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 September 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
-------------- -------------
Indicate by check mark whether the registrant is a shell company (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
SEPTEMBER 30, 2005 and DECEMBER 31, 2004 (unaudited)
ASSETS
September 30, December 31,
2005 2004
--------------- ---------------
Cash and cash equivalents $ 684,197 $ 1,090,027
--------------- ---------------
Loans
Loans, secured by deeds of trust 5,600,584 5,225,128
Loans, unsecured, net discount of $79,748 and $93,823 for
September 30, 2005 and December 31, 2004, respectively 275,301 261,276
--------------- ---------------
5,875,885 5,486,404
Less allowance for loan losses (380,225) (315,751)
--------------- ---------------
Net loans 5,495,660 5,170,653
--------------- ---------------
Interest and other receivables
Accrued interest and late fees 85,771 61,364
Advances on loans 574 2,890
--------------- ---------------
Total interest and other receivables 86,345 64,254
--------------- ---------------
Real estate held for sale, net 130,215 128,902
--------------- ---------------
Total assets $ 6,396,417 $ 6,453,836
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable $ 3,131 $ 11,487
Payable to affiliate 16,022 12,541
--------------- ---------------
Total liabilities 19,153 24,028
--------------- ---------------
Partners' capital
Limited partners' capital, subject to redemption 6,367,503 6,420,047
General partners' capital 9,761 9,761
--------------- ---------------
Total partners' capital 6,377,264 6,429,808
--------------- ---------------
Total liabilities and partners' capital $ 6,396,417 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004 (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenues
Interest on loans $ 185,568 $ 121,022 $ 441,217 $ 362,174
Interest - interest bearing accounts 1,070 1,203 7,454 2,974
Late charges, prepayment penalties and fees 9,969 13,679 13,124 41,083
----------- ----------- ----------- -----------
196,607 135,904 461,795 406,231
----------- ----------- ----------- -----------
Expenses
Mortgage servicing fees 22,321 12,306 47,363 37,474
Asset management fees 3,347 2,030 7,374 6,142
Clerical costs through Redwood Mortgage Corp. 2,437 3,098 6,886 9,923
Provision for losses on loans and real estate held for 55,091 16,813 63,161 32,113
sale
Professional services 12,605 7,095 34,019 33,435
Other 4,846 9,087 12,502 39,169
----------- ----------- ----------- -----------
100,647 50,429 171,305 158,256
----------- ----------- ----------- -----------
Net income $ 95,960 $ 85,475 $ 290,490 $ 247,975
=========== =========== =========== ===========
Net income
General partners (1%) 960 855 2,905 2,480
Limited partners (99%) 95,000 84,620 287,585 245,495
----------- ----------- ----------- -----------
$ 95,960 $ 85,475 $ 290,490 $ 247,975
=========== =========== =========== ===========
Net income per $1,000 invested by limited partners for entire period:
-where income is compounded and retained $ 15 $ 13 $ 46 $ 38
=========== =========== =========== ===========
-where partner receives income in monthly
distributions $ 15 $ 13 $ 45 $ 37
=========== =========== =========== ===========
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 NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004 (unaudited)
2005 2004
------------- -------------
Cash flows from operating activities
Net income $ 290,490 $ 247,975
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses and real estate held for sale 63,161 32,113
Early withdrawal penalties credited to income (2,199) (9,752)
Amortization of discount on unsecured loans (14,075) (14,075)
Loss on disposal of real estate held for sale - 1,048
Change in operating assets and liabilities
Accrued interest and advances on loans (22,091) (6,926)
Accounts payable and payable to affiliate (4,875) 7,104
Prepaid expenses - (2,176)
------------- -------------
Net cash provided by operating activities 310,411 255,311
------------- -------------
Cash flows from investing activities
Principal collected on loans 1,482,795 433,778
Loans originated (1,858,251) (531,113)
Payments for real estate held for sale - (1,203)
Proceeds from disposition of real estate - 451,688
Reduction in unsecured note 50 -
------------- -------------
Net cash provided by (used in) investing activities (375,406) 353,150
------------- -------------
Cash flows from financing activities
Partners' withdrawals (340,835) (390,765)
------------- -------------
Net cash used in financing activities (340,835) (390,765)
------------- -------------
Net increase (decrease) in cash and cash equivalents (405,830) 217,696
Cash and cash equivalents - beginning of period 1,090,027 32,160
------------- -------------
Cash and cash equivalents - end of period $ 684,197 $ 249,856
============= =============
The accompanying notes are an integral part of these financial statements.
