-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H2ICcnf6JBwE07iL56aLCJbWfKzHkTnU/IzCKmkjCkkPzMtyIWKYyyoQm7I0P7On oKnMY0S0GNDG5NXNiZaMtw== 0000811592-04-000002.txt : 20040330 0000811592-04-000002.hdr.sgml : 20040330 20040330151941 ACCESSION NUMBER: 0000811592-04-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REDWOOD MORTGAGE INVESTORS VI CENTRAL INDEX KEY: 0000811592 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 943094928 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17573 FILM NUMBER: 04700563 BUSINESS ADDRESS: STREET 1: 650 EL CAMINO REAL STE G CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 6503655341 MAIL ADDRESS: STREET 1: 650 EL CAMINO REAL SUITE G CITY: REDWWOD CITY STATE: CA ZIP: 94063 10-K 1 rmi610k2003.txt REDWOOD MORTGAGE INVESTORS VI (a California Limited Partnership) Index to Form 10-K December 31, 2003 Part I Page No. ------------ Item 1 - Business 3 Item 2 - Properties 6 Item 3 - Legal Proceedings 6 Item 4 - Submission of Matters to a Vote of Security Holders (Partners) 6 Part II Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 7 Item 6 - Selected Financial Data 7 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 7a - Quantitative and Qualitative Disclosures About Market Risk 16 Item 8 - Financial Statements and Supplementary Data 18 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 39 Item 9a - Controls and Procedures 39 Part III Item 10 - Directors and Executive Officers of the Registrant 39 Item 11 - Executive Compensation 40 Item 12 - Security Ownership of Certain Beneficial Owners and Management 41 Item 13 - Certain Relationships and Related Transactions 41 Item 14 - Principal Accountant Fees and Services 41 Part IV Item 15 - Exhibits, Financial Statements and Schedules, and Reports of Form 8-K 42 Signatures 43 Certifications 44
1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the year ended December 31, 2003 Commission File number 33-12519 - ----------------------------------------------------------------------------- REDWOOD MORTGAGE INVESTORS VI - ----------------------------------------------------------------------------- (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) Registrant's telephone number including area code (650) 365-5341 - ----------------------------------------------------------------------------- Securities registered pursuant to Section 12 (b) of the Act: None Title of each class Name of each exchange on which registered - ----------------------------------------------------------------------------- None None - ----------------------------------------------------------------------------- Securities registered pursuant to Section 12 (g) of the Act: Limited Partnership Units Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 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 --------------- ------------ At the close of the sale of Units in 1989, the limited partnership Units purchased by non-affiliates was 97,725.94 Units computed at $100.00 a Unit for $9,772,594, excluding general partners' contribution of $9,772. 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, incorporated in Parts II, III, and IV. 2 Part I Item 1 - Business Redwood Mortgage Investors VI is a California Limited Partnership (the "Partnership"). Michael R. Burwell, an individual, and Gymno Corporation, a California corporation, are the general partners. The address of the general partners is 900 Veterans Blvd., Suite 500, Redwood City, California 94063. The Partnership's primary purpose is to invest its capital in first and second deeds of trust secured 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, 2003, the Partnership had a balance of loans totaling $5,255,620 with interest rates thereon ranging from 6.50% to 10.75%. Currently first mortgage loans comprise 75.79% of the total amount of secured loan portfolio. Second mortgage loans comprise 24.21% of the secured loan portfolio. Owner-occupied homes, combined with non-owner occupied homes, total 28.65% of the secured mortgage loans. Secured mortgage loans to apartments make up 2.60% of the total secured loans portfolio. Commercial secured loans decreased from last year, now comprising 68.75% of the portfolio, a decrease of 4.41% from 2002. The major concentration of secured loans, comprising 93.34% of the total secured loans, are in five counties of the San Francisco Bay Area. The balance is primarily in Northern California. Currently secured loan size is averaging $328,476 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 21.13%. 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 2003. Delinquencies are discussed under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. For the year ended December 31, 2003 the Partnership did not take back any collateral from defaulted borrowers. During the year 2002, the Partnership acquired one 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. The Partnership realized a loss upon sale of approximately $15,000, which had previously been reserved for. The Partnership also owns (through previous foreclosure) two other properties; a commercial property and the other 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, 2003 is $130,215. Currently the Partnership is in the process of negotiating a sale with an interested buyer. The Partnership's net investment of $130,215 is less than 1% of Partnership assets. The general partners believe that the property is worth considerably more than its net investment.The second property is a commercial property located in Walnut Creek, California. The property is currently pending sale. We anticipate that the sale will occur in the last quarter of 2004. Management has set aside loss reserves in the amount of $784,191, which they believe are adequate in amount to cover anticipated losses. 3 The Partnership's revenues decreased from $735,900 in 2001 to $574,171 in 2002 and to $491,640 in 2003. This was due largely to the decline in interest on loans, which averaged 9.48% in 2001, 7.99% in 2002 and 7.39% in 2003. Cash flow the Partnership generated from mortgage interest and loan pay-downs and pay-offs was used primarily to meet limited partner capital and earnings liquidations. For the three years ended December 31, 2003 withdrawals by limited partners were $836,749 in 2001, $602,753 in 2002 and $506,503 in 2003. During the year 2003, the Partnership's annualized yield on compounding accounts was 5.00% and on monthly distributing accounts it was 4.89%. 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. Mortgage interest rates have fallen during the last 24 to 36 months. This has been partially due to actions by the Federal Reserve Bank to reduce the discount rate on borrowings charged to member banks, a sluggish economy and low inflation rates. Although the general trend for interest rates has been down, many lenders have tightened their credit and reduced their lending exposure in various markets and property types. This credit tightening from competing lenders would generally provide the Partnership with additional lending opportunities at attractive rates. However, as a result of the slowing economy, there are now fewer transactions in the marketplace, which could potentially reduce the number of lending opportunities to the Partnership. Continued rate reductions by the Federal Reserve Bank, a continued slowing economy, and continued low inflation rates could have the effect of reducing mortgage yields. In the future, when cash flow permits, currently existing loans with relatively high yields could be replaced with loans with lower yields as they pay-off, which in turn could reduce the net yield paid to the limited partners. In addition, if there is less demand by borrowers for loans and, thus, fewer loans for the Partnership to invest in, it will invest its excess cash in shorter-term alternative investments yielding considerably less than the current investment portfolio. Secured Loan Portfolio As of December 31, 2003, a summary of the Partnership's secured loan portfolio is set forth below. Loans as a Percentage of Appraised Value First Trust Deed Loans $ 3,983,032 Second Trust Deed Loans 1,272,588 ------------- Total loans $ 5,255,620 Priority Positions due other Lenders at Time of Loan 2,377,041 Total Debt $ 7,632,661 ============= Appraised Property Value at time of loan $ 9,677,215 Total Secured Loans as a % of Appraisal based on appraisals and prior liens at date of loan 78.87% Number of Secured Loans Outstanding 16 Average Secured Loan 328,476 Average Secured Loan as a % of Net Assets 4.98% Largest Secured Loan Outstanding 2,103,300 Largest Secured Loan as a % of Net Assets 31.89% 4 Secured Loans as a Percentage of Total Loans Percent ----------------------------------------------------- ------------ First Trust Deeds 75.79% Second Trust Deeds 24.21% Total 100.00% Secured Loans by Type of Property Amount Percent ----------------------------------------- ------------ ------------ Owner Occupied Homes $ 640,000 12.18% Non-Owner Occupied Homes 865,710 16.47% Apartments 136,841 2.60% Commercial 3,613,069 68.75% Land 0 0.00% ------------ ------------ Total $ 5,255,620 100.00% ============ ============ The following is a distribution of secured loans outstanding as of December 31, 2003 by Counties: California County Secured Loans Percent ---------------------------------------------- ------------- ----------- San Francisco Bay Area Counties Santa Clara $ 2,210,368 42.06% Alameda 2,054,886 39.10% San Francisco 290,125 5.52% San Mateo 244,968 4.66% Marin 105,000 2.00% ------------- ----------- 4,905,347 93.34% San Francisco Bay Area Adjacent Counties Stanislaus 176,085 3.35% ------------- ----------- 176,085 3.35% Other California Counties Sacramento 96,716 1.84% Shasta 77,472 1.47% ------------- ----------- 174,188 3.31% Total $ 5,255,620 100.00% ============= =========== Statement of Condition of loans: Number of Loans in Foreclosure 0 Scheduled maturity dates of secured loans as of December 31, 2003 are as follows: Year Ending December 31, -------------------------- 2004 $ 503,556 2005 958,209 2006 96,716 2007 3,258,681 2008 46,387 Thereafter 392,071 ------------ $ 5,255,620 ============ 5 The Partnership's largest loan in the principal amount of $2,103,300 represents 40.02% of outstanding secured loans and 31.76% of Partnership assets. Larger loans sometimes increase above 10% of the secured loan portfolio or Partnership assets as these amounts decrease due to limited partner withdrawals and loan payoffs and due to restructuring of existing loans. In this instance all of these factors affected this loan. Chief among them was a restructure of two loans with outstanding principal plus accrued interest, late fees and advances into one new loan with an outstanding balance of $2,103,300. The Partnership has a substantial amount of its loan receivable balance from one borrower at December 31, 2003 and 2002. The borrower accounted for approximately 58% and 62% of the loan balances at such dates. This borrower has two loans secured by separate properties in the principal amounts of $2,103,000 and $956,800 as of December 31, 2003. The scheduled maturities for 2004 include three loans for $253,556, representing 4.82% of the secured loan portfolio, past maturity at December 31, 2003. Additionally, one loan for $96,716 (1.84% of the secured loan portfolio) was categorized as impaired. The Partnership occasionally allows borrowers to continue to make the regular interest payments on debt past maturity for periods of time. In many instances the interest rate on these past maturity loans is higher than currently existing interest rates. Interest payments on these loans were current, except for one impaired loan where repayment was delinquent over 90 days. Item 2 - Properties The Partnership did not take back any collateral security from borrowers in 2003. During 2002, the Partnership took back one piece of real estate collateral through foreclosure. The Partnership, together with other partnerships, all affiliates of the general partners, own the property. The property is 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 and the Partnership sustained a loss of approximately $15,000, which had been anticipated and reserved for. The Partnership also owns, through previous foreclosures, two other properties; a commercial property and an undeveloped land parcel. 