is a long term
investment").
Current Economic Conditions.
From July 1 through December 31, 2004, the Federal Reserve increased the
Federal Funds Rate four times by one quarter percentage point (1/4 of one
percent) each time to 2.00%. These were 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 1.00%
upward shift in the Federal Funds Rate will not have a material 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 twelve 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 stabilize during 2005. From the general partners' experience,
we anticipate that the annualized yield for 2005 will range between 5.75% and
6.50%.
16
The Partnership makes loans primarily in Northern California. As of
December 31, 2004, approximately 89%, ($4,632,774) of the loans held by the
Partnership were in four San Francisco Bay Area Counties. The remainder of the
loans held were secured primarily by Northern California real estate outside the
San Francisco Bay Area. Like the rest of the nation, the San Francisco Bay Area
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 economy, which includes lower earnings, losses and
layoffs.
Recently the national and 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 Chronicle dated January 20, 2005 reported that "Despite
earlier forecasts of softer housing demand in 2004, low interest rates drove the
Bay Area real estate market to record levels last year. The median sale price of
a single-family home in 2004 was $532,000, a 17% rise over $455,000 in 2003 and
the highest for any year since 1988, real estate information firm DataQuick
reported Wednesday. A total of 134,848 houses and condos changed hands in the
nine counties in 2004, blowing past the previous peak of 122,149 set in 2003.
December, traditionally a slow time for real estate sales, closed out 2004 in
strong - although not record-setting - fashion. The median price for a
single-family home hit $554,000, a 17% jump over the December 2003 median. The
record median of $560,000 was set in November. The housing boom wasn't expected
to last through 2004. In the face of anticipated interest rate hikes, many
economists had predicted that local and national real estate markets would cool.
But after mortgage rates rose for several weeks in the spring, disappointing job
growth reignited fears about the economy, driving rates lower. The uncertainty
created by both rising and falling rates prompted buyers to jump into the
housing market. John Karevoll, [a researcher at DataQuick in La Jolla (San Diego
County)] expects appreciation rates to ease from the mid to high teens to the
single digits once the benchmark 30-year fixed mortgage rate climbs closer to
6.5 or 7.0% later in the year. Last week, mortgage giant Freddie Mac said the
30-year fixed rate hit 5.74%."
While the residential market outlook remains strong overall the commercial
real estate market appears equally as strong. As reported in the San Francisco
Business Times for the week of January 7-13, 2005 "The numbers are in and
they're looking pretty. San Francisco office market fundamentals improved during
the last quarter of 2004, with overall vacancy shrinking to between 15.4% and
19%, depending on which brokerage firm is crunching the numbers. Main reasons?
Dwindling supply due to stalemated construction, a handful of residential
conversions and a hopped-up tally of positive net absorption. According to Tove
Nilsen, Colliers International's director of market research, the S.F office
market as a whole logged 699,843 square feet of positive absorption during the
last quarter of the year, bringing the annual total to 1.2 million square feet.
Cushman & Wakefield Senior Research Associate Brad Van Blois (who counts 1.198
Million square feet of overall net absorption for the year) attributes a big
chunk of that - 302,610 square feet - to fresh companies moving to town.
Space-hungry/expanding companies also made this the sixth consecutive quarter
for positive net absorption - a marked turnaround from the exodus of mid-2000 to
mid-2003. And rents? They stabilized. For the year, city-wide Class A direct
rent decreased 1.9% to $28.80 per square foot, Class B space slipped 1.6% to
$22.80 and Class C declined 4.3% to $19.44, according to Cushman & Wakefield.
Class A rents in the commercial business district also dropped, to $30.48 in the
fourth quarter compared to $30.60 during the same period last year, also
according to Van Blois. But prime Class A space in the financial district is
getting harder to come by, with the sweetest sublease space now soaked up by
other tenants and mostly commodity space left. Class A space in the financial
district was $31.15, up from $30.36 the previous quarter, according to Nilsen.
As expected, commercial building sales - the hot ticket for all of last year -
beat all previous records. Low interest rates and pent up demand pushed dozens
of investors to buy a whopping $2.5 billion in commercial buildings in the city
this year, beating the $2.4 billion record set in 2000, according to Nilsen.
[Van Blois] added: "The market fundamentals have improved each quarter, and it's
encouraging, but overall we still have a long way to go." Sales stayed steady
through the year end, with 23 commercial and industrial properties closing
escrow during the month of November, according to Jennifer Raike of Old Republic
Title Co.'s monthly list of transactions."
As of December 31, 2004, the Partnership had an average loan to value ratio
based on appraised values and prior liens as of the date the loan was made of
79.67%. 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 of prior liens 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
Contractual Obligations Table. - None
Item 7a - 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 December
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 2005 through 2009 and separately aggregates the information for all
maturities arising after 2009. The carrying values of these assets and
liabilities approximate their fair values as of December 31, 2004:
2005 2006 2007 2008 2009 Thereafter Total
------------------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $ 1,075,231 $1,075,231
Average interest rate 1.20% 1.20%
Loans secured by deeds
of trust $ 664,882 621,716 3,205,206 - 627,579 105,745 $5,225,128
Average interest rate 10.00% 9.23% 9.07% - 9.08% 10.00% 9.23%
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 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.
18
PORTFOLIO REVIEW - For the years ended December 31, 2004, 2003 and 2002.
Loan Portfolio
The Partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of December 31, 2004,
2003 and 2002 the Partnership's loans secured by real property collateral in
four San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara and
Alameda) represented $4,632,774 (89%), $4,905,347 (93%) and $4,588,023 (89%),
respectively, of the outstanding secured loan portfolio. The remainder of the
portfolio represented loans secured by real estate located primarily in Northern
California.
