UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2005
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: 000-17573
REDWOOD MORTGAGE INVESTORS VI,
a California Limited Partnership
(Exact name of registrant as specified in its charter)
California 94-3031211
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063-1743
(Address of principal executive offices) (Zip Code)
(650) 365-5341
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes XX No
-------------- --------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No XX
-------------- -------------
1
Part I - Item I. FINANCIAL STATEMENTS
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
BALANCE SHEETS
JUNE 30, 2005 and DECEMBER 31, 2004 (unaudited)
ASSETS
June 30, December 31,
2005 2004
--------------- ----------------
Cash and cash equivalents $ 771,832 $ 1,090,027
--------------- ----------------
Loans
Loans, secured by deeds of trust 5,500,127 5,225,128
Loans, unsecured, net discount of $84,440 and $93,823 for
June 30, 2005 and December 31, 2004, respectively 270,610 261,276
--------------- ----------------
5,770,737 5,486,404
Less allowance for loan losses (325,134) (315,751)
--------------- ----------------
Net loans 5,445,603 5,170,653
--------------- ----------------
Interest and other receivables
Accrued interest and late fees 60,994 61,364
Advances on loans 508 2,890
--------------- ----------------
Total interest and other receivables 61,502 64,254
--------------- ----------------
Real estate held for sale, net 130,215 128,902
Prepaid expenses 2,587 -
Due from affiliate 5,518 -
--------------- ----------------
Total assets $ 6,417,257 $ 6,453,836
=============== ================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable $ 4,278 $ 11,487
Payable to affiliate 12,014 12,541
--------------- ---------------
Total liabilities 16,292 24,028
--------------- ---------------
Partners' capital
Limited partners' capital, subject to redemption 6,391,204 6,420,047
General partners' capital 9,761 9,761
--------------- ---------------
Total partners' capital 6,400,965 6,429,808
--------------- ---------------
Total liabilities and partners' capital $ 6,417,257 $ 6,453,836
=============== ===============
The accompanying notes are an integral part of these financial statements.
2
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 and 2004 (unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenues
Interest on loans $ 126,914 $ 124,749 $ 255,649 $ 241,152
Interest - interest bearing accounts 3,587 1,509 6,384 1,771
Late charges, prepayment penalties and fees 1,158 13,863 3,155 27,404
----------- ----------- ----------- -----------
131,659 140,121 265,188 270,327
----------- ----------- ----------- -----------
Expenses
Mortgage servicing fees 12,090 16,238 25,042 25,168
Asset management fees 2,013 2,046 4,027 4,112
Clerical costs through Redwood Mortgage Corp. 1,738 6,825 4,449 6,825
Provision for losses on loans and real estate held for 3,379 8,813 8,070 15,300
sale
Professional services 11,883 8,805 21,414 26,340
Other 4,981 16,510 7,656 30,082
----------- ----------- ----------- -----------
36,084 59,237 70,658 107,827
----------- ----------- ----------- -----------
Net income $ 95,575 $ 80,884 $ 194,530 $ 162,500
=========== =========== =========== ===========
Net income
General partners (1%) 955 809 1,945 1,625
Limited partners (99%) 94,620 80,075 192,585 160,875
----------- ----------- ----------- -----------
$ 95,575 $ 80,884 $ 194,530 $ 162,500
=========== =========== =========== ===========
Net income per $1,000 invested by limited partners
for entire period:
-where income is compounded and retained $ 15 $ 12 $ 30 $ 25
=========== =========== =========== ===========
-where partner receives income in monthly
distributions $ 15 $ 12 $ 30 $ 24
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
3
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 and 2004 (unaudited)
SIX MONTHS ENDED JUNE 30,
---------------------------------
2005 2004
--------------- --------------
Cash flows from operating activities
Net income $ 194,530 $ 162,500
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses and real estate held for sale 8,070 15,300
Early withdrawal penalties credited to income (1,674) (7,493)
Amortization of discount on unsecured loans (9,383) (9,383)
Loss on disposal of real estate held for sale - 1,048
Change in operating assets and liabilities
Accrued interest and advances on loans 2,752 (11,911)
Due from affiliate (5,518) -
Accounts payable and payable to affiliate (7,736) 3,884
Prepaid expenses (2,587) -
--------------- --------------
Net cash provided by operating activities 178,454 153,945
--------------- --------------
Cash flows from investing activities
Principal collected on loans 1,050,002 211,656
Loans originated (1,325,000) (187)
Payments for real estate held for sale - (1,203)
Proceeds from disposition of real estate - 451,688
Reduction in unsecured note 49 -
--------------- --------------
Net cash provided by (used in) investing activities (274,949) 661,954
--------------- --------------
Cash flows from financing activities
Partners' withdrawals (221,700) (268,228)
--------------- --------------
Net cash used in financing activities (221,700) (268,228)
--------------- --------------
Net increase (decrease) in cash and cash equivalents (318,195) 547,671
Cash and cash equivalents - beginning of period 1,090,027 32,160
--------------- --------------
Cash and cash equivalents - end of period $ 771,832 $ 579,831
=============== ==============
The accompanying notes are an integral part of these financial statements.
