-----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, Sx/ImhV4yWyJHFoCyctFTcubPn686uG6ygqPuRXKbxYbnGTN4mPs6jLpsZF9Vdjz OBO0BpqDEbxpJb+TVdzUXw== 0000811592-05-000006.txt : 20050815 0000811592-05-000006.hdr.sgml : 20050815 20050815124329 ACCESSION NUMBER: 0000811592-05-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050815 DATE AS OF CHANGE: 20050815 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17573 FILM NUMBER: 051024773 BUSINESS ADDRESS: STREET 1: 900 VETERANS BLVD SUITE 500 CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 6503655341 MAIL ADDRESS: STREET 1: 900 VETERANS BLVD SUITE 500 CITY: REDWOOD CITY STATE: CA ZIP: 94063 10-Q 1 rmi610q2ndqtr2005.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number: 000-17573 REDWOOD MORTGAGE INVESTORS VI, a California Limited Partnership (Exact name of registrant as specified in its charter) California 94-3031211 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 900 Veterans Blvd., Suite 500, Redwood City, CA 94063-1743 (Address of principal executive offices) (Zip Code) (650) 365-5341 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes XX No -------------- -------------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No XX -------------- ------------- 1 Part I - Item I. FINANCIAL STATEMENTS REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) BALANCE SHEETS JUNE 30, 2005 and DECEMBER 31, 2004 (unaudited) ASSETS June 30, December 31, 2005 2004 --------------- ---------------- Cash and cash equivalents $ 771,832 $ 1,090,027 --------------- ---------------- Loans Loans, secured by deeds of trust 5,500,127 5,225,128 Loans, unsecured, net discount of $84,440 and $93,823 for June 30, 2005 and December 31, 2004, respectively 270,610 261,276 --------------- ---------------- 5,770,737 5,486,404 Less allowance for loan losses (325,134) (315,751) --------------- ---------------- Net loans 5,445,603 5,170,653 --------------- ---------------- Interest and other receivables Accrued interest and late fees 60,994 61,364 Advances on loans 508 2,890 --------------- ---------------- Total interest and other receivables 61,502 64,254 --------------- ---------------- Real estate held for sale, net 130,215 128,902 Prepaid expenses 2,587 - Due from affiliate 5,518 - --------------- ---------------- Total assets $ 6,417,257 $ 6,453,836 =============== ================ LIABILITIES AND PARTNERS' CAPITAL Liabilities Accounts payable $ 4,278 $ 11,487 Payable to affiliate 12,014 12,541 --------------- --------------- Total liabilities 16,292 24,028 --------------- --------------- Partners' capital Limited partners' capital, subject to redemption 6,391,204 6,420,047 General partners' capital 9,761 9,761 --------------- --------------- Total partners' capital 6,400,965 6,429,808 --------------- --------------- Total liabilities and partners' capital $ 6,417,257 $ 6,453,836 =============== ===============
The accompanying notes are an integral part of these financial statements. 2 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 and 2004 (unaudited) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------- ---------------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Revenues Interest on loans $ 126,914 $ 124,749 $ 255,649 $ 241,152 Interest - interest bearing accounts 3,587 1,509 6,384 1,771 Late charges, prepayment penalties and fees 1,158 13,863 3,155 27,404 ----------- ----------- ----------- ----------- 131,659 140,121 265,188 270,327 ----------- ----------- ----------- ----------- Expenses Mortgage servicing fees 12,090 16,238 25,042 25,168 Asset management fees 2,013 2,046 4,027 4,112 Clerical costs through Redwood Mortgage Corp. 1,738 6,825 4,449 6,825 Provision for losses on loans and real estate held for 3,379 8,813 8,070 15,300 sale Professional services 11,883 8,805 21,414 26,340 Other 4,981 16,510 7,656 30,082 ----------- ----------- ----------- ----------- 36,084 59,237 70,658 107,827 ----------- ----------- ----------- ----------- Net income $ 95,575 $ 80,884 $ 194,530 $ 162,500 =========== =========== =========== =========== Net income General partners (1%) 955 809 1,945 1,625 Limited partners (99%) 94,620 80,075 192,585 160,875 ----------- ----------- ----------- ----------- $ 95,575 $ 80,884 $ 194,530 $ 162,500 =========== =========== =========== =========== Net income per $1,000 invested by limited partners for entire period: -where income is compounded and retained $ 15 $ 12 $ 30 $ 25 =========== =========== =========== =========== -where partner receives income in monthly distributions $ 15 $ 12 $ 30 $ 24 =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 3 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2005 and 2004 (unaudited) SIX MONTHS ENDED JUNE 30, --------------------------------- 2005 2004 --------------- -------------- Cash flows from operating activities Net income $ 194,530 $ 162,500 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses and real estate held for sale 8,070 15,300 Early withdrawal penalties credited to income (1,674) (7,493) Amortization of discount on unsecured loans (9,383) (9,383) Loss on disposal of real estate held for sale - 1,048 Change in operating assets and liabilities Accrued interest and advances on loans 2,752 (11,911) Due from affiliate (5,518) - Accounts payable and payable to affiliate (7,736) 3,884 Prepaid expenses (2,587) - --------------- -------------- Net cash provided by operating activities 178,454 153,945 --------------- -------------- Cash flows from investing activities Principal collected on loans 1,050,002 211,656 Loans originated (1,325,000) (187) Payments for real estate held for sale - (1,203) Proceeds from disposition of real estate - 451,688 Reduction in unsecured note 49 - --------------- -------------- Net cash provided by (used in) investing activities (274,949) 661,954 --------------- -------------- Cash flows from financing activities Partners' withdrawals (221,700) (268,228) --------------- -------------- Net cash used in financing activities (221,700) (268,228) --------------- -------------- Net increase (decrease) in cash and cash equivalents (318,195) 547,671 Cash and cash equivalents - beginning of period 1,090,027 32,160 --------------- -------------- Cash and cash equivalents - end of period $ 771,832 $ 579,831 =============== ==============