As of December 31, 2004, 2003 and 2002 the Partnership held 14, 16 and 22
secured loans, respectively, in the following categories:
December 31, December 31, December 31,
2004 2003 2002
--------------------------- --------------------------- --------------------------
Single family residence (1-4 units) $1,316,596 25.20% $1,505,710 28.65% $ 824,381 15.91%
Multiple family dwellings (5+ units) 96,716 1.85% 136,841 2.60% 566,600 10.93%
Commercial 3,811,816 72.95% 3,613,069 68.75% 3,792,119 73.16%
------------ ----------- ------------ ----------- ------------ ----------
Total $5,225,128 100.00% $5,255,620 100.00% $5,183,100 100.00%
============ =========== ============ =========== ============ ==========
As of December 31, 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 December 31, 2004:
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of December 31, 2004
# of Loans Amount Percent
------------ -------------- -------------
1st Mortgages 9 $ 4,212,912 81%
2nd Mortgages 5 1,012,216 19%
============ ============== =============
Total 14 $ 5,225,128 100%
Maturing 12/31/05 and prior 3 $664,882 13%
Maturing prior to 12/31/06 3 621,716 12%
Maturing prior to 12/31/07 3 3,205,206 61%
Maturing after 12/31/07 5 733,324 14%
============ ============== =============
Total 14 $ 5,225,128 100%
Average Loan $ 373,223 7%
Largest Loan 2,103,300 40%
Smallest Loan 31,516 0.60%
Average Loan-to-Value, based upon appraisals
and senior liens at date of inception of loan 79.67%
The Partnership's largest loan in the principal amount of $2,103,300
represents 40.25% of outstanding secured loans and 32.59% of Partnership assets.
Larger loans can sometimes represent over 10% of the secured loan portfolio or
Partnership assets as these amounts decrease due to limited partner withdrawals
and loan payoffs and also as a result of the restructuring several loans into
one loan. These factors were all present in this situation. Chief among them was
the restructuring 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.
19
The Partnership has a substantial amount of its loan receivable balance
from one borrower at December 31, 2004, 2003 and 2002. The borrower accounted
for approximately 59%, 58% and 62%, respectively, 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 December 31, 2004. Neither of
these loans is considered past due 90 days or past maturity. Due to a collateral
shortfall on these loans Redwood Mortgage Corp. has provided an indemnity to the
Partnership.
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 December 31, 2004 the general partners have determined that
the allowance for loan losses of $315,751 (4.91% of net assets) and the
allowance for real estate held for sale of $1,313 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 December 31, 2004, three loans were delinquent in interest
payments or principal over 90 days.
The Partnership may also make loans requiring periodic disbursements of
funds. These loans include ground up construction of buildings and loans for
rehabilitation of existing structures. Interest on these loans is computed at
simple interest method and only on the amounts disbursed on a daily basis. As of
December 31, 2004 there were no such loans.
Item 8 - Financial Statements and Supplementary Data
A - Financial Statements
The following financial statements of Redwood Mortgage Investors VI are
included in Item 8:
o Report of Independent Registered Public Accounting Firm
o Balance Sheets - December 31, 2004, and December 31, 2003
o Statements of Income for the years ended December 31, 2004, 2003 and 2002
o Statements of Changes in Partners' Capital for the years ended December 31,
2004, 2003 and 2002
o Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
o Notes to Financial Statements
B - Financial Statement Schedules
The following financial statement schedules of Redwood Mortgage Investors
VI are included in Item 8:
o Schedule II - Valuation and Qualifying Accounts
o Schedule IV - Mortgage Loans on Real Estate
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
20
REDWOOD MORTGAGE INVESTORS VI
(A CALIFORNIA LIMITED PARTNERSHIP)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2004
21
TABLE OF CONTENTS
Page No.
---------------
Report of Independent Registered Public Accounting Firm 23
Balance Sheets 24
Statements of Income 25
Statements of Changes in Partners' Capital 26
Statements of Cash Flows 27
Notes to Financial Statements 28
Supplemental Schedules
Schedule II - Valuation and Qualifying Accounts 38
Schedule IV - Mortgage Loans on Real Estate 39
Rule 12-29 Loans on Real Estate
22
ARMANINO McKENNA LLP
CERTIFIED PUBLIC ACCOUNTANTS
12667 Alcosta Blvd., Suite 500
San Ramon, CA 94583
(925) 790-2600
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners
Redwood Mortgage Investors VI
Redwood City, California
We have audited the accompanying balance sheets of Redwood Mortgage
Investors VI (a California limited partnership) as of December 31, 2004 and 2003
and the related statements of income, changes in partners' capital and cash
flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of Redwood Mortgage Investors VI's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. Redwood Mortgage
Investors VI is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of Redwood
Mortgage Investors VI's internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Redwood Mortgage Investors
VI as of December 31, 2004 and 2003 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. Schedules II and IV are presented
for purposes of additional analysis and are not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARMANINO McKENNA LLP
San Ramon, California
February 14, 2005
23
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Balance Sheets
December 31, 2004 and 2003
ASSETS
2004 2003
------------- ------------
Cash and cash equivalents $ 1,090,027 $ 32,160
------------- ------------
Loans
Loans, secured by deeds of trust 5,225,128 5,255,620
Loans, unsecured, net of discount of $93,822
and $112,587 in 2004 and 2003, respectively 261,276 242,462
Allowance for loan losses (315,751) (279,865)
------------- ------------
Net loans 5,170,653 5,218,217
------------- ------------
Interest and other receivables
Accrued interest and late fees 61,364 54,562
Advances on loans 2,890 4,091
------------- ------------
Total interest and other receivables 64,254 58,653
------------- ------------
Real estate held for sale, net 128,902 1,312,773
------------- ------------
Total assets $ 6,453,836 $6,621,803
============= ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable $ 11,487 $ 13,064
Payable to affiliate 12,541 12,496
------------- ------------
Total liabilities 24,028 25,560
------------- ------------
Partners' capital
Limited partners' capital, subject to redemption 6,420,047 6,586,482
General partners' capital 9,761 9,761
------------- ------------
Total partners' capital 6,429,808 6,596,243
------------- ------------
Total liabilities and partners' capital $ 6,453,836 $6,621,803
============= ============
The accompanying notes are an integral part of these financial statements.