4
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 (unaudited)
NOTE 1 - GENERAL
In the opinion of the management of the Partnership, the accompanying
unaudited financial statements contain all adjustments, consisting of normal,
recurring adjustments, necessary to present fairly the financial information
included therein. These financial statements should be read in conjunction with
the audited financial statements included in the Partnership's Form 10-K for the
fiscal year ended December 31, 2004 filed with the Securities and Exchange
Commission. The results of operations for the six month period ended June 30,
2005 are not necessarily indicative of the operating results to be expected for
the full year.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Loans secured by deeds of trust
At June 30, 2005 and December 31, 2004, there was one loan categorized as
impaired by the Partnership for $96,716. In 2004, it was determined that a
reduction in the carrying value of this loan was no longer required. The
impaired loan had accrued interest, late charges and advances totaling $7,553
and $6,936 at June 30, 2005 and December 31, 2004, respectively. The average
recorded investment in the impaired loan was $96,716 for the six month period
ended June 30, 2005 and for the year ended December 31, 2004.
At June 30, 2005 and December 31, 2004, the Partnership had two loans
totaling $216,257 and one loan totaling $96,716, respectively, that were past
due 90 days or more in interest payments. Included in the June 30, 2005 and
December 31, 2004 past due loans is one loan with an outstanding principal
balance of $96,716, which is also considered to be impaired. Additionally, at
June 30, 2005 and December 31, 2004, the Partnership had two loans past maturity
with outstanding principal balances of $175,714 and $175,865, for a combined
total of four and three loans during each period past due 90 days or more in
interest payments, and/or past maturity totaling $391,971 and $272,581,
respectively. In addition, accrued interest, late charges and advances on these
loans totaled $11,228 and $4,249 at June 30, 2005 and December 31, 2004,
respectively. At June 30, 2005 the Partnership does not consider three 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 June 30, 2005 and December 31, 2004, as presented in Note 6, the average loan
to appraised value of security based upon appraised values and prior liens at
the time the loans were consummated was 79.92% and 79.67%, 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
The composition of the allowance for loan losses as of June 30, 2005 and
December 31, 2004 was as follows:
June 30, December 31,
2005 2004
--------------- ---------------
Impaired loans $ - $ -
Specified loans 6,796 6,796
Unsecured loans 270,610 261,227
General 47,728 47,728
--------------- ---------------
$ 325,134 $ 315,751
=============== ===============
5
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for loan losses (continued)
Activity in the allowance for loan losses is as follows for the six months
ended June 30, 2005 and the year ended December 31, 2004:
June 30, December 31,
2005 2004
---------------- ---------------
Beginning balance $ 315,751 $ 279,865
Provision for loan losses 8,070 35,886
Write-offs - -
Transfer from real estate held for sale 1,313 -
---------------- ---------------
$ 325,134 $ 315,751
================ ===============
Income taxes
No provision for federal and state income taxes, except for a minimum state
tax of $800, is made in the financial statements since income taxes are the
obligation of the partners if and when income taxes apply.
Net income per $1,000 invested
Amounts reflected in the statements of income as net income per $1,000
invested by limited partners for the entire period are amounts allocated to
limited partners who held their investment throughout the period and have
elected to either leave their earnings to compound or have elected to receive
periodic distributions of their net income. Individual income is allocated each
month based on the limited partners' pro rata share of partners' capital.
Because the net income percentage varies from month to month, amounts per $1,000
will vary for those individuals who made or withdrew investments during the
period, or select other options.
Management estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions about the reported amounts of
assets and liabilities, and disclosures of contingent assets and liabilities, at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Such estimates relate principally to the
determination of the allowance for loan losses, including the valuation of
impaired loans and the valuation of real estate held for sale. Actual results
could differ significantly from these estimates.
Reclassifications
Certain reclassifications, not affecting previously reported net income or
total partners' capital, have been made to the previously issued financial
statements to conform to the current year classification.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
6
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 (unaudited)
NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES
The following are commissions and fees that are paid to the general
partners and affiliates.
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, Redwood Mortgage Corp., an affiliate of the general
partners, may collect an amount equivalent to 12% of the loaned amount until 6
months after the termination date of the offering. Thereafter, loan brokerage
commissions (points) will be limited to an amount not to exceed 4% of the total
Partnership assets per year. The loan brokerage commissions are paid by the
borrowers, and thus, are not an expense of the Partnership.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., an affiliate of the general
partners, based on the unpaid principal balance of the loan portfolio, or such
lesser amount as is reasonable and customary in the geographic area where the
property securing the mortgage is located. Once a loan is categorized as
impaired, mortgage servicing fees are no longer accrued. Additional servicing
fees are recorded upon the receipt of any subsequent payments on impaired loans.
Redwood Mortgage Corp. waived $5,518 in loan servicing fees during the second
quarter of 2005.
Asset management fee
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8
of 1% annually).
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. These fees are incurred by the
borrowers and paid to the general partners.
Operating expenses
The general partners or their affiliate, Redwood Mortgage Corp., are
reimbursed by the Partnership for all operating expenses incurred by them on
behalf of the Partnership, including without limitation, out-of-pocket general
and administration expenses of the Partnership, accounting and audit fees, legal
fees and expenses, postage and preparation of reports to limited partners.
Redwood Mortgage Corp. waived $870 in reimbursements during the second quarter
of 2005.
NOTE 4 - REAL ESTATE HELD FOR SALE
In 1993 the Partnership, together with two other affiliates, acquired
through foreclosure a parcel of land located in East Palo Alto, CA, which is on
the market for sale. The general partners believe that this property is worth
considerably more than its carrying value, 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 has been slow. Interest in land sales
for commercial sites has been improving. As of June 30, 2005 the Partnership's
investment in this property was $130,215.