The accompanying notes are an integral part of these financial statements. 4 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 (unaudited) NOTE 1 - GENERAL In the opinion of the management of the Partnership, the accompanying unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the financial information included therein. These financial statements should be read in conjunction with the audited financial statements included in the Partnership's Form 10-K for the fiscal year ended December 31, 2004 filed with the Securities and Exchange Commission. The results of operations for the six month period ended June 30, 2005 are not necessarily indicative of the operating results to be expected for the full year. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Loans secured by deeds of trust At June 30, 2005 and December 31, 2004, there was one loan categorized as impaired by the Partnership for $96,716. In 2004, it was determined that a reduction in the carrying value of this loan was no longer required. The impaired loan had accrued interest, late charges and advances totaling $7,553 and $6,936 at June 30, 2005 and December 31, 2004, respectively. The average recorded investment in the impaired loan was $96,716 for the six month period ended June 30, 2005 and for the year ended December 31, 2004. At June 30, 2005 and December 31, 2004, the Partnership had two loans totaling $216,257 and one loan totaling $96,716, respectively, that were past due 90 days or more in interest payments. Included in the June 30, 2005 and December 31, 2004 past due loans is one loan with an outstanding principal balance of $96,716, which is also considered to be impaired. Additionally, at June 30, 2005 and December 31, 2004, the Partnership had two loans past maturity with outstanding principal balances of $175,714 and $175,865, for a combined total of four and three loans during each period past due 90 days or more in interest payments, and/or past maturity totaling $391,971 and $272,581, respectively. In addition, accrued interest, late charges and advances on these loans totaled $11,228 and $4,249 at June 30, 2005 and December 31, 2004, respectively. At June 30, 2005 the Partnership does not consider three of these loans to be impaired because there is sufficient collateral to cover the amount outstanding to the Partnership, and is still accruing interest on these loans. At June 30, 2005 and December 31, 2004, as presented in Note 6, the average loan to appraised value of security based upon appraised values and prior liens at the time the loans were consummated was 79.92% and 79.67%, respectively. When loans are considered impaired, the allowance for loan losses is updated to reflect the change in the valuation of collateral security. However, a low loan to value ratio tends to minimize reductions for impairment. Allowance for loan losses The composition of the allowance for loan losses as of June 30, 2005 and December 31, 2004 was as follows: June 30, December 31, 2005 2004 --------------- --------------- Impaired loans $ - $ - Specified loans 6,796 6,796 Unsecured loans 270,610 261,227 General 47,728 47,728 --------------- --------------- $ 325,134 $ 315,751 =============== =============== 5 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 (unaudited) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Allowance for loan losses (continued) Activity in the allowance for loan losses is as follows for the six months ended June 30, 2005 and the year ended December 31, 2004: June 30, December 31, 2005 2004 ---------------- --------------- Beginning balance $ 315,751 $ 279,865 Provision for loan losses 8,070 35,886 Write-offs - - Transfer from real estate held for sale 1,313 - ---------------- --------------- $ 325,134 $ 315,751 ================ =============== Income taxes No provision for federal and state income taxes, except for a minimum state tax of $800, is made in the financial statements since income taxes are the obligation of the partners if and when income taxes apply. Net income per $1,000 invested Amounts reflected in the statements of income as net income per $1,000 invested by limited partners for the entire period are amounts allocated to limited partners who held their investment throughout the period and have elected to either leave their earnings to compound or have elected to receive periodic distributions of their net income. Individual income is allocated each month based on the limited partners' pro rata share of partners' capital. Because the net income percentage varies from month to month, amounts per $1,000 will vary for those individuals who made or withdrew investments during the period, or select other options. Management estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Such estimates relate principally to the determination of the allowance for loan losses, including the valuation of impaired loans and the valuation of real estate held for sale. Actual results could differ significantly from these estimates. Reclassifications Certain reclassifications, not affecting previously reported net income or total partners' capital, have been made to the previously issued financial statements to conform to the current year classification. Profits and losses Profits and losses are allocated among the limited partners according to their respective capital accounts monthly after 1% of the profits and losses are allocated to the general partners. 6 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 (unaudited) NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES The following are commissions and fees that are paid to the general partners and affiliates. Mortgage brokerage commissions For fees in connection with the review, selection, evaluation, negotiation and extension of loans, Redwood Mortgage Corp., an affiliate of the general partners, may collect an amount equivalent to 12% of the loaned amount until 6 months after the termination date of the offering. Thereafter, loan brokerage commissions (points) will be limited to an amount not to exceed 4% of the total Partnership assets per year. The loan brokerage commissions are paid by the borrowers, and thus, are not an expense of the Partnership. Mortgage servicing fees Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the unpaid principal are paid to Redwood Mortgage Corp., an affiliate of the general partners, based on the unpaid principal balance of the loan portfolio, or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. Once a loan is categorized as impaired, mortgage servicing fees are no longer accrued. Additional servicing fees are recorded upon the receipt of any subsequent payments on impaired loans. Redwood Mortgage Corp. waived $5,518 in loan servicing fees during the second quarter of 2005. Asset management fee The general partners receive monthly fees for managing the Partnership's loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8 of 1% annually). Other fees The Partnership Agreement provides for other fees such as reconveyance, mortgage assumption and mortgage extension fees. These fees are incurred by the borrowers and paid to the general partners. Operating expenses The general partners or their affiliate, Redwood Mortgage Corp., are reimbursed by the Partnership for all operating expenses incurred by them on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners. Redwood Mortgage Corp. waived $870 in reimbursements during the second quarter of 2005. NOTE 4 - REAL ESTATE HELD FOR SALE In 1993 the Partnership, together with two other affiliates, acquired through foreclosure a parcel of land located in East Palo Alto, CA, which is on the market for sale. The general partners believe that this property is worth considerably more than its carrying value, but it may take a considerable amount of additional time to sell the property and realize its full potential. The property is unique in that it may only be utilized for commercial or industrial uses. Until recently, land sales activity has been slow. Interest in land sales for commercial sites has been improving. As of June 30, 2005 the Partnership's investment in this property was $130,215. 