24
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Statements of Income
For the Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
-------------- -------------- --------------
Revenues
Interest on loans $ 490,786 $ 455,850 $ 552,898
Interest - interest bearing accounts 5,515 3,080 5,147
Interest on promissory note - - 7,128
Late fees, prepayment penalties and fees 42,436 32,710 8,998
-------------- -------------- --------------
538,737 491,640 574,171
-------------- -------------- --------------
Expenses
Mortgage servicing fees 50,160 48,759 138,851
Asset management fees 8,160 8,427 8,677
Clerical costs from Redwood Mortgage Corp. 12,807 17,039 22,872
Provisions for (recovery of) losses on loans
and real estate held for sale 35,886 4,585 (5,864)
Professional services 44,756 37,603 31,460
Other 39,816 42,111 8,192
-------------- -------------- --------------
191,585 158,524 204,188
-------------- -------------- --------------
Net income $ 347,152 $ 333,116 $ 369,983
============== ============== ==============
Net income
General partners (1%) $ 3,472 $ 3,331 $ 3,700
Limited partners (99%) 343,680 329,785 366,283
-------------- -------------- --------------
$ 347,152 $ 333,116 $ 369,983
============== ============== ==============
Net income per $1,000 invested by limited
partners for entire period
Where income is reinvested and compounded $ 54 $ 50 $ 54
Where partner receives income in monthly
Distributions $ 53 $ 49 $ 53
The accompanying notes are an integral part of these financial statements.
25
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Statements of Changes in Partners' Capital
For the Years Ended December 31, 2004, 2003 and 2002
Limited General
Partners Partners Total
------------ ------------ ------------
Balances at December 31, 2001 $6,999,670 $ 9,766 $7,009,436
Net income 366,283 3,700 369,983
Early withdrawal penalties (6,287) - (6,287)
Partners' withdrawals (596,466) (3,700) (600,166)
------------ ------------ ------------
Balances at December 31, 2002 6,763,200 9,766 6,772,966
Net income 329,785 3,331 333,116
Early withdrawal penalties (7,502) - (7,502)
Partners' withdrawals (499,001) (3,336) (502,337)
------------ ------------ ------------
Balances at December 31, 2003 6,586,482 9,761 6,596,243
Net income 343,680 3,472 347,152
Early withdrawal penalties (10,801) - (10,801)
Partners' withdrawals (499,314) (3,472) (502,786)
------------ ------------ ------------
Balances at December 31, 2004 $6,420,047 $ 9,761 $6,429,808
============ ============ ============
The accompanying notes are an integral part of these financial statements.
26
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Statements of Cash Flows
For the Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
-------------- ------------- --------------
Cash flows from operating activities
Net income $ 347,152 $ 333,116 $ 369,983
Adjustments to reconcile net income to
net cash provided by operating activities
Provision (recovery) for loan losses
and real estate 35,886 4,585 (5,864)
Early withdrawal penalties credited to income (10,801) (7,502) (6,287)
Amortization of discount on unsecured loans (18,765) (18,765) -
Change in operating assets and liabilities
Loans, unsecured (49) - 82,362
Accrued interest and late fees (6,802) 6,822 (162,674)
Advances on loans 1,201 26,916 74,251
Accounts payable (1,577) 1,111 (8,308)
Payable to affiliate 45 (2,147) (20,989)
Deferred interest - - (74,022)
-------------- ------------- --------------
Net cash provided by operating activities 346,290 344,136 248,452
-------------- ------------- --------------
Cash flows from investing activities
Principal collected on loans 899,907 1,564,808 1,265,798
Loans originated (869,415) (1,637,342) (900,418)
Note receivable payments - - 178,200
Payments on real estate held for sale - (78,232) (41,153)
Proceeds from disposition of real estate 1,183,871 - -
-------------- ------------- --------------
Net cash provided by (used in) investing activities 1,214,363 (150,766) 502,427
-------------- ------------- --------------
Cash flows from financing activities
Partners' withdrawals (502,786) (502,337) (600,166)
-------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents 1,057,867 (308,967) 150,713
Cash and cash equivalents at beginning of year 32,160 341,127 190,414
-------------- ------------- --------------
Cash and cash equivalents at end of year $ 1,090,027 $ 32,160 $ 341,127
============== ============= ==============
The accompanying notes are an integral part of these financial statements.
27
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
1. Organization and General
Redwood Mortgage Investors VI (the "Partnership"), a California Limited
Partnership, was organized in 1987. The general partners are Michael R. Burwell,
an individual, and Gymno Corporation, a California corporation. The Partnership
was organized to engage in business as a mortgage lender for the primary purpose
of making loans secured by deeds of trust on California real estate. Loans are
being arranged and serviced by Redwood Mortgage Corp., an affiliate of the
general partners.
The Partnership is scheduled to terminate on December 31, 2027, unless
sooner terminated as provided in the Partnership Agreement.
2. Summary of Significant Accounting Policies
Management estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions about the reported amounts of
assets and liabilities, and disclosures of contingent assets and liabilities, at
the 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.
Loans, secured by deeds of trust
Loans generally are stated at their outstanding unpaid principal balance
with interest thereon being accrued as earned.
