REDWOOD MORTGAGE INVESTORS VI
(a California Limited Partnership)
Index to Form 10-K
December 31, 2005
Part I
Page No.
------------
Item 1 - Business 4
Item 2 - Properties 8
Item 3 - Legal Proceedings 8
Item 4 - Submission of Matters to a Vote of Security Holders (Partners) 8
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 8
Item 6 - Selected Financial Data 9
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 7a - Quantitative and Qualitative Disclosures About Market Risk 18
Item 8 - Financial Statements and Supplementary Data 20
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42
Item 9a - Controls and Procedures 42
Item 9b - Other Information 42
Part III
Item 10 - Directors and Executive Officers of the Registrant 42
Item 11 - Executive Compensation 43
Item 12 - Security Ownership of Certain Beneficial Owners and Management 44
Item 13 - Certain Relationships and Related Transactions 44
Item 14 - Principal Accountant Fees and Services 44
Part IV
Item 15 - Exhibits, Financial Statements and Schedules 45
Signatures 46
Certifications 47
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 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 (I.R.S. Employer Identification)
incorporation or organization)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063
(address of principal executive offices) (zip code)
(650) 365-5341
(Registrant's telephone number, including area code)
Securities registered pursuant to Section
12 (b) of the Act: NONE
Securities registered pursuant to Section
12 (g) of the Act: Limited Partnership Units
2
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act of 1933, as amended.
Yes No XX
-------------- -------------
Indicate by check mark if the registrant is not required to file pursuant
to Section 13 or Section 15(d) of the Securities Act of 1934, as amended.
Yes No XX
-------------- -------------
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes XX No
-------------- -------------
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act).
Yes No XX
-------------- -------------
As of June 30, 2005, the aggregate value of limited partnership Units held
by non-affiliates was $6,391,203. This calculation is based on the capital
account balance of the limited partners and excludes limited partnership Units
held by the general partners.
Documents incorporated by reference:
Portions of the Prospectus for Redwood Mortgage Investors VI, included as
part of the form S-11 Registration Statement, SEC File No. 33-12519 dated
September 3, 1987 and Supplement No. 6 dated May 16, 1989, are incorporated in
Parts II, III, and IV.
3
Part I
Item 1 - Business
Redwood Mortgage Investors VI is a California Limited Partnership (the
"Partnership"). Michael R. Burwell, an individual, and Gymno Corporation, a
California corporation, are the general partners. The address of the general
partners is 900 Veterans Blvd., Suite 500, Redwood City, California 94063. The
Partnership's primary purpose is to invest its capital in first and second deeds
of trust secured primarily by Northern California properties. Loans are arranged
and serviced by Redwood Mortgage Corp., an affiliate of the general partners.
The Partnership's objectives are to make investments which will: (i) provide the
maximum possible cash returns which limited partners may elect to (a) receive as
monthly, quarterly or annual cash distributions or (b) have earnings credited to
their capital accounts and used to invest in Partnership activities; and (ii)
preserve and protect the Partnership's capital. The Partnership's general
business is more fully described under the section entitled "Investment
Objectives and Criteria", pages 23-26 of the Prospectus, a part of the
above-referenced Registration Statement, which is incorporated by reference.
The Partnership was formed in September 1987, with an approved 120,000
Units of $100 each ($12,000,000). The Units were offered on a "best efforts"
basis through broker/dealer member firms of the National Association of
Securities Dealers, Inc. It immediately began issuing Units and began investing
in loans in October 1987. The offering terminated in September 1989, and as of
that date 97,725.94 limited partner Units were sold realizing proceeds of
$9,772,594. At December 31, 2005, the Partnership had a balance of loans
totaling $2,021,973 with interest rates thereon ranging from 8.50% to 10.50%.
Currently first mortgage loans comprise 40.08% of the total amount of
secured loan portfolio. Second mortgage loans comprise 59.92% of the secured
loan portfolio. Single Family (1-4 units) homes, total 84.25% of the secured
mortgage loans. Commercial secured loans decreased from last year, now
comprising 15.75% of the portfolio, a decrease of 57.20% from 2004. The major
concentration of secured loans, comprising 73.13% of the total secured loans, is
in three of the six counties that comprise the San Francisco Bay Area. The
balance is primarily in Northern California. Currently secured loan size is
averaging $224,664 per loan. Some of the secured loans are fractionalized
between affiliated partnerships with objectives similar to those of the
Partnership to further reduce risk. Average equity per loan transaction, which
is our loan plus any senior loans, divided by the property's appraised value,
subtracted from 100%, stood at 34.05%, based on senior loans and appraised
values at the inception of our loan. Generally, the more equity, the more
protection for the lender. The Partnership's loan portfolio had no properties in
foreclosure as of the end of December 2005.
Delinquencies are discussed under Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
For the year ended December 31, 2005 and 2004 the Partnership did not take
back any collateral from defaulted borrowers. During the year 2002, the
Partnership acquired a piece of real estate property through foreclosure. This
property consisted of four townhouses. The Partnership commenced refurbishment
of the units and concluded a sale of the units in March 2004. A second property,
acquired in 2000, was a commercial property located in Walnut Creek, California.
The property was sold during the fourth quarter of 2004. The Partnership
realized a loss upon the sale of both of these properties totaling approximately
$783,000, which had previously been reserved for.
The Partnership also owns (through previous foreclosure in April, 1993) one
other property; undeveloped land. The land is located in East Palo Alto. The
land is owned with two other affiliated partnerships. The Partnership's net
investment of $130,215 is 2.05% of Partnership assets. The general partners
believe that the property is worth considerably more than its net investment,
but it may take a considerable amount of additional time to sell the property
and realize its full potential. The property is unique in that it may only be
utilized for commercial or industrial uses. Until recently, land sales activity
had been slow, but interest in land sales for commercial sites has been
increasing.
4
The Partnership's revenues increased from $491,640 in 2003 to $538,737 in
2004 and decreased slightly to $522,282 in 2005. The increase from 2003 to 2004
was due primarily to the increase in the average interest rate on loans, which
was 7.80% in 2003, 8.41% in 2004, and 9.12% in 2005. In addition, the increase
in revenue in 2004 was due primarily to the receipt of a non-refundable deposit
on the sale of a real estate held for sale property totaling $28,929. In 2005
the decrease from 2004 was primarily due to the collection of $44,318 in
interest and $5,912 in late charges on a loan that was previously categorized as
impaired; offset by a lower average outstanding loan balance, which was
substantially affected by the pay off of two loans totaling $3,060,100 in
November, 2005. As a result of this payoff the Partnership's loan balances
declined from $5,599,663 to $2,172,419. The Partnership was unable to place the
payoff proceeds of $3,060,100 on new notes immediately. Instead, the proceeds
were deposited into the Partnership's money market account. Cash flow the
Partnership generated from mortgage interest and loan pay-downs and pay-offs was
used to meet limited partner capital and earnings liquidations. Withdrawals by
limited partners were $506,503, $510,115 and $457,826 for the three years ended
December 31, 2003, 2004 and 2005, respectively.
During the year 2005, the Partnership's annualized yield on compounding
accounts was 6.15% and on monthly distributing accounts it was 5.99%.
Competition and General Economic Conditions.
The Partnership's major competitors in providing mortgage loans are banks,
savings and loan associates, thrifts, conduit lenders, mortgage brokers, and
other entities both larger and smaller than the Partnership. The Partnership is
competitive in large part because the general partners generate all of their
loans. The general partners have been in the business of making or investing in
mortgage loans in Northern California since 1978 and have developed a quality
reputation and recognition within the field.
Beginning in July of 2004, the Federal Reserve changed its interest rate
policy from one of three years of continuously lowered interest rates, which hit
a 40 year historic interest rate low, to one of tempered but gradual interest
rate increases. In keeping with this new policy since July 2004, the Federal
Reserve has increased the Federal Funds Rate by one quarter percentage point
(1/4 of one percent) at each of its meetings to 5.25% as of December 31, 2005.
This deliberate upward change in the Federal Funds Rate has caused short term
interest rates to rise, and to a lesser degree, pushed longer term rates up as
well. Nationally and more specifically in Northern California, the location of
the majority of our lending activities, the economies have substantially
recovered from the economic downturn lasting from 2000 through 2003. Employment
and job creation has improved. During 2004 and 2005, the residential and
commercial real estate markets in Northern California enjoyed solid price
appreciation. During the latter half of 2005, long-term interest rates have
begun to inch upward. Residential sales volumes have declined yet median home
sales prices have remained at or near their record 2005 highs. While some
concern exists as to whether real estate values will soften, interest rates
continue to remain attractive by historical standards, unemployment remains low
and the economy is strong. Management believes these factors will contribute to
a real estate marketplace with lower appreciation in 2006 compared to 2004 and
2005. With less real estate transactions likely to exist competition for loans
will be fierce. Since it appears that the bottom of the interest rate cycle was
reached in 2004, we believe loan runoff to lower interest rates will be reduced
allowing the partnership to retain its loans for longer periods. Excess cash
will be invested in short-term alternative investments, such as money market
funds yielding considerably less than the current loan investment portfolio.
5
Secured Loan Portfolio
As of December 31, 2005, a summary of the Partnership's secured loan
portfolio is set forth below.
Loans as a Percentage of Appraised Value
First Trust Deed Loans $ 810,359
Second Trust Deed Loans 1,211,614
---------------
Total loans $ 2,021,973
Priority Positions due other Lenders at Time of Loan 2,367,593
Total Debt $ 4,389,566
===============
Appraised Property Value at time of loan $ 6,655,409
Total Secured Loans as a % of Appraisal based on
appraisals and prior liens at date of loan 65.95%
Number of Secured Loans Outstanding 9
Average Secured Loan 224,664
Average Secured Loan as a % of Net Assets 3.53%
Largest Secured Loan Outstanding 532,131
Largest Secured Loan as a % of Net Assets 8.37%
Largest secured Loan as a % of Total Assets 8.36%
Secured Loans as a Percentage of Total Loans Percent
----------------------------------------------------- ---------------
First Trust Deeds 40.08%
Second Trust Deeds 59.92%
---------------
Total 100.00%
===============
Secured Loans by Type of Property Amount Percent
----------------------------------------------------- --------------- ------------
Single Family (1-4 units) $ 1,703,472 84.25%
Commercial 318,501 15.75%
--------------- ------------
Total $ 2,021,973 100.00%
=============== ============
6
The following is a distribution of secured loans outstanding as of December
31, 2005 by California Counties:
Total
California County Secured Loans Percent
------------------------------------------------------ ---------------- -------------
San Francisco Bay Area Counties
San Mateo $ 544,069 26.91%
Santa Clara 532,131 26.32%
Alameda 402,432 19.90%
---------------- -------------
1,478,632 73.13%
San Francisco Bay Area Adjacent Counties
Monterey 250,000 12.36%
Stanislaus 174,432 8.63%
---------------- -------------
424,432 20.99%
Other California Counties
Colusa 118,909 5.88%
---------------- -------------
118,909 5.88%
Total $ 2,021,973 100.00%
================ =============
Number of Loans in Foreclosure 0
Scheduled maturity dates of secured loans as of December 31, 2005 are as
follows:
Year Ending
December 31,
--------------------------
2006 $ 424,432
2007 144,069
2008 400,000
2009 272,394
2010 781,078
--------------
$ 2,021,973
==============
The Partnership's largest loan in the principal amount of $532,131
represents 26.32% of outstanding secured loans and 8.36% 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.