7 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 (unaudited) NOTE 4 - REAL ESTATE HELD FOR SALE (continued) The following table reflects the costs of real estate acquired through foreclosure and the recorded reductions to estimated fair values, including estimated costs to sell, as of June 30, 2005 and December 31, 2004: June 30, December 31, 2005 2004 ----------------- ---------------- Cost of property $ 130,215 $ 130,215 Reduction in value - (1,313) ----------------- ---------------- Real estate held for sale, net $ 130,215 $ 128,902 ================= ================ NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of financial instruments: Secured loans carrying value was $5,500,127 and $5,225,128 at June 30, 2005 and December 31, 2004, respectively. The fair value of these loans of $5,507,128 and $5,209,821, respectively, was estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans would be made. The applicable amount of the allowance for loan losses along with accrued interest and advances related thereto should also be considered in evaluating the fair value versus the carrying value. NOTE 6 - ASSET CONCENTRATIONS AND CHARACTERISTICS Loans are secured by recorded deeds of trust. At June 30, 2005 and December 31, 2004, there were 16 and 14 secured loans outstanding respectively, with the following characteristics: June 30, December 31, 2005 2004 ---------------- --------------- Number of secured loans outstanding 16 14 Total secured loans outstanding $ 5,500,127 $ 5,225,128 Average secured loan outstanding $ 343,758 $ 373,223 Average secured loan as percent of total secured loans 6.25% 7.14% Average secured loan as percent of partners' capital 5.37% 5.80% Largest secured loan outstanding $ 2,103,300 $ 2,103,300 Largest secured loan as percent of total secured loans 38.24% 40.25% Largest secured loan as percent of partners' capital * 32.86% 32.71% Largest secured loan as percent of total assets 32.78% 32.59% Number of counties where security is located (all California) 9 8 Largest percentage of secured loans in one county 40.15% 42.28% Average secured loan to appraised value of security based on appraised values and prior liens at time loan was consummated 79.92% 79.67% Number of secured loans in foreclosure status None None Amounts of secured loans in foreclosure None None
* At loan inception this loan represented 8.8% of outstanding loans and 8.7% of partners' capital. 8 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 (unaudited) NOTE 6 - ASSET CONCENTRATIONS AND CHARACTERISTICS (continued) Over time, loans may increase above 10% of the secured loan portfolio or Partnership assets as the loan portfolio and assets of the Partnership decrease due to limited partner withdrawals and/or loan payoffs. The following categories of secured loans were held at June 30, 2005 and December 31, 2004: June 30, December 31, 2005 2004 ----------------- ---------------- First trust deeds $ 3,977,933 $ 4,212,912 Second trust deeds 1,522,194 1,012,216 ----------------- ---------------- Total loans 5,500,127 5,225,128 Prior liens due other lenders at time of loan 4,949,048 3,026,354 ----------------- ---------------- Total debt $ 10,449,175 $ 8,251,482 ================= ================ Appraised property value at time of loan $ 13,074,020 $ 10,356,549 ----------------- ---------------- Total loans as percent of appraisals based on appraised values and prior liens at time loan was consummated 79.92% 79.67% ----------------- ---------------- Secured loans by type of property Owner occupied homes $ 1,342,675 $ 627,579 Non-owner occupied homes 250,000 689,017 Apartments 96,716 96,716 Commercial 3,810,736 3,811,816 ----------------- ---------------- $ 5,500,127 $ 5,225,128 ================= ================
Scheduled maturity dates of secured loans as of June 30, 2005 are as follows: Year Ending December 31, ------------------------------- 2005 $ 175,714 2006 671,716 2007 3,204,746 2008 400,000 2009 343,363 Thereafter 704,588 --------------- $ 5,500,127 =============== The maturities for 2005 include two loans totaling $175,714, which were past maturity at June 30, 2005. Interest payments on both of these loans were current at June 30, 2005. At times, the Partnership's cash deposits exceeded federally insured limits. Management believes deposits are maintained in financially secure financial institutions. 9 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 (unaudited) NOTE 6 - ASSET CONCENTRATIONS AND CHARACTERISTICS (continued) The Partnership has a substantial amount of its loan receivable balance from one borrower at June 30, 2005 and December 31, 2004. This borrower accounted for approximately 56% and 59% of the loan balances at such dates, respectively. This borrower accounted for approximately 55% and 57% of interest revenue for the six month period ended June 30, 2005 and year ended December 31, 2004, respectively. At June 30, 2005 and December 31, 2004, the collateral value securing these loans was less than the principal balance due under the loans. Redwood Mortgage Corp. has provided an indemnity to the Partnership whereby it has agreed to indemnify and hold harmless, the Partnership from any expenses or losses incurred by the Partnership by reason of the Partnership's inability to collect all principal due under the loans after the Partnership has exhausted all reserves set aside for these loans and all remedies available to it including foreclosure of the underlying collateral. Therefore, these loans are not considered impaired solely because the value of the collateral securing the loans is less than the principal due to the Partnership. NOTE 7 - COMMITMENTS AND CONTINGENCIES Workout agreements The Partnership has negotiated various contractual workout agreements with borrowers. Under the terms of these workout agreements the Partnership is not obligated to make any additional monetary advances for the maintenance or repair of the collateral securing the loans as of June 30, 2005 and December 31, 2004. There are one and three loans totaling $96,716 and $272,581 in workout agreements as of June 30, 2005 and December 31, 2004, respectively. Legal proceedings The Partnership is involved in various legal actions arising in the normal course of business. In the opinion of management, such matters will not have a material effect upon the financial position of the Partnership. Part I - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP Critical Accounting Policies. In preparing the financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet dates and revenues and expenses for the reporting periods. Such estimates relate principally to the determination of (1) the allowance for loan losses (i.e. the amount of allowance established against loans receivable as an estimate of potential loan losses) including the accrued interest and advances that are estimated to be unrecoverable based on estimates of amounts to be collected plus estimates of the value of the property as collateral and (2) the valuation of real estate held for sale. At June 30, 2005, there was one real estate property held for sale, acquired through foreclosure in a prior year. Loans and the related accrued interest, late fees and advances are analyzed on a regular basis for recoverability. Delinquencies are identified and followed as part of the loan system. Delinquencies are determined based upon contractual terms. A provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral values, and to provide for unrecoverable loans and receivables, including impaired loans, other loans, accrued interest, late fees and advances on loans and other accounts receivable (unsecured). The Partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined that the full amount is not collectible. 