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. At December 31, 2004 and 2003, there
was one loan categorized as impaired by the Partnership for $96,716, with a
reduction in the carrying value of the impaired loan of $14,596 at December 31,
2003. The reduction in the carrying value of the impaired loans was included in
the allowance for loan losses. In 2004, it was determined that a reduction in
carrying value was no longer required on this loan. The impaired loan had
accrued interest, late charges and advances totaling $6,936 and $7,977 at
December 31, 2004 and 2003. The average recorded investment in impaired loans
was $96,716, $96,716 and $1,282,304 for the three years ended 2004, 2003 and
2002, respectively.
28
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
2. Summary of Significant Accounting Policies (continued)
Loans, secured by deeds of trust (continued)
At December 31, 2004 and 2003, the Partnership had three and two loans past
due 90 days or more in interest payments or principal, including the impaired
loan, totaling $272,581 and $241,070, respectively. In addition, accrued
interest, late charges and advances on these loans totaled $4,249 and $18,073 at
December 31, 2004 and 2003, respectively. The Partnership does not consider two
of these loans to be impaired because there is sufficient collateral to cover
the amount outstanding to the Partnership and is still accruing interest on
these loans. At December 31, 2004 and 2003, as presented in Note 9, the average
loan to appraised value of security based upon appraised values and prior
indebtedness at the time the loans were consummated was 79.67% and 78.87%,
respectively. When loans are considered impaired, the allowance for loan losses
is updated to reflect the change in the valuation of collateral security.
However, a low loan to value ratio tends to minimize reductions for impairment.
Allowance for loan losses
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. A provision is made for loan losses to adjust the allowance
for loan losses to an amount considered by management to be adequate, with due
consideration to collateral values, to provide for unrecoverable loans and
receivables, including impaired loans, other loans, accrued interest, late fees
and advances on loans and other accounts receivable (unsecured). The Partnership
charges off uncollectible loans and related receivables directly to the
allowance account once it is determined that the full amount is not collectible.
The composition of the allowance for loan losses as of December 31, 2004
and 2003 was as follows:
2004 2003
------------ ------------
Impaired loans $ - $ 14,596
Specified loans 6,796 28,750
General 47,728 -
Unsecured loans 261,227 236,519
------------ ------------
$ 315,751 $ 279,865
============ ============
Activity in the allowance for loan losses is as follows for the years
ended December 31:
2004 2003 2002
------------ ------------ ------------
Beginning balance $ 279,865 $ 275,294 $ 370,612
Provision for loan losses 35,886 4,585 3,083
Recoveries - - (8,947)
Restructures/transfers - - (48,009)
Write-offs - (14) (41,445)
------------ ------------ ------------
$ 315,751 $ 279,865 $ 275,294
============ ============ ============
Cash and cash equivalents
The Partnership considers all highly liquid financial instruments with
maturities of three months or less at the time of purchase to be cash
equivalents.
29
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
2. Summary of Significant Accounting Policies (continued)
Real estate held for sale
Real estate held for sale includes real estate acquired through foreclosure
and is stated at the lower of the recorded investment in the property, plus any
senior indebtedness, or at the property's estimated fair value, less estimated
costs to sell.
The Partnership periodically compares the carrying value of real estate to
expected future undiscounted cash flows for the purpose of assessing the
recoverability of the recorded amounts. If the carrying value exceeds future
undiscounted cash flows, the assets are reduced to fair value.
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
monthly distributions of their net income. Individual income is allocated each
month based on the limited partners' pro rata share of partners' capital.
Because the net income percentage varies from month to month, amounts per $1,000
will vary for those individuals who made or withdrew investments during the
period, or select other options.
Late fee revenue
Late fees are generally charged at 6% of the monthly installment payment
past due. During 2004, 2003 and 2002, late fee revenue of $2,009, $7,379, and
$1,947, respectively, was recorded. The Partnership has a late fee receivable at
December 31, 2004 and 2003 of $2,356 and $1,608, respectively.
Recently issued accounting pronouncements
In December 2003, the American Institute of Certified Public Accountants
(AICPA) Accounting Standards Executive Committee (AcSEC) issued Statement of
Position 03-03, "Accounting for Certain Loans or Debt Securities Acquired in a
Transfer"(SOP 03-3). SOP 03-03 is effective for loans acquired in fiscal years
beginning after December 15, 2004, with early adoption encouraged. SOP 03-03
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in loans or
debt securities acquired in a transfer if those differences are attributable, at
least in part, to credit quality. It includes loans acquired in business
combinations and applies to all nongovernmental entities, including
not-for-profit organizations. The SOP does not apply to loans originated by the
entity. The implementation of SOP 03-03 is not anticipated to have any
significant effect on the Partnership.
30
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
3. Other Partnership Provisions
The Partnership is a California limited partnership. The rights, duties and
powers of the general and limited partners of the Partnership are governed by
the limited partnership agreement and Sections 15611 et seq. of the California
Corporations Code.
The general partners are in complete control of the Partnership business,
subject to the voting rights of the limited partners on specified matters. Any
one of the general partners acting alone has the power and authority to act for
and bind the Partnership.
A majority of the outstanding limited partnership interests may, without
the permission of the general partners, vote to: (i) terminate the Partnership,
(ii) amend the limited partnership agreement, (iii) approve or disapprove the
sale of all or substantially all of the assets of the Partnership and (iv)
remove or replace one or all of the general partners.
The approval of the majority of limited partners is required to elect a new
general partner to continue the Partnership business where there is no remaining
general partner after a general partner ceases to be a general partner other
than by removal.
Election to receive monthly, quarterly or annual distributions
At subscription, investors elected to receive monthly, quarterly or annual
distributions of earnings allocations, or to allow earnings to compound. Subject
to certain limitations, a compounding investor may subsequently change his
election, but an investor's election to have cash distributions is irrevocable.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
Liquidity, capital withdrawals and early withdrawals
There are substantial restrictions on transferability of Partnership units
and accordingly an investment in the Partnership is non-liquid. Limited partners
had no right to withdraw from the Partnership or to obtain the return of their
capital account for at least one year from the date of purchase of Partnership
units.