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, 2003 is $130,125. Currently the Partnership is negotiating a sale with an interested buyer. The general partners believe that the property is worth considerably more than its net investment. The second property is a commercial property located in Walnut Creek, California. The property is currently pending sale. Management has set aside loss reserves in the amount of $784,191, which they believe are adequate in amount to cover anticipated losses. 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. 6 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, 2003, 418 limited partners had a capital balance of $6,586,482. A description of the Partnership's Units, transfer restrictions, and withdrawal provisions is more fully described under the section entitled "Description of Units" and "Summary of the Limited Partnership Agreement", pages 38-42 of the Prospectus, a part of the above-referenced Registration Statement, which is incorporated by reference. Item 6 - Selected Financial Data Redwood Mortgage Investors VI began operations in October, 1987. Its financial condition and results of operation as of and for the five years ended December 31, 2003 were: Balance Sheets December 31, -------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------ ------------ ------------ ------------ ------------ Cash $ 32,160 $ 341,127 $ 190,414 $ 354,860 $ 1,120,295 Loans Loans, secured by deeds of trust 5,255,620 5,183,100 4,970,433 5,570,576 5,282,773 Loans, unsecured 242,462 223,697 82,362 82,362 - Interest and other receivables Accrued interest and late fees 54,562 61,384 797,105 664,292 706,841 Advances on loans 4,091 31,007 197,946 133,647 137,930 Less allowances for loan losses (279,865) (275,294) (370,612) (261,452) (303,249) Note receivable - Redwood Mortgage Corp - - 178,200 125,000 300,000 Real estate held for sale, net 1,312,773 1,234,541 1,093,503 767,583 133,300 Real estate owned in process - - - - 668,132 ------------ ------------ ------------ ------------ ------------ Total assets $ 6,621,803 $ 6,799,562 $ 7,139,351 $ 7,436,868 $ 8,046,022 ============ ============ ============ ============ ============
7 Liabilities and Partners' Capital December 31, ------------------------------------------------------------------------------ 2003 2002 2001 2000 1999 ------------ ------------ ------------ ------------ ------------ Liabilities Accounts payable $ 13,064 $ 11,953 $ 20,261 $ 13,068 $ - Deferred interest on loans - - 74,022 - 15,676 Payable to affiliates 12,496 14,643 35,632 - - ------------ ------------ ------------ ------------ ------------ Total liabilities 25,560 26,596 129,915 13,068 15,676 ------------ ------------ ------------ ------------ ------------ Partners' capital Limited partners' capital, subject to Redemption 6,586,482 6,763,200 6,999,670 7,414,034 8,020,580 General partners' capital 9,761 9,766 9,766 9,766 9,766 ------------ ------------ ------------ ------------ ------------ Total partners' capital 6,596,243 6,772,966 7,009,436 7,423,800 8,030,346 ------------ ------------ ------------ ------------ ------------ Total liabilities and partners' capital $ 6,621,803 $ 6,799,562 $ 7,139,351 $ 7,436,868 $ 8,046,022 ============ ============ ============ ============ ============
Statements of Income 2003 2002 2001 2000 1999 ------------ ------------ ------------ ------------ ------------ Gross revenue $ 491,640 $ 574,171 $ 735,900 $ 785,209 $ 1,086,317 Expenses 158,524 204,188 309,249 307,280 565,408 ------------ ------------ ------------ ------------ ------------ Net income $ 333,116 $ 369,983 $ 426,651 $ 477,929 $ 520,909 ============ ============ ============ ============ ============ Net income: to general partners (1%) $ 3,331 $ 3,700 $ 4,266 $ 4,779 $ 5,209 to limited partners (99%) 329,785 366,283 422,385 473,150 515,700 ------------ ------------ ------------ ------------ ------------ $ 333,116 $ 369,983 $ 426,651 $ 477,929 $ 520,909 ============ ============ ============ ============ ============ Net income per $1,000 invested by limited partners for entire period: - where income is reinvested and compounded $ 50 $ 54 $ 59 $ 62 $ 62 ============ ============ ============ ============ ============ - where partner receives income in monthly distributions $ 49 $ 53 $ 58 $ 61 $ 61 ============ ============ ============ ============ ============
The annualized yield, when income is compounded and retained for 1999 was 6.24%, for 2000 the annualized yield was 6.22%, for 2001 the annualized yield was 5.95%, for 2002 the annualized yield was 5.40%, and for 2003 the annualized yield was 5.00%. The annualized yield, when income is distributed monthly for 1999 was 6.07%, for 2000 the annualized yield was 6.05%, for 2001 the annualized yield was 5.79%, for 2002 the annualized yield was 5.27% and for 2003 the annualized yield was 4.89%. The average annualized yield, when income is compounded and retained, from inception through December 31, 2003 was 6.92%. The average annualized yield, when income is distributed monthly, from inception through December 31, 2003 was 6.71%. 8 Item 7 - Management 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, 2003, there were three real properties all acquired through foreclosure, one in 2002 and the other two in prior years. Loans and the related accrued interest, late fees and advances are analyzed on a continuous basis for recoverability. Delinquencies are identified and followed as part of the loan system. Delinquencies are determined based upon contractual terms. A provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral values, to provide for unrecoverable loans and receivables, including impaired loans, other loans, accrued interest, late fees and advances on loans and other accounts receivable (unsecured). The Partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined that the full amount is not collectible. If the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement and the shortfall in the amounts due are not insignificant, the carrying amount of the investment shall be reduced to the present value of future cash flows discounted at the loan's effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral. If events and or changes in circumstances cause management to have serious doubts about the collectibility of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances, including accrued interest and advances. Recent trends in the economy have been taken into consideration in the aforementioned process of arriving at the allowance for loan losses. Actual results could vary from the aforementioned provisions for losses. Forward Looking Statements. Some of the information in the Form 10-K may contain forward looking statements. Uses of words such as "will", "may", "anticipate", "estimate", "continue" or other forward looking words, discuss future expectations or predictions. The foregoing analysis of 2003 includes forward looking statements and predictions about the possibility of future events, results of operations and financial condition. As such, this analysis may prove to be inaccurate because of assumptions made by the general partners or the actual development of the future events. No assurance can be given that any of these statements or predictions will ultimately prove to be correct or substantially correct. Related Parties. The general partners of the Partnership are Gymno Corporation and Michael R. Burwell. Most Partnership business is conducted through Redwood Mortgage Corp., an affiliate of the general partners, which arranges, services and maintains the loan portfolio for the benefit of the Partnership. The fees received by the affiliate are paid pursuant to the partnership agreement and are determined at the sole discretion of the affiliate. In the past the affiliate has elected not to take the maximum compensation. The following is a list of various Partnership activities for which related parties are compensated. 9 o Mortgage Brokerage Commissions For fees in connection with the review, selection, evaluation, negotiation and extension of loans, the Partnership 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, 2001, 2002 and 2003, loan brokerage commissions paid by the borrowers were $46,581, $22,611 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 $41,406, $138,851 and $48,759 were incurred for the years ended December 31, 2001, 2002 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 $24,500 in 2003. Reducing net income reduces the annualized yields. An increase or decrease in this fee within the limits set by the Partnership's agreement directly impacts the yield to the limited partners. o Asset Management Fees The general partners receive monthly fees for managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net asset value' (3/8 of 1% on an annual basis). Management fees to the general partners of $9,115, 8,677 and $8,427 were incurred by the Partnership for the years ended December 31, 2001, 2002 and 2003, respectively. o Other Fees The Partnership agreement provides that the general partners may receive other fees such as reconveyance, mortgage assumption and mortgage extension fees. Such fees are incurred by the borrowers and are paid to the general partners. o Income and Losses All income and losses are credited or charged to partners in relation to their respective Partnership interests. The allocation to the general partners (combined) shall be a total of 1%. o Operating Expenses An affiliate of the Partnership, Redwood Mortgage Corp., is reimbursed by the Partnership for all operating expenses actually incurred by it on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners. o Contributed Capital The general partners jointly and severally were to contribute 1/10 of 1% in cash contributions as proceeds from the offerings are received from the limited partners. As of December 31, 2002 and 2003, 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, 2001, 2002 and 2003 The net income decrease of $51,278 (11%) for the year ended December 31, 2001 versus December 31, 2000 was due primarily to a decrease in interest earned on loans of $85,613, a decrease in late charges of $4,094, a decrease in interest on promissory note of $11,179, and an increase of mortgage servicer subsidy of $53,200; offset by significant expense increases or (decreases) for the year ended December 31, 2001 versus December 31, 2000 of lower mortgage servicing fees of ($7,150), and an increase in the provision for losses on loans and real estate acquired through foreclosure of $7,609. The income decrease of $56,668 (13%) for the year ended December 31, 2002 versus December 2001 was due primarily to an increase in interest earned on loans of $40,515, a decrease in late charges of $18,480, and a decrease in mortgage servicer subsidy of $178,200; offset by significant expense increases or (decreases) for the year ended December 31, 2002 versus December 31, 2001 of higher mortgage servicing fees of $97,445, a decrease in the provision for losses on loans and real estate acquired through foreclosure of ($206,900), and an increase in professional fees of $11,594. 