10 If the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement and the shortfall in the amounts due are not insignificant, the carrying amount of the loan is reduced to the present value of future cash flows discounted at the loan's effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral. If events and or changes in circumstances cause management to have serious doubts about the collectibility of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances, including accrued interest and advances. Recent trends in the economy have been taken into consideration in the aforementioned process of arriving at the allowance for loan losses. Actual results could vary from the aforementioned provisions for losses. Real estate held for sale includes real estate acquired through foreclosure and is stated at the lower of the recorded investment in the loan, plus any senior indebtedness, or at the property's estimated fair value, less estimated costs to sell. The Partnership periodically compares the carrying value of real estate to expected undiscounted future cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to estimated fair value. Forward Looking Statements. Certain statements in this Report on Form 10-Q which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Partnership's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward-looking statements include statements regarding future interest rates and economic conditions and their effect on the Partnership and its assets, trends in the California real estate market, estimates as to the allowance for loan losses, estimates of future limited partner withdrawals and 2005 annualized yield estimates. Actual results may be materially different from what is projected by such forward-looking statements. Factors that might cause such a difference include unexpected changes in economic conditions and interest rates, the impact of competition and competitive pricing and downturns in the real estate markets in which the Partnership has made loans. All forward-looking statements and reasons why results may differ included in this Form 10-Q are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results may differ. Related Parties. The general partners of the Partnership are Gymno Corporation and Michael R. Burwell. Most Partnership business is conducted through Redwood Mortgage Corp., an affiliate of the general partners, which arranges, services, and maintains the loan portfolio for the benefit of the Partnership. Michael R. Burwell is President and Chief Financial Officer of Redwood Mortgage Corp. and Gymno Corporation. The fees received by the affiliate are paid pursuant to the Partnership Agreement and are determined at the sole discretion of the affiliate. In the past the affiliate has elected not to take the maximum compensation. The following is a list of various Partnership activities for which related parties are compensated. o Mortgage Brokerage Commissions For fees in connection with the review, selection, evaluation, negotiation and extension of loans, Redwood Mortgage Corp. may collect an amount equivalent to 12% of the loaned amount until 6 months after the termination date of the offering. Thereafter, the loan brokerage commissions (points) will be limited to an amount not to exceed 4% of the total Partnership assets per year. The loan brokerage commissions are paid by the borrowers, and thus, are not an expense of the Partnership. Loan brokerage commissions paid by the borrowers were $36,250 and $0 for the six month periods and $18,500 and $0 for the three month periods ended June 30, 2005 and 2004, respectively. 11 o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% on an annual basis) of the unpaid principal of the Partnership's loans are paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. Mortgage servicing fees of $25,042 and $25,168 were incurred for the six month periods and $12,090 and $16,238 were incurred for the three month periods ended June 30, 2005 and 2004, respectively. Redwood Mortgage Corp. waived $5,518 in loan servicing fees during the second quarter of 2005. o Asset Management Fees The general partners receive monthly fees for managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net asset value' (3/8 of 1% on an annual basis). Management fees to the general partners of $4,027 and $4,112 were incurred for the six month periods and $2,013 and $2,046 were incurred for the three month periods ended June 30, 2005 and 2004, respectively. o Other Fees The Partnership Agreement provides that the general partners may receive other fees such as processing and escrow, reconveyance, mortgage assumption and mortgage extension fees. Such fees are incurred by the borrowers and are paid to the general partners. Such fees aggregated $1,937 and $72 for the six month periods and $502 and $12 for the three month periods ended June 30, 2005 and 2004, respectively. o Income and Losses All income and losses are credited or charged to partners in relation to their respective Partnership interests. The allocation to the general partners (combined) shall be a total of 1%, which was $1,945 and $1,625 for the six month periods and $955 and $809 for the three month periods ended June 30, 2005 and 2004, respectively. o Operating Expenses An affiliate of the Partnership, Redwood Mortgage Corp. is reimbursed by the Partnership for all operating expenses actually incurred by it on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners. Such reimbursement was $4,449 and $6,825 for the six month periods and $1,738 and $3,317 for the three month periods ended June 30, 2005 and 2004, respectively. Redwood Mortgage Corp. waived $870 in reimbursements during the second quarter of 2005. o Contributed Capital The general partners jointly and severally were to contribute 1/10 of 1% in cash contributions as proceeds from the offerings are received from the limited partners. As of June 30, 2005 and December 31, 2004, a general partner, Gymno Corporation, had contributed $9,772 as capital in accordance with Section 4.02(a) of the Partnership Agreement. 12 Results of Operations - For the six and three months ended June 30, 2005 and 2004 Changes in the Partnership's operating results for the six and three month periods ended June 30, 2005 versus 2004 are discussed below: Changes during the Changes during the six months ended three months ended June 30, 2005 June 30, 2005 versus 2004 versus 2004 ------------------ ------------------- Net income increase $ 32,030 $ 14,691 ============== =============== Revenue Interest on loans 14,497 2,165 Interest - interest bearing accounts 4,613 2,078 Late charges and other fees (24,249) (12,705) -------------- --------------- $ (5,139) $ (8,462) -------------- --------------- Expenses Mortgage servicing fees $ (126) $ (4,148) Asset management fees (85) (33) Clerical costs through Redwood Mortgage Corp. (2,376) (5,087) Provision for losses on loans and real estate held for sale (7,230) (5,434) Professional services (4,926) 3,078 Other (22,426) (11,529) -------------- --------------- $ (37,169) $ (23,153) -------------- --------------- Net income increase $ 32,030 $ 14,691 ============== ===============