7
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 (unaudited)
NOTE 4 - REAL ESTATE HELD FOR SALE (continued)
The following table reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, including
estimated costs to sell, as of June 30, 2005 and December 31, 2004:
June 30, December 31,
2005 2004
----------------- ----------------
Cost of property $ 130,215 $ 130,215
Reduction in value - (1,313)
----------------- ----------------
Real estate held for sale, net $ 130,215 $ 128,902
================= ================
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Secured loans carrying value was $5,500,127 and $5,225,128 at June 30, 2005
and December 31, 2004, respectively. The fair value of these loans of $5,507,128
and $5,209,821, respectively, was estimated based upon projected cash flows
discounted at the estimated current interest rates at which similar loans would
be made. The applicable amount of the allowance for loan losses along with
accrued interest and advances related thereto should also be considered in
evaluating the fair value versus the carrying value.
NOTE 6 - ASSET CONCENTRATIONS AND CHARACTERISTICS
Loans are secured by recorded deeds of trust. At June 30, 2005 and December
31, 2004, there were 16 and 14 secured loans outstanding respectively, with the
following characteristics:
June 30, December 31,
2005 2004
---------------- ---------------
Number of secured loans outstanding 16 14
Total secured loans outstanding $ 5,500,127 $ 5,225,128
Average secured loan outstanding $ 343,758 $ 373,223
Average secured loan as percent of total secured loans 6.25% 7.14%
Average secured loan as percent of partners' capital 5.37% 5.80%
Largest secured loan outstanding $ 2,103,300 $ 2,103,300
Largest secured loan as percent of total secured loans 38.24% 40.25%
Largest secured loan as percent of partners' capital * 32.86% 32.71%
Largest secured loan as percent of total assets 32.78% 32.59%
Number of counties where security is located (all California) 9 8
Largest percentage of secured loans in one county 40.15% 42.28%
Average secured loan to appraised value of security based on appraised
values and prior liens at time loan was consummated 79.92% 79.67%
Number of secured loans in foreclosure status None None
Amounts of secured loans in foreclosure None None
* At loan inception this loan represented 8.8% of outstanding loans and
8.7% of partners' capital.
8
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 (unaudited)
NOTE 6 - ASSET CONCENTRATIONS AND CHARACTERISTICS (continued)
Over time, loans may increase above 10% of the secured loan portfolio or
Partnership assets as the loan portfolio and assets of the Partnership decrease
due to limited partner withdrawals and/or loan payoffs.
The following categories of secured loans were held at June 30, 2005 and
December 31, 2004:
June 30, December 31,
2005 2004
----------------- ----------------
First trust deeds $ 3,977,933 $ 4,212,912
Second trust deeds 1,522,194 1,012,216
----------------- ----------------
Total loans 5,500,127 5,225,128
Prior liens due other lenders at time of loan 4,949,048 3,026,354
----------------- ----------------
Total debt $ 10,449,175 $ 8,251,482
================= ================
Appraised property value at time of loan $ 13,074,020 $ 10,356,549
----------------- ----------------
Total loans as percent of appraisals based on appraised values
and prior liens at time loan was consummated 79.92% 79.67%
----------------- ----------------
Secured loans by type of property
Owner occupied homes $ 1,342,675 $ 627,579
Non-owner occupied homes 250,000 689,017
Apartments 96,716 96,716
Commercial 3,810,736 3,811,816
----------------- ----------------
$ 5,500,127 $ 5,225,128
================= ================
Scheduled maturity dates of secured loans as of June 30, 2005 are as
follows:
Year Ending December 31,
-------------------------------
2005 $ 175,714
2006 671,716
2007 3,204,746
2008 400,000
2009 343,363
Thereafter 704,588
---------------
$ 5,500,127
===============
The maturities for 2005 include two loans totaling $175,714, which were
past maturity at June 30, 2005. Interest payments on both of these loans were
current at June 30, 2005.
At times, the Partnership's cash deposits exceeded federally insured
limits. Management believes deposits are maintained in financially secure
financial institutions.
9
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 (unaudited)
NOTE 6 - ASSET CONCENTRATIONS AND CHARACTERISTICS (continued)
The Partnership has a substantial amount of its loan receivable balance
from one borrower at June 30, 2005 and December 31, 2004. This borrower
accounted for approximately 56% and 59% of the loan balances at such dates,
respectively. This borrower accounted for approximately 55% and 57% of interest
revenue for the six month period ended June 30, 2005 and year ended December 31,
2004, respectively. At June 30, 2005 and December 31, 2004, 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.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Workout agreements
The Partnership has negotiated various contractual workout agreements with
borrowers. Under the terms of these workout agreements the Partnership is not
obligated to make any additional monetary advances for the maintenance or repair
of the collateral securing the loans as of June 30, 2005 and December 31, 2004.
There are one and three loans totaling $96,716 and $272,581 in workout
agreements as of June 30, 2005 and December 31, 2004, respectively.
Legal proceedings
The Partnership is involved in various legal actions arising in the normal
course of business. In the opinion of management, such matters will not have a
material effect upon the financial position of the Partnership.
Part I - Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP
Critical Accounting Policies.
In preparing the financial statements, management is required to make
estimates based on the information available that affect the reported amounts of
assets and liabilities as of the balance sheet dates and revenues and expenses
for the reporting periods. Such estimates relate principally to the
determination of (1) the allowance for loan losses (i.e. the amount of allowance
established against loans receivable as an estimate of potential loan losses)
including the accrued interest and advances that are estimated to be
unrecoverable based on estimates of amounts to be collected plus estimates of
the value of the property as collateral and (2) the valuation of real estate
held for sale. At June 30, 2005, there was one real estate property held for
sale, acquired through foreclosure in a prior year.