The Partnership had a substantial amount of its loan receivable balance
from one borrower at December 31, 2004 and 2003. The borrower accounted for
approximately 59% and 58% of the loan balances at such dates. This borrower had
two loans secured by separate properties in the principal amounts of $2,103,000
and $956,800. These loans were paid off in November, 2005. In addition, an
impaired loan with a principal balance of $96,716 paid off in November, 2005.
The scheduled maturities for 2006 include two loans for $174,432,
representing 8.63% of the secured loan portfolio, past maturity at December 31,
2005. The Partnership occasionally allows borrowers to continue to make the
regular interest payments on debt past maturity for periods of time. In many
instances the interest rate on these past maturity loans is higher than
currently existing interest rates. Interest payments on these loans were
current.
7
Item 2 - Properties
The Partnership did not take back any collateral security from borrowers in
2005 or 2004. During 2002, the Partnership took back one piece of real estate
collateral through foreclosure. The Partnership, together with other
partnerships, all affiliates of the general partners, owned the property. The
property was a 4 unit condominium complex. During the year 2003, renovation work
was completed and the property was placed on the market for sale. A purchase
offer was accepted and the escrow closed in March, 2004. As of December 31,
2003, the carrying value of this property was $454,862. A second property,
acquired in 2000, was a commercial property located in Walnut Creek, California.
The property was sold in October, 2004. The Partnership realized a loss upon the
sale of both of these properties totaling approximately $783,000, which had been
anticipated and the loss was offset against reserves previously set aside for
these properties.
The Partnership also owns, through previous foreclosures, one other
property; undeveloped land. The land is located in East Palo Alto. The land is
owned with two other affiliated partnerships. The Partnership's net investment
in the land at December 31, 2005 is $130,215. The general partners believe that
the property is worth considerably more than its net investment, but it may take
a considerable amount of additional time to sell the property and realize its
full potential. The property is unique in that it may only be utilized for
commercial or industrial uses. Until recently, land sales activity had been
slow, but interest in land sales for commercial sites has been increasing.
Item 3 - Legal Proceedings
In the normal course of business, the Partnership may become involved in
various types of legal proceedings such as assignment of rents, bankruptcy
proceedings, appointment of receivers, unlawful detainers, judicial foreclosure,
etc., to enforce the provisions of the deeds of trust, collect the debt owed
under the promissory notes, or to protect, or recoup its investment from the
real property secured by the deeds of trust. None of these actions would
typically be of any material importance. As of the date hereof, the Partnership
is not involved in any legal proceedings other than those that would be
considered part of the normal course of business.
Item 4 - Submission of Matters to a Vote of Security Holders (Partners)
No matters have been submitted to a vote of the Partnership.
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and
Related Unitholder Matters
120,000 Units at $100 each (minimum 20 Units) were offered through
broker-dealer member firms of the National Association of Securities Dealers on
a "best efforts" basis (as indicated in Part I item 1). All Units were sold to
California residents. Investors have the option of withdrawing earnings on a
monthly, quarterly or annual basis or having their earnings retained in the
Partnership. Limited partners may withdraw from the Partnership in accordance
with the terms of the partnership agreement subject to early withdrawal
penalties. There is no established public trading market for the Units. As of
December 31, 2005, 368 limited partners had a capital balance of $6,346,746.
A description of the Partnership's Units, transfer restrictions, and
withdrawal provisions is more fully described under the section entitled
"Description of Units" and "Summary of the Limited Partnership Agreement", pages
38-42 of the Prospectus, a part of the above-referenced Registration Statement,
which is incorporated by reference.
8
Item 6 - Selected Financial Data
Redwood Mortgage Investors VI began operations in October, 1987. Its
financial condition and results of operation as of and for the five years ended
December 31, 2005 were:
Balance Sheets
December 31,
-------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
-------------- -------------- -------------- -------------- --------------
Cash $ 4,361,983 $ 1,090,027 $ 32,160 $ 341,127 $ 190,414
Loans
Loans, secured by deeds of trust 2,021,973 5,225,128 5,255,620 5,183,100 4,970,433
Loans, unsecured, net 144,098 261,276 242,462 223,697 82,362
Interest and other receivables
Accrued interest and late fees 22,138 61,364 54,562 61,384 797,105
Advances on loans 51 2,890 4,091 31,007 197,946
Less allowances for loan losses (315,379) (315,751) (279,865) (275,294) (370,612)
Note receivable - Redwood Mortgage Corp. - - - - 178,200
Real estate held for sale, net 130,215 128,902 1,312,773 1,234,541 1,093,503
-------------- -------------- -------------- -------------- --------------
Total assets $ 6,365,079 $ 6,453,836 $ 6,621,803 $ 6,799,562 $ 7,139,351
============== ============== ============== ============== ==============
Liabilities and Partners' Capital
December 31,
-------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
-------------- -------------- -------------- -------------- --------------
Liabilities
Accounts payable $ - $ 11,487 $ 13,064 $ 11,953 $ 20,261
Deferred interest on loans - - - - 74,022
Payable to affiliates 8,572 12,541 12,496 14,643 35,632
-------------- -------------- -------------- -------------- --------------
Total liabilities 8,572 24,028 25,560 26,596 129,915
-------------- -------------- -------------- -------------- --------------
Partners' capital
Limited partners' capital, subject to
redemption 6,346,746 6,420,047 6,586,482 6,763,200 6,999,670
General partners' capital 9,761 9,761 9,761 9,766 9,766
-------------- -------------- -------------- -------------- --------------
Total partners' capital 6,356,507 6,429,808 6,596,243 6,772,966 7,009,436
-------------- -------------- -------------- -------------- --------------
Total liabilities and partners' capital $ 6,365,079 $ 6,453,836 $ 6,621,803 $ 6,799,562 $ 7,139,351
============== ============== ============== ============== ==============
9
Statements of Income
2005 2004 2003 2002 2001
-------------- -------------- -------------- -------------- --------------
Gross revenue $ 522,282 $ 538,737 $ 491,640 $ 574,171 $ 735,900
Expenses 133,874 191,585 158,524 204,188 309,249
-------------- -------------- -------------- -------------- --------------
Net income $ 388,408 $ 347,152 $ 333,116 $ 369,983 $ 426,651
============== ============== ============== ============== ==============
Net income: to general partners (1%) $ 3,884 $ 3,472 $ 3,331 $ 3,700 $ 4,266
to limited partners (99%) 384,524 343,680 329,785 366,283 422,385
-------------- -------------- -------------- -------------- --------------
$ 388,408 $ 347,152 $ 333,116 $ 369,983 $ 426,651
============== ============== ============== ============== ==============
Net income per $1,000 invested by
limited partners for entire period:
- where income is compounded $ 62 $ 54 $ 50 $ 54 $ 59
============== ============== ============== ============== ==============
- where partner receives income in
monthly distributions $ 60 $ 53 $ 49 $ 53 $ 58
============== ============== ============== ============== ==============
Annualized yields when income is compounded or distributed monthly for the
years 2001 through 2005 are outlined in the table below:
Compounded Distributed
--------------- ---------------
2001 5.95% 5.79%
2002 5.40% 5.27%
2003 5.00% 4.89%
2004 5.40% 5.27%
2005 6.15% 5.99%
The average annualized yield, when income is compounded from inception
through December 31, 2005 was 6.84%. The average annualized yield, when income
is distributed monthly, from inception through December 31, 2005 was 6.60%.
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE
PARTNERSHIP
Critical Accounting Policies.
In preparing the financial statements, management is required to make
estimates based on the information available that affect the reported amounts of
assets and liabilities as of the balance sheet dates and revenues and expenses
during the reporting periods. Such estimates relate principally to the
determination of (1) the allowance for loan losses (i.e. the amount of allowance
established against loans receivable as an estimate of potential loan losses)
including the accrued interest and advances that are estimated to be
unrecoverable based on estimates of amounts to be collected plus estimates of
the value of the property as collateral and (2) the valuation of real estate
acquired through foreclosure. At December 31, 2005, we owned one real property
that we had acquired through foreclosure in a prior year.
Loans and the related accrued interest, late fees and advances are analyzed
on a periodic basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. A provision is made for loan losses to adjust the allowance
for loan losses to an amount considered by management to be adequate, with due
consideration to collateral values, to provide for unrecoverable loans and
receivables, including impaired loans, other loans, accrued interest, late fees
and advances on loans and other accounts receivable (unsecured). The Partnership
charges off uncollectible loans and related receivables directly to the
allowance account once it is determined that the full amount is not collectible.
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 investment
shall be reduced to the present value of future cash flows discounted at the
loan's effective interest rate. If a loan is collateral dependent, it is valued
at the estimated fair value of the related collateral.
If events and or changes in circumstances cause management to have serious
doubts about the collectibility of the contractual payments, a loan may be
categorized as impaired and interest is no longer accrued. Any subsequent
payments on impaired loans are applied to reduce the outstanding loan balances,
including accrued interest and advances.
Recent trends in the economy have been taken into consideration in the
aforementioned process of arriving at the allowance for loan losses. Actual
results could vary from the aforementioned provisions for losses.
Forward-Looking Statements.
Certain statements in this Report on Form 10-K which are not historical
facts may be considered forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended, including statements regarding the
Company's expectations, hopes, intentions, beliefs and strategies regarding the
future. Forward-looking statements include statements regarding future interest
rates and economic conditions and their effect on the Partnership and its
assets, trends in the California real estate market, estimates as to the
allowance for loan losses, estimates of future limited partner withdrawals, 2006
annualized yield estimates, the intention not to sell the Partnership's loan
portfolio and the expectation that foreclosures will not have a material effect
on liquidity. Actual results may be materially different from what is projected
by such forward-looking statements. Factors that might cause such a difference
include unexpected changes in economic conditions and interest rates, the impact
of competition and competitive pricing and downturns in the real estate markets
in which the Company has made loans. All forward-looking statements and reasons
why results may differ included in this Form 10-K are made as of the date
hereof, and we assume no obligation to update any such forward-looking statement
or reason why actual results may differ.
Related Parties.