The increase in interest on loans of $14,497 and $2,165 for the six and three month periods ended June 30, 2005 versus June 30, 2004 was primarily due to an increase in the average loan portfolio balance to $5,362,628 as of June 30, 2005 versus $5,149,886 as of June 30, 2004. The increase is also due to collection of additional interest on a loan totaling $6,135. Additional interest provisions are occasionally negotiated with borrowers as further compensation earned by the lender upon the payoff of a loan. These increases were partially offset by a reduction in the average interest rate from 9.28% at June 30, 2004 to 9.10% at June 30, 2005. The decrease in late charge revenue and other fees of $24,249 and $12,705 for the six and three month periods ended June 30, 2005 versus June 30, 2004 is due to the Partnership no longer receiving non-refundable option payments on a property sold in October, 2004. During the six and three month periods ended June 30, 2004, the Partnership received $19,286 and $9,643 of such option payments. The decrease was also due in part to a reduction in early withdrawal penalties of $5,819 and $3,078 for the six and three month periods ended June 30, 2005. These amounts were offset by an increase in late fees and miscellaneous income of $855 and $0 for the six and three month periods ended June 30, 2005. The increase in interest-bearing accounts of $4,613 and $2,078 for the six and three month periods ended June 30, 2005 versus June 30, 2004 was due to a higher average balance of deposits the Partnership had in the interest bearing account during the six and three month periods ended June 30, 2005 versus 2004. The Partnership maintained an average balance of $1,049,130 and $1,146,040 in the bank account during the first half and second quarter of 2005 compared to an average balance of $426,141 and $604,498 during the corresponding period of 2004. The decrease in loan servicing fees of $126 and $4,148 for the six and three month periods ended June 30, 2005 versus June 30, 2004 is primarily attributable to Redwood Mortgage waiving $5,518 in loan servicing fees during the second quarter of 2005. The decrease in the provision for losses on loans and real estate held for sale of $7,230 and $5,434 for the six and three month periods ended June 30, 2005 versus June 30, 2004 is due to a reduction in the balance of real estate owned and the general partners' estimate that the reserves are adequate as supplemented by a guarantee received from Redwood Mortgage Corp. relating to the collectibility of certain Partnership loans. 13 The decrease in professional services of $4,926 and increase of $3,078 for the six and three month periods ended June 30, 2005 versus June 30, 2004, was due to the timing of billing and payment of professional fees pertaining to the audit and tax return processing and legal fees in 2005 as compared to 2004. The decrease in clerical costs of $2,376 and $5,087 for the six and three month periods ended June 30, 2005 versus June 30, 2004 was primarily attributable to reduced costs in servicing this Partnership and a waiver of approximately $870 during the second quarter of 2005. The decrease in other expenses of $22,426 and $11,529 for the six and three month periods ended June 30, 2005 was related to the reduction in costs associated with the upkeep of real estate properties held for sale. Two real estate sales transactions occurred in 2004 which brought the real estate owned inventory from three properties, with value totaling $1,312,773 as of January 1, 2004 to one with a value totaling $130,215 as of June 30, 2005. Partnership capital decreased from $6,429,808 at December 31, 2004 to $6,400,965 at June 30, 2005. The decrease is attributable to continued earnings and capital liquidations. The Partnership began funding loans in October 1987. The Partnership's secured loans outstanding as of June 30, 2005 and December 31, 2004 were $5,500,127 and $5,225,128, respectively. The overall increase in loans outstanding at June 30, 2005 from December 31, 2004, was primarily due to the Partnership's ability to fund more loans to replace those that were being paid off during the first half of 2005. The Partnership placed $1,325,000 of new loans in the six month period ended June 30, 2005 and received principal payoffs from borrowers of $1,050,002. The Partnership's operating results and delinquencies are within the normal range of the general partners' expectations, based upon their experience in managing similar partnerships over the last twenty-six years. Foreclosures are a normal aspect of Partnership operations and the general partners anticipate that they will not have a material effect on liquidity. As of June 30, 2005, there were no properties in foreclosure. As of June 30, 2005 and 2004, the Partnership's real estate held for sale account balance was $130,215 and $862,288, respectively. The decrease was due to the sale of one of the properties in October of 2004. Cash is continually being generated from interest earnings, late charges, prepayment penalties, amortization of principal, proceeds from sale of real estate held and loan pay-offs. Currently, this amount exceeds Partnership expenses and earnings and partner liquidation requirements. As loan opportunities become available, excess cash and available funds are invested in new loans. Allowance for Losses. The general partners regularly review the loan portfolio, examining the status of delinquencies, the underlying collateral securing these loans, real estate held for sale expenses, sales activities, and borrower's payment records and other data relating to the loan portfolio. Data on the local real estate market and on the national and local economy are studied. Based upon this information and more, the allowance for loan losses is increased or decreased. Borrower foreclosures are a normal aspect of Partnership operations. The Partnership is not a credit based lender and hence while it reviews the credit history and income of borrowers, and if applicable, the income from income producing properties, the general partners expect that we will on occasion take back real estate security. During 2002 and 2003 the economy stabilized. During 2004 and 2005 the economy and the Northern California real estate market has strengthened. At June 30, 2005 the Partnership had two loans past maturity totaling $175,714, but these loans were current in interest payments. In addition to the above, the Partnership had two other loans totaling $216,257 past due 90 days or more in interest payments. One of these loans is considered to be impaired, which means that interest is no longer being accrued and that payments received will be applied to reduce the outstanding loan balances, including accrued interest and advances. The principal balance of the impaired loan is $96,716. The Partnership does not have any filed notices of default, which would begin the foreclosure process at June 30, 2005. The Partnership has a workout agreement on this impaired loan totaling $96,716 (1.76% of the secured loan portfolio) as of June 30, 2005. Typically, a workout agreement allows the borrower to extend the maturity date of the balloon payment and/or allows the borrower to make current monthly payments while deferring for periods of time, past due payments, or allows time to pay the loan in full. These workout agreements and foreclosures