4
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 nine month period ended September
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 September 30, 2005 and December 31, 2004, there was no loan and one loan
totaling $96,716, categorized as impaired by the Partnership, respectively. In
2004, it was determined that a reduction in the carrying value of this loan was
no longer required. The real estate securing this loan appreciated in value over
a period of time and the borrower began to pay-down the advances and accrued
interest. The increase in value had been determined to be other than temporary.
As of September 30, 2005, all the advances were paid in full together with a
portion of the accrued interest. This loan was evaluated and it was established
that the loan was no longer impaired as of September 30, 2005. The loan was
recategorized and all interest and late charges owed by the borrower were
accrued and recognized as income through September 30, 2005. Thereafter interest
and late charges against this loan will be accrued on a regular basis.
At September 30, 2005 and December 31, 2004, the Partnership had one loan
totaling $96,716, that was past due 90 days or more in interest payments.
Additionally, at September 30, 2005 and December 31, 2004, the Partnership had
two loans past maturity with outstanding principal balances of $175,646 and
$175,865, for a combined total of three loans during each period past due 90
days or more in interest payments, and/or past maturity totaling $272,362 and
$272,581, respectively. In addition, accrued interest, late charges and advances
on these loans totaled $42,980 and $4,249 at September 30, 2005 and December 31,
2004, respectively. At September 30, 2005 the Partnership does not consider any
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 September 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 78.16%% and 79.67%,
respectively.
Allowance for loan losses
The composition of the allowance for loan losses as of September 30, 2005
and December 31, 2004 was as follows:
September 30, December 31,
2005 2004
----------------- ----------------
Impaired loans $ - $ -
Specified loans 6,796 6,796
Unsecured loans 270,610 261,227
General 102,819 47,728
----------------- ----------------
$ 380,225 $ 315,751
================= ================
5
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 nine months
ended September 30, 2005 and the year ended December 31, 2004:
September 30, December 31,
2005 2004
---------------- ---------------
Beginning balance $ 315,751 $ 279,865
Provision for loan losses 63,161 35,886
Write-offs - -
Transfer from real estate held for sale 1,313 -
---------------- ---------------
$ 380,225 $ 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
SEPTEMBER 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 or their affiliates.