The general partners of the Partnership are Gymno Corporation and Michael
R. Burwell. Most Partnership business is conducted through Redwood Mortgage
Corp., an affiliate of the general partners, which arranges, services and
maintains the loan portfolio for the benefit of the Partnership. The fees
received by the affiliate and general partners are paid pursuant to the
partnership agreement and are determined at the sole discretion of the general
partner subject to limitations imposed by the partnership agreement. In the past
the general partners have elected not to take the maximum compensation. The
following is a list of various Partnership activities for which related parties
are compensated.
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, an affiliate of the
general partners may collect an amount equivalent to 12% of the loaned amount
until 6 months after the termination date of the offering. Thereafter, the loan
brokerage commissions (points) will be limited to an amount not to exceed 4% of
the total Partnership assets per year. The loan brokerage commissions are paid
by the borrowers, and thus, are not an expense of the Partnership. For the years
ended December 31, 2005, 2004 and 2003, loan brokerage commissions paid by the
borrowers were $52,248, $24,156 and $42,407, 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 $56,508, $50,160 and $48,759 were incurred
for the years ended December 31, 2005, 2004 and 2003, respectively.
These servicing fees were charged at 1%, on an annual basis, of the
outstanding principal balances. If the maximum mortgage servicing fee of 1.5%,
on an annual basis, had been charged to the Partnership, then net income would
have been reduced by approximately $28,254, $25,080 and $24,380 in 2005, 2004
and 2003, respectively. Reducing net income reduces the annualized yields. An
increase or decrease in this fee within the limits set by the Partnership's
agreement directly impacts the yield to the limited partners.
11
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). For the years ended December 31,
2005, 2004 and 2003 management fees totaled $24,092, $24,481 and $25,281,
respectively. Of these fees the Partnership waived $12,061, $16,321 and $16,854
and paid $12,031, $8,160 and $8,427, respectively, to the general partners.
o Other Fees The Partnership agreement provides that the general partners
may receive other fees such as reconveyance, mortgage assumption and mortgage
extension fees. Such fees are incurred by the borrowers and are paid to the
general partners.
o Income and Losses All income and losses are credited or charged to
partners in relation to their respective Partnership interests. The allocation
to the general partners (combined) shall not exceed 1%.
o Operating Expenses An affiliate of the Partnership, Redwood Mortgage
Corp., is reimbursed by the Partnership for all operating expenses actually
incurred by it on behalf of the Partnership, including without limitation,
out-of-pocket general and administration expenses of the Partnership, accounting
and audit fees, legal fees and expenses, postage and preparation of reports to
limited partners.
o Contributed Capital The general partners jointly and severally were to
contribute 1/10 of 1% in cash contributions as proceeds from the offerings are
received from the limited partners. As of December 31, 2004 and 2005, a general
partner, Gymno Corporation, had contributed $9,772 as capital in accordance with
Section 4.02(a) of the partnership agreement.
Results of Operations - For the years ended December 31, 2005, 2004 and
2003
Changes in the Partnership's operating results for the years ended December
31, 2005 and 2004 are discussed below.
Changes during the year ended December 31,
2005 2004
------------- ------------
Net income increase/(decrease) $ 41,256 $ 14,036
============= ============
Revenue
Interest on loans (878) 34,936
Interest-interest bearing accounts 11,235 2,435
Late charges and other fees (26,812) 9,726
------------- ------------
$ (16,455) $ 47,097
------------- ------------
Expenses
Mortgage servicing fees $ 6,348 $ 1,401
Asset management fees 3,871 (267)
Clerical costs from Redwood Mortgage Corp. (3,587) (4,226)
Provision for losses on loans and real
estate held for sale (37,571) 31,301
Professional services (3,050) 7,153
Other (23,722) (2,301)
------------- ------------
$ (57,711) $ 33,061
------------- ------------
Net income increase $ 41,256 $ 14,036
============= ============
12
The decrease in interest on loans of $878 for the year ended December 31,
2005 was primarily due to the decline in the average loan portfolio balance to
$4,876,596 in 2005 from an average loan portfolio balance of $5,240,374 in 2004.
The average interest rate on notes also decreased to 9.13% in 2005 from an
average interest rate of 9.37% in 2004. The reduction in loan balances to
$2,021,973 as of December 31, 2005 from $5,225,128 as of December 31, 2004 was
primarily due to substantial pay-offs of loans and the Partnership's inability
to fund new loans from the pay-off proceeds in 2005. Two loans totaling
$3,060,100 that were major contributors of interest income to the Partnership
were paid off in November, 2005. Contributing to 2005 income, an impaired loan
totaling $96,716 paid-off in 2005 deriving interest of $43,021, which was not
previously accrued. The receipt of interest from the previously impaired loan
helped the Partnership minimize reduced interest income due to a lower average
loan portfolio balance and a decreased average interest rate in 2005. The
increase in interest on loans of $34,936 for the year ended December 31, 2004
was primarily due to an interest rate increase on two loans totaling $3,060,100
in 2004. This increase alone generated additional interest income of $32,514 to
the Partnership. Interest income was $489,908, $490,786 and $455,850 for the
years ended December 31, 2005, 2004 and 2003, respectively. The average interest
rate in 2005 was 9.13% as compared to 9.37% for 2004 and 8.73% for 2003.
The increase in interest-interest bearing accounts of $11,235 and $2,435
for the years ended December 31, 2005 and 2004, respectively, represents
interest earned on a larger average balance deposit, which increased to
$1,220,447 for the year ended December 31, 2005 from an average balance of
$561,094 that existed in 2004 and from an average balance of $186,644 in 2003
The decrease in late charge revenue and other fees of $26,812 for the year
ended December 31, 2005 was primarily due to non-refundable option payments
received on a property held for sale. These payments totaled $28,929 in 2004 and
the related real estate property was sold in December 2004. The decrease was
also due to a decline in miscellaneous income to $8,440 in 2005 from $11,498 in
2004, due to reduced collection of prepayment penalties of $2,256 in 2005 as
compared to $10,801 in 2004. However, these were offset by the collection of
other fees totaling $6,184 in 2005 as compared to $697 in 2004 and the
collection of late charges totaling $7,184 in 2005 as compared to $2,009 in
2004. The increase in late charge revenue and other fees of $9,726 for the year
ended December 31, 2004 was due to the receipt of non-refundable option
payments, on real estate held for sale of $28,929; offset by a decrease in late
fees and miscellaneous income of $19,203.
The increase in mortgage servicing fees of $6,348 for the year ended
December 31, 2005 was primarily due to the payment of servicing fees of $9,439
on an impaired loan, which was collected in 2005. The increase in mortgage
servicing fees of $1,401 for the year ended December 31, 2004 was due to an
overall higher average loan portfolio balance of $5,240,374 in 2004 as compared
to $5,219,360 in 2003; offset by the collection of delinquent interest from a
loan that paid off in 2003.
The increase in asset management fees of $3,871 for the year ended December
31, 2005 was primarily due to the Partnership paying the full 3/8% asset
management fee during the final three months of 2005 instead of a reduced fee of
1/8% as agreed upon by the general partners. The decrease in asset management
fees of $267 for the year ended December 31, 2004 was primarily due to declining
balances of limited partners' capital, which were $6,420,047 and $6,586,482, at
December 31, 2004 and 2003, respectively.
The decrease in clerical costs of $3,587 and $4,226 for the years ended
December 31, 2005 and 2004, respectively, was primarily attributable to reduced
clerical costs in servicing this Partnership.
The decrease in the provision for losses on loans and real estate held for
sale of $37,571 for the year ended December 31, 2005 was due to the Partnership
not allocating any additional provision and recording a recovery of $1,685 in
2005. There were two loans matured 90 days or more totaling $174,432, but no
delinquent loans past due 90 days or more in interest payments as of December
31, 2005 and the Partnership felt that no further provision for loan loss was
required. The increase in the provision for losses on loans and real estate held
for sale of $31,301 for the year ended December 31, 2004 was deemed appropriate
by Partnership's management due to the higher average loan portfolio balance of
$5,240,374 and three delinquent loans past due 90 days or more in interest
payments. Loan portfolio balances decreased to $2,021,973 in 2005 from the
portfolio balance of $5,225,128 that existed in 2004 and a reserve for loan
losses of $315,379 and $315,751 as of December 31, 2005 and 2004, respectively,
was considered to be adequate.
The decrease in professional services of $3,050 for the year ended December
31, 2005 was due to reduced fees and the timing of professional services in
2005. The increase in professional services of $7,153 for the year ended
December 31, 2004 was primarily due to general accounting cost increases.
13
The decrease in other expenses of $23,722 and $2,295 for the years ended
December 31, 2005 and 2004 was primarily due to the reduction in costs
associated with the upkeep of existing real estate properties held for sale. In
2005 the upkeep cost was $8,507 as compared to $32,077 in 2004.
As of September 2, 1989, the date the offering of the Partnership's limited
partner Units was formally closed, the Partnership had sold 97,725.94 limited
partner Units and its contributed capital totaled $9,772,594 of the approved
$12,000,000 issue, in Units of $100 each. On December 31, 2005 the net capital
of limited and general partners totaled $6,356,507.
The Partnership began funding loans in October 1987. The Partnership's
secured loans outstanding as of December 31, 2005, 2004 and 2003 were
$2,021,973, $5,225,128 and $5,255,620, respectively. The average loan balances
over this time period have remained relatively stable until November, 2005 when
two loans totaling $3,060,100 were paid off and the loan portfolio balance
reduced to $2,021,973. The cash from these loan pay-offs will primarily be used
to make investments in new loan opportunities. It may take a number of months to
find and select appropriate loan investments. The Partnership utilized income,
loan pay offs and proceeds from the sale of real estate held for sale properties
to meet limited partner capital liquidations and make additional loans. During
the years ended December 31, 2005, 2004 and 2003 loan principal collections and
sale proceeds of the properties exceeded limited partner liquidations.
In 2005 the Partnership funded $1,858,250 in new loans versus pay-offs of
$5,061,405. The Partnership was unable to immediately invest in excess of
$3,000,000 in loan proceeds received from two loans in late 2005. Therefore,
loans funded in 2005 appear substantially less than loan pay-offs. It is
anticipated the cash held by the Partnership generated from these loan pay-offs
will be invested in 2006. Loan balances decreased by $3,203,155 (61.30%) and
$30,492 (0.58%) in 2005 and 2004, respectively.
The Partnership's operating results and delinquencies are within the normal
range of the general partners' expectations, based upon their experience in
managing similar partnerships over the last twenty years. Foreclosures are a
normal aspect of Partnership operations and the general partners anticipate that
they will not have a material effect on liquidity.
Cash is continually being generated from interest earnings, late charges,
prepayment penalties, amortization of principal, proceeds from sale of real
estate held and loan pay-offs. Currently, this amount exceeds Partnership
expenses and earnings and partner liquidation requirements. As loan
opportunities become available, excess cash and available funds are invested in
new loans.
Allowance for Losses.