generally exist within our loan portfolio to greater or lesser degrees, depending primarily on the health of the economy. The number of foreclosures and workout agreements will rise during difficult times and conversely fall during good economic times. The one workout agreement existing at June 30, 2005, in management's opinion, does not have a material effect on our results of operations or liquidity. This workout agreement has been 14 considered when management arrived at an appropriate allowance for loan losses and based on our experience, are reflective of our loan marketplace segment. Because of the number of variables involved, the magnitude of possible swings and the general partners' inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the general partners. As of June 30, 2005 and 2004, the Partnership's real estate held for sale balance was $130,215 and $862,288, respectively. The decrease in real estate held for sale balance of $732,073 as of June 30, 2005 is due to the sale of one of the properties in October 2004, at a loss of approximately $778,500 which, was previously fully reserved for. The Partnership has not taken back any collateral security from borrowers in 2004 or 2005. The Partnership's real estate held for sale inventory has been reduced to one property. This remaining property is an undeveloped piece of land, which is located in East Palo Alto, California. The Partnership has held its interest in this land since April, 1993. The land is owned with two other affiliated partnerships. Currently, the Partnership is not in contract or negotiating with any interested parties for the sale of this property. The general partners believe that the property is worth considerably more than its net investment, but it may take a considerable amount of additional time to sell the property and realize its full potential. The property is unique in that it may only be utilized for commercial or industrial uses. Until recently, land sales activity had been slow, but interest in land sales for commercial sites has been increasing. Management provided $8,070 and $15,300 as provision for loan losses for the six month periods ended June 30, 2005and 2004, respectively, and $3,379 and $8,813 for the three month periods ended June 30, 2005 and 2004, respectively. The provision for loan losses builds up the allowance for potential losses. During 2002, Redwood Mortgage Corp. provided an indemnity to the Partnership whereby it has agreed to indemnify and hold harmless, the Partnership from any expenses or losses incurred by the Partnership by reason of the Partnership's inability to collect all principal due under certain loans after the Partnership has exhausted all reserves set aside for these loans and all remedies available to it including foreclosure of the underlying collateral. Therefore, these loans are not considered impaired solely because the value of the collateral securing the loans is less than the principal due to the Partnership. PORTFOLIO REVIEW - For the six months ended June 30, 2005 and 2004 Loan Portfolio The Partnership's loan portfolio consists primarily of short-term (one to five years), fixed rate loans secured by real estate. As of June 30, 2005 and 2004 the Partnership's loans secured by real property collateral in the four San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, and Alameda) represented $4,658,398 (85%) and $4,694,002 (93%), respectively, of the outstanding secured loan portfolio. The remainder of the portfolio represented loans secured by real estate located primarily in Northern California. As of June 30, 2005 and 2004, the Partnership held 16 and 14 loans respectively in the following categories: June 30, June 30, 2005 2004 ----------------------------- ----------------------------- Single family homes(1-4 units) $ 1,592,675 28.96% $ 1,341,812 26.60% Apartments (5+ units) 96,716 1.76% 136,841 2.71% Commercial 3,810,736 69.28% 3,565,498 70.69% ------------- ------------ ------------- ------------ Total $ 5,500,127 100.00% $ 5,044,151 100.00% ============= ============ ============= ============
15 As of June 30, 2005, the Partnership held 16 loans secured by deeds of trust. The following table sets forth the priorities, asset concentrations and maturities of the loans held by the Partnership as of June 30, 2005: PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS As of June 30, 2005 # of Loans Amount Percent ------------ -------------- ------------- 1st Mortgages 8 $ 3,977,933 72% 2nd Mortgages 8 1,522,194 28% ============ ============== ============= Total 16 $ 5,500,127 100% Maturing 12/31/05 and prior 2 $ 175,714 3% Maturing prior to 12/31/06 3 671,716 12% Maturing prior to 12/31/07 3 3,204,746 58% Maturing after 12/31/07 8 1,447,951 27% ============ ============== ============= Total 16 $ 5,500,127 100% Average Loan $ 343,758 6% Largest Loan 2,103,300 38% Smallest Loan 31,365 0.57% Average Loan-to-Value, based upon appraisals and senior liens at date of inception of loan 79.92%
The Partnership's largest loan in the principal amount of $2,103,300 represents 38% of outstanding secured loans and 33% of Partnership assets. Larger loans sometimes increase above 10% of the secured loan portfolio or Partnership assets as these amounts decrease due to limited partner withdrawals and loan payoffs and due to restructuring of existing loans. In this instance all of these factors affected this loan. Chief among them was a restructure of two loans with outstanding principal plus accrued interest, late fees and advances into one new loan with an outstanding balance of $2,103,300. The Partnership has a substantial amount of its loan receivable balance from one borrower at June 30, 2005 and 2004. The borrower accounted for approximately 56% and 61% of the loan balances at such dates. This borrower has two loans secured by separate properties in the principal amounts of $2,103,300 and $956,800 as of June 30, 2005. Neither of these loans are past due in principal or 90 days or more past due in interest. Liquidity and Capital Resources. The Partnership relies upon loan payoffs and borrowers' mortgage payments for the source of funds for loans. Recently, mortgage interest rates have decreased somewhat from those available at the inception of the Partnership. If interest rates were to increase substantially, the yield of the Partnership's loans may provide lower yields than other comparable debt-related investments. Additionally, since the Partnership has made primarily fixed rate loans, if interest rates were to rise, the likely result would be a slower prepayment rate for the Partnership. This could cause a lower degree of liquidity as well as a slowdown in the ability of the Partnership to invest in loans at the then current interest rates. Conversely, in the event interest rates were to decline, the Partnership could experience significant borrower prepayments, which, if the Partnership can only obtain the then existing lower rates of interest may cause a dilution of the Partnership's yield on loans, thereby lowering the Partnership's overall yield to the limited partners. Cash is constantly being generated from borrower interest payments, late charges, amortization of loan principal and loan payoffs. Currently, cash flow exceeds Partnership expenses, earnings and limited partner capital payout requirements. Excess cash flow will be invested in new loan opportunities, when available, and in other Partnership business. 