Loans and the related accrued interest, late fees and advances are analyzed
on a regular basis for recoverability. Delinquencies are identified and followed
as part of the loan system. Delinquencies are determined based upon contractual
terms. A provision is made for loan losses to adjust the allowance for loan
losses to an amount considered by management to be adequate, with due
consideration to collateral values, and 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.
10
If the probable ultimate recovery of the carrying amount of a loan, with
due consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement and the shortfall in
the amounts due are not insignificant, the carrying amount of the loan is
reduced to the present value of future cash flows discounted at the loan's
effective interest rate. If a loan is collateral dependent, it is valued at the
estimated fair value of the related collateral.
If events and or changes in circumstances cause management to have serious
doubts about the collectibility of the contractual payments, a loan may be
categorized as impaired and interest is no longer accrued. Any subsequent
payments on impaired loans are applied to reduce the outstanding loan balances,
including accrued interest and advances.
Recent trends in the economy have been taken into consideration in the
aforementioned process of arriving at the allowance for loan losses. Actual
results could vary from the aforementioned provisions for losses.
Real estate held for sale includes real estate acquired through foreclosure
and is stated at the lower of the recorded investment in the loan, 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 undiscounted future cash flows for the purpose of assessing the
recoverability of the recorded amounts. If the carrying value exceeds future
undiscounted cash flows, the assets are reduced to estimated fair value.
Forward Looking Statements.
Certain statements in this Report on Form 10-Q 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
Partnership'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 Partnership has made loans. All forward-looking
statements and reasons why results may differ included in this Form 10-Q 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.
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. Michael R.
Burwell is President and Chief Financial Officer of Redwood Mortgage Corp. and
Gymno Corporation. The fees received by the affiliate are paid pursuant to the
Partnership Agreement and are determined at the sole discretion of the
affiliate. In the past the affiliate has elected not to take the maximum
compensation. The following is a list of various Partnership activities for
which related parties are compensated.
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, Redwood Mortgage
Corp. may collect an amount equivalent to 12% of the loaned amount until 6
months after the termination date of the offering. Thereafter, the loan
brokerage commissions (points) will be limited to an amount not to exceed 4% of
the total Partnership assets per year. The loan brokerage commissions are paid
by the borrowers, and thus, are not an expense of the Partnership. Loan
brokerage commissions paid by the borrowers were $36,250 and $0 for the six
month periods and $18,500 and $0 for the three month periods ended June 30, 2005
and 2004, respectively.
11
o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of
1% (1.5% on an annual basis) of the unpaid principal of the Partnership's loans
are paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and
customary in the geographic area where the property securing the mortgage is
located. Mortgage servicing fees of $25,042 and $25,168 were incurred for the
six month periods and $12,090 and $16,238 were incurred for the three month
periods ended June 30, 2005 and 2004, respectively. Redwood Mortgage Corp.
waived $5,518 in loan servicing fees during the second quarter of 2005.
o Asset Management Fees The general partners receive monthly fees for
managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net
asset value' (3/8 of 1% on an annual basis). Management fees to the general
partners of $4,027 and $4,112 were incurred for the six month periods and $2,013
and $2,046 were incurred for the three month periods ended June 30, 2005 and
2004, respectively.
o Other Fees The Partnership Agreement provides that the general partners
may receive other fees such as processing and escrow, reconveyance, mortgage
assumption and mortgage extension fees. Such fees are incurred by the borrowers
and are paid to the general partners. Such fees aggregated $1,937 and $72 for
the six month periods and $502 and $12 for the three month periods ended June
30, 2005 and 2004, respectively.
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%, which was $1,945 and
$1,625 for the six month periods and $955 and $809 for the three month periods
ended June 30, 2005 and 2004, respectively.
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. Such reimbursement was $4,449 and $6,825 for the six month
periods and $1,738 and $3,317 for the three month periods ended June 30, 2005
and 2004, respectively. Redwood Mortgage Corp. waived $870 in reimbursements
during the second quarter of 2005.
o Contributed Capital The general partners jointly and severally were to
contribute 1/10 of 1% in cash contributions as proceeds from the offerings are
received from the limited partners. As of June 30, 2005 and December 31, 2004, a
general partner, Gymno Corporation, had contributed $9,772 as capital in
accordance with Section 4.02(a) of the Partnership Agreement.
12
Results of Operations - For the six and three months ended June 30, 2005
and 2004
Changes in the Partnership's operating results for the six and three month
periods ended June 30, 2005 versus 2004 are discussed below:
Changes during the Changes during the
six months ended three months ended
June 30, 2005 June 30, 2005
versus 2004 versus 2004
------------------ -------------------
Net income increase $ 32,030 $ 14,691
============== ===============
Revenue
Interest on loans 14,497 2,165
Interest - interest bearing accounts 4,613 2,078
Late charges and other fees (24,249) (12,705)
-------------- ---------------
$ (5,139) $ (8,462)
-------------- ---------------
Expenses
Mortgage servicing fees $ (126) $ (4,148)
Asset management fees (85) (33)
Clerical costs through Redwood Mortgage Corp. (2,376) (5,087)
Provision for losses on loans and real estate held for sale (7,230) (5,434)
Professional services (4,926) 3,078
Other (22,426) (11,529)
-------------- ---------------
$ (37,169) $ (23,153)
-------------- ---------------
Net income increase $ 32,030 $ 14,691
============== ===============
The increase in interest on loans of $14,497 and $2,165 for the six and
three month periods ended June 30, 2005 versus June 30, 2004 was primarily due
to an increase in the average loan portfolio balance to $5,362,628 as of June
30, 2005 versus $5,149,886 as of June 30, 2004. The increase is also due to
collection of additional interest on a loan totaling $6,135. Additional interest
provisions are occasionally negotiated with borrowers as further compensation
earned by the lender upon the payoff of a loan. These increases were partially
offset by a reduction in the average interest rate from 9.28% at June 30, 2004
to 9.10% at June 30, 2005.