In order to provide a certain degree of liquidity to the limited partners
after the one-year period, limited partners may withdraw all or part of their
capital accounts from the Partnership in four quarterly installments beginning
on the last day of the calendar quarter following the quarter in which the
notice of withdrawal is given, subject to a 10% early withdrawal penalty. The
10% penalty is applicable to the amount withdrawn as stated in the notice of
withdrawal and will be deducted from the capital account.
After five years from the date of purchase of the units, limited partners
have the right to withdraw from the Partnership, on an installment basis.
Generally, this is done over a five-year period in twenty quarterly
installments. Once a limited partner has been in the Partnership for the minimum
five-year period, no penalty will be imposed if withdrawal is made in twenty
quarterly installments or longer. Notwithstanding the five-year (or longer)
withdrawal period, the general partners may liquidate all or part of a limited
partner's capital account in four quarterly installments beginning on the last
day of the calendar quarter following the quarter in which the notice of
withdrawal is given. This withdrawal is subject to a 10% early withdrawal
penalty applicable to any sums withdrawn prior to the time when such sums could
have been withdrawn without penalty.
31
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
3. Other Partnership Provisions (continued)
Liquidity, capital withdrawals and early withdrawals (continued)
The Partnership will not establish a reserve from which to fund withdrawals
and, accordingly, the Partnership's capacity to return a limited partner's
capital account is restricted to the availability of Partnership cash flow.
Furthermore, no more than 20% of the total limited partners' capital accounts
outstanding at the beginning of any year shall be liquidated during any calendar
year.
4. General Partners and Related Parties
The following are commissions and fees that are paid to the general
partners and affiliates:
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, affiliates 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. In 2004, 2003 and 2002, loan brokerage commissions paid by the
borrowers were $24,156, $42,407, and $22,611, respectively.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., 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 service fees
are recorded upon the receipt of any subsequent payments on impaired loans.
Mortgage servicing fees of $50,160, $48,759, and $138,851, were incurred for
2004, 2003 and 2002, respectively. The Partnership has a payable to Redwood
Mortgage Corp. for servicing fees of $12,541 and $12,496 at December 31, 2004
and 2003, respectively.
Asset management fee
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8
of 1% annually). Asset management fees of $8,160, $8,427, and $8,677 were
incurred for 2004, 2003 and 2002, respectively.
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. These fees are incurred by the
borrowers and paid to parties related to the general partners.
Operating expenses
Redwood Mortgage Corp.is reimbursed by the Partnership for all operating
expenses incurred by them on behalf of the Partnership, including without
limitation, out-of-pocket general and administration expenses of the
Partnership, accounting and audit fees, legal fees and expenses, postage and
preparation of reports to limited partners. During 2004, 2003 and 2002,
operating expenses totaling $12,807, $17,039 and $22,872, respectively, were
reimbursed to Redwood Mortgage Corp.
32
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
5. Real Estate Held for Sale
The following schedule reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, including
estimated costs to sell, as of December 31, 2004 and 2003:
2004 2003
------------ ------------
Costs of properties $ 130,215 $2,096,964
Reduction in value (1,313) (784,191)
------------ ------------
Real estate held for sale, net $ 128,902 $1,312,773
============ ============
During 2004, the Partnership sold real estate with an original investment
of $1,966,748, and a carrying value of $1,161,600, for $1,183,871. The original
investment in this property had been reduced in prior years by management's
estimate of the ultimate realizable value of the property.
6. Income Taxes
The following reflects a reconciliation of partners' capital reflected in
the financial statements to the tax basis of Partnership capital:
2004 2003
------------- -------------
Partners' capital per financial statements $ 6,429,808 $ 6,596,243
Allowance for loan losses and real estate 317,064 1,064,056
------------- -------------
Partners' capital tax basis $ 6,746,872 $ 7,660,299
============= =============
In 2004 and 2003, approximately 72% and 73%, respectively, of taxable
income was allocated to tax-exempt organizations (e.g., retirement plans).
7. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments:
(a) Cash and cash equivalents - The carrying amount equals fair value. All
amounts, including interest-bearing accounts are subject to immediate
withdrawal.
(b) Secured loans carrying value was $5,225,128 and $5,255,620 at December
31, 2004 and 2003, respectively. The fair value of these loans of $5,209,821 and
$4,997,256, 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.
33
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
8. Asset Concentrations and Characteristics
Most loans are secured by recorded deeds of trust. At December 31, 2004 and
2003, there were 14 and 16 secured loans outstanding respectively, with the
following characteristics:
2004 2003
------------- -------------
Number of secured loans outstanding 14 16
Total secured loans outstanding $ 5,225,128 $ 5,255,620
Average secured loan outstanding $ 373,223 $ 328,476
Average secured loan as percent of total secured loans 7.14% 6.25%
Average secured loan as percent
of partners' capital 5.80% 4.98%
Largest secured loan outstanding $ 2,103,300 $ 2,103,300
Largest secured loan as percent of total secured loans 40.25% 40.02%
Largest secured loan as percent of partners' capital 32.71% 31.89%
Largest secured loan as percent of total assets 32.59% 31.73%
Number of counties where security
is located (all California) 8 8
Largest percentage of loans in one county 42.28% 42.06%
Average secured loan to appraised value
of security based on appraised values and prior
liens at time loan was consummated 79.67% 78.87%
Number of secured loans in foreclosure status - -
Amount of secured loans in foreclosure $ - $ -
34
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
8. Asset Concentrations and Characteristics (continued)
The following categories of secured loans were held at December 31, 2004
and 2003:
2004 2003
-------------- -------------
First trust deeds $ 4,212,912 $ 3,983,032
Second trust deeds 1,012,216 1,272,588
-------------- -------------
Total loans 5,225,128 5,255,620
Prior liens due other lenders at time of loan 3,026,354 2,377,041
-------------- -------------
Total debt $ 8,251,482 $ 7,632,661
============== =============
Appraised property value at time of loan $ 10,356,549 $ 9,677,215
============== =============
Total loans as percent of appraisals 79.67% 78.87%
============== =============
Loans by type of property
Owner occupied homes $ 627,579 $ 640,000
Non-owner occupied homes 689,017 865,710
Apartments 96,716 136,841
Commercial 3,811,816 3,613,069
-------------- -------------
$ 5,225,128 $ 5,255,620
============== =============
Interest rates on the loans range from 6.50% to 10.50% at December 31,
2004, and 6.50% to 10.75% at December 31, 2003.