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 September 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
SEPTEMBER 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 September 30, 2005 and December 31, 2004:
September 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 $5,600,584 and $5,225,128 at September 30,
2005 and December 31, 2004, respectively. The fair value of these loans of
$5,633,365 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 September 30, 2005 and
December 31, 2004, there were 15 and 14 secured loans outstanding respectively,
with the following characteristics:
September 30, December 31,
2005 2004
---------------- -----------------
Number of secured loans outstanding 15 14
Total secured loans outstanding $ 5,600,584 $ 5,225,128
Average secured loan outstanding $ 373,372 $ 373,223
Average secured loan as percent of total secured loans 6.67% 7.14%
Average secured loan as percent of partners' capital 5.85% 5.80%
Largest secured loan outstanding $ 2,103,300 $ 2,103,300
Largest secured loan as percent of total secured loans 37.56% 40.25%
Largest secured loan as percent of partners' capital * 32.98% 32.71%
Largest secured loan as percent of total assets 32.88% 32.59%
Number of counties where security is located (all California) 8 8
Largest percentage of secured loans in one county 47.07% 42.28%
Average secured loan to appraised value of security based on appraised
values and prior liens at time loan was consummated 78.16% 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
SEPTEMBER 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 September 30, 2005
and December 31, 2004:
September 30, December 31,
2005 2004
----------------- ----------------
First trust deeds $ 3,871,539 $ 4,212,912
Second trust deeds 1,729,045 1,012,216
----------------- ----------------
Total loans 5,600,584 5,225,128
Prior liens due other lenders at time of loan 4,139,214 3,026,354
----------------- ----------------
Total debt $ 9,739,798 $ 8,251,482
================= ================
Appraised property value at time of loan $ 12,461,520 $ 10,356,549
----------------- ----------------
Total loans as percent of appraisals based on appraised
values and prior liens at time loan was consummated 78.16% 79.67%
----------------- ----------------
Secured loans by type of property
Owner occupied homes $ 1,873,714 $ 627,579
Non-owner occupied homes 250,000 689,017
Apartments 96,716 96,716
Commercial 3,380,154 3,811,816
----------------- ----------------
$ 5,600,584 $ 5,225,128
================= ================
Scheduled maturity dates of secured loans as of September 30, 2005 are as
follows:
Year Ending December 31,
-----------------------------------
2005 $ 175,646
2006 346,716
2007 3,204,507
2008 400,000
2009 342,343
Thereafter 1,131,372
---------------
$ 5,600,584
===============
The maturities for 2005 include two loans totaling $175,646, which were
past maturity at September 30, 2005. Interest payments on both of these loans
were current at September 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
SEPTEMBER 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 September 30, 2005 and December 31, 2004. This borrower
accounted for approximately 55% and 59% of the loan balances at such dates,
respectively. This borrower accounted for approximately 47% and 57% of interest
revenue for the nine month period ended September 30, 2005 and year ended
December 31, 2004, respectively. At the time these loans were made to the
borrower, the value of the collateral securing these loans was less than the
principal balance due under the loans. Redwood Mortgage Corp. has provided an
indemnity to the Partnership whereby it has agreed to indemnify and hold
harmless, the Partnership from any expenses or losses incurred by the
Partnership by reason of the Partnership's inability to collect all principal
due under the loans after the Partnership has exhausted all reserves set aside
for these loans and all remedies available to it including foreclosure of the
underlying collateral. Real estate values in the San Francisco Bay Area have
appreciated considerably over the years, and a recent appraisal of these two
properties by an independent party revealed a loan to value ratio of 63%. This
revised valuation backed by the indemnity, enhances the Partnership's position.
These loans are not considered impaired.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Workout agreements
From time to time, the Partnership negotiates 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 September 30,
2005 and December 31, 2004, there were one and three loans totaling $96,716 and
$272,581 in workout agreements, 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 September 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 loan
payoffs, 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.