The decrease in late charge revenue and other fees of $24,249 and $12,705
for the six and three month periods ended June 30, 2005 versus June 30, 2004 is
due to the Partnership no longer receiving non-refundable option payments on a
property sold in October, 2004. During the six and three month periods ended
June 30, 2004, the Partnership received $19,286 and $9,643 of such option
payments. The decrease was also due in part to a reduction in early withdrawal
penalties of $5,819 and $3,078 for the six and three month periods ended June
30, 2005. These amounts were offset by an increase in late fees and
miscellaneous income of $855 and $0 for the six and three month periods ended
June 30, 2005.
The increase in interest-bearing accounts of $4,613 and $2,078 for the six
and three month periods ended June 30, 2005 versus June 30, 2004 was due to a
higher average balance of deposits the Partnership had in the interest bearing
account during the six and three month periods ended June 30, 2005 versus 2004.
The Partnership maintained an average balance of $1,049,130 and $1,146,040 in
the bank account during the first half and second quarter of 2005 compared to an
average balance of $426,141 and $604,498 during the corresponding period of
2004.
The decrease in loan servicing fees of $126 and $4,148 for the six and
three month periods ended June 30, 2005 versus June 30, 2004 is primarily
attributable to Redwood Mortgage waiving $5,518 in loan servicing fees during
the second quarter of 2005.
The decrease in the provision for losses on loans and real estate held for
sale of $7,230 and $5,434 for the six and three month periods ended June 30,
2005 versus June 30, 2004 is due to a reduction in the balance of real estate
owned and the general partners' estimate that the reserves are adequate as
supplemented by a guarantee received from Redwood Mortgage Corp. relating to the
collectibility of certain Partnership loans.
13
The decrease in professional services of $4,926 and increase of $3,078 for
the six and three month periods ended June 30, 2005 versus June 30, 2004, was
due to the timing of billing and payment of professional fees pertaining to the
audit and tax return processing and legal fees in 2005 as compared to 2004.
The decrease in clerical costs of $2,376 and $5,087 for the six and three
month periods ended June 30, 2005 versus June 30, 2004 was primarily
attributable to reduced costs in servicing this Partnership and a waiver of
approximately $870 during the second quarter of 2005.
The decrease in other expenses of $22,426 and $11,529 for the six and three
month periods ended June 30, 2005 was related to the reduction in costs
associated with the upkeep of real estate properties held for sale. Two real
estate sales transactions occurred in 2004 which brought the real estate owned
inventory from three properties, with value totaling $1,312,773 as of January 1,
2004 to one with a value totaling $130,215 as of June 30, 2005.
Partnership capital decreased from $6,429,808 at December 31, 2004 to
$6,400,965 at June 30, 2005. The decrease is attributable to continued earnings
and capital liquidations.
The Partnership began funding loans in October 1987. The Partnership's
secured loans outstanding as of June 30, 2005 and December 31, 2004 were
$5,500,127 and $5,225,128, respectively. The overall increase in loans
outstanding at June 30, 2005 from December 31, 2004, was primarily due to the
Partnership's ability to fund more loans to replace those that were being paid
off during the first half of 2005. The Partnership placed $1,325,000 of new
loans in the six month period ended June 30, 2005 and received principal payoffs
from borrowers of $1,050,002.
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-six years. Foreclosures are a
normal aspect of Partnership operations and the general partners anticipate that
they will not have a material effect on liquidity. As of June 30, 2005, there
were no properties in foreclosure. As of June 30, 2005 and 2004, the
Partnership's real estate held for sale account balance was $130,215 and
$862,288, respectively. The decrease was due to the sale of one of the
properties in October of 2004.
Cash is continually being generated from interest earnings, late charges,
prepayment penalties, amortization of principal, proceeds from sale of real
estate held and loan pay-offs. Currently, this amount exceeds Partnership
expenses and earnings and partner liquidation requirements. As loan
opportunities become available, excess cash and available funds are invested in
new loans.
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the
status of delinquencies, the underlying collateral securing these loans, real
estate held for sale expenses, sales activities, and borrower's payment records
and other data relating to the loan portfolio. Data on the local real estate
market and on the national and local economy are studied. Based upon this
information and more, the allowance for loan losses is increased or decreased.
Borrower foreclosures are a normal aspect of Partnership operations. The
Partnership is not a credit based lender and hence while it reviews the credit
history and income of borrowers, and if applicable, the income from income
producing properties, the general partners expect that we will on occasion take
back real estate security. During 2002 and 2003 the economy stabilized. During
2004 and 2005 the economy and the Northern California real estate market has
strengthened. At June 30, 2005 the Partnership had two loans past maturity
totaling $175,714, but these loans were current in interest payments. In
addition to the above, the Partnership had two other loans totaling $216,257
past due 90 days or more in interest payments. One of these loans is considered
to be impaired, which means that interest is no longer being accrued and that
payments received will be applied to reduce the outstanding loan balances,
including accrued interest and advances. The principal balance of the impaired
loan is $96,716. The Partnership does not have any filed notices of default,
which would begin the foreclosure process at June 30, 2005. The Partnership has
a workout agreement on this impaired loan totaling $96,716 (1.76% of the secured
loan portfolio) as of June 30, 2005. 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 one workout agreement existing
at June 30, 2005, in management's opinion, does not have a material effect on
our results of operations or liquidity. This workout agreement has been
14
considered when management arrived at an appropriate allowance for loan losses
and based on our experience, are reflective of our loan marketplace segment.