10 The net income decrease of $36,867 (10%) for the year ended December 31, 2003 versus December 31, 2002 was due primarily to a decrease in interest earned on loans of $97,048, a decrease in interest-interest bearing accounts of $2,067, a decrease in interest on promissory note of $7,128, and an increase in late fee and other fees of $23,712; offset by significant expense increases or (decreases) for the year ended December 31, 2003 including a decrease in mortgage servicing fees of $90,092, a decrease in clerical cost of $5,833, an increase in the provision for losses on loans and real estate acquired through foreclosure of $10,449, an increase in professional fees of $6,143 and an increase in other expenses of $33,919. The decrease in interest on loans of $97,048 for the year ended December 31, 2003 was due to a lower interest rates on new loans made to replace loan payoff and non-receipt of additional interest on impaired loans in 2003 versus $51,404 of additional interest collected on impaired loans in 2002. The increase in interest on loans of $40,515 for the year ended December 31, 2002 versus 2001 was due to a slightly higher average loan portfolio balance, which was $5,183,100 at December 31, 2002 compared to the December 31, 2001 balance of $4,970,433. Also, in 2002 the Partnership collected interest on impaired loans that paid-off in 2002. The decrease in interest on loans of $85,613 for the year ended December 31, 2001 versus 2000 was due to lower average loan portfolio balance of $4,970,433 at December 31, 2001 compared to $5,570,576 at December 31, 2000. During 2001 $513,795 fewer loans were written than in 2000 and loan pay-offs increased by $489,497 in 2001, over the 2000 total of $2,058,681. No interest on impaired loans was collected during 2001. The decrease in interest-interest bearing accounts of $4,094, $7,780 and $2,067 for the years ended December 31, 2001, 2002 and 2003, respectively, is due to lower interest rates being earned on interest bearing accounts and less money held in interest bearing accounts. The decrease of $11,179 in interest on promissory notes for 2001 versus 2000 is due to lower average note balance outstanding in 2001. The increase of $2,216 in interest on promissory note for 2002 versus 2001 is due to a higher average note balance outstanding in 2002 versus 2001. The decrease in interest on promissory note of $7,128 for 2003 versus 2002 is due to the promissory note being paid in full in 2002, therefore no interest was due. The increase in mortgage servicer subsidy of $53,200 in 2001 versus 2000 is due to an increased subsidy by the mortgage servicer in 2001. The decrease in mortgage servicer subsidy of $178,200 in 2002 versus 2001 and $0 in 2003 is due to no subsidy being provided by the mortgage servicer in 2002 and 2003. The decrease in late charge revenue of $1,623 and $18,480 for the years ended December 31, 2001 and 2002 reflects less collection of past due borrower payments and less delinquency. The increase in late charge revenue of $23,712 in 2003 versus 2002 is due primarily to collection of late charges on an advance of $16,424, and late charges of $4,850 on a loan paid-off in 2003. Professional fees decreased by $5,596 in 2001 but increased by $11,594 in 2002 and by $6,143 in 2003. The fluctuations relate mainly to the increased costs and timing of services for audits, and tax filing. The decrease in mortgage servicing fees of $7,150 for the year ended December 31, 2001 is primarily attributable to the lower average loan portfolio balances during 2001. The increase in mortgage servicing fees of $97,445 in 2002 is due to the collection of previously past due payments on impaired loans, which were collected in 2002. The Partnership does not accrue servicing fees to Redwood Mortgage Corp. on impaired loans. Rather, servicing fees are incurred as borrower payments are received. The decrease in mortgage servicing fees of $90,092 in 2003 is due to no collection of interest on impaired loans and lower average loan portfolio balances during 2003. 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 $24,500 in 2003. 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 The increase of $7,609 in provision for losses on loans and real estate acquired through foreclosure for the year ended December 31, 2001 versus 2000 reflects the general partners' estimate that reserves needed to be increased to cover anticipated losses. The decrease of $206,900 in provision for losses on loans and real estate acquired through foreclosure for the year ended December 31, 2002 versus 2001 reflects the general partners' estimate that the existing reserves were adequate as complemented by a guarantee received from Redwood Mortgage Corp. relating to the collectibility of certain Partnership loans. The increase in provision for losses by $10,449 in 2003 is an additional allowance against potential loan losses, which could occur in the future. The decrease in asset management fees of $665 (6.80%), $438 (4.81%) and $250 (2.88%) for 2001, 2002 and 2003, respectively, is due to a decrease in capital under management in 2001, 2002 and 2003. The increase in clerical costs of $8,509 (43.31%) in 2001, but decreases of $5,284 (18.77%) and $5,833 (25.50%) for 2002 and 2003, respectively, are due primarily to a decrease in the Partnership size. As of September 2, 1989, 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. As of that date the offering was formally closed. On December 31, 2003, the Partnership's net capital totaled $6,596,243. The Partnership began funding loans in October 1987. The Partnership's secured loans outstanding for the years ended December 31, 2001, 2002 and 2003 were $4,970,433, $5,183,100 and $5,255,620, respectively. The average loan balances over this time period has remained relatively stable as the Partnership utilized loan payoffs to meet limited partner capital liquidations and make additional loans. During the years 2001, 2002 and 2003, loan principal collections exceeded limited partner liquidations. Since January 2001 and through December 31, 2003, the Federal Reserve has reduced interest rates significantly by cutting the Federal Funds Rate to 1.00%. The effect of the cuts has greatly reduced short-term interest rates and to a lesser extent reduced long-term interest rates. New loans will be originated at then existing interest rates. In the future, the general partners anticipate that interest rates likely will change from their current levels. The general partners cannot at this time predict at what levels interest rates will be in the future. The general partners anticipate that new loans will be placed at rates similar to those during 2003. The lowering of interest rates has encouraged those borrowers that hold higher interest rate loans than those currently available to seek refinancing of their existing obligations to take advantage of these lower rates. The Partnership may face prepayments in the existing portfolio from borrowers taking advantage of these lower rates. However, demand for loans from qualified borrowers continues to be strong and as prepayments occur, we expect to replace these loans with loans at somewhat lower interest rates. Based upon the rates expected in connection with the existing loans, anticipated interest rates to be charged by the Partnership and the general partners' experience, the general partners anticipate, but do not guarantee, that the annualized yield for compounding limited partners will range between 4.75% and 5.00% for the year 2004. Allowance for Losses. The general partners regularly review the loan portfolio, examining the status of delinquencies, the underlying collateral securing these loans, real estate held for sale expenses, sales activities, and borrower's payment records and other data relating to the loan portfolio. Data on the local real estate market, and on the national and local economy are studied. Based upon this information and more, loan loss reserves are increased or decreased. Borrower foreclosures are a normal aspect of Partnership operations. The Partnership is not a credit based lender and hence while it reviews the credit history and income of borrowers, and if applicable, the income from income producing properties, the general partners expect that we will on occasion take back real estate security. During 2001, the Northern California real estate market slowed and the national and local economies slipped into recession. During 2002 and 2003 the economy has stabilized, but is still stagnant. At December 31, 2003 the Partnership had one loan past due 90 days or more totaling $144,335. This loan past due 90 days or more is also past maturity. In addition to the one 90 day or more delinquent loan the Partnership has two loans which are making current monthly payments but are past maturity. These two loans past maturity have principal balances of $109,221. In addition to the above, the Partnership considers one loan to be impaired, which means that interest is no longer being accrued and that payments received will be applied to reduce the outstanding loan balances, including accrued interest and advances. The principal balance of the impaired loan is $96,716. The Partnership does not have any filed notices of default, which would begin the foreclosure process at December 31, 2003. The Partnership entered into workout agreements with borrowers who are past maturity 12 or delinquent in their regular payments. The Partnership had workout agreements on two loans totaling $176,068 (3.35% of the loan portfolio) as of December 31, 2003. These borrowers in workout agreements are included in the delinquent and past matured loans. Typically, a workout agreement allows the borrower to extend the maturity date of the balloon payment and/or allows the borrower to make current monthly payments while deferring for periods of time, past due payments, or allows time to pay the loan