Scheduled maturity dates of secured loans as of December 31, 2004 are as
follows:
Year Ending December 31,
------------------------------
2005 $ 664,882
2006 621,716
2007 3,205,206
2008 -
2009 627,579
Thereafter 105,745
--------------
Total $ 5,225,128
==============
The remaining scheduled maturities for 2005 include $175,865 in two loans,
which were past maturity at December 31, 2004 and are included in the total of
loans 90 days or more delinquent presented in Note 2. Occasionally, the
Partnership allows borrowers to continue to make the payments on debt past
maturity for periods of time.
Cash deposits at December 31, 2004, exceeded federal insurance limits (up
to $100,000 per bank) by approximately $1,087,000.
35
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
8. Asset Concentrations and Characteristics (continued)
The Partnership has a substantial amount of its loan receivable balance
from one borrower at December 31, 2004 and 2003. This borrower accounted for
approximately 59% and 58% of the secured loan balances at such dates. This
borrower accounted for approximately 57%, 47% and 31% of interest on loans for
the years ended December 31, 2004, 2003 and 2002, respectively. At December 31,
2004 and December 31, 2003, the collateral value 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. Neither of these loans is past due 90 days or
more on interest payments nor are they past maturity.
9. Commitments and Contingencies
Workout agreements
The Partnership has negotiated various contractual workout agreements with
borrowers. The Partnership is not obligated to fund additional money as of
December 31, 2004. There are three loans totaling $272,581 in workout agreements
as of December 31, 2004.
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.
36
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2004, 2003 and 2002
10. Selected Financial Information (Unaudited)
Calendar Quarter
------------------------------------------------------------
First Second Third Fourth Annual
----------- ------------ ------------- ------------ ------------
Revenues
2004 $ 130,206 $ 140,121 $ 135,904 $ 132,506 $ 538,737
2003 $ 110,453 $ 149,615 $ 107,613 $ 123,959 $ 491,640
Expenses
2004 $ 48,590 $ 59,237 $ 50,429 $ 33,329 $ 191,585
2003 $ 35,041 $ 57,724 $ 24,466 $ 41,293 $ 158,524
Net income allocated to general partners
2004 $ 816 $ 809 $ 855 $ 992 $ 3,472
2003 $ 754 $ 919 $ 832 $ 826 $ 3,331
Net income allocated to limited partners
2004 $ 80,800 $ 80,075 $ 84,620 $ 98,185 $ 343,680
2003 $ 74,658 $ 90,972 $ 82,315 $ 81,840 $ 329,785
Net income per $1,000 invested
where income is
Compounded
2004 $ 12 $ 12 $ 13 $ 17 $ 54
2003 $ 12 $ 12 $ 12 $ 14 $ 50
Withdrawn
2004 $ 12 $ 12 $ 13 $ 16 $ 53
2003 $ 12 $ 12 $ 12 $ 13 $ 49
37
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Schedule II
Valuation and Qualifying Accounts
For the Three Years Ended December 31, 2002, 2003 and 2004
Col B. Col. C - Additions Col E.
------------------------------
Col A. Balance at Charged to Charged Balance
Beginning Costs and to Other Col. D at End
Description of Period Expenses Accounts Deductions of Period
- ---------------------------------------- ------------- ------------- ------------- ------------- -------------
Year Ended December 31, 2002
Deducted from asset accounts
Allowance for loan losses $ 370,612 $ (5,864) $ (48,009) (a) $ (41,445) (b) $ 275,294
Cumulative write-down of
real estate held for sale (REO) 534,612 - 249,998 - 784,191
------------- ------------- -------------- ------------- -------------
$ 904,805 $ (5,864) $ 210,936 (a) $ (41,445) $ 1,059,485
============= ============= ============== ============= =============
Year Ended December 31, 2003
Deducted from asset accounts
Allowance for loan losses $ 275,294 $ 4,585 $ - $ (14) (b) $ 279,865
Cumulative write-down of
real estate held for sale (REO) 784,191 - - - 784,191
------------- ------------- -------------- ------------- -------------
$ 1,059,485 $ 4,585 $ - $ (14) (b) $ 1,064,056
============= ============= ============== ============= =============
Year Ended December 31, 2004
Deducted from asset accounts
Allowance for loan losses $ 279,865 $ 35,886 $ - $ - $ 315,751
Cumulative write-down of
real estate held for sale (REO) 784,191 - - (782,878) (c) 1,313
------------- ------------- -------------- ------------- -------------
$ 1,064,056 $ 35,886 $ - $ (782,878) (c) $ 317,064
============= ============= ============== ============= =============
Note (a) - Represents restructuring of loans
Note (b) - Represents write-offs of loans
Note (c) - Represents sales of REO
38
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Schedule IV
Mortgage Loans on Real Estate
Rule 12-29 Loans on Real Estate
December 31, 2004
Col. H
Principal
Col. F Amount
Face Col. G of Loans
Col. C Col. D Amount of Carrying Subject to Col. I Col. J
Col. B Final Periodic Col. E Mortgage Amount of Delinquent Type California
Col. A Interest Maturity Payment Prior Original Mortgage Principal of Geographic
Descript. Rate Date Terms Liens Amount Investment or Interest Lien Location
- ----------------------------------------------------------------------------------------------------------------------------
Apts. 6.50% 05/01/06 $ 541 $ 89,904 $ 100,000 $ 96,716 $ 96,716 2nd Sacramento
Comm. 10.00% 12/01/03 1,276 - 145,455 144,349 144,349 1st Stanislaus
Comm. 10.00% 12/01/03 284 208,012 32,323 31,516 31,516 2nd Stanislaus