Because of the number of variables involved, the magnitude of possible swings
and the general partners' inability to control many of these factors, actual
results may and do sometimes differ significantly from estimates made by the
general partners.
As of June 30, 2005 and 2004, the Partnership's real estate held for sale
balance was $130,215 and $862,288, respectively. The decrease in real estate
held for sale balance of $732,073 as of June 30, 2005 is due to the sale of one
of the properties in October 2004, 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 or 2005. The Partnership's real
estate held for sale inventory has been reduced to one property. This remaining
property is an undeveloped piece of land, which 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 $8,070 and $15,300 as provision for loan losses for the
six month periods ended June 30, 2005and 2004, respectively, and $3,379 and
$8,813 for the three month periods ended June 30, 2005 and 2004, respectively.
The provision for loan losses builds up the allowance for potential losses.
During 2002, Redwood Mortgage Corp. provided an indemnity to the Partnership
whereby it has agreed to indemnify and hold harmless, the Partnership from any
expenses or losses incurred by the Partnership by reason of the Partnership's
inability to collect all principal due under certain loans after the Partnership
has exhausted all reserves set aside for these loans and all remedies available
to it including foreclosure of the underlying collateral. Therefore, these loans
are not considered impaired solely because the value of the collateral securing
the loans is less than the principal due to the Partnership.
PORTFOLIO REVIEW - For the six months ended June 30, 2005 and 2004
Loan Portfolio
The Partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of June 30, 2005 and
2004 the Partnership's loans secured by real property collateral in the four San
Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, and Alameda)
represented $4,658,398 (85%) and $4,694,002 (93%), 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 June 30, 2005 and 2004, the Partnership held 16 and 14 loans
respectively in the following categories:
June 30, June 30,
2005 2004
----------------------------- -----------------------------
Single family homes(1-4 units) $ 1,592,675 28.96% $ 1,341,812 26.60%
Apartments (5+ units) 96,716 1.76% 136,841 2.71%
Commercial 3,810,736 69.28% 3,565,498 70.69%
------------- ------------ ------------- ------------
Total $ 5,500,127 100.00% $ 5,044,151 100.00%
============= ============ ============= ============
15
As of June 30, 2005, the Partnership held 16 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the loans held by the Partnership as of June 30, 2005:
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of June 30, 2005
# of Loans Amount Percent
------------ -------------- -------------
1st Mortgages 8 $ 3,977,933 72%
2nd Mortgages 8 1,522,194 28%
============ ============== =============
Total 16 $ 5,500,127 100%
Maturing 12/31/05 and prior 2 $ 175,714 3%
Maturing prior to 12/31/06 3 671,716 12%
Maturing prior to 12/31/07 3 3,204,746 58%
Maturing after 12/31/07 8 1,447,951 27%
============ ============== =============
Total 16 $ 5,500,127 100%
Average Loan $ 343,758 6%
Largest Loan 2,103,300 38%
Smallest Loan 31,365 0.57%
Average Loan-to-Value, based upon appraisals
and senior liens at date of inception of loan 79.92%
The Partnership's largest loan in the principal amount of $2,103,300
represents 38% of outstanding secured loans and 33% 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 June 30, 2005 and 2004. The borrower accounted for
approximately 56% and 61% of the loan balances at such dates. This borrower has
two loans secured by separate properties in the principal amounts of $2,103,300
and $956,800 as of June 30, 2005. Neither of these loans are past due in
principal or 90 days or more past due in interest.
Liquidity and Capital Resources.
The Partnership relies upon loan payoffs and borrowers' mortgage payments
for the source of funds for loans. Recently, mortgage interest rates have
decreased somewhat from those available at the inception of the Partnership. If
interest rates were to increase substantially, the yield of the Partnership's
loans may provide lower yields than other comparable debt-related investments.
Additionally, since the Partnership has made primarily fixed rate loans, if
interest rates were to rise, the likely result would be a slower prepayment rate
for the Partnership. This could cause a lower degree of liquidity as well as a
slowdown in the ability of the Partnership to invest in loans at the then
current interest rates. Conversely, in the event interest rates were to decline,
the Partnership could experience significant borrower prepayments, which, if the
Partnership can only obtain the then existing lower rates of interest may cause
a dilution of the Partnership's yield on loans, thereby lowering the
Partnership's overall yield to the limited partners. Cash is constantly being
generated from borrower interest payments, late charges, amortization of loan
principal and loan payoffs. Currently, cash flow exceeds Partnership expenses,
earnings and limited partner capital payout requirements. Excess cash flow will
be invested in new loan opportunities, when available, and in other Partnership
business.
16
At the time of subscription to the Partnership, limited partners made a
decision to either take distributions of earnings monthly, quarterly or annually
or to compound earnings in their capital account. For the six and three month
periods ended June 30, 2005 and 2004, the Partnership made distributions of
earnings to limited partners of $69,202 and $54,973, and $36,510 and $27,187,
respectively. Distribution of earnings to limited partners for the six and three
month periods ended June 30, 2005 and 2004, to limited partners' capital
accounts and not withdrawn, was $123,383 and $105,902, and $58,110 and $52,888,
respectively. As of June 30, 2005 and 2004, limited partners electing to
withdraw earnings represented 39% and 35% of the limited partners' outstanding
capital accounts, respectively.