in full. These workout agreements and foreclosures generally exist within our loan portfolio to greater or lesser degrees, depending primarily on the health of the economy. The number of foreclosures and workout agreements will rise during difficult times and conversely fall during good economic times. The delinquencies and workout agreements existing at December 31, 2003, in management's opinion, do not have a material effect on our results of operations or liquidity. These workouts and delinquencies have been considered when management arrived at appropriate loan loss reserves and based on our experience, are reflective of our loan marketplace segment. Because of the number of variables involved, the magnitude of possible swings and the general partners inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the general partners. As of December 31, 2001, 2002 and 2003, the Partnership's real estate held for sale balance was $1,093,503, $1,234,541 and $1,312,773, respectively. The increase in 2003 was due to improvements made to these properties. The Partnership did not take back any collateral security from borrowers in 2003. During 2002, the Partnership took back one piece of real estate collateral through foreclosure. The Partnership, together with other partnerships, all affiliates of the general partners, own the property. The property is 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 and in March of 2004, upon sale the Partnership sustained a loss of approximately $12,400, which had been anticipated and reserved for. The Partnership also owns, through previous foreclosures, two other properties; a commercial property and the other 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, 2003 is $130,125. Currently the Partnership is negotiating a sale with an interested buyer. The general partners believe that the property is worth considerably more than its net investment. The second property is a commercial property located in Walnut Creek, California. At December 31,2003, the cost of this property was $1,511,887. The property is currently pending sale. Management has set aside loss reserves of $784,191, which they believe are adequate in amount to cover anticipated losses. Management provided $201,036, ($5,864) and $4,585 as provision (recoveries) for loan losses for the years ended December 31, 2001, 2002 and 2003, respectively. The increase in the provision for loan losses for 2001 and 2003 was to build up for the allowance for potential losses in the future. During 2002 the allowance for loan losses was reduced based on management's revised estimate of potential losses based in part on a guarantee received from Redwood Mortgage Corp. relating to the collectibility of certain Partnership loans. As of December 31, 2003, there is a collateral shortfall on these loans ranging from approximately $191,000 to $337,000 that has not been reserved for. Management believes that the allowance for loan losses at December 31, 2003 is adequate. The Partnership may restructure loans. This is done either through the modification of an existing loan or by re-writing a whole new loan. It could involve, among other conditions, an extension in maturity date, a reduction in repayment amount, a reduction in interest rate, granting an additional loan. In 2002, the Partnership restructured four previously impaired loans into two new loans with a lower interest rate. The amount restructured was $3,060,100. As of December 31, 2003, there is a collateral shortfall on the restructured loans ranging from approximately $194,000 to $337,000 that has not been reserved for. Redwood Mortgage Corp. has guaranteed to cover losses sustained by the Partnership related to these restructured loans to the extent such losses exceed existing reserves, as defined in the agreement, and related collateral value. Borrower Liquidity and Capital Resources. The Partnership relies upon loan payoffs and borrowers' mortgage payments for the source of funds for loans. Recently, mortgage interest rates have decreased somewhat from those available at the inception of the Partnership. If interest rates were to increase substantially, the yield of the Partnership's loans may provide lower yields than other comparable debt-related investments. Additionally, since the Partnership has made primarily fixed rate loans, if interest rates were to rise, the likely result would be a slower prepayment rate 13 for the Partnership. This could cause a lower degree of liquidity as well as a slowdown in the ability of the Partnership to invest in loans at the then current interest rates. Conversely, in the event interest rates were to decline, the Partnership could see significant borrower prepayments, which, if the Partnership can only obtain the then existing lower rates of interest may cause a dilution of the Partnership's yield on loans, thereby lowering the Partnership's overall yield to the limited partners. Cash is constantly being generated from borrower payments of interest, principal and loan payoffs. Currently, cash flow exceeds Partnership expenses and earnings requirements. Cash is constantly being generated from borrower interest payments, late charges, amortization of loan principal and loan payoffs. Currently, cash flow exceeds Partnership expenses, earnings and limited partner capital payout requirements. Excess cash flow will be invested in new loan opportunities, when available, and in other Partnership business. At the time of subscription to the Partnership, limited partners must elect either to receive monthly, quarterly or annual cash distributions from the Partnership, or to compound earnings in their capital account. If you initially elect 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, 2001, 2002 and 2003, the Partnership made distributions of earnings to limited partners of $164,787, $130,296 and $115,254, respectively. Distribution of earnings to limited partners for the years ended December 31, 2001, 2002 and 2003, to limited partners' capital accounts and not withdrawn, was $257,598, $235,987 and $214,530, respectively. As of December 31, 2001, 2002 and 2003, limited partners electing to withdraw earnings represented 37%, 35% and 35%, respectively, of the limited partners outstanding capital accounts. These percentages have remained relatively stable. The Partnership also allows the limited partners to withdraw their capital account subject to certain limitations and penalties (see liquidation provisions of Partnership Agreement). For the years ended December 31, 2001, 2002 and 2003, $187,804, $78,674 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, 2001, 2002 and 2003, respectively, and is expected by the general partners to commonly occur at these levels. Additionally, for the years ended December 31, 2001, 2002 and 2003, $484,158, $393,784 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, 2003 were: Years ended December 31, 2001 2002 2003 ------------- ------------- ------------ Earnings $ 164,787 $ 130,296 $ 115,254 Capital *671,962 *472,457 391,249 ------------- ------------- ------------ Total $ 836,749 $ 602,753 $ 506,503 ============= ============= ============ *These amounts represent gross of early withdrawal penalties. 14 In some cases in order to satisfy Broker Dealers and other reporting requirements, the general partners have valued the limited partners' interest in the Partnership on a basis which utilizes a per Unit system of calculation, rather than based upon the investors' capital account. This information has been reported in this manner in order to allow the Partnership to integrate with certain software used by the Broker Dealers and other reporting entities. In those cases, the Partnership will report to Broker Dealers, Trust Companies and others a "reporting" number of Units based upon a $1.00 per Unit calculation. The number of reporting Units provided will be calculated based upon the limited partner's capital account value divided by $1.00. Each investor's capital account balance is set forth periodically on the Partnership account statement provided to investors. The reporting Units are solely for Broker Dealers requiring such information for their software programs and do not reflect actual Units owned by a limited partner or the limited partners' right or interest in cash flow or any other economic benefit in the Partnership. Each investor's capital account balance is set forth periodically on the Partnership account statement provided to investors. The amount of Partnership earnings each investor is entitled to receive is determined by the ratio that each investor's capital account bears to the total amount of all investor capital accounts then outstanding. The capital account balance of each investor should be included on any NASD member client account statement in providing a per Unit estimated value of the client's investment in the Partnership in accordance with NASD Rule 2340. While the general partners have set an estimated value for the Partnership Units, such determination may not be representative of the ultimate price realized by an investor for such Units upon sale. No public trading market exists for the Partnership's Units and none is likely to develop. Thus, there is no certainty that the Units can be sold at a price equal to the stated value of the capital account. Furthermore, the ability of an investor to liquidate his or her investment is limited subject to certain liquidation rights provided by the Partnership, which may include early withdrawal penalties (See the section of the Prospectus entitled "Risk Factors - Purchase of Units is a long term investment"). Current Economic Conditions. The Partnership makes loans primarily in Northern California. As of December 31, 2003, approximately 93.34%, ($4,905,347) of the loans held by the Partnership were in five San Francisco Bay Area Counties. The remainder of the loans held were secured primarily by Northern California real estate outside the San Francisco Bay Area. Like the rest of the nation, the San Francisco Bay Area has also felt the recession and accompanying slow down in economic growth and increasing unemployment. The technology companies of Silicon Valley, the airline industry, the tourism industry and other industries are feeling the effects of the overall United States economy, which includes lower earnings, losses and layoffs. Recently the national and Northern California economies seem to be improving. Job creation remains a concern, as little job creation seems to be evident. The partnership makes loans primarily in Northern California and real estate values of residential, commercial, multi-family properties and land are of particular interest to the partnership. Real estate is the primary security for the partnership's loans. The residential real estate market in California continues to appreciate. The Office of Federal Housing Enterprise Oversight reported that the state average home prices rose 13.8% in 2003. Southern California home price appreciation outpaced Northern California home price appreciation. Yet even Santa Clara County had positive price appreciation in 2003. The residential market is not all positive. The luxury home market in the San Francisco Bay Area is still well below values posted in 1999 and 2000. The strong residential real estate outlook implies that collateral values behind the partnership's loans should remain firm and assist in reducing losses if the take back of collateral through the foreclosure process should eventuate. While the residential market outlook remains strong overall the commercial real estate market is not as strong. Commercial property values are chiefly tied to the income a property can produce. Vacancies in office properties since 2000 have risen sharply in the San Francisco Bay Area. In the fourth quarter of 2003 both BT Commercial Real Estate and Cornish and Carey Commercial/Oncor International reported declines in San Francisco peninsula office vacancies. Each reported about 1% declines to about 27.3%. Colliers International reported a decline in San Francisco office vacancy in the fourth quarter of 2003 from 17.3% to 16.9%. Rents have also continued to fall and in San Francisco the average is $29.31, which is down from $30.04 at the start of 2003. These statistics seem to indicate that the commercial rental market is stabilizing but that existing vacancies will take a long time to fill. Commercial real estate values have decreased but lowered capitalization rates have helped keep commercial property from large value reductions. The decrease in vacancies could mean improved cash flows for owners, which translates into improved debt service abilities. 