The general partners periodically review the loan portfolio, examining the
status of delinquencies, the underlying collateral securing these loans, real
estate held for sale expenses, sales activities, and borrower's payment records
and other data relating to the loan portfolio. Data on the local real estate
market and on the national and local economy are studied. Based upon this and
other information, the allowance for loan losses is increased or decreased.
Borrower foreclosures are a normal aspect of Partnership operations. The
Partnership is not a credit based lender and hence while it reviews the credit
history and income of borrowers, and if applicable, the income from income
producing properties, the general partners expect that we will on occasion take
back real estate security. During 2004 and 2005 the economy and the Northern
California real estate market has strengthened. At December 31, 2005 the
Partnership had no loans past due 90 days or more in interest payments. As of
December 31, 2005 the Partnership has two loans which are making current monthly
payments but are 90 days or more past maturity. These past maturity loans have a
principal balance of $174,432. The Partnership does not have any filed notices
of default, which would begin the foreclosure process at December 31, 2005. The
Partnership occasionally enters into workout agreements with borrowers who are
past maturity or delinquent in their regular payments. The Partnership had no
workout agreements as of December 31, 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.
Management expects the number of foreclosures and workout agreements will rise
during difficult times and conversely fall during good economic times. These
workouts and delinquencies have been considered when management arrived at an
appropriate allowance for loan losses and based on our experience, are
reflective of our loan marketplace segment. Because of the number of variables
involved, the magnitude of possible swings and the general partners' inability
to control many of these factors, actual results may and do sometimes differ
significantly from estimates made by the general partners.
14
As of December 31, 2005, 2004 and 2003 the Partnership's real estate held
for sale balance was $130,215, $128,902 and $1,312,773, respectively. The
decrease in the real estate held for sale balance of $1,183,871 from December
31, 2003 to December 31, 2004 was due to the sale of two of the properties.
During 2002, the Partnership took back one piece of real estate collateral
through foreclosure. The Partnership, together with other partnerships, all
affiliates of the general partners, owned the property. The property was a 4
unit condominium complex. During the year 2003, renovation work was completed
and the property was placed on the market for sale. A purchase offer was
accepted and the escrow closed in March, 2004. The Partnership sustained a loss
of approximately $5,800, which had been anticipated and reserved for. In October
2004, the Partnership sold another real estate held for sale property at a loss
of approximately $778,500 which was previously fully reserved for. The
Partnership has not taken back any collateral security from borrowers in 2004 or
2005. The Partnership's real estate held for sale inventory was reduced to one
property. This remaining property is an undeveloped piece of land. The land is
located in East Palo Alto, California. The Partnership has held its interest in
this land since April, 1993. The land is owned with two other affiliated
partnerships. 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 recorded ($1,685) and $35,886 as (recovery)/provision for loan
losses for the year ended December 31, 2005 and 2004, respectively. As of
December 31, 2005, the allowance for loan losses totaling $315,379 is considered
to be adequate. The Partnership may restructure loans. This is done through the
modification of an existing loan or by re-writing a whole new loan. It could
involve, among other changes, an extension in maturity date, a reduction in
repayment amount, a reduction in interest rate, or granting an additional loan.
In 2002, the Partnership restructured four previously impaired loans into two
new loans with a lower interest rate. The amount restructured was $3,060,100.
These two restructured loans were paid off in November, 2005. 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 (in excess of the then established reserves) incurred by the Partnership
with respect to these four restructured loans. Two of these four loans have been
paid off and a partial paydown has also been received against the other two. The
balance remaining is fully reserved for in the Partnership's allowance for loan
losses.
Borrower Liquidity and Capital Resources.
The Partnership relies upon loan payoffs and borrowers' mortgage payments
for the source of funds for loans. Over the past several years, mortgage
interest rates have decreased somewhat from those available at the inception of
the Partnership. If interest rates were to increase substantially, the yield of
the Partnership's loans may provide lower yields than other comparable
debt-related investments. Additionally, since the Partnership has historically
made primarily fixed rate loans, if interest rates were to rise, the likely
result would be a slower prepayment rate for the Partnership. This could cause a
lower degree of liquidity as well as a slowdown in the ability of the
Partnership to invest in loans at the then current interest rates. Conversely,
in the event interest rates were to decline, the Partnership could see
significant borrower prepayments, which, if the Partnership can only obtain the
then existing lower rates of interest may cause a dilution of the Partnership's
yield on loans, thereby lowering the Partnership's overall yield to the limited
partners. Cash is constantly being generated from borrower payments of interest,
principal and loan payoffs. Currently, cash flow exceeds Partnership expenses
and earnings distribution requirements.
At the time of subscription to the Partnership, limited partners must elect
either to receive monthly, quarterly or annual cash distributions from the
Partnership, or to compound earnings in their capital account. If one initially
elects to receive monthly, quarterly or annual distributions, such election,
once made, is irrevocable. Earnings allocable to limited partners who elect to
compound earnings in their capital account, will be retained by the Partnership
for making further loans or for other proper Partnership purposes, and such
amounts will be added to such limited partners' capital accounts.
For the years ended December 31, 2005, 2004 and 2003 the Partnership made
distributions of earnings to limited partners of $146,271, $120,015 and
$115,254, respectively. Distribution of earnings to limited partners for the
years ended December 31, 2005, 2004 and 2003 to limited partners' capital
accounts and not withdrawn was $238,253, $223,665 and $214,531, respectively. As
of December 31, 2005, 2004 and 2003 limited partners electing to withdraw
earnings represented 40%, 34% and 35%, respectively, of the limited partners'
outstanding capital accounts. This percentage range has remained relatively
stable.
15
The Partnership also allows the limited partners to withdraw their capital
account subject to certain limitations and penalties (see liquidation provisions
of Partnership Agreement). For the years ended December 31, 2005, 2004 and 2003
$30,322, $142,997 and $93,770, respectively, were liquidated subject to the 10%
and/or 8% penalty for early withdrawal. These withdrawals are within the
normally anticipated range that the general partners would expect in their
experience in this and other partnerships. The general partners expect that a
small percentage of limited partners will elect to liquidate their capital
accounts over one year with a 10% and/or 8% early withdrawal penalty. In
originally conceiving the Partnership, the general partners wanted to provide
limited partners needing their capital returned a degree of liquidity.
Generally, limited partners electing to withdraw over one year need to liquidate
investments to raise cash. The demand the Partnership is experiencing in
withdrawals by limited partners electing a one year liquidation program
represents a small percentage of limited partner capital as of December 31,
2005, 2004 and 2003, respectively, and is expected by the general partners to
commonly occur at these levels.
Additionally, for the years ended December 31, 2005, 2004 and 2003
$281,232, $247,103 and $297,479, 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.
Actual liquidation of both capital and earnings for the three years ended
December 31, 2005 was:
Years ended December 31,
---------------------------------------------------
2005 2004 2003
-------------- --------------- --------------
Earnings $ 146,271 $ 120,015 $ 115,254
Capital* 311,554 390,100 391,249
-------------- --------------- --------------
Total $ 457,825 $ 510,115 $ 506,503
============== =============== ==============
*These amounts represent gross of early withdrawal penalties.
In some cases in order to satisfy Broker Dealers and other reporting
requirements, the general partners have valued the limited partners' interest in
the Partnership on a basis which utilizes a per Unit system of calculation,
rather than based upon the investors' capital account. This information has been
reported in this manner in order to allow the Partnership to integrate with
certain software used by the Broker Dealers and other reporting entities. In
those cases, the Partnership will report to Broker Dealers, Trust Companies and
others a "reporting" number of Units based upon a $1.00 per Unit calculation.
The number of reporting Units provided will be calculated based upon the limited
partner's capital account value divided by $1.00. Each investor's capital
account balance is set forth periodically on the Partnership account statement
provided to investors. The reporting Units are solely for Broker Dealers
requiring such information for their software programs and do not reflect actual
Units owned by a limited partner or the limited partners' right or interest in
cash flow or any other economic benefit in the Partnership. Each investor's
capital account balance is set forth periodically on the Partnership account
statement provided to investors. The amount of Partnership earnings each
investor is entitled to receive is determined by the ratio that each investor's
capital account bears to the total amount of all investor capital accounts then
outstanding. The capital account balance of each investor should be included on
any NASD member client account statement in providing a per Unit estimated value
of the client's investment in the Partnership in accordance with NASD Rule 2340.
While the general partners have set an estimated value for the Partnership
Units, such determination may not be representative of the ultimate price
realized by an investor for such Units upon sale. No public trading market
exists for the Partnership's Units and none is likely to develop. Thus, there is
no certainty that the Units can be sold at a price equal to the stated value of
the capital account. Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain liquidation rights provided by the
Partnership, which may include early withdrawal penalties (See the section of
the Prospectus entitled "Risk Factors - Purchase of Units is a long term
investment").
16
Current Economic Conditions.
During 2005, the United States economy as a whole performed well. Gross
Domestic Product estimates for 2005 of 3.5% show a slight slowdown from the 4.2%
Gross Domestic Product of 2004. The United States average annual unemployment
rate for 2005 was 4.9% and has trended downward throughout 2005. Regionally, the
San Francisco Bay Area demonstrated a very similar unemployment rate with an
average annual unemployment rate of 5.1% for 2005 down 0.9% from 2004. The rate
of inflation concerns many with energy costs having risen significantly over the
last year. The consumer price index rose 3.4% in 2005 compared to 3.3% for 2004.
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 10 year
treasury rate is hovering around 4.5% at year end but is expected to increase in
the future. Should this occur, real estate markets may slow due to the higher
costs of money.
The Partnership makes loans primarily in Northern California. As such the
regional real estate market is of primary concern to the Partnership. As of
December 31, 2005, approximately 73.13% ($1,478,632) of the loans held by the
Partnership were in three 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.
In general, California residential real estate continued to appreciate in
value during 2005. In California the median price of a single family home in
December, 2005 was $548,430 which was 15.6% higher than in December, 2004. In
the nine county San Francisco Bay Area, the median price of a single-family home
in December, 2005 was $633,000 14.3% above the December, 2004 median
single-family home sales price of $554,000. The total sales volumes, the number
of homes sold, has recently been declining. This slow down in the number of
homes sold has not significantly impacted residential sales prices. Mortgage
interest rates for both fixed and adjustable rate loans have been rising,
decreasing housing affordability. Rising interest rates and decreasing sales
volumes will likely slow down the rate of housing appreciation we have seen over
the last two years. Nonetheless, a strong residential real estate marketplace
exists and as such 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 rates and rents increased during 2005 in most markets throughout the
San Francisco Bay Area. CB Richard Ellis reports that San Francisco Class A
office rents averaged $34.54, up from $32.52 in 2004 and that vacancy decreased
from 15.4% in 2004 to approximately 12% in 2005. The San Francisco leasing
market absorbed an estimated 1.5 million square feet net during 2005 according
to Grubb and Ellis. Sales of San Francisco commercial office buildings are brisk
with record per square foot prices being attained and 2005 being a record volume
sales year (Grubb & Ellis Research Fourth Quarter 2005). 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 December 31, 2005, the Partnership
had an average loan to value ratio of 65.95%, 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.