11
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, Redwood Mortgage
Corp. may collect an amount equivalent to 12% of the loaned amount until 6
months after the termination date of the offering. Thereafter, the loan
brokerage commissions (points) will be limited to an amount not to exceed 4% of
the total Partnership assets per year. The loan brokerage commissions are paid
by the borrowers, and thus, are not an expense of the Partnership. Loan
brokerage commissions paid by the borrowers were $52,248 and $14,406 for the
nine month periods and $15,998 and $14,406 for the three month periods ended
September 30, 2005 and 2004, 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 $47,363 and $37,474 were incurred for the
nine month periods and $22,321 and $12,306 were incurred for the three month
periods ended September 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 $7,374 and $6,142 were incurred for the nine month periods and
$3,347 and $2,030 were incurred for the three month periods ended September 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 $2,221 and $1,863 for
the nine month periods and $284 and $725 for the three month periods ended
September 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 $2,905 and
$2,480 for the nine month periods and $960 and $855 for the three month periods
ended September 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 $6,886 and $9,923 for the nine month
periods and $2,437 and $3,098 for the three month periods ended September 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 September 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 nine and three months ended September 30,
2005 and 2004
Changes in the Partnership's operating results for the nine and three month
periods ended September 30, 2005 versus 2004 are discussed below:
Changes during the Changes during the
nine months ended three months ended
September 30, 2005 September 30, 2005
versus 2004 versus 2004
---------------------- ----------------------
Net income increase $ 42,515 $ 10,485
=============== ==============
Revenue
Interest on loans 79,043 64,546
Interest - interest bearing accounts 4,480 (133)
Late charges and other fees (27,959) (3,710)
--------------- --------------
$ 55,564 $ 60,703
--------------- --------------
Expenses
Mortgage servicing fees $ 9,889 $ 10,015
Asset management fees 1,232 1,317
Clerical costs through Redwood Mortgage Corp. (3,037) (661)
Provision for losses on loans and real estate held for sale 31,048 38,278
Professional services 584 5,510
Other (26,667) (4,241)
--------------- --------------
$ 13,049 $ 50,218
--------------- --------------
Net income increase $ 42,515 $ 10,485
=============== ==============
The increase in interest on loans of $79,043 and $64,546 for the nine and
three month periods ended September 30, 2005 as compared to the same periods in
2004 was due to an increase in the average loan portfolio balance to $5,413,900
and an increase in average interest rate to 9.13% as of September 30, 2005 as
compared to $5,130,541 and 9.06% as of September 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. Further, interest
on a loan previously considered to be impaired, was accrued through September
30, 2005 adding interest income of $42,497. There is a strong likelihood that
during the fourth quarter of 2005 two loans with principal balances totaling
approximately $3,060,000 will be paid off. Should this occur, interest income
may be significantly reduced until the funds can be placed into new mortgage
investments.
The decrease in late charge revenue and other fees of $27,959 and $3,710
for the nine and three month periods ended September 30, 2005 as compared to the
same periods in 2004 is due to the Partnership no longer receiving
non-refundable option payments on a property sold in October, 2004. During the
nine and three month periods ended September 30, 2004, the Partnership received
$28,929 and $9,643 of such option payments. The decrease was also due in part to
a reduction in early withdrawal penalties of $7,553 and $1,734 for the nine and
three month periods ended September 30, 2005. These amounts were offset by an
increase in late fees and miscellaneous income of $8,523 and $7,667 for the nine
and three month periods ended September 30, 2005 due to collection of past due
amounts on a previously impaired loan.
The increase in interest-bearing accounts of $4,480 for the nine month
period ended September 30, 2005 as compared to the same period in 2004 was due
to a higher average balance of deposits the Partnership had in the interest
bearing account during the nine month period ended September 30, 2005 as
compared to the same period in 2004. The average balances for the nine and three
month periods ended September 30, 2005 were $860,637 and $428,612, respectively.
The Partnership maintained an average balance of $409,765 and $433,555 in the
bank account during the third quarter of 2005 and 2004, respectively, hence the
reduction in interest income of $133.
13
The increase in loan servicing fees of $9,889 and $10,015 for the nine and
three month periods ended September 30, 2005 as compared to the same periods in
2004 is primarily attributable to the higher average loan balances and the
Partnership accruing the servicing fee of $8,014 on a loan that was previously
considered to be impaired. This was partially offset by Redwood Mortgage, the
servicing agent, waiving $5,518 in loan servicing fees during the second quarter
of 2005. Mortgage fees on impaired loans are due as borrower payments are
received.
The increase in the provision for losses on loans and real estate held for
sale of $31,048 and $38,278 for the nine and three month periods ended September
30, 2005 as compared to the same periods in 2004 is due to the general partners'
consideration that the general reserve should be increased in relation to the
overall size of the loan portfolio. See additional discussion in allowance for
loan loss section.