15 As of December 31, 2003, the Partnership had an average loan to value ratio based on appraised values and prior liens as of the date the loan was made of 78.87%. This percentage does not account for any increases or decreases in property values since the date the loan was made, nor does it include any reductions in principal of prior liens through amortization of payments after the loan was made. This loan to value ratio will assist the Partnership in weathering loan delinquencies and foreclosures should they eventuate. 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, 2003. The presentation, for each category of information, aggregates the assets and liabilities by their maturity dates for maturities occurring in each of the years 2004 through 2008 and separately aggregates the information for all maturities arising after 2008. The carrying values of these assets and liabilities approximate their fair values as of December 31, 2003: 2004 2005 2006 2007 2008 Thereafter Total ------------------------------------------------------------------------------------- Interest earning assets: Money market accounts $ 2,311 $ 2,311 Average interest rate 0.99% 0.99% Loans secured by deeds of trust $503,556 958,209 96,716 3,258,681 46,387 392,071 $5,255,620 Average interest rate 10.24% 9.69% 6.50% 7.68% 10.00% 9.09% 7.78%
Market Risk. The Partnership's primary market risk in terms of its profitability is the exposure to fluctuations in earnings resulting from fluctuations in general interest rates. The majority of the Partnership's mortgage loans (100% as of December 31, 2003) 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, 2001, 2002 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, 2001, 2002 and 2003 the Partnership's loans secured by real property collateral in five of the San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda and Marin) represented $3,855,721 (77.57%), $4,588,023 (88.52%), and $4,905,347 (93.34%), respectively, of the outstanding secured loan portfolio. The remainder of the portfolio represented loans secured by real estate located primarily in Northern California. 16 The following table sets forth the distribution of loans held by the Partnership by property type for the years ended December 31, 2001, 2002 and 2003: December 31, --------------------------------------------------------------------------------------- 2001 2002 2003 -------------------------- --------------------------- -------------------------- Single-family homes (1-4 units) - owner occupied $ 741,154 14.91% $ 749,707 14.47% $ 640,000 12.18% Single-family homes (1-4 units) - non-owner occupied 181,952 3.66% 74,674 1.44% 865,710 16.47% Apartments (over 4 units) 562,015 11.31% 566,600 10.93% 136,841 2.60% Commercial 3,154,562 63.47% 3,792,119 73.16% 3,613,069 68.75% Land 330,750 6.65% - - - - ------------ ---------- ------------- ---------- ------------ ----------- Total $4,970,433 100.00% $5,183,100 100.00% $5,255,620 100.00% ============ ========== ============= ========== ============ ===========
As of December 31, 2003, the Partnership held 16 loans secured by deeds of trust. The following table sets forth the priorities, asset concentrations and maturities of the secured loans held by the Partnership as of December 31, 2003. PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF SECURED LOANS As of December 31, 2003 # of Loans Amount Percent ------------ ------------ ---------- 1st Mortgages 8 $ 3,983,032 75.79% 2nd Mortgages 8 1,272,588 24.21% ============ ============= ========== Total 16 $ 5,255,620 100.00% Maturing in 2004 4 $ 503,556 9.58% Maturing in 2005 4 958,209 18.23% Maturing in 2006 1 96,716 1.84% Maturing after 12/31/06 7 3,697,139 70.35% ============ ============= ========== Total 16 $ 5,255,620 100.00% Average Secured Loan $ 328,476 6.25% Largest Secured Loan 2,103,300 40.02% Smallest Secured Loan 31,736 0.60% Average Loan-to-Value based upon appraisals and prior liens at time of loan 78.87%
The Partnership's largest loan in the principal amount of $2,103,300 represents 40.02% of outstanding secured loans and 31.76% of Partnership assets. Larger loans sometimes increase above 10% of the secured loan portfolio or Partnership assets as these amounts decrease due to limited partner withdrawals and loan payoffs and due to restructuring of existing loans. In this instance all of these factors affected this loan. Chief among them was a restructure of two loans with outstanding principal plus accrued interest, late fees and advances into one new loan with an outstanding balance of $2,103,300. The Partnership has a substantial amount of its loan receivable balance from one borrower at December 31, 2003 and 2002. The borrower accounted for approximately 58% and 62% of the loan balances at such dates. This borrower has two loans secured by separate properties in the principal amounts of $2,103,000 and $956,800 as of December 31, 2003. 17 ASSET QUALITY A consequence of lending activities is that occasionally losses will be experienced and that the amount of such losses will vary from time to time, depending upon the risk characteristics of the loan portfolio as affected by economic conditions and the financial experiences of borrowers. Many of these factors are beyond the control of the general partners. There is no precise method of predicting specific losses or amounts that ultimately may be charged off on particular segments of the loan portfolio, especially in light of the current economic environment. The conclusion that a loan may become uncollectible, in whole or in part, is a matter of judgment. Although institutional lenders are subject to requirements and regulations that, among other things, require them to perform ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and to obtain and maintain current information regarding their borrowers and the securing properties, the Partnership is not subject to these regulations and has not adopted certain of these practices. Rather, the general partners, in connection with the periodic closing of the accounting records of the Partnership and the preparation of the financial statements, determine whether the allowance for loan losses is adequate to cover potential loan losses of the Partnership. As of December 31, 2003 the general partners have determined that the allowance for loan losses of $279,865 (4.24% of net assets) and the allowance for real estate held for sale of $784,191 (11.89% 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, 2003, one loan was delinquent over 90 days amounting to $144,335. The Partnership also makes 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, 2003 there was one such loan. A summary of the status of the partnership's loan, which are periodically disbursed as of December 31, 2003, is set forth below: Complete Construction Rehabilitation ----------------------- ----------------- Disbursed funds $ 0 $ 163,086 Undisbursed funds $ 0 $ 3,619 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 Independent Auditors' Report o Balance Sheets - December 31, 2003, and December 31, 2002 o Statements of Income for the years ended December 31, 2003, 2002 and 2001 o Statements of Changes in Partners' Capital for the years ended December 31, 2003, 2002 and 2001 o Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 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. 18 REDWOOD MORTGAGE INVESTORS VI (A CALIFORNIA LIMITED PARTNERSHIP) FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003 AND 2002 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2003 19 TABLE OF CONTENTS Page No. --------- Independent Auditors' Report 21 Balance Sheets 22 Statements of Income 23 Statements of Changes in Partners' Capital 24 Statements of Cash Flows 25 Notes to Financial Statements 26 Supplemental Schedules Schedule II - Valuation and Qualifying Accounts 36 Schedule IV - Mortgage Loans on Real Estate 37 20 ARMANINO McKENNA LLP CERTIFIED PUBLIC ACCOUNTANTS 12667 Alcosta Blvd., Suite 500 San Ramon, CA 94583 (925) 790-2600 INDEPENDENT AUDITORS' REPORT 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, 2003 and 2002 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, 2003. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as 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, 2003 and 2002, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedules II and IV are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARMANINO McKENNA LLP San Ramon, California February 13, 2004 21 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) BALANCE SHEETS DECEMBER 31, 2003 AND 2002 ASSETS 2003 2002 ------------ ------------ Cash and cash equivalents $ 32,160 $ 341,127 ------------ ------------ Loans Loans, secured by deeds of trust 5,255,620 5,183,100 Loans, unsecured, net of discount of $112,587 and $131,352 in 2003 and 2002, respectively 242,462 223,697 Allowance for loan losses (279,865) (275,294) ------------ ------------ Net loans 5,218,217 5,131,503 ------------ ------------ Interest and other receivables Accrued interest and late fees 54,562 61,384 Advances on loans 4,091 31,007 ------------ ------------ Total interest and other receivables 58,653 92,391 ------------ ------------ Real estate held for sale, net 1,312,773 1,234,541 ------------ ------------ Total assets $ 6,621,803 $ 6,799,562 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Liabilities Accounts payable $ 13,064 $ 11,953 Payable to affiliate 12,496 14,643 ------------ ------------ Total liabilities 25,560 26,596 ------------ ------------ Partners' capital Limited partners' capital, subject to redemption 6,586,482 6,763,200 General partners' capital 9,761 9,766 ------------ ------------ Total partners' capital 6,596,243 6,772,966 ------------ ------------ Total liabilities and partners' capital $ 6,621,803 $ 6,799,562 ============ ============