Management expects this loan to value ratio will assist the Partnership in
weathering loan delinquencies and foreclosures should they eventuate.
Contractual Obligations Table. - None
17
Item 7a - Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in money
market accounts, and loans held in the Partnership's portfolio as of December
31, 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 2006 through 2010 and separately aggregates the information for all
maturities arising after 2010. The carrying values of these assets and
liabilities approximate their fair values as of December 31, 2005:
2006 2007 2008 2009 2010 Thereafter Total
------------------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $4,348,435 $4,348,435
Average interest rate 1.50% 1.50%
Loans secured by deeds
of trust $ 424,432 144,069 400,000 272,394 781,078 - $2,021,973
Average interest rate 9.12% 10.50% 8.50% 9.25% 9.25% - 9.16%
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.
PORTFOLIO REVIEW - For the years ended December 31, 2005, 2004 and 2003
Loan Portfolio
The Partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of December 31, 2005,
2004 and 2003 the Partnership's loans secured by real property collateral in
four of the six San Francisco Bay Area counties (San Francisco, San Mateo, Santa
Clara and Alameda) represented $1,478,632 (73%), $4,632,774 (89%) and $4,905,347
(93%), respectively, of the outstanding secured loan portfolio. The remainder of
the portfolio represented loans secured by real estate located primarily in
Northern California.
18
As of December 31, 2005, 2004 and 2003 the Partnership held 9, 14 and 16
secured loans, respectively, in the following categories:
December 31,
------------------------------------------------------------------------------------------
2005 2004 2003
--------------------------- --------------------------- ---------------------------
Single family (1-4 units) $1,703,472 84.25% $1,316,596 25.20% $1,505,710 28.65%
Apartments (5+ units) - - 96,716 1.85% 136,841 2.60%
Commercial 318,501 15.75% 3,811,816 72.95% 3,613,069 68.75%
------------ ----------- ------------ ----------- ------------ ----------
Total $2,021,973 100.00% $5,225,128 100.00% $5,255,620 100.00%
============ =========== ============ =========== ============ ==========
As of December 31, 2005, the Partnership held 9 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the loans held by the Partnership as of December 31, 2005:
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of December 31, 2005
# of Loans Amount Percent
------------ -------------- -------------
1st Mortgages 5 $ 810,359 40%
2nd Mortgages 4 1,211,614 60%
============ ============== =============
Total 9 $2,021,973 100%
Maturing 12/31/06 and prior 3 $ 424,432 21%
Maturing prior to 12/31/07 1 144,069 7%
Maturing prior to 12/31/08 1 400,000 20%
Maturing after 12/31/08 4 1,053,472 52%
============ ============== =============
Total 9 $ 2,021,973 100%
Average Loan $ 224,664 11.11%
Largest Loan 532,131 26.32%
Smallest Loan 30,536 1.51%
Average Loan-to-Value, based upon appraisals
and senior liens at date of inception of loan 65.95%
The Partnership's largest loan in the principal amount of $532,131
represents 26.32% of outstanding secured loans and 8.36% of Partnership assets.
Larger loans can sometimes represent over 10% of the secured loan portfolio or
Partnership assets as these amounts decrease due to limited partner withdrawals
and loan payoffs and also as a result of the restructuring several loans into
one loan.
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 December 31, 2005 the general partners have determined that
the allowance for loan losses of $315,379 (4.96% 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 December 31, 2005, there were two loans matured 90
days or more totaling $174,432, but no loans were delinquent in interest
payments or principal over 90 days.
The Partnership may also make loans requiring periodic disbursements of
funds. These loans include ground up construction of buildings and loans for
rehabilitation of existing structures. Interest on these loans is computed at
simple interest method and only on the amounts disbursed on a daily basis. As of
December 31, 2005 there were no such loans.
Item 8 - Financial Statements and Supplementary Data
A - Financial Statements
The following financial statements of Redwood Mortgage Investors VI are
included in Item 8:
o Report of Independent Registered Public Accounting Firm
o Balance Sheets - December 31, 2005 and 2004
o Statements of Income for the years ended December 31, 2005, 2004 and 2003
o Statements of Changes in Partners' Capital for the years ended December
31, 2005, 2004 and 2003
o Statements of Cash Flows for the years ended December 31, 2005, 2004 and
2003
o Notes to Financial Statements
B - Financial Statement Schedules
The following financial statement schedules of Redwood Mortgage Investors
VI are included in Item 8:
o Schedule II - Valuation and Qualifying Accounts
o Schedule IV - Mortgage Loans on Real Estate
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
20
REDWOOD MORTGAGE INVESTORS VI
(A CALIFORNIA LIMITED PARTNERSHIP)
FINANCIAL STATEMENTS
AND SUPPLEMENTAL INFORMATION
AS OF DECEMBER 31, 2005 AND 2004
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
21
TABLE OF CONTENTS
Page No.
---------------
Report of Independent Registered Public Accounting Firm 23
Balance Sheets 24
Statements of Income 25
Statements of Changes in Partners' Capital 26
Statements of Cash Flows 27
Notes to Financial Statements 28
Supplemental Schedules
Schedule II - Valuation and Qualifying Accounts 39
Schedule IV - Mortgage Loans on Real Estate 40
Rule 12-29 Loans on Real Estate
22
ARMANINO McKENNA LLP
CERTIFIED PUBLIC ACCOUNTANTS
12667 Alcosta Blvd., Suite 500
San Ramon, CA 94583
(925) 790-2600
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners
Redwood Mortgage Investors VI
Redwood City, California
We have audited the accompanying balance sheets of Redwood Mortgage
Investors VI (a California limited partnership) as of December 31, 2005 and 2004
and the related statements of income, changes in partners' capital and cash
flows for each of the three years in the period ended December 31, 2005. These
financial statements are the responsibility of Redwood Mortgage Investors VI's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. Redwood Mortgage
Investors VI is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of Redwood
Mortgage Investors VI's internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Redwood Mortgage Investors
VI as of December 31, 2005 and 2004 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2005 in
conformity with accounting principles generally accepted in the United States of
America.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. Schedules II and IV are presented
for purposes of additional analysis and are not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARMANINO McKENNA LLP
San Ramon, California
March 3, 2006
23
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Balance Sheets
December 31, 2005 and 2004
ASSETS
2005 2004
-------------- --------------
Cash and cash equivalents $ 4,361,983 $ 1,090,027
-------------- --------------
Loans
Loans, secured by deeds of trust 2,021,973 5,225,128
Loans, unsecured, net of discount of $107,034 and $93,822 in 2005
and 2004, respectively 144,098 261,276
Allowance for loan losses (315,379) (315,751)
-------------- --------------
Net loans 1,850,692 5,170,653
-------------- --------------
Interest and other receivables
Accrued interest and late fees 22,138 61,364
Advances on loans 51 2,890
-------------- --------------
Total interest and other receivables 22,189 64,254
-------------- --------------
Real estate held for sale, net 130,215 128,902
-------------- --------------
Total assets $ 6,365,079 $ 6,453,836
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable $ - $ 11,487
Payable to affiliate 8,572 12,541
-------------- --------------
Total liabilities 8,572 24,028
-------------- --------------
Partners' capital
Limited partners' capital, subject to redemption 6,346,746 6,420,047
General partners' capital 9,761 9,761
-------------- --------------
Total partners' capital 6,356,507 6,429,808
-------------- --------------
Total liabilities and partners' capital $ 6,365,079 $ 6,453,836
============== ==============
The accompanying notes are an integral part of these financial statements
24
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Statements of Income
December 31, 2005 and 2004
2005 2004 2003
----------- ------------ -----------
Revenues
Interest on loans $ 489,908 $ 490,786 $ 455,850
Interest - interest bearing accounts 16,750 5,515 3,080
Late fees, prepayment penalties and fees 15,624 42,436 32,710
----------- ------------ -----------
522,282 538,737 491,640
----------- ------------ -----------
Expenses
Mortgage servicing fees 56,508 50,160 48,759
Asset management fees 12,031 8,160 8,427
Clerical costs from Redwood Mortgage Corp. 9,212 12,799 17,025
Provisions for (recovery of) losses on loans
and real estate held for sale (1,685) 35,886 4,585
Professional services 41,706 44,756 37,603
Other 16,102 39,824 42,125
----------- ------------ -----------
133,874 191,585 158,524
----------- ------------ -----------
Net income $ 388,408 $ 347,152 $ 333,116
=========== ============ ===========
Net income
General partners (1%) $ 3,884 $ 3,472 $ 3,331
Limited partners (99%) 384,524 343,680 329,785
----------- ------------ -----------
$ 388,408 $ 347,152 $ 333,116
=========== ============ ===========
Net income per $1,000 invested by limited partners for entire period
Where income is reinvested $ 62 $ 54 $ 50
Where partner receives income in monthly distributions $ 60 $ 53 $ 49
The accompanying notes are an integral part of these financial statements
25
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Statements of Changes in Partners' Capital
For the Years Ended December 31, 2005, 2004 and 2003
Limited General
Partners Partners Total
-------------- ------------- --------------
Balances at December 31, 2002 $ 6,763,200 $ 9,766 $ 6,772,966
Net income 329,785 3,331 333,116
Early withdrawal penalties (7,502) - (7,502)
Partners' withdrawals (499,001) (3,336) (502,337)
-------------- ------------- --------------
Balances at December 31, 2003 6,586,482 9,761 6,596,243
Net income 343,680 3,472 347,152
Early withdrawal penalties (10,801) - (10,801)
Partners' withdrawals (499,314) (3,472) (502,786)
-------------- ------------- --------------
Balances at December 31, 2004 6,420,047 9,761 6,429,808
Net income 384,524 3,884 388,408
Early withdrawal penalties (2,256) - (2,256)
Partners' withdrawals (455,569) (3,884) (459,453)
-------------- ------------- --------------
Balances at December 31, 2005 $ 6,346,746 $ 9,761 $ 6,356,507
============== ============= ==============
The accompanying notes are an integral part of these financial statements
26
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Statements of Cash Flows
For the Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003
-------------- -------------- --------------
Cash flows from operating activities
Net income $ 388,408 $ 347,152 $ 333,116
Adjustments to reconcile net income to
net cash provided by operating activities
Provision (recovery) for loan losses
and real estate (1,685) 35,886 4,585
Early withdrawal penalties credited to income (2,256) (10,801) (7,502)
Change in discount on unsecured loans 13,212 (18,765) (18,765)
Change in operating assets and liabilities
Loans, unsecured 103,966 (49) 0
Accrued interest and late fees 39,226 (6,802) 6,822
Advances on loans 2,839 1,201 26,916
Accounts payable (11,487) (1,577) 1,111
Payable to affiliate (3,969) 45 (2,147)
-------------- -------------- --------------
Net cash provided by operating activities 528,254 346,290 344,136
-------------- -------------- --------------
Cash flows from investing activities
Principal collected on loans 5,061,405 899,907 1,564,808
Loans originated (1,858,250) (869,415) (1,637,342)
Payments on real estate held for sale - - (78,232)
Proceeds from disposition of real estate - 1,183,871 -
-------------- -------------- --------------
Net cash provided by (used in) investing activities 3,203,155 1,214,363 (150,766)
-------------- -------------- --------------
Cash flows from financing activities
Partners' withdrawals (459,453) (502,786) (502,337)
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 3,271,956 1,057,867 (308,967)
Cash and cash equivalents at beginning of year 1,090,027 32,160 341,127
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 4,361,983 $ 1,090,027 $ 32,160
============== ============== ==============
The accompanying notes are an integral part of these financial statements
27
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
1. Organization and General
Redwood Mortgage Investors VI (the "Partnership"), a California Limited
Partnership, was organized in 1987. The general partners are Michael R. Burwell,
an individual, and Gymno Corporation, a California corporation. The Partnership
was organized to engage in business as a mortgage lender for the primary purpose
of making loans secured by deeds of trust on California real estate. Loans are
being arranged and serviced by Redwood Mortgage Corp., an affiliate of the
general partners.