Comm. 10.00% 07/01/11 997 - 109,769 105,745 - 1st Santa Clara
Comm. 9.00% 02/28/07 15,775 - 2,103,300 2,103,300 - 1st Santa Clara
Comm. 9.00% 02/28/07 7,176 - 956,800 956,800 - 1st Alameda
Comm. 10.50% 10/01/07 1,345 - 147,000 145,107 - 1st San Mateo
Comm. 10.50% 12/01/06 2,844 2,270,636 650,000 325,000 - 2nd San Francisco
Res. 8.75% 01/01/09 2,242 - 285,000 283,163 - 1st Alameda
Res. 10.00% 12/25/05 4,078 226,465 650,000 489,017 - 2nd Alameda
Res. 9.25% 08/01/09 1,275 - 155,000 154,675 - 1st Alameda
Res. 8.50% 09/01/06 1,417 - 200,000 200,000 - 1st Monterey
Res. 9.25% 09/01/09 987 - 120,000 119,773 - 1st Colusa
Res. 9.75% 10/01/09 601 231,337 70,000 69,967 - 2nd Alameda
----------------------------------------------------------------
Total $ 40,838 $3,026,354 $5,724,647 $5,225,128 $ 272,581
================================================================
Note: Most loans have balloon payments due at maturity
39
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Schedule IV (continued)
Mortgage Loans on Real Estate
Rule 12-29 Loans on Real Estate
December 31, 2004
Reconciliation of carrying amount (cost) of loans at close of periods
Year ended December 31,
------------------------------------------------
2004 2003 2002
------------- ------------- -------------
Balance at beginning of year $ 5,255,620 $ 5,183,100 $ 4,970,433
------------- ------------- -------------
Additions during period
New loans 869,415 1,637,342 900,418
Other - - 920,346
------------- ------------- -------------
Total additions 869,415 1,637,342 1,820,764
------------- ------------- -------------
Deductions during period
Collections of principal 899,907 1,564,808 1,265,798
Foreclosures - - 300,854
Cost of loans sold - - -
Amortization of premium - - -
Other - 14 41,445
------------- ------------- -------------
Total deductions 899,907 1,564,822 1,608,097
------------- ------------- -------------
Balance at close of year $ 5,225,128 $ 5,255,620 $ 5,183,100
============= ============= =============
40
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with the Partnership's independent public
accountants during the years ended December 31, 2004 and 2003.
Item 9a. - Controls and Procedures
The Partnership carried out an evaluation, under the supervision and with
the participation of the general partners of the effectiveness of the design and
operation of the Partnership's disclosure controls and procedures as of the end
of the period covered by this report pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, the general
partners concluded that the Partnership's disclosure controls and procedures
were effective in timely alerting the general partners to material information
related to the Partnership that is required to be included in our periodic
filings with the Securities and Exchange Commission.
There were no significant changes in the Partnership's internal control
over financial reporting during the Partnership's fourth fiscal quarter that
have materially affected, or are likely to materially affect, the Partnership's
internal control over financial reporting.
Item 9b. - Other Information
None
Part III
Item 10 - Directors and Executive Officers of the Registrant
The Partnership has no Officers or Directors. Rather, the activities of the
Partnership are managed by the two general partners, one of whom is an
individual, Michael R. Burwell. The second general partner is Gymno Corporation,
a California corporation, formed in 1986. Mr. Burwell is one of the two
shareholders of Gymno Corporation, a California corporation, and has a 50%
interest in the corporation.
The General Partners.
Michael R. Burwell. Michael R. Burwell, age 48, General Partner, past
member of Board of Trustees and Treasurer, Mortgage Brokers Institute
(1984-1986); President, Director, Chief Financial Officer, Redwood Mortgage
Corp. (1979-present); Director, Secretary and Treasurer A & B Financial
Services, Inc. (1980-present); President, Director, Chief Financial Officer and
Secretary (since 1986) of Gymno Corporation; President, Director, Secretary and
Treasurer of The Redwood Group, Ltd. (1979-present). Mr. Burwell is licensed as
a real estate sales person.
Gymno Corporation. Gymno Corporation, General Partner, is a California
corporation formed in 1986 for the purpose of acting as a general partner of
this partnership and of other limited partnerships formed by the individual
general partners. The shares in Gymno Corporation are held equally by Michael R.
Burwell and the estate of D. Russell Burwell. Upon the completion of the
administration of D. Russell Burwell's estate, Michael R. Burwell will have a
controlling interest in Gymno Corporation. Michael R. Burwell is a director of
Gymno and the director position held by D. Russell Burwell is currently vacant.
Michael R. Burwell is its President, Chief Financial Officer and Secretary.
Financial Oversight by General Partners.
The partnership does not have a board of directors or an audit committee.
Accordingly, the general partners serve the equivalent function of an audit
committee for, among other things, the following purposes: appointment,
compensation, review and oversight of the work of our independent public
accountants, and establishing the enforcing of the Code of Ethics. However,
since the partnership does not have an audit committee and the general partners
are not independent of the partnership, the partnership does not have an "audit
committee financial expert."
41
Code of Ethics.