The accompanying notes are an integral part of these financial statements 22 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 2003 2002 2001 ------------ ------------ ------------ Revenues Interest on loans $ 455,850 $ 552,898 $ 512,383 Interest - interest bearing accounts 3,080 5,147 12,927 Interest on promissory note - 7,128 4,912 Late fees, prepayment penalties and fees 32,710 8,998 27,478 Mortgage servicer subsidy - - 178,200 ------------ ------------ ------------ 491,640 574,171 735,900 ------------ ------------ ------------ Expenses Mortgage servicing fees 48,759 138,851 41,406 Asset management fees 8,427 8,677 9,115 Clerical costs from Redwood Mortgage Corp. 17,039 22,872 28,156 Provisions for (recovery of) losses on loans and real estate 4,585 (5,864) 201,036 Professional services 37,603 31,460 19,866 Other 42,111 8,192 9,670 ------------ ------------ ------------ 158,524 204,188 309,249 ------------ ------------ ------------ Net income $ 333,116 $ 369,983 $ 426,651 ============ ============ ============ Net income General partners (1%) $ 3,331 $ 3,700 $ 4,266 Limited partners (99%) 329,785 366,283 422,385 ------------ ------------ ------------ $ 333,116 $ 369,983 $ 426,651 ============ ============ ============ Net income per $1,000 invested by limited partners for entire period Where income is reinvested and compounded $ 50 $ 54 $ 59 Where partner receives income in monthly distributions $ 49 $ 53 $ 58
The accompanying notes are an integral part of these financial statements 23 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 Limited General Partners Partners Total ----------- ----------- ----------- Balances at December 31, 2000 $7,414,034 $ 9,766 $7,423,800 Net income 422,385 4,266 426,651 Early withdrawal penalties (15,024) - (15,024) Partners' withdrawals (821,725) (4,266) (825,991) ----------- ----------- ----------- Balances at December 31, 2001 6,999,670 9,766 7,009,436 Net income 366,283 3,700 369,983 Early withdrawal penalties (6,287) - (6,287) Partners' withdrawals (596,466) (3,700) (600,166) ----------- ----------- ----------- Balances at December 31, 2002 6,763,200 9,766 6,772,966 Net income 329,785 3,331 333,116 Early withdrawal penalties (7,502) - (7,502) Partners' withdrawals (499,001) (3,336) (502,337) ----------- ----------- ----------- Balances at December 31, 2003 $6,586,482 $ 9,761 $6,596,243 =========== =========== =========== The accompanying notes are an integral part of these financial statements 24 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 2003 2002 2001 ------------- ------------- ------------ Cash flows from operating activities Net income $ 333,116 $ 369,983 $ 426,651 Adjustments to reconcile net income to net cash provided by operating activities Provision (recovery) for loan losses and real estate 4,585 (5,864) 201,036 Early withdrawal penalties credited to income (7,502) (6,287) (15,024) Discount on unsecured loans (18,765) - - Mortgage servicer subsidy - - (178,200) Change in operating assets and liabilities Loans, unsecured - 82,362 - Accrued interest and late fees 6,822 (162,674) (168,444) Advances on loans 26,916 74,251 (28,667) Accounts payable 1,111 (8,308) 7,192 Payable to affiliate (2,147) (20,989) 35,632 Deferred interest - (74,022) 74,022 ------------- ------------- ------------ Net cash provided by operating activities 344,136 248,452 354,198 ------------- ------------- ------------ Cash flows from investing activities Principal collected on loans 1,564,808 1,265,798 2,548,178 Loans originated (1,637,342) (900,418) (1,838,265) Note receivable payments - 178,200 125,000 Payments on real estate held for sale (78,232) (41,153) (588,438) Proceeds from disposition of real estate - - 60,872 ------------- ------------- ------------ Net cash provided by (used in) investing activities (150,766) 502,427 307,347 ------------- ------------- ------------ Cash flows from financing activities Partners' withdrawals (502,337) (600,166) (825,991) ------------- ------------- ------------ Net increase (decrease) in cash and cash equivalents (308,967) 150,713 (164,446) Cash and cash equivalents at beginning of year 341,127 190,414 354,860 ------------- ------------- ------------ Cash and cash equivalents at end of year $ 32,160 $ 341,127 $ 190,414 ============= ============= ============
The accompanying notes are an integral part of these financial statements 25 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 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 by the effective interest method. 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, 2003 and 2002, loans categorized as impaired by the Partnership totaled $96,716, with a reduction in the carrying value of the impaired loans of $14,596, and $6,620, respectively. The reduction in the carrying value of the impaired loans is included in the allowance for loan losses. The impaired loans have accrued interest, late charges and advances totaling $7,977 and $10,973 at December 31, 2003 and 2002. The average recorded investment in the impaired loans was $96,716, $1,282,304 and $2,468,698 for the three years ended 2003, 2002 and 2001, respectively. 26 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 2. Summary of Significant Accounting Policies (continued) Loans, secured by deeds of trust (continued) At December 31, 2003 and 2002, the Partnership had one and two loans past due 90 days or more totaling $144,335 and $207,648, respectively. The Partnership does not consider these loans to be impaired because there is sufficient collateral to cover the amount outstanding to the Partnership, and is still accruing interest on these loans. At December 31, 2003 and 2002, as presented in Note 9, the average loan to appraised value of security at the time the loans were consummated was 78.87% and 79.68%, 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. During 2002, the Partnership restructured four previously impaired loans into two new loans with a lower interest rate. The amount restructured was $3,060,100. As of December 31, 2003, there is a collateral shortfall on the restructured loans ranging from approximately $194,000 to $337,000 that has not been reserved for. Redwood Mortgage Corp. has guaranteed to cover losses sustained by the Partnership related to these restructured loans to the extent such losses exceed existing reserves, as defined in the agreement, and related collateral value. Allowance for loan losses Loans and the related accrued interest, late fees and advances are analyzed on a continuous basis for recoverability. Delinquencies are identified and followed as part of the loan system. Delinquencies are determined based upon contractual terms. A provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral values, to provide for unrecoverable loans and receivables, including impaired loans, other loans, accrued interest, late fees and advances on loans and other accounts receivable (unsecured). The Partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined that the full amount is not collectible. The composition of the allowance for loan losses as of December 31, 2003 and 2002 was as follows: 2003 2002 ------------ ------------ Impaired loans $ 14,596 $ 6,620 Specified loans 28,750 44,977 Unsecured loans 236,519 223,697 ------------ ------------ $ 279,865 $ 275,294 ============ ============ Activity in the allowance for loan losses is as follows for the years ended December 31: 2003 2002 2001 ----------- ----------- ----------- Beginning balance $ 275,294 $ 370,612 $ 261,452 Provision for loan losses 4,585 3,083 109,160 Recoveries - (8,947) - Restructures / transfers - (48,009) - Write-offs (14) (41,445) - ----------- ----------- ----------- $ 279,865 $ 275,294 $ 370,612 =========== =========== =========== 27 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 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. During 2002, the Partnership transferred $249,999 from the allowance for loan losses to the allowance for losses on real estate held for sale. 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 2003, 2002 and 2001, late fee revenue of $7,379, $1,947, and $10,959, respectively, was recorded. The Partnership has a late fee receivable at December 31, 2003 and 2002 of $1,608 and $968, respectively. Recently issued accounting pronouncements In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires the recognition of liabilities for guarantees that are issued or modified subsequent to December 31, 2002. The liabilities should reflect the fair value, at inception, of the guarantor's obligations to stand ready to perform, in the event that the specified triggering events or conditions occur. The implementation of FIN 45 did not have any significant effect on the Partnership. 28 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 2. Summary of Significant Accounting Policies (continued) Recently issued accounting pronouncements (continued) In January 2003, the FASB issued FASB Interpretation 46 "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46). FIN 46 is effective immediately for any variable interest entities created after January 31, 2003 and is effective beginning in the third quarter of 2003 to any variable interest entities created prior to the issuance of the interpretation. FIN 46 provides a new framework to identify variable interest entities and to determine when an entity should include the assets, liabilities, non-controlling interests and the results of activities of a variable interest entity in its financial statements. The implementation of FIN 46 did not have any significant effect on the Partnership. In December 2003, the American Institute of Certified Public Accountants (AICPA) Accounting Standards Executive Committee (AcSEC) issued Statement of Position 03-03, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer"(SOP 03-3). SOP 03-03 is effective for loans acquired in fiscal years beginning after December 15, 2004, with early adoption encouraged. SOP 03-03 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes loans acquired in business combinations and applies to all nongovernmental entities, including not-for-profit organizations. The SOP does not apply to loans originated by the entity. The implementation of SOP 03-03 is not anticipated to have any significant effect on the Partnership. 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 all the 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. 