The Partnership also allows the limited partners to withdraw their capital
account subject to certain limitations. For the six and three month periods
ended June 30, 2005 and 2004, $23,054 and $103,036, and $9,027 and $46,829,
respectively, were liquidated subject to the 10% and/or 8% penalty for early
withdrawal. These withdrawals are within the normally anticipated range that the
general partners would expect in their experience in this and other
partnerships. The general partners expect that a small percentage of limited
partners will elect to liquidate their capital accounts over one year with a 10%
and/or 8% early withdrawal penalty. In originally conceiving the Partnership,
the general partners wanted to provide limited partners needing their capital
returned a degree of liquidity. Generally, limited partners electing to withdraw
over one year need to liquidate investments to raise cash. The demand the
Partnership is experiencing in withdrawals by limited partners electing a one
year liquidation program represents a small percentage of limited partner
capital as of June 30, 2005 and 2004, respectively, and is expected by the
general partners to commonly occur at these levels.
Additionally, for the six and three month periods ended June 30, 2005 and
2004, $129,174 and $116,087, and $73,666 and $58,910, respectively, were
liquidated by limited partners who have elected a liquidation program over a
period of five years or longer. Once the initial five-year hold period has
passed, the general partners expect to see an increase in liquidations due to
the ability of limited partners to withdraw without penalty. This ability to
withdraw after five years by limited partners has the effect of providing
limited partner liquidity. The general partners expect a portion of the limited
partners to take advantage of this provision. This has the anticipated effect of
the Partnership growing, primarily through reinvestment of earnings in years one
through five. The general partners expect to see increasing numbers of limited
partner withdrawals in years five through eleven, at which time the bulk of
those limited partners who have sought withdrawal will have been liquidated.
After year eleven, liquidation generally subsides and the Partnership capital
again tends to increase.
In some cases in order to satisfy broker dealers and other reporting
requirements, the general partners have valued the limited partners' interest in
the Partnership on a basis which utilizes a per Unit system of calculation,
rather than based upon the investors' capital account. This information has been
reported in this manner in order to allow the Partnership to integrate with
certain software used by the broker dealers and other reporting entities. In
those cases, the Partnership will report to broker dealers, Trust Companies and
others a "reporting" number of Units based upon a $1.00 per Unit calculation.
The number of reporting Units provided will be calculated based upon the limited
partner's capital account value divided by $1.00. Each investor's capital
account balance is set forth periodically on the Partnership account statement
provided to investors. The reporting Units are solely for broker dealers
requiring such information for their software programs and do not reflect actual
Units owned by a limited partner or the limited partners' right or interest in
cash flow or any other economic benefit in the Partnership. Each investor's
capital account balance is set forth periodically on the Partnership account
statement provided to investors. The amount of Partnership earnings each
investor is entitled to receive is determined by the ratio that each investor's
capital account bears to the total amount of all investor capital accounts then
outstanding. The capital account balance of each investor should be included on
any NASD member client account statement in providing a per Unit estimated value
of the client's investment in the Partnership in accordance with NASD Rule 2340.
While the general partners have set an estimated value for the Partnership
Units, such determination may not be representative of the ultimate price
realized by an investor for such Units upon sale. No public trading market
exists for the Partnership's Units and none is likely to develop. Thus, there is
no certainty that the Units can be sold at a price equal to the stated value of
the capital account. Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain liquidation rights provided by the
Partnership, which may include early withdrawal penalties.
17
Current Economic Conditions.
From July 1, 2004 through June 30, 2005, the Federal Reserve increased the
Federal Funds Rate to 3.25% from 1.00%. The recent upward movement in the
Federal Funds Rate during 2004 and 2005 has raised short-term rates but has not
yet raised long-term interest rates significantly. New loans will be originated
at then existing interest rates. In the future the general partners anticipate
that interest rates likely will change from their current levels. The general
partners cannot, at this time, predict at what levels interest rates will be in
the future. The general partners anticipate that new loans will be placed during
2005 at rates slightly above those that prevailed in 2004. The recent increases
in short term interest rates and to a lesser extent long term interest rates has
encouraged those borrowers with interest rates above the current going rates to
refinance their indebtedness so as to lock in these historically low interest
rates should they move higher in the future However, demand for loans from
qualified borrowers continues to be strong and as prepayments occur, the general
partners expect to replace paid off loans with loans at somewhat lower interest
rates. At this time, the general partners believe that the average loan
portfolio interest rate will remain relatively stable over the year 2005. Based
upon the rates payable in connection with the existing loans, and anticipated
interest rates to be charged by the partnership and the general partners'
experience, the general partners anticipate that the annualized yield will range
between 5.75% and 6.50% in 2005.
The Partnership makes loans primarily in Northern California. As of June
30, 2005, approximately 85%, ($4,658,398) of the loans held by the Partnership
were in four San Francisco Bay Area Counties. The remainder of the loans held
was secured primarily by Northern California real estate outside of the San
Francisco Bay Area.
The national and Northern California economies continue to improve. Both
are exhibiting steady economic growth, low inflation, and improving unemployment
numbers. The increases in the price of oil and the pace of real estate
appreciation remain a concern. During July of 2005 the Mortgage Bankers
Association issued their long term economic forecast through 2007 which included
predictions of a 3.5% economic growth rate, a core inflation rate of 1.5% for
the next several years, relatively low long-term interest rates rising to
perhaps 6.25% for 30-year mortgages, declining unemployment to 4.9%, job growth
of about 180,000 jobs per month and a slowdown in residential appreciation to a
more sustainable 4.5% per year. These predictions indicate an economy that is
continuing to grow and improve, which is good for both mortgage businesses and
the real estate industry as a whole.