The Partnership is scheduled to terminate on December 31, 2027, unless
sooner terminated as provided in the Partnership Agreement.
2. Summary of Significant Accounting Policies
Management estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions about the reported amounts of
assets and liabilities, and disclosures of contingent assets and liabilities, at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Such estimates relate principally to the
determination of the allowance for loan losses, including the valuation of
impaired loans and the valuation of real estate held for sale. Actual results
could differ significantly from these estimates.
Loans, secured by deeds of trust
Loans generally are stated at their outstanding unpaid principal balance
with interest thereon being accrued as earned.
If the probable ultimate recovery of the carrying amount of a loan, with
due consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement, and the shortfall in
the amounts due are not insignificant, the carrying amount of the loan is
reduced to the present value of future cash flows discounted at the loan's
effective interest rate. If a loan is collateral dependent, it is valued at the
estimated fair value of the related collateral.
If events and or changes in circumstances cause management to have serious
doubts about the collectibility of the contractual payments, a loan may be
categorized as impaired and interest is no longer accrued. Any subsequent
payments on impaired loans are applied to reduce the outstanding loan balances,
including accrued interest and advances. At December 31, 2004, there was one
loan categorized as impaired by the Partnership for $96,716. The impaired loan
had accrued interest, late charges and advances totaling $6,936 at December 31,
2004. There were no loans categorized as impaired as of December 31, 2005. The
average recorded investment in impaired loans was $48,358 and $96,716 for the
years ended December 31, 2005 and 2004, respectively.
At December 31, 2005 and 2004, the Partnership had two and three loans past
maturity or past due 90 days or more in interest payments or principal,
including one impaired loan in 2004, totaling $174,432 and $272,581,
respectively. In addition, accrued interest, late charges and advances on these
loans totaled $0 and $4,249 at December 31, 2005 and 2004, respectively. The
Partnership does not consider any of the 2005 and two of the 2004 loans to be
impaired because there is sufficient collateral to cover the amount outstanding
to the Partnership, and is still accruing interest on these loans. At December
31, 2005 and 2004, as presented in Note 8, the average loan to appraised value
of security based upon appraised values and prior indebtedness at the time the
loans were consummated was 65.95% 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.
28
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
2. Summary of Significant Accounting Policies (continued)
Allowance for loan losses
Loans and the related accrued interest, late fees and advances are analyzed
on a periodic basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. A provision is made for loan losses to adjust the allowance
for loan losses to an amount considered by management to be adequate, with due
consideration to collateral values, to provide for unrecoverable loans and
receivables, including impaired loans, other loans, accrued interest, late fees
and advances on loans and other accounts receivable (unsecured). The Partnership
charges off uncollectible loans and related receivables directly to the
allowance account once it is determined that the full amount is not collectible.
The composition of the allowance for loan losses was as follows:
December 31, December 31,
------------------------------ -------------------------------
2005 2004
------------------------------ -------------------------------
Percent of Percent of
loans in loans in
each each
category category
to total to total
Amount loans Amount loans
-------------- ------------- ------------- -------------
Balance at End of Year
Applicable to:
- --------------------------------------------
Domestic
Real estate - mortgage
Single family (1-4 units) $ 138,375 84.25% $ 9,875 25.20%
Apartments - - 3,385 1.85%
Commercial 32,906 15.75% 41,264 72.95%
Land - - - -
-------------- ------------- ------------- -------------
Total real estate - mortgage $ 171,281 100% $ 54,524 100%
============== ============= ============= =============
Unsecured loans $ 144,098 100% $ 261,227 100%
-------------- ------------- ------------- -------------
Total unsecured loans $ 144,098 100% $ 261,227 100%
============== ============= ============= =============
Total allowance for losses $ 315,379 100% $ 315,751 100%
============== ============= ============= =============
29
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
2. Summary of Significant Accounting Policies (continued)
Allowance for loan losses (continued)
Activity in the allowance for loan losses is as follows:
Years Ended December 31,
---------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
Balance at beginning of year $ 315,751 $ 279,865 $ 275,294
Charge-offs
Domestic
Real estate - mortgage
Single family (1-4 units) - - -
Apartments - - (14)
Commercial - - -
Land - - -
-------------- -------------- ---------------
- - (14)
-------------- -------------- ---------------
Recoveries
Domestic
Real estate - mortgage
Single family (1-4 units) - - -
Apartments - - -
Commercial - - -
Land - - -
-------------- -------------- ---------------
- - -
-------------- -------------- ---------------
Net charge-offs - - (14)
-------------- -------------- ---------------
Additions/(recovery) charge to operations (1,685) 35,886 4,585
-------------- -------------- ---------------
Transfer from real estate held for sale reserve 1,313 - -
-------------- -------------- ---------------
Balance at end of year $ 315,379 $ 315,751 $ 279,865
============== ============== ===============
Ratio of net charge-offs during the period
to average secured loans outstanding
during the period 0% 0% .01%
============== ============== ===============
30
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
2. Summary of Significant Accounting Policies (continued)
Cash and cash equivalents
The Partnership considers all highly liquid financial instruments with
maturities of three months or less at the time of purchase to be cash
equivalents.
Real estate held for sale
Real estate held for sale includes real estate acquired through foreclosure
and is stated at the lower of the recorded investment in the property, plus any
senior indebtedness, or at the property's estimated fair value, less estimated
costs to sell.
The Partnership periodically compares the carrying value of real estate to
expected future undiscounted cash flows for the purpose of assessing the
recoverability of the recorded amounts. If the carrying value exceeds future
undiscounted cash flows, the assets are reduced to fair value.
Income taxes
No provision for federal and state income taxes, except for a minimum state
tax of $800, is made in the financial statements since income taxes are the
obligation of the partners if and when income taxes apply.
Net income per $1,000 invested
Amounts reflected in the statements of income as net income per $1,000
invested by limited partners for the entire period are amounts allocated to
limited partners who held their investment throughout the period and have
elected to either leave their earnings to compound or have elected to receive
monthly distributions of their net income. Individual income is allocated each
month based on the limited partners' pro rata share of partners' capital.
Because the net income percentage varies from month to month, amounts per $1,000
will vary for those individuals who made or withdrew investments during the
period, or select other options.
Late fee revenue
Late fees are generally charged at 6% of the monthly installment payment
past due. During 2005, 2004 and 2003, late fee revenue of $7,184, $2,009, and
$7,379, respectively, was recorded. The Partnership has a late fee receivable at
December 31, 2005 and 2004 of $978 and $2,356, respectively.
Recently issued accounting pronouncements
In June 2005, the FASB issued FAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB
No. 3, Reporting Accounting Changes in Interim Financial Statements. The
Statement applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. FAS 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impracticable. It is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Earlier application is
permitted for accounting changes and corrections of errors made occurring in
fiscal years beginning after June 1, 2005. The Partnership does not expect the
effect of FAS 154 will have material impact on its financial statements.
31
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
3. Other Partnership Provisions
The Partnership is a California limited partnership. The rights, duties and
powers of the general and limited partners of the Partnership are governed by
the limited partnership agreement and Sections 15611 et seq. of the California
Corporations Code.
The general partners are in complete control of the Partnership business,
subject to the voting rights of the limited partners on specified matters. Any
one of the general partners acting alone has the power and authority to act for
and bind the Partnership.
A majority of the outstanding limited partnership interests may, without
the permission of the general partners, vote to: (i) terminate the Partnership,
(ii) amend the limited partnership agreement, (iii) approve or disapprove the
sale of all or substantially all of the assets of the Partnership and (iv)
remove or replace one or all of the general partners.
The approval of the majority of limited partners is required to elect a new
general partner to continue the Partnership business where there is no remaining
general partner after a general partner ceases to be a general partner other
than by removal.
Election to receive monthly, quarterly or annual distributions
At subscription, investors elected to receive monthly, quarterly or annual
distributions of earnings allocations, or to allow earnings to compound. Subject
to certain limitations, a compounding investor may subsequently change his
election, but an investor's election to have cash distributions is irrevocable.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
Liquidity, capital withdrawals and early withdrawals
There are substantial restrictions on transferability of Partnership units
and accordingly an investment in the Partnership is non-liquid. Limited partners
had no right to withdraw from the Partnership or to obtain the return of their
capital account for at least one year from the date of purchase of Partnership
units.
In order to provide a certain degree of liquidity to the limited partners
after the one-year period, limited partners may withdraw all or part of their
capital accounts from the Partnership in four quarterly installments beginning
on the last day of the calendar quarter following the quarter in which the
notice of withdrawal is given, subject to a 10% early withdrawal penalty. The
10% penalty is applicable to the amount withdrawn as stated in the notice of
withdrawal and will be deducted from the capital account.
32
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
3. Other Partnership Provisions (continued)
Liquidity, capital withdrawals and early withdrawals (continued)
After five years from the date of purchase of the units, limited partners
have the right to withdraw from the Partnership, on an installment basis.
Generally, this is done over a five-year period in twenty quarterly
installments. Once a limited partner has been in the Partnership for the minimum
five-year period, no penalty will be imposed if withdrawal is made in twenty
quarterly installments or longer. Notwithstanding the five-year (or longer)
withdrawal period, the general partners may liquidate all or part of a limited
partner's capital account in four quarterly installments beginning on the last
day of the calendar quarter following the quarter in which the notice of
withdrawal is given. This withdrawal is subject to a 10% early withdrawal
penalty applicable to any sums withdrawn prior to the time when such sums could
have been withdrawn without penalty.