29 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 3. Other Partnership Provisions continued) Profits and losses Profits and losses are allocated among the limited partners according to their respective capital accounts monthly after 1% of the profits and losses are allocated to the general partners. Liquidity, capital withdrawals and early withdrawals There are substantial restrictions on transferability of Partnership units and accordingly an investment in the Partnership is non-liquid. Limited partners had no right to withdraw from the Partnership or to obtain the return of their capital account for at least one year from the date of purchase of Partnership units. In order to provide a certain degree of liquidity to the limited partners after the one-year period, limited partners may withdraw all or part of their capital accounts from the Partnership in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given, subject to a 10% early withdrawal penalty. The 10% penalty is applicable to the amount withdrawn as stated in the notice of withdrawal and will be deducted from the capital account. After five years from the date of purchase of the units, limited partners have the right to withdraw from the Partnership, on an installment basis. Generally, this is done over a five-year period in twenty quarterly installments. Once a limited partner has been in the Partnership for the minimum five-year period, no penalty will be imposed if withdrawal is made in twenty quarterly installments or longer. Notwithstanding the five-year (or longer) withdrawal period, the general partners may liquidate all or part of a limited partner's capital account in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given. This withdrawal is subject to a 10% early withdrawal penalty applicable to any sums withdrawn prior to the time when such sums could have been withdrawn without penalty. 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, the Partnership 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 2003, 2002 and 2001, loan brokerage commissions paid by the borrowers were $42,407, $22,611, and $46,581, respectively. 30 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 4. General Partners and Related Parties (continued) Mortgage servicing fees Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the unpaid principal are paid to Redwood Mortgage Corp., 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 $48,759, $138,851, and $41,406, were incurred for 2003, 2002 and 2001, respectively. The Partnership has a payable to Redwood Mortgage Corp. for servicing fees of $12,496 and $14,643 at December 31, 2003 and 2002, respectively. Asset management fee The general partners receive monthly fees for managing the Partnership's loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8 of 1% annually). Asset management fees of $8,427, $8,677, and $9,115 were incurred for 2003, 2002 and 2001, respectively. Other fees The Partnership Agreement provides for other fees such as reconveyance, mortgage assumption and mortgage extension fees. These fees are incurred by the borrowers and paid to parties related to the general partners. Operating expenses The general partners or their affiliate, Redwood Mortgage Corp., are reimbursed by the Partnership for all operating expenses incurred by them on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners. During 2003, 2002 and 2001, operating expenses totaling $17,039, $22,872 and $28,156, 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, 2003 and 2002: 2003 2002 ------------ ------------ Costs of properties $ 2,096,964 $ 2,018,732 Reduction in value (784,191) (784,191) ------------ ------------ Real estate held for sale, net $ 1,312,773 $ 1,234,541 ============ ============ 31 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 6. Income Taxes The following reflects a reconciliation of partners' capital reflected in the financial statements to the tax basis of Partnership capital: 2003 2002 ------------ ------------ Partners' capital per financial statements $ 6,596,243 $ 6,772,966 Allowance for loan losses and real estate 1,064,056 1,059,485 ------------ ------------ Partners' capital tax basis $ 7,660,299 $ 7,832,451 ============ ============ In 2003 and 2002, approximately 73% of taxable income was allocated to tax-exempt organizations (e.g., retirement plans). - 7. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of financial instruments: (a) Cash and cash equivalents - The carrying amount equals fair value. All amounts, including interest-bearing accounts are subject to immediate withdrawal. (b) Secured loans carrying value was $5,255,620 and $5,183,100 at December 31, 2003 and 2002, respectively. The fair value of these loans of $5,019,338 and $4,862,646, 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. Non-cash Transactions During 2002, the Partnership restructured four loans that resulted in an increase to loans receivable of $920,346 and a decrease to the allowance for loan losses, accrued interest and advances of $21,707, $849,365 and $92,688, respectively. During 2002, the Partnership foreclosed on a property that resulted in an increase to real estate held for sale of $349,883 and a decrease to loans receivable and accrued interest of $300,853 and $49,030, respectively. During 2002, the Partnership originated two unsecured, non-interest bearing loans, which resulted in an increase to unsecured loans and the allowance for loan losses of $355,049 and $223,697, respectively. The Partnership imputed interest on these loans at 10.5% per annum, which resulted in a decrease to unsecured loans of $131,352 and an increase to discount on loans of $131,352. 32 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 9. Asset Concentrations and Characteristics Most loans are secured by recorded deeds of trust. At December 31, 2003 and 2002, there were 16 and 22 secured loans outstanding respectively, with the following characteristics: 2003 2002 ------------ ------------- Number of secured loans outstanding 16 22 Total secured loans outstanding $ 5,255,620 $ 5,183,100 Average secured loan outstanding $ 328,476 $ 235,595 Average secured loan as percent of total 6.25% 4.55% Average secured loan as percent of partners' capital 4.98% 3.48% Largest secured loan outstanding $ 2,103,300 $ 2,103,300 Largest secured loan as percent of total 40.02% 40.58% Largest secured loan as percent of partners' capital 31.89% 31.05% Number of counties where security is located (all California) 8 10 Largest percentage of secured loans in one county 42.06% 42.67% Average secured loan to appraised value of security based upon appraisals and prior liens at time loan was consummated 78.87% 79.68% Number of secured loans in foreclosure - - Amounts of secured loans in foreclosure $ - $ -
The following categories of secured loans were held at December 31, 2003 and 2002: 2003 2002 ------------ ------------- First trust deeds $ 3,983,032 $ 4,392,120 Second trust deeds 1,272,588 790,979 ------------ ------------- Total loans 5,255,620 5,183,100 Prior liens due other lenders at time of loan 2,377,041 2,779,170 ------------ ------------- Total debt $ 7,632,661 $ 7,962,270 ============ ============= Appraised property value at time of loan $ 9,677,215 $ 9,992,743 ============ ============= Total loans as a percent of appraisals based upon appraisals and prior liens at date of loan 78.87% 79.68% ============ ============= Loans by type of property Owner occupied homes $ 640,000 $ 749,707 Non-owner occupied homes 865,710 74,674 Apartments 136,841 566,600 Commercial 3,613,069 3,792,119 ------------ ------------- $ 5,255,620 $ 5,183,100 ============ =============
33 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 9. Asset Concentrations and Characteristics (continued) Scheduled maturity dates of secured loans as of December 31, 2003 are as follows: Year Ending December 31, 2004 $ 503,556 2005 958,209 2006 96,716 2007 3,258,681 2008 46,387 Thereafter 392,071 ------------ $5,255,620 ============ The remaining scheduled maturities for 2004 include three loans totaling $253,556, which were past maturity at December 31, 2003. One of these loans was categorized as delinquent over 90 days and is included in the total of loans 90 days or more delinquent presented in Note 2. Cash deposits at December 31, 2003, exceeded federal insurance limits (up to $100,000 per bank) by approximately $60,000. The Partnership has a substantial amount of its loan receivable balance from one borrower at December 31, 2003 and 2002. This borrower accounted for approximately 58% and 62% of the loan balances at such dates. This borrower accounted for approximately 47%, 31% and 35% of interest revenue for the years ended December 31, 2003, 2002 and 2001, respectively. 10. 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, 2003. There are two loans totaling $176,068 in workout agreements as of December 31, 2003. 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. 34 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 11. Selected Financial Information (Unaudited) Calendar Quarter ------------------------------------------------------- First Second Third Fourth Annual ---------- --------- ---------- ---------- ---------- Revenues 2003 $110,453 $149,615 $107,613 $123,959 $491,640 2002 $214,521 $120,559 $125,341 $113,750 $574,171 2001 $143,077 $142,581 $134,603 $315,639 $735,900 Expenses 2003 $ 35,041 $ 57,724 $ 24,466 $ 41,293 $158,524 2002 $116,728 $ 26,094 $ 34,988 $ 26,378 $204,188 2001 $ 30,562 $ 34,253 $ 29,249 $215,185 $309,249 Net income allocated to general partners 2003 $ 754 $ 919 $ 832 $ 826 $ 3,331 2002 $ 978 $ 945 $ 903 $ 874 $ 3,700 2001 $ 1,125 $ 1,083 $ 1,054 $ 1,004 $ 4,266 Net income allocated to limited partners 2003 $ 74,658 $ 90,972 $ 82,315 $ 81,840 $329,785 2002 $ 96,815 $ 93,520 $ 89,450 $ 86,498 $366,283 2001 $111,390 $107,245 $104,300 $ 99,450 $422,385 Net income per $1,000 invested where income is reinvested 2003 $ 12 $ 12 $ 12 $ 14 $ 50 2002 $ 14 $ 13 $ 13 $ 14 $ 54 2001 $ 15 $ 15 $ 14 $ 15 $ 59 where income is withdrawn 2003 $ 12 $ 12 $ 12 $ 13 $ 49 2002 $ 14 $ 13 $ 13 $ 13 $ 53 2001 $ 15 $ 15 $ 14 $ 14 $ 58
35 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS December 31, 2003 Col. C - Additions Col B --------------------------- Col E Balance at Charged Charged to Balance at Col A Beginning to Costs Other Col. D End of Description of Period & Expenses Accounts Deductions Period - --------------------------------------- ----------- ------------ ------------ -------------- ------------ Year Ended December 31, 2003 Deducted from asset accounts Allowance for doubtful accounts $ 275,294 $ 4,585 $ - $ (14)(a) $ 279,865 Cumulative write-down of real estate held for sale (REO) 784,191 - - - 784,191 ----------- ------------ ------------ -------------- ------------ $1,059,485 $ 4,585 $ - $ (14)(a) $ 1,064,056 =========== ============ ============ ============== ============