The increase in professional services of $584 and $5,510 for the nine and
three month periods ended September 30, 2005 as compared to the same periods in
2004, was due to increased costs and the timing of billings 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 $3,037 and $661 for the nine and three
month periods ended September 30, 2005 as compared to the same periods in 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 $26,667 and $4,241 for the nine and three
month periods ended September 30, 2005 as compared to the same periods in 2004
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 September 30, 2005.
Partnership capital decreased from $6,429,808 at December 31, 2004 to
$6,377,264 at September 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 September 30, 2005 and December 31, 2004 were
$5,600,584 and $5,225,128, respectively. The overall increase in loans
outstanding at September 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 nine months ended September 30, 2005. The Partnership placed
$1,858,251 of new loans in the nine month period ended September 30, 2005 and
received principal payoffs from borrowers of $1,482,795.
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 September 30, 2005,
there were no properties in foreclosure. As of September 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.
14
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 September 30, 2005 the Partnership had two loans past maturity
totaling $175,646, but these loans were current in interest payments. In
addition to the above, the Partnership had one loan totaling $96,716 past due 90
days or more in interest payments. None of these loans is considered to be
impaired. The Partnership does not have any filed notices of default, which
would begin the foreclosure process at September 30, 2005. The Partnership has a
workout agreement on the one loan totaling $96,716 (1.73% of the secured loan
portfolio) as of September 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 September 30, 2005, in management's opinion, does not have
a material effect on our results of operations or liquidity. This workout
agreement has 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 September 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 September 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 $63,161 and $32,113 as provision for loan losses for
the nine month periods ended September 30, 2005 and 2004, respectively, and
$55,091 and $16,813 for the three month periods ended September 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. A recent appraisal of these
properties by an independent appraiser revealed a loan to value ratio of 63%
which is considered by management to be a strong position. This latest
valuation, backed by the indemnity enhances the Partnership's position.
15
PORTFOLIO REVIEW - For the nine months ended September 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 September 30, 2005
and 2004 the Partnership's loans secured by real property collateral in the
three San Francisco Bay Area counties (San Mateo, Santa Clara, and Alameda)
represented $4,759,727 (85%) and $4,760,387 (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 September 30, 2005 and 2004, the Partnership held 15 and 15 loans
respectively in the following categories:
September 30, September 30,
2005 2004
---------------------------- -----------------------------
Single family homes(1-4 units) $ 2,123,714 37.92% $ 1,728,671 32.29%
Apartments (5+ units) 96,716 1.73% 136,841 2.56%
Commercial 3,380,154 60.35% 3,487,443 65.15%
------------- ------------ ------------- ------------
Total $ 5,600,584 100.00% $ 5,352,955 100.00%
============= ============ ============= ============
As of September 30, 2005, the Partnership held 15 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 September 30, 2005:
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of September 30, 2005
# of Loans Amount Percent
------------ -------------- -------------
1st Mortgages 7 $3,871,539 69%
2nd Mortgages 8 1,729,045 31%
============ ============== =============
Total 15 $5,600,584 100%
Maturing 12/31/05 and prior 2 $ 175,646 3%
Maturing prior to 12/31/06 2 346,716 6%
Maturing prior to 12/31/07 3 3,204,507 57%
Maturing after 12/31/07 8 1,873,715 34%
============ ============== =============
Total 15 $5,600,584 100%
Average Loan $ 373,372 7%
Largest Loan 2,103,300 38%
Smallest Loan 31,297 0.56%
Average Loan-to-Value, based upon appraisals
and senior liens at date of inception of loan 78.16%
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 September 30, 2005 and 2004. The borrower accounted for
approximately 55% and 57% 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 September 30, 2005. Neither of these loans is past due in
principal or 90 days or more past due in interest.
16
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. During the fourth quarter of 2005 it is anticipated that two loans
with outstanding principal balances of approximately $3,060,000 will be paid
off. Alone, payoff of these two loans represents 55% of the Partnership's
secured loan portfolio at September 30, 2005. The Partnership will endeavor to
place cash proceeds into suitable mortgage loan investments. However, it is
unlikely that the cash will immediately be placed in new loans. As a result,
interest income may decline until suitable replacement loans are funded.