The Partnership will not establish a reserve from which to fund withdrawals
and, accordingly, the Partnership's capacity to return a limited partner's
capital account is restricted to the availability of Partnership cash flow.
Furthermore, no more than 20% of the total limited partners' capital accounts
outstanding at the beginning of any year shall be liquidated during any calendar
year.
4. General Partners and Related Parties
The following are commissions and fees that are paid to the general
partners and affiliates:
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, 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. In 2005, 2004 and 2003, loan
brokerage commissions paid by the borrowers were $52,248, $24,156, and $42,407,
respectively.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., an affiliate of the general
partners, based on the unpaid principal balance of the loan portfolio, or such
lesser amount as is reasonable and customary in the geographic area where the
property securing the mortgage is located. Once a loan is categorized as
impaired, mortgage servicing fees are no longer accrued. Additional service fees
are recorded upon the receipt of any subsequent payments on impaired loans.
Mortgage servicing fees of $56,508, $50,160, and $48,759, were incurred for
2005, 2004 and 2003, respectively. The Partnership has a payable to Redwood
Mortgage Corp. for servicing fees of $8,572 and $12,541 at December 31, 2005 and
2004, respectively.
Asset management fee
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8
of 1% annually). Asset management fees of $12,031, $8,160, and $8,427 were
incurred for 2005, 2004 and 2003, respectively.
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. These fees are incurred by the
borrowers and paid to parties related to the general partners.
33
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
4. General Partners and Related Parties (continued)
Operating expenses
Redwood Mortgage Corp. is reimbursed by the Partnership for all operating
expenses 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. During 2005, 2004 and 2003,
operating expenses totaling $9,212, $12,799 and $17,025, respectively, were
reimbursed to Redwood Mortgage Corp.
5. Real Estate Held for Sale
The following schedule reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, including
estimated costs to sell, as of December 31, 2005 and 2004:
2005 2004
--------------- --------------
Costs of properties $ 130,215 $ 130,215
Reduction in value - (1,313)
--------------- --------------
Real estate held for sale, net $ 130,215 $ 128,902
=============== ==============
6. Income Taxes
The following reflects a reconciliation of partners' capital reflected in
the financial statements to the tax basis of Partnership capital:
2005 2004
-------------- --------------
Partners' capital per financial statements $ 6,356,507 $ 6,429,808
Allowance for loan losses and real estate 315,379 317,064
-------------- --------------
Partners' capital tax basis $ 6,671,886 $ 6,746,872
============== ==============
In 2005 and 2004, approximately 72% of taxable income was allocated to
tax-exempt organizations (e.g., retirement plans). -
34
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
7. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments:
(a) Cash and cash equivalents - The carrying amount equals fair value. All
amounts, including interest-bearing accounts are subject to immediate
withdrawal.
(b) Secured loans carrying value was $2,021,973 and $5,225,128 at December
31, 2005 and 2004, respectively. The fair value of these loans of $2,078,582 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.
8. Asset Concentrations and Characteristics
Most loans are secured by recorded deeds of trust. At December 31, 2005 and
2004, there were 9 and 14 secured loans outstanding respectively, with the
following characteristics:
2005 2004
--------------- --------------
Number of secured loans outstanding 9 14
Total secured loans outstanding $ 2,021,973 $ 5,225,128
Average secured loan outstanding $ 224,664 $ 373,223
Average secured loan as percent of total secured loans 11.11% 7.14%
Average secured loan as percent of partners' capital 3.53% 5.80%
Largest secured loan outstanding $ 532,131 $ 2,103,300
Largest secured loan as percent of total secured loans 26.32% 40.25%
Largest secured loan as percent of partners' capital 8.37% 32.71%
Largest secured loan as percent of total assets 8.36% 32.59%
Number of counties where security
is located (all California) 6 8
Largest percentage of secured loans in one county 26.91% 42.28%
Average secured loan to appraised value
of security based on appraised values and prior
liens at time loan was consummated 65.95% 79.67%
Number of secured loans in foreclosure - -
Amounts of secured loans in foreclosure $ - $ -
35
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
8. Asset Concentrations and Characteristics (continued)
The following categories of secured loans were held at December 31, 2005
and 2004:
2005 2004
--------------- ---------------
First trust deeds $ 810,359 $ 4,212,912
Second trust deeds 1,211,614 1,012,216
--------------- ---------------
Total loans 2,021,973 5,225,128
Prior liens due other lenders at time of loan 2,367,593 3,026,354
--------------- ---------------
Total debt $ 4,389,566 $ 8,251,482
=============== ===============
Appraised property value at time of loan $ 6,655,409 $ 10,356,549
=============== ===============
Total loans as a percent of appraisals 65.95% 79.67%
=============== ===============
Loans by type of property
Single family (1-4 units) $ 1,703,472 $ 1,316,596
Apartments - 96,716
Commercial 318,501 3,811,816
--------------- ---------------
$ 2,021,973 $ 5,225,128
=============== ===============
Interest rates on the loans range from 8.50% to 10.50% at December 31,
2005, and 6.50% to 10.50% at December 31, 2004.
Scheduled maturity dates of secured loans as of December 31, 2005 are as
follows:
Year Ending December 31,
----------------------------------
2006 $ 424,432
2007 144,069
2008 400,000
2009 272,394
2010 781,078
---------------
$ 2,021,973
===============
36
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
8. Asset Concentrations and Characteristics (continued)
The remaining scheduled maturities for 2006 include $174,432 in two loans,
which were 90 days past maturity at December 31, 2005. None of these loans had
interest payments categorized as delinquent over 90 days. Occasionally, the
Partnership allows borrowers to continue to make the payments on debt past
maturity for periods of time.
Cash deposits at December 31, 2005, exceeded federal insurance limits (up
to $100,000 per bank) by approximately $4,364,000.
The Partnership has a substantial amount of its loan receivable balance due
from one borrower at December 31, 2004. This borrower accounted for
approximately 59% of the secured loan balance at December 31, 2004 and
approximately 57% and 47% of interest on loans for the years ended December 31,
2004 and 2003, respectively. During 2005, these loans were repaid in full. At
December 31, 2004, the collateral value securing these loans was less than the
principal balance due under the loans. Redwood Mortgage Corp. had 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 were not considered impaired solely because
the value of the collateral securing the loans was less than the principal due
to the Partnership.
The Partnership also has 71% of its receivable balance due from four
borrowers at December 31, 2005. These borrowers accounted for approximately 15%
of interest revenue for the year ended December 31, 2005.
9. Commitments and Contingencies
Workout agreements
The Partnership has negotiated various contractual workout agreements with
borrowers. The Partnership is not obligated to fund additional money as of
December 31, 2005. There are no loans in a workout agreement as of December 31,
2005.
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.
37
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2005, 2004 and 2003
10. Selected Financial Information (Unaudited)
Calendar Quarter
-----------------------------------------------------------
First Second Third Fourth Annual
------------ ----------- ----------- ------------ ------------
Revenues
2005 $ 133,529 $ 131,659 $ 196,607 $ 60,487 $ 522,282
2004 $ 130,206 $ 140,121 $ 135,904 $ 132,506 $ 538,737
Expenses
2005 $ 34,574 $ 36,084 $ 100,647 $ (37,431) $ 133,874
2004 $ 48,590 $ 59,237 $ 50,429 $ 33,329 $ 191,585
Net income allocated
to general partners
2005 $ 990 $ 955 $ 960 $ 979 $ 3,884
2004 $ 816 $ 809 $ 855 $ 992 $ 3,472
Net income allocated
to limited partners
2005 $ 97,965 $ 94,620 $ 95,000 $ 96,939 $ 384,524
2004 $ 80,800 $ 80,075 $ 84,620 $ 98,185 $ 343,680
Net income per $1,000 invested
where income is
Reinvested
2005 $ 15 $ 15 $ 15 $ 17 $ 62
2004 $ 12 $ 12 $ 13 $ 17 $ 54
Withdrawn
2005 $ 15 $ 15 $ 15 $ 15 $ 60
2004 $ 12 $ 12 $ 13 $ 16 $ 53
38
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Schedule II
Valuation and Qualifying Accounts
For the Three Years Ended December 31, 2003, 2004 and 2005
Col. C - Additions
Col. B ------------------------------- Col. E
Balance at Charged to Charged Balance
Col. A Beginning Costs and to Other Col. D at End
Description of Period Expenses Accounts Deductions of Period
- ---------------------------------------- -------------- ------------- -------------- ------------- --------------
Year Ended December 31, 2003
Deducted from asset accounts
Allowance for doubtful accounts $ 275,294 $ 4,585 $ - (a) $ (14) (a) $ 279,865
Cumulative write-down of
real estate held for sale (REO) 784,191 - - - 784,191
-------------- ------------- -------------- ------------- --------------
$ 1,059,485 $ 4,585 $ - (a) $ (14) (a) $ 1,064,056
============== ============= ============== ============= ==============
Year Ended December 31, 2004
Deducted from asset accounts
Allowance for doubtful accounts $ 279,865 $ 35,886 $ - $ - $ 315,751
Cumulative write-down of
real estate held for sale (REO) 784,191 - - (782,878) (b) 1,313
-------------- ------------- -------------- ------------- --------------
$ 1,064,056 $ 35,886 $ - $(782,878) $ 317,064
============== ============= ============== ============= ==============
Year Ended December 31, 2005
Deducted from asset accounts
Allowance for doubtful accounts $ 315,751 $ (1,685) $ 1,313 $ - $ 315,379
Cumulative write-down of
real estate held for sale (REO) 1,313 - (1,313) - -
-------------- ------------- -------------- ------------- --------------
$ 317,064 $ (1,685) $ - $ - $ 315,379
============== ============= ============== ============= ==============
Note (a) - Represents write-offs of loans.
Note (b) - Represents sales of REO.