Note (a) - Represents write-offs of loans. 36 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) SCHEDULE IV mortgage loans on real estate rule 12-29 loans on real estate December 31, 2003 Col. B Col. C Col. D Col. E Col. F Col. G Col. H Col. I Col. J Col. A Interest Final Period Prior Face Amt Carry Amt Principal Amt Type Geographic Descript Rate Maturity Payment Liens Mortgage Mortgage Delinquent Lien Location - ------------------------------------------------------------------------------------------------------------------------- Apts. 6.50% 05/01/06 $ 541 $ 89,904 $ 100,000 $ 96,716 $ 96,716 2nd Sacramento Apts. 7.00% 02/10/05 234 80,250 40,125 40,125 - 2nd San Francisco Comm. 9.00% 05/10/02 671 - 83,333 77,472 77,472 1st Shasta Comm. 10.00% 12/01/03 1,276 - 145,455 144,349 144,349 1st Stanislaus Comm. 10.00% 12/01/01 284 208,012 32,323 31,736 31,736 2nd Stanislaus Comm. 10.00% 07/01/11 997 - 109,769 107,068 - 1st Santa Clara Comm. 7.50% 02/28/07 13,146 - 2,103,300 2,103,300 - 1st Santa Clara Comm. 7.50% 02/28/07 5,980 - 956,800 956,800 - 1st Alameda Res. 10.25% 08/01/04 2,135 714,286 250,000 250,000 - 2nd San Francisco Comm. 10.50% 10/01/07 1,345 - 147,000 145,957 - 1st San Mateo Res. 10.50% 10/01/07 485 81,786 53,000 52,624 - 2nd San Mateo Res. 10.25% 12/01/05 897 465,349 105,000 105,000 - 2nd Marin Comm. 10.00% 03/01/08 409 186,316 46,579 46,387 - 2nd San Mateo Res. 8.75% 09/01/05 2,053 - 300,000 163,086 - 1st Alameda Res. 8.75% 01/01/09 2,242 - 285,000 285,000 - 1st Alameda Res. 10.00% 12/25/05 5,417 551,138 650,000 650,000 - 2nd Alameda ------------------------------------------------------------- Total $ 38,111 $2,377,041 $5,407,684 $5,255,620 $ 350,273 =============================================================
Notes: Loans classified as impaired had principal balances totaling $96,716. Impaired loans are defined as loans where the costs of related balances exceeds the anticipated fair value less costs to collect. Interest is no longer accrued thereon. Amounts reflected in column G (carrying amount of loans) represent both costs and the tax basis of the loans. 37 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Schedule IV (continued) mortgage loans on real estate rule 12-29 loans on real estate December 31, 2003 Reconciliation of carrying amount (cost) of loans at close of periods Year ended December 31, -------------------------------------------- 2003 2002 2001 ------------ ------------ ------------ Balance at beginning of year $ 5,183,100 $ 4,970,433 $ 5,570,576 ------------ ------------ ------------ Additions during period New loans 1,637,342 900,418 1,838,265 Other - 920,346 109,770 ------------ ------------ ------------ Total additions 1,637,342 1,820,764 1,948,035 ------------ ------------ ------------ Deductions during period Collections of principal 1,564,808 1,265,798 2,548,178 Foreclosures - 300,854 - Cost of loans sold - - - Amortization of premium - - - Other 14 41,445 - ------------ ------------ ------------ Total deductions 1,564,822 1,608,097 2,548,178 ------------ ------------ ------------ Balance at close of year $ 5,255,620 $ 5,183,100 $ 4,970,433 ============ ============ ============ 38 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no disagreements with the partnership's independent public accountants during the years ended December 31, 2003 and 2002. 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 the Securities and Exchange Act of 1934. Based upon that evaluation, the general partners concluded that the partnership's disclosure controls and procedures were effective. There were no significant changes in the partnership's internal control over financial reporting during the partnership's fourth fiscal quarter and through the date of this report that have materially affected, or are likely to materially affect, the partnership's internal control over financial reporting. 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 46, General Partner, past member of Board of Trustees and Treasurer, Mortgage Brokers Institute (1984-1986); President, Director, Chief Financial Officer, Redwood Mortgage Corp. (1979-present); Director, Secretary and Treasurer A & B Financial Services, Inc. (1980-present); President, Director, Chief Financial Officer and Secretary (since 1986) of Gymno Corporation; President, Director, Secretary and Treasurer of The Redwood Group, Ltd. (1979-present). Mr. Burwell is licensed as a real estate sales person. Gymno Corporation. Gymno Corporation, General Partner, is a California corporation formed in 1986 for the purpose of acting as a general partner of this partnership and of other limited partnerships formed by the individual general partners. The shares in Gymno Corporation are held equally by Michael R. Burwell and the estate of D. Russell Burwell. Upon the completion of the administration of D. Russell Burwell's estate, Michael R. Burwell will have a controlling interest in Gymno Corporation. Michael R. Burwell is a director of Gymno and the director position held by D. Russell Burwell is currently vacant. Michael R. Burwell is its President, Chief Financial Officer and Secretary. Financial Oversight by General Partners. The partnership does not have a board of directors or an audit committee. Accordingly, the general partners serve the equivalent function of an audit committee for, among other things, the following purposes: appointment, compensation, review and oversight of the work of our independent public accountants, and establishing the enforcing of the Code of Ethics. However, since the partnership does not have an audit committee and the general partners are not independent of the partnership, the partnership does not have an "audit committee financial expert." 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. 39 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, 2003. All such compensation is in compliance with the guidelines and limitations set forth in the Prospectus. Entity Receiving Compensation Description of Compensation and Services Rendered Amount - ----------------------------------------------------------------------------------------------------------- I. Redwood Mortgage Corp. Loan Servicing Fee for servicing loans.........................$48,759 General Partners &/or Affiliates Asset Management Fee for managing assets........................$8,427 General Partners 1% interest in profits..........................................$3,331
II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY COMPANIES RELATED TO THE GENERAL PARTNERS (EXPENSES OF BORROWERS NOT OF THE PARTNERSHIP) Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in connection with the review, selection, evaluation, negotiation, and extension extension of the loans paid by the borrowers and not by the Partnership...............$42,407 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........................$1,044 Gymno Corporation Reconveyance Fee..................................................$261
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 . . . . . . . . . . . . . . . . . . . . .. . . . . . $17,039 40 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 2003 and 2002 are as follows: Audit Fees The aggregate fees billed during the years ended December 31, 2003 and 2002 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 $32,090 and $26,919, respectively. Audit Related Fees There were no fees billed during the years ended December 31, 2003 and 2002 for audit-related services. Tax fees The aggregate fees billed for tax services for the years ended December 31, 2003 and 2002, were $2,675 and $3,969, 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, 2003 and 2002. All audit and non-audit services are approved by the general partner prior to the accountant being engaged by the Partnership. 41 Part IV Item 15 - Exhibits, Financial Statements Schedules, and Reports on Form 8-K (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 (1) 10.2 Servicing Agreement (1) 10.3 (a) Form of Note secured by Deed of Trust which provides for principal and interest payments (1) (b) Form of Note secured by Deed of Trust which provides principal and interest payments and right of assumption (1) (c) Form of Note secured by Deed of Trust which provides for interest only payments (1) (d) Form of Note (1) 10.4 (a) Deed of Trust and Assignment of Rents to accompany Exhibits 10.3 (a) and (c) (1) (b) Deed of Trust and Assignment of Rents to accompany Exhibits 10.3 (b) (1) (c) Deed of Trust to accompany Exhibit 10.3 (d) (1) 10.5 Promissory Note for Formation Loan (1) 10.6 Agreement to Seek a Lender (1) All of these exhibits were previously filed as the exhibits to Registrant's Statement on Form S-11 (Registration No. 33-12519) and incorporated by reference herein. (B) Reports on form 8-K No reports on Form 8-K have been filed during the last quarter of the period covered by this report. (C) See (A) 3 above (D) 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. 42 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, 2004. REDWOOD MORTGAGE INVESTORS VI By: /S/ Michael R. Burwell ----------------------------------- Michael R. Burwell, General Partner By: Gymno Corporation, General Partner By: /S/ Michael R. Burwell ---------------------------------------- Michael R. Burwell, President, Secretary & 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, 2004. Signature Title Date /S/ Michael R. Burwell - ---------------------- Michael R. Burwell General Partner March 30, 2004 /S/ Michael R. Burwell - ---------------------- Michael R. Burwell President, Secretary & Chief March 30, 2004 Financial Officer of Gymno Corporation (Principal Financial and Accounting Officer); Director of Gymno Corporation 43 Exhibit 99.1 GENERAL PARTNER CERTIFICATION I, Michael R. Burwell, General Partner, certify that: 1. I have reviewed this annual report on Form 10-K of Redwood Mortgage Investors VI, a California Limited Partnership (the "Registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: (a) designed such disclosure controls and procedures 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 as of December 31, 2003 (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls. 6. The Registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Michael R. Burwell - ----------------------------------- Michael R. Burwell, General Partner March 30, 2004 44 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Redwood Mortgage Investors VI (the "Partnership") on Form 10-K for the period ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the Partnership, certify that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ Michael R. Burwell - ----------------------------------- Michael R. Burwell, General Partner March 30, 2004 45 Exhibit 99.2 PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION I, Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner, certify that: 1. I have reviewed this annual report on Form 10-K of Redwood Mortgage Investors VI, a California Limited Partnership (the "Registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: (a) designed such disclosure controls and procedures 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 as of December 31, 2003 (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls. 6. The Registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Michael R. Burwell - --------------------------------- Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner March 30, 2004 46 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Redwood Mortgage Investors VI (the "Partnership") on Form 10-K for the period ended December 31, 2003 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. /s/ Michael R. Burwell - --------------------------------- Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner March 30, 2004 47 -----END PRIVACY-ENHANCED MESSAGE-----