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 nine and three month
periods ended September 30, 2005 and 2004, the Partnership made distributions of
earnings to limited partners of $105,260 and $83,945, and $36,059 and $28,972,
respectively. Distribution of earnings to limited partners for the nine and
three month periods ended September 30, 2005 and 2004, to limited partners'
capital accounts and not withdrawn, was $182,325 and $161,550, and $58,941 and
$55,648, respectively. As of September 30, 2005 and 2004, limited partners
electing to withdraw earnings represented 39% and 34% 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 nine and three month periods
ended September 30, 2005 and 2004, $29,615 and $130,599, and $6,561 and $27,563,
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 September 30, 2005 and 2004, respectively, and is expected by the
general partners to commonly occur at these levels.
Additionally, for the nine and three month periods ended September 30, 2005
and 2004, $205,254 and $183,488, and $76,080 and $67,402, 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.
17
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.
Current Economic Conditions.
From July 1, 2004 through September 30, 2005, the Federal Reserve increased
the Federal Funds Rate to 3.75% from 1%. The recent upward movement in the
Federal Funds Rate during 2004 and 2005 has raised short-term rates; and while
long-term interest rates have risen, they have not increased at a pace
comparable to the rise in short-term rates. In the future the general partners
anticipate that interest rates will likely 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, have encouraged those borrowers with interest rates above the
current going rates to refinance their indebtedness to lock in these
historically low interest rates should they increase in the future. Demand for
loans from qualified borrowers continues to be strong and as loan repayments
occur, the general partners expect to replace the paid off loans with loans at
interest rates attainable in the then existing interest rate environment. At
this time, the general partners believe that the average loan portfolio interest
rate will remain relatively stable over the remainder of 2005. Based upon the
rates payable in connection with the existing loans, anticipated interest rates
to be charged by the Partnership, and the general partners' experience, the
general partners anticipate that the Partnership's annualized yield will range
between 5.75% and 6.75% in 2005.
During the third quarter of 2005, the United States economy as a whole
performed well. Early estimates of a 3.8% third quarter Real Gross Domestic
Product shows a continuation of the previous nine consecutive quarters of
expansion in excess of 3% (BEA 11/05). The United States unemployment rate for
October, 2005 was 5% and has hovered close to that level throughout the second
and third quarters of 2005. Regionally, the San Francisco Bay Area demonstrated
a very similar unemployment rate with an unemployment rate of 4.9% for the month
ended August, 2005. The San Francisco Bay area unemployment rate has been
declining from 5.3% in January, 2005 to the current 4.9% (United States
Department of Labor 11/05). The rate of inflation concerns many with energy
costs having risen significantly over the last year. The consumer price index
spiked upward 1.2% in September, 2005 and was 4.7% higher than in September,
2004 (United States Department of Labor 11/05). It remains to be seen whether
increased energy costs will ripple through the economy and drive inflation
upward, which could push interest rates higher. These statistics indicate an
economy that is continuing to grow, which is good for both mortgage lenders and
the real estate industry as a whole.
The Partnership makes loans primarily in Northern California. As such the
regional real estate market is of primary concern to the Partnership. As of
September 30, 2005 and 2004, approximately 85%, ($4,759,727) and 89%
($4,760,387) of the loans held by the Partnership were in three of the six San
Francisco Bay Area Counties, respectively. The remainder of the loans held was
secured primarily by Northern California real estate outside of the San
Francisco Bay Area.
California residential real estate continued to appreciate in value during
the third quarter of 2005. In the San Francisco Bay Area, as of September 2005
single family home median sales prices increased by 19.4%, 22.1%, 15.7% 10.3%,
21.0% and 18.5% to $616,000, $580,000, $899,000, $757,500, $816,500, and
$705,000 for the Alameda, Contra Costa, Marin, San Francisco, San Mateo and
Santa Clara counties from September 2004, respectively (DataQuick Information
Systems).