39
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Schedule IV
Mortgage Loans on Real Estate
Rule 12-29 Loans on Real Estate
December 31, 2005
Col. H
Principal
Col. F Amount
Face Col. G of Loans
Col. C Col. D Amount of Carrying Subject to Col. I Col. J
Col. B Final Periodic Col. E Mortgage Amount of Delinquent Type California
Col. A Interest Maturity Payment Prior Original Mortgage Principal of Geographic
Descrip. Rate Date Terms Liens Amount Investment or Interest Lien Location
- -----------------------------------------------------------------------------------------------------------------------------------
Comm. 10.00% 12/1/2003 $ 1,276 $ - $ 145,455 $ 143,896 $ 143,896 1st Stanislaus
Comm. 10.00% 12/1/2003 284 208,012 32,323 30,536 30,536 2nd Stanislaus
Comm. 10.50% 10/01/07 1,345 - 147,000 144,069 - 1st San Mateo
Res. 9.25% 08/01/09 1,275 - 155,000 153,485 - 1st Alameda
Res. 8.50% 09/01/06 1,417 - 250,000 250,000 - 1st Monterey
Res. 9.25% 09/01/09 987 - 120,000 118,909 - 1st Colusa
Res. 9.25% 06/01/10 2,057 198,779 250,000 248,947 - 2nd Alameda
Res. 8.50% 07/01/08 2,833 500,000 400,000 400,000 - 2nd San Mateo
Res. 9.25% 08/01/10 4,387 1,460,802 533,250 532,131 - 2nd Santa Clara
---------------------------------------------------------
Total $ 2,367,593 $2,033,028 $2,021,973 $ 174,432
=========================================================
Note: Most loans have balloon payments due at maturity
40
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Schedule IV
Mortgage Loans on Real Estate
Rule 12-29 Loans on Real Estate
December 31, 2005
Reconciliation of carrying amount (cost) of loans at close of periods
Year ended December 31,
-------------------------------------------------
2005 2004 2003
-------------- ------------- --------------
Balance at beginning of year $ 5,225,128 $ 5,255,620 $ 5,183,100
-------------- ------------- --------------
Additions during period
New loans 1,858,250 869,415 1,637,342
Other - - -
-------------- ------------- --------------
Total additions 1,858,250 869,415 1,637,342
-------------- ------------- --------------
Deductions during period
Collections of principal 5,061,405 899,907 1,564,808
Foreclosures - - -
Cost of loans sold - - -
Amortization of premium - - -
Other - - 14
-------------- ------------- --------------
Total deductions 5,061,405 899,907 1,564,822
-------------- ------------- --------------
Balance at close of year $ 2,021,973 $ 5,225,128 $ 5,255,620
============== ============= ==============
41
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with the Partnership's independent registered
public accounting firm during the years ended December 31, 2005 and 2004.
Item 9a. - Controls and Procedures
The Partnership carried out an evaluation, under the supervision and with
the participation of the general partners of the effectiveness of the design and
operation of the Partnership's disclosure controls and procedures as of the end
of the period covered by this report pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, the general
partners concluded that the Partnership's disclosure controls and procedures
were effective in timely alerting the general partners to material information
related to the Partnership that is required to be included in our periodic
filings with the Securities and Exchange Commission.
There were no significant changes in the Partnership's internal control
over financial reporting during the Partnership's fourth fiscal quarter that
have materially affected, or are likely to materially affect, the Partnership's
internal control over financial reporting.
Item 9b. - Other Information
None
Part III
Item 10 - Directors and Executive Officers of the Registrant
The Partnership has no Officers or Directors. Rather, the activities of the
Partnership are managed by the two general partners, one of whom is an
individual, Michael R. Burwell. The second general partner is Gymno Corporation,
a California corporation, formed in 1986. Mr. Burwell is one of the two
shareholders of Gymno Corporation, a California corporation, and has a 50%
interest in the corporation.
The General Partners.
Michael R. Burwell. Michael R. Burwell, age 49, General Partner, past
member of Board of Trustees and Treasurer, Mortgage Brokers Institute
(1984-1986); President, Director, Chief Financial Officer, Redwood Mortgage
Corp. (1979-present); Director, Secretary and Treasurer A & B Financial
Services, Inc. (1980-present); President, Director, Chief Financial Officer and
Secretary (since 1986) of Gymno Corporation; President, Director, Secretary and
Treasurer of The Redwood Group, Ltd. (1979-present). Mr. Burwell is licensed as
a real estate sales person.
Gymno Corporation. Gymno Corporation, General Partner, is a California
corporation formed in 1986 for the purpose of acting as a general partner of
this Partnership and of other limited partnerships formed by the individual
general partners. The shares in Gymno Corporation are held equally by Michael R.
Burwell and the Burwell trusts. Michael R. Burwell is a director of Gymno and
the director position held by D. Russell Burwell is currently vacant. Michael R.
Burwell is its President, Chief Financial Officer and Secretary. Michael R.
Burwell has a controlling interest in this company through his ownership of
stock and as trustee of the Burwell trusts.
Financial Oversight by General Partners.
The partnership does not have a board of directors or an audit committee.
Accordingly, the general partners serve the equivalent function of an audit
committee for, among other things, the following purposes: appointment,
compensation, review and oversight of the work of our independent public
accountants, and establishing the enforcing of the Code of Ethics. However,
since the partnership does not have an audit committee and the general partners
are not independent of the partnership, the partnership does not have an "audit
committee financial expert."
42
Code of Ethics.
The general partners have adopted a Code of Ethics applicable to the
general partners and to any agents, employees or independent contractors engaged
by the general partners to perform the functions of a principal financial
officer, principal accounting officer or controller of the partnership, if any.
You may obtain a copy of this Code of Ethics, without charge, upon request by
calling our Investor Services Department at (650) 365-5341.
Item 11 - Executive Compensation
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP
As indicated above in item 10, the Partnership has no officers or
directors. The Partnership is managed by the general partners. There are certain
fees and other items paid to management and related parties. A more complete
description of management compensation is found in the Prospectus, pages 11-12,
under the section "Compensation of the General Partners and the Affiliates",
which is incorporated by reference. Such compensation is summarized below.
The following compensation has been paid to the general partners and
affiliates for services rendered during the year ended December 31, 2005. All
such compensation is in compliance with the guidelines and limitations set forth
in the partnership agreement.
Entity Receiving Compensation Description of Compensation and Services Rendered Amount
----------------------------------------------------------------------------------------------------------------------
I. Redwood Mortgage Corp. Loan Servicing Fee for servicing loans...................................$56,508
General Partners &/or Affiliates Asset Management Fee for managing assets.................................$12,031
General Partners 1% interest in profits....................................................$3,884
II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY
COMPANIES RELATED TO THE GENERAL PARTNERS (EXPENSES OF BORROWERS NOT OF THE
PARTNERSHIP)
Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in connection
with the review, selection, evaluation, negotiation, and
extension of the loans paid by the borrowers and not by the
Partnership................................................................$52,248
Redwood Mortgage Corp. Processing and Escrow Fees for services in connection with
notary, document preparation, credit investigation, and escrow
fees payable by the borrowers and not by the Partnership....................$2,000
Gymno Corporation Reconveyance Fee..............................................................$371
III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN
EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE
STATEMENT OF INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . .$9,212
43
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The general partners receive a combined total of a 1% interest in
Partnership income and losses and distributions of cash available for
distribution.
Item 13 - Certain Relationships and Related Transactions
Refer to footnotes 3 and 4 of the Notes to Financial Statements in Part II
item 8, which describes related party fees and data.
Also refer to sections of the Prospectus "Compensation of General Partners
and Affiliates", page 11, and "Conflicts of Interest", page 13, as part of the
above-referenced Registration Statement, which is incorporated by reference.
Item 14 - Principal Accountant Fees and Services
Fees for services performed for the Partnership by the principal accountant
for 2005 and 2004 are as follows:
Audit Fees The aggregate fees billed during the years ended December 31,
2005 and 2004 for professional services rendered for the audit of the
Partnership's annual financial statements included in the Partnership's Annual
Report on Form 10-K and review of financial statements included in the
Partnership's Quarterly Reports on Form 10-Q were $33,523 and $37,136,
respectively.
Audit Related Fees There were no fees billed during the years ended
December 31, 2005 and 2004 for audit-related services.
Tax fees The aggregate fees billed for tax services for the years ended
December 31, 2005 and 2004 were $3,661 and $3,478, respectively. These fees
relate to professional services rendered primarily for tax compliance.
All Other Fees There were no other fees billed during the years ended
December 31, 2005 and 2004.
All audit and non-audit services are approved by the general partner prior
to the accountant being engaged by the Partnership.
44
Part IV
Item 15 - Exhibits and Financial Statements Schedules
A. Documents filed as part of this report:
1. The Financial Statements are listed in Part II, Item 8 under
A-Financial Statements.
2. The Financial Statement Schedules are listed in Part II, Item 8
under B-Financial Statement Schedules.
3. Exhibits.
Exhibit No Description of Exhibits
- ---------------- ------------------------------------------------------------
3.1 Limited Partnership Agreement
3.2 Form of Certificate of Limited Partnership Interest
3.3 Certificate of Limited Partnership
10.1 Escrow Agreement
10.2 Servicing Agreement
10.3 (a) Form of Note secured by Deed of Trust which provides for
principal and interest payments
(b) Form of Note secured by Deed of Trust which provides
principal and interest payments and right of assumption
(c) Form of Note secured by Deed of Trust which provides for
interest only payments (d) Form of Note
10.4 (a) Deed of Trust and Assignment of Rents to accompany Exhibits
10.3 (a) and (c)
(b) Deed of Trust and Assignment of Rents to accompany Exhibits
10.3 (b)
(c) Deed of Trust to accompany Exhibit 10.3 (d)
10.5 Promissory Note for Formation Loan
10.6 Agreement to Seek a Lender
31.1 Certification of General Partner pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of General Partner pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of General Partner pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of General Partner pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
All of the above exhibits other than 31.1, 31.2, 32.1 and 32.2, were
previously filed as the exhibits to Registrant's Statement on Form S-11
(Registration No. 33-12519) and incorporated by reference herein.
B. See (A) 3 above
C. See (A) 2 above. Additional reference is made to prospectus (S-11)
dated September 3, 1987 to pages 56 through 59 and supplement #6 dated
May 16, 1989 pages 16-18, for financial data related to Gymno
Corporation, a general partner.
45
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 30th day of March,
2006.
REDWOOD MORTGAGE INVESTORS VI
By: /S/ Michael R. Burwell
---------------------------------------------
Michael R. Burwell, General Partner
By: Gymno Corporation, General Partner
By: /S/ Michael R. Burwell
------------------------------------------
Michael R. Burwell, President, Secretary
& Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacity indicated on the 30th day of March, 2005.
Signature Title Date
/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell General Partner March 30, 2006
/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell President, Secretary & Chief March 30, 2006
Financial Officer of Gymno
Corporation (Principal Financial
and Accounting Officer);
Director of Gymno Corporation
46
Exhibit 31.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VI, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's 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 the Registrant's board of
directors (or persons performing the equivalent functions):
(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 information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- ----------------------------
Michael R. Burwell, General Partner
March 30, 2006
47
Exhibit 31.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VI, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's 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 the Registrant's board of
directors (or persons performing the equivalent functions):
(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 information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- ---------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 30, 2006
48
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VI (the
"Partnership") on Form 10-K for the period ended December 31, 2005 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the
Partnership, certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, "filed" with the
Securities and Exchange Commission.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, General Partner
March 30, 2006
49
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VI (the
"Partnership") on Form 10-K for the period ended December 31, 2005 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President and Chief Financial
Officer of Gymno Corporation, General Partner of the Partnership, certify that
to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, "filed" with the
Securities and Exchange Commission.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 30, 2006
50