16 At the time of subscription to the Partnership, limited partners made a decision to either take distributions of earnings monthly, quarterly or annually or to compound earnings in their capital account. For the six and three month periods ended June 30, 2005 and 2004, the Partnership made distributions of earnings to limited partners of $69,202 and $54,973, and $36,510 and $27,187, respectively. Distribution of earnings to limited partners for the six and three month periods ended June 30, 2005 and 2004, to limited partners' capital accounts and not withdrawn, was $123,383 and $105,902, and $58,110 and $52,888, respectively. As of June 30, 2005 and 2004, limited partners electing to withdraw earnings represented 39% and 35% of the limited partners' outstanding capital accounts, respectively. The Partnership also allows the limited partners to withdraw their capital account subject to certain limitations. For the six and three month periods ended June 30, 2005 and 2004, $23,054 and $103,036, and $9,027 and $46,829, respectively, were liquidated subject to the 10% and/or 8% penalty for early withdrawal. These withdrawals are within the normally anticipated range that the general partners would expect in their experience in this and other partnerships. The general partners expect that a small percentage of limited partners will elect to liquidate their capital accounts over one year with a 10% and/or 8% early withdrawal penalty. In originally conceiving the Partnership, the general partners wanted to provide limited partners needing their capital returned a degree of liquidity. Generally, limited partners electing to withdraw over one year need to liquidate investments to raise cash. The demand the Partnership is experiencing in withdrawals by limited partners electing a one year liquidation program represents a small percentage of limited partner capital as of June 30, 2005 and 2004, respectively, and is expected by the general partners to commonly occur at these levels. Additionally, for the six and three month periods ended June 30, 2005 and 2004, $129,174 and $116,087, and $73,666 and $58,910, respectively, were liquidated by limited partners who have elected a liquidation program over a period of five years or longer. Once the initial five-year hold period has passed, the general partners expect to see an increase in liquidations due to the ability of limited partners to withdraw without penalty. This ability to withdraw after five years by limited partners has the effect of providing limited partner liquidity. The general partners expect a portion of the limited partners to take advantage of this provision. This has the anticipated effect of the Partnership growing, primarily through reinvestment of earnings in years one through five. The general partners expect to see increasing numbers of limited partner withdrawals in years five through eleven, at which time the bulk of those limited partners who have sought withdrawal will have been liquidated. After year eleven, liquidation generally subsides and the Partnership capital again tends to increase. In some cases in order to satisfy broker dealers and other reporting requirements, the general partners have valued the limited partners' interest in the Partnership on a basis which utilizes a per Unit system of calculation, rather than based upon the investors' capital account. This information has been reported in this manner in order to allow the Partnership to integrate with certain software used by the broker dealers and other reporting entities. In those cases, the Partnership will report to broker dealers, Trust Companies and others a "reporting" number of Units based upon a $1.00 per Unit calculation. The number of reporting Units provided will be calculated based upon the limited partner's capital account value divided by $1.00. Each investor's capital account balance is set forth periodically on the Partnership account statement provided to investors. The reporting Units are solely for broker dealers requiring such information for their software programs and do not reflect actual Units owned by a limited partner or the limited partners' right or interest in cash flow or any other economic benefit in the Partnership. Each investor's capital account balance is set forth periodically on the Partnership account statement provided to investors. The amount of Partnership earnings each investor is entitled to receive is determined by the ratio that each investor's capital account bears to the total amount of all investor capital accounts then outstanding. The capital account balance of each investor should be included on any NASD member client account statement in providing a per Unit estimated value of the client's investment in the Partnership in accordance with NASD Rule 2340. While the general partners have set an estimated value for the Partnership Units, such determination may not be representative of the ultimate price realized by an investor for such Units upon sale. No public trading market exists for the Partnership's Units and none is likely to develop. Thus, there is no certainty that the Units can be sold at a price equal to the stated value of the capital account. Furthermore, the ability of an investor to liquidate his or her investment is limited subject to certain liquidation rights provided by the Partnership, which may include early withdrawal penalties. 17 Current Economic Conditions. From July 1, 2004 through June 30, 2005, the Federal Reserve increased the Federal Funds Rate to 3.25% from 1.00%. The recent upward movement in the Federal Funds Rate during 2004 and 2005 has raised short-term rates but has not yet raised long-term interest rates significantly. New loans will be originated at then existing interest rates. In the future the general partners anticipate that interest rates likely will change from their current levels. The general partners cannot, at this time, predict at what levels interest rates will be in the future. The general partners anticipate that new loans will be placed during 2005 at rates slightly above those that prevailed in 2004. The recent increases in short term interest rates and to a lesser extent long term interest rates has encouraged those borrowers with interest rates above the current going rates to refinance their indebtedness so as to lock in these historically low interest rates should they move higher in the future However, demand for loans from qualified borrowers continues to be strong and as prepayments occur, the general partners expect to replace paid off loans with loans at somewhat lower interest rates. At this time, the general partners believe that the average loan portfolio interest rate will remain relatively stable over the year 2005. Based upon the rates payable in connection with the existing loans, and anticipated interest rates to be charged by the partnership and the general partners' experience, the general partners anticipate that the annualized yield will range between 5.75% and 6.50% in 2005. The Partnership makes loans primarily in Northern California. As of June 30, 2005, approximately 85%, ($4,658,398) of the loans held by the Partnership were in four San Francisco Bay Area Counties. The remainder of the loans held