The general partners have adopted a Code of Ethics applicable to the
general partners and to any agents, employees or independent contractors engaged
by the general partners to perform the functions of a principal financial
officer, principal accounting officer or controller of the partnership, if any.
You may obtain a copy of this Code of Ethics, without charge, upon request by
calling our Investor Services Department at (650) 365-5341.
Item 11 - Executive Compensation
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP
As indicated above in item 10, the Partnership has no officers or
directors. The Partnership is managed by the general partners. There are certain
fees and other items paid to management and related parties. A more complete
description of management compensation is found in the Prospectus, pages 11-12,
under the section "Compensation of the General Partners and the Affiliates",
which is incorporated by reference. Such compensation is summarized below.
The following compensation has been paid to the general partners and
affiliates for services rendered during the year ended December 31, 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.................................$50,160
General Partners &/or Affiliates Asset Management Fee for managing assets................................$8,160
General Partners 1% interest in profits..................................................$3,472
II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY
COMPANIES RELATED TO THE GENERAL PARTNERS (EXPENSES OF BORROWERS NOT OF THE
PARTNERSHIP)
Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in connection
with the review, selection, evaluation, negotiation, and
extension
extension of the loans paid by the borrowers and not by the
Partnership............................................................$24,156
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................$2,250
Gymno Corporation Reconveyance Fee..........................................................$338
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 . . . . . . . . . . . . . . . . . . . . . . . . . . $12,807
42
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The general partners receive a combined total of a 1% interest in
Partnership income and losses and distributions of cash available for
distribution.
Item 13 - Certain Relationships and Related Transactions
Refer to footnotes 3 and 4 of the Notes to Financial Statements in Part II
item 8, which describes related party fees and data.
Also refer to sections of the Prospectus "Compensation of General Partners
and Affiliates", page 11, and "Conflicts of Interest", page 13, as part of the
above-referenced Registration Statement, which is incorporated by reference.
Item 14 - Principal Accountant Fees and Services
Fees for services performed for the Partnership by the principal accountant
for 2004 and 2003 are as follows:
Audit Fees The aggregate fees billed during the years ended December 31,
2004 and 2003 for professional services rendered for the audit of the
Partnership's annual financial statements included in the Partnership's Annual
Report on Form 10-K and review of financial statements included in the
Partnership's Quarterly Reports on Form 10-Q were $37,136 and $32,090,
respectively.
Audit Related Fees There were no fees billed during the years ended
December 31, 2004 and 2003 for audit-related services.
Tax fees The aggregate fees billed for tax services for the years ended
December 31, 2004 and 2003, were $3,478 and $2,675, respectively. These fees
relate to professional services rendered primarily for tax compliance.
All Other Fees There were no other fees billed during the years ended
December 31, 2004 and 2003.
All audit and non-audit services are approved by the general partner prior
to the accountant being engaged by the Partnership.
43
Part IV
Item 15 - Exhibits and Financial Statements Schedules
A. Documents filed as part of this report:
1. The Financial Statements are listed in Part II, Item 8 under A-Financial
Statements.
2. The Financial Statement Schedules are listed in Part II, Item 8 under
B-Financial Statement Schedules.
3. Exhibits.
Exhibit No Description of Exhibits
------------ --------------------------------------------------------------
3.1 Limited Partnership Agreement
3.2 Form of Certificate of Limited Partnership Interest
3.3 Certificate of Limited Partnership
10.1 Escrow Agreement
10.2 Servicing Agreement
10.3 (a) Form of Note secured by Deed of Trust which provides for
principal and interest payments
(b) Form of Note secured by Deed of Trust which provides principal
and interest payments and right of assumption
(c) Form of Note secured by Deed of Trust which provides for
interest only payments (d) Form of Note
10.4 (a) Deed of Trust and Assignment of Rents to accompany Exhibits
10.3 (a) and (c)
(b) Deed of Trust and Assignment of Rents to accompany Exhibits
10.3 (b)
(c) Deed of Trust to accompany Exhibit 10.3 (d)
10.5 Promissory Note for Formation Loan
10.6 Agreement to Seek a Lender
31.1 Certification of General Partner pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of General Partner pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of General Partner pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of General Partner pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
All of the above exhibits, other than 31.1, 31.2, 32.1 and 32.2, were
previously filed as the exhibits to Registrant's Statement on Form S-11
(Registration No. 33-12519) and incorporated by reference herein.
B. See (A) 3 above
C. See (A) 2 above. Additional reference is made to prospectus (S-11) dated
September 3, 1987 to pages 56 through 59 and supplement #6 dated May 16,
1989 pages 16-18, for financial data related to Gymno Corporation, a
general partner.
44
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized on the 31st day of March,
2005.
REDWOOD MORTGAGE INVESTORS VI
By: /S/ Michael R. Burwell
-----------------------------------
Michael R. Burwell, General Partner
By: Gymno Corporation, General Partner
By: /S/ Michael R. Burwell
-----------------------------------------
Michael R. Burwell, President, Secretary
& Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacity indicated on the 31st day of March, 2005.
Signature Title Date
/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell General Partner March 31, 2005
/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell President, Secretary & Chief March 31, 2005
Financial Officer of Gymno
Corporation (Principal Financial
and Accounting Officer);
Director of Gymno Corporation
45
Exhibit 31.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VI, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's annual control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial data; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, General Partner
March 31, 2005
46
Exhibit 31.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VI, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's annual control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial data; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- ---------------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 31, 2005
47
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VI (the
"Partnership") on Form 10-K for the period ended December 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 at the dates and for the periods indicated.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, General Partner
March 31, 2005
48
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VI (the
"Partnership") on Form 10-K for the period ended December 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 and Chief Financial
Officer of Gymno Corporation, General Partner of the Partnership, certify that
to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership at the dates and for the periods indicated.
/s/ Michael R. Burwell
- ---------------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 31, 2005
49