The Northern California residential real estate market continued to exhibit
strong appreciation during the second quarter of 2005. Values of single family
homes in the six county San Francisco Bay Area rose on a June year to year
comparison by 18.2%. These price increases are significant but the real estate
market may be beginning to slow as sales volumes of homes declined by an average
of 9.4% as compared to 2004. The partnership invests a significant amount of its
portfolio in residential mortgages and a strong appreciating market assists in
creating loan demand and enhancing loan security.
The Northern California commercial real estate market continued eight
consecutive quarters of positive numbers. Space absorption in the office sector
continued throughout the Bay Area, while San Francisco was typical. Absorption
as reported by Grubb and Ellis was 507,871 square feet for the second quarter
and 689,942 for the year to date while Cushman Wakefield reported 447,646 for
the second quarter and 860,827 for the year to date. This steady positive
absorption continues the progress of whittling down the available office
inventory which stood at approximately 22% in San Francisco as little a two
years ago. Cushman Wakefield reports overall San Francisco vacancies of 17.6%.
Despite the high vacancy rate, rents have begun to increase. C.B. Richard Ellis
reported that San Francisco rents averaged $27.18 per square foot while Cushman
Wakefield reported that rents averaged $30.24 per square foot. Little new
construction is likely to occur as new construction costs run $525 per square
foot and top sales prices average $320 per square foot. The three highest per
square foot sales transactions in 2005 were $495, $467 and $434 per square foot.
Over $2 billion in property has sold in the first half of 2005, which is only
$700 million short of the total sales volume in 2004. While 2004 was a record
breaking year, it is likely that 2005 will surpass the 2004 record. The
continued improvement of the commercial market assists owners in making their
debt payments. Increased occupancies and increasing rents assist by adding value
to the real estate security of our commercial loans.
18
For Partnership loans outstanding as of June 30, 2005, the Partnership had
an average loan to value ratio of 79.92%, computed based on appraised values and
senior liens as of the date the loan was made. This percentage does not account
for any increases or decreases in property values since the date the loan was
made, nor does it include any reductions in principal on senior indebtedness
through amortization of payments after the loan was made. This loan to value
ratio will assist the Partnership in weathering loan delinquencies and
foreclosures should they eventuate.
Contractual Obligations Table. None
Part I - Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table contains information about the cash held in money
market accounts, and loans held in the Partnership's portfolio as of June 30,
2005. 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 market values as of June 30, 2005:
2005 2006 2007 2008 2009 Thereafter Total
--------------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $ 746,366 $ 746,366
Average interest rate 1.45% 1.45%
Unsecured loans $ 270,610 $ 270,610
Average Interest Rate 0% 0%
Loans secured by deeds
of trust $ 175,714 671,716 3,204,746 400,000 343,363 704,588 $5,500,127
Average interest rate 10.00% 9.18% 9.07% 8.50% 9.35% 9.15% 9.10%
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.
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.
19
The conclusion that a loan may become uncollectible, in whole or in part,
is a matter of judgment. Although institutional lenders are subject to
requirements and regulations that, among other things, require them to perform
ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and
to obtain and maintain current information regarding their borrowers and the
securing properties, the Partnership is not subject to these regulations and has
not adopted certain of these practices. Rather, the general partners, in
connection with the periodic closing of the accounting records of the
Partnership and the preparation of the financial statements, determine whether
the allowance for loan losses is adequate to cover potential loan losses of the
Partnership. As of June 30, 2005 the general partners have determined that the
allowance for loan losses and real estate owned of $325,134 (5.08% of net
assets) is adequate in amount. Because of the number of variables involved, the
magnitude of the swings possible and the general partners' inability to control
many of these factors, actual results may and do sometimes differ significantly
from estimates made by the general partners. As of June 30, 2005, two loans were
past maturity over 90 days amounting to $175,714. In addition, two loans
totaling $216,257 were past due 90 days or more in interest payments. One of
these loans for $96,716 was subject to a workout agreement, which requires the
borrower to make regular monthly loan payments. This loan is the only loan
categorized as impaired.
The Partnership also owns (through previous foreclosure) one property; an
undeveloped commercial property located in East Palo Alto, California. The land
is owned with two other affiliated Partnerships. The Partnership's net
investment in the land at June 30, 2005 is $130,215, or 2.03% of Partnership
assets. The general partners believe that the property is worth considerably
more than its net investment. There are no ongoing negotiations for the sale of
this property.
Part I - Item 4. CONTROLS AND PROCEDURES
As of June 30, 2005, 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 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 are effective in
timely alerting the general partners to material information relating 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
first six months that have materially affected, or are reasonably likely to
materially affect, the Partnership's internal control over financial reporting.
20
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership periodically is a defendant in various legal
actions. Please refer to Note 7 of Financial Statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits
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
21
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized on the 15th day of August
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/Treasurer & Chief Financial Officer
22
Exhibit 31.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VI, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures, 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 quarterly 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 internal
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
August 15, 2005
23
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 quarterly report on Form 10-Q of Redwood Mortgage
Investors VI, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures, 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 quarterly 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 internal
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, Secretary/Treasurer
and Chief Financial Officer, of Gymno
Corporation, General Partner
August 15, 2005
24
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 Quarterly Report of Redwood Mortgage Investors VI
(the "Partnership") on Form 10-Q for the period ending June 30, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 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
August 15, 2005
25
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 Quarterly Report of Redwood Mortgage Investors VI
(the "Partnership") on Form 10-Q for the period ending June 30, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General
Partner of the Partnership, certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership at the dates and for the periods indicated.
/s/ Michael R. Burwell
- ------------------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial
Officer of Gymno Corporation, General Partner
August 15, 2005
26