was secured primarily by Northern California real estate outside of the San Francisco Bay Area. The national and Northern California economies continue to improve. Both are exhibiting steady economic growth, low inflation, and improving unemployment numbers. The increases in the price of oil and the pace of real estate appreciation remain a concern. During July of 2005 the Mortgage Bankers Association issued their long term economic forecast through 2007 which included predictions of a 3.5% economic growth rate, a core inflation rate of 1.5% for the next several years, relatively low long-term interest rates rising to perhaps 6.25% for 30-year mortgages, declining unemployment to 4.9%, job growth of about 180,000 jobs per month and a slowdown in residential appreciation to a more sustainable 4.5% per year. These predictions indicate an economy that is continuing to grow and improve, which is good for both mortgage businesses and the real estate industry as a whole. The Northern California residential real estate market continued to exhibit strong appreciation during the second quarter of 2005. Values of single family homes in the six county San Francisco Bay Area rose on a June year to year comparison by 18.2%. These price increases are significant but the real estate market may be beginning to slow as sales volumes of homes declined by an average of 9.4% as compared to 2004. The partnership invests a significant amount of its portfolio in residential mortgages and a strong appreciating market assists in creating loan demand and enhancing loan security. The Northern California commercial real estate market continued eight consecutive quarters of positive numbers. Space absorption in the office sector continued throughout the Bay Area, while San Francisco was typical. Absorption as reported by Grubb and Ellis was 507,871 square feet for the second quarter and 689,942 for the year to date while Cushman Wakefield reported 447,646 for the second quarter and 860,827 for the year to date. This steady positive absorption continues the progress of whittling down the available office inventory which stood at approximately 22% in San Francisco as little a two years ago. Cushman Wakefield reports overall San Francisco vacancies of 17.6%. Despite the high vacancy rate, rents have begun to increase. C.B. Richard Ellis reported that San Francisco rents averaged $27.18 per square foot while Cushman Wakefield reported that rents averaged $30.24 per square foot. Little new construction is likely to occur as new construction costs run $525 per square foot and top sales prices average $320 per square foot. The three highest per square foot sales transactions in 2005 were $495, $467 and $434 per square foot. Over $2 billion in property has sold in the first half of 2005, which is only $700 million short of the total sales volume in 2004. While 2004 was a record breaking year, it is likely that 2005 will surpass the 2004 record. The continued improvement of the commercial market assists owners in making their debt payments. Increased occupancies and increasing rents assist by adding value to the real estate security of our commercial loans. 18 For Partnership loans outstanding as of June 30, 2005, the Partnership had an average loan to value ratio of 79.92%, computed based on appraised values and senior liens as of the date the loan was made. This percentage does not account for any increases or decreases in property values since the date the loan was made, nor does it include any reductions in principal on senior indebtedness through amortization of payments after the loan was made. This loan to value ratio will assist the Partnership in weathering loan delinquencies and foreclosures should they eventuate. Contractual Obligations Table. None Part I - Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following table contains information about the cash held in money market accounts, and loans held in the Partnership's portfolio as of June 30, 2005. The presentation, for each category of information, aggregates the assets and liabilities by their maturity dates for maturities occurring in each of the years 2005 through 2009 and separately aggregates the information for all maturities arising after 2009. The carrying values of these assets and liabilities approximate their fair market values as of June 30, 2005: 2005 2006 2007 2008 2009 Thereafter Total -------------------------------------------------------------------------------------- Interest earning assets: Money market accounts $ 746,366 $ 746,366 Average interest rate 1.45% 1.45% Unsecured loans $ 270,610 $ 270,610 Average Interest Rate 0% 0% Loans secured by deeds of trust $ 175,714 671,716 3,204,746 400,000 343,363 704,588 $5,500,127 Average interest rate 10.00% 9.18% 9.07% 8.50% 9.35% 9.15% 9.10%
Market Risk. The Partnership's primary market risk in terms of its profitability is the exposure to fluctuations in earnings resulting from fluctuations in general interest rates. The majority of the Partnership's mortgage loans earn interest at fixed rates. Changes in interest rates may also affect the value of the Partnership's investment in mortgage loans and the rates at which the Partnership reinvests funds obtained from loan repayments and new capital contributions from limited partners. If interest rates increase, the interest rates the Partnership obtains from reinvested funds will generally increase, but the value of the Partnership's existing loans at fixed rates will generally tend to decrease. The risk is mitigated by the fact that the Partnership does not intend to sell its loan portfolio, rather such loans are held until they are paid off. If interest rates decrease, the amounts becoming available to the Partnership for investment due to repayment of Partnership loans may be reinvested at lower rates than the Partnership had been able to obtain in prior investments, or than the rates on the repaid loans. In addition, interest rate decreases may encourage borrowers to refinance their loans with the Partnership at a time where the Partnership is unable to reinvest in loans of comparable value. The Partnership does not hedge or otherwise seek to manage interest rate risk. The Partnership does not enter into risk sensitive instruments for trading purposes. ASSET QUALITY A consequence of lending activities is that occasionally losses will be experienced and that the amount of such losses will vary from time to time, depending upon the risk characteristics of the loan portfolio as affected by economic conditions and the financial experiences of borrowers. Many of these factors are beyond the control of the general partners. There is no precise method of predicting specific losses or amounts that ultimately may be charged off on particular segments of the loan portfolio, especially in light of the current economic environment. 19 The conclusion that a loan may become uncollectible, in whole or in part, is a matter of judgment. Although institutional lenders are subject to requirements and regulations that, among other things, require them to perform ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and to obtain and maintain current information regarding their borrowers and the securing properties, the Partnership is not subject to these regulations and has not adopted certain of these practices. Rather, the general