18
The total sales volumes and the number of homes sold have been declining.
Sales volumes for the nine months ended September 2005 as compared to September
2004 were typically 5% lower. Mortgage interest rates for both fixed and
adjustable rate loans have been rising, decreasing housing affordability. During
the week of October 14, 2005, 30 year fixed rate mortgages increased above a 6%
interest rate for the first time since March 2005 (Freddie Mac). Rising interest
rates will likely slow down the rate of housing appreciation we have seen over
the last two years. A strong residential real estate marketplace increases
lending opportunities and assists in providing adequate equity to help repay
mortgage debt should borrowers become delinquent in their payments.
Commercial real estate in the San Francisco Bay Area continued its rebound.
Occupancy is increasing and rents are either stagnant or increasing in most
markets throughout the San Francisco Bay Area. Grubb and Ellis reports that
class A space in San Francisco average rents are $32.60 up 3.6% from the second
quarter and that vacancy is at 17.6%t down from 18.5% in the second quarter and
21.2% in the third quarter of 2004. The San Francisco leasing market has
absorbed an estimated 1.9 million square feet net during 2005. Sales of
commercial office buildings are brisk with record per square foot prices being
attained and 2005 being on track to be a record volume sales year. A healthy
commercial real estate market increases lending opportunities and assists in
providing adequate equity to repay mortgage debt should borrowers become
delinquent in their payments.
For Partnership loans outstanding as of September 30, 2005, the Partnership
had an average loan to value ratio of 78.16%, 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 September
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 September 30, 2005:
2005 2006 2007 2008 2009 Thereafter Total
------------ ------------ ------------ ------------- ------------ ------------ -------------
Interest earning assets:
Money market accounts $ 331,130 $ 331,130
Average interest rate 1.50% 1.50%
Unsecured loans $275,301 $ 275,301
Average Interest Rate 0% 0%
Loans secured by deeds
of trust $ 175,646 346,716 3,204,507 400,000 342,343 1,131,372 $5,600,584
Average interest rate 10.00% 7.94% 9.07% 8.50% 9.35% 9.12% 9.01%
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.
19
ASSET QUALITY
A consequence of lending activities is that occasionally losses will be
experienced and that the amount of such losses will vary from time to time,
depending upon the risk characteristics of the loan portfolio as affected by
economic conditions and the financial experiences of borrowers. Many of these
factors are beyond the control of the general partners. There is no precise
method of predicting specific losses or amounts that ultimately may be charged
off on particular segments of the loan portfolio, especially in light of the
current economic environment.
The conclusion that a loan may become uncollectible, in whole or in part,
is a matter of judgment. Although institutional lenders are subject to
requirements and regulations that, among other things, require them to perform
ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and
to obtain and maintain current information regarding their borrowers and the
securing properties, the Partnership is not subject to these regulations and has
not adopted certain of these practices. Rather, the general partners, in
connection with the periodic closing of the accounting records of the
Partnership and the preparation of the financial statements, determine whether
the allowance for loan losses is adequate to cover potential loan losses of the
Partnership. As of September 30, 2005 the general partners have determined that
the allowance for loan losses and real estate owned of $380,225 (5.96% 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 September 30, 2005, two loans
were past maturity amounting to $175,646. In addition, one loan totaling $96,716
was past due 90 days or more in interest payments for a combined total of three
loans past due 90 days or more in interest payments, and/or past maturity
totaling $272,362. This past due 90 days loan for $96,716 was subject to a
workout agreement, which requires the borrower to make regular monthly loan
payments.
The Partnership also owns (through previous foreclosure) one property; an
undeveloped 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 September 30, 2005 is $130,215, or 2.04% 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 September 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 nine 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 14th day of November
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
November 14, 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
November 14, 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 September 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
November 14, 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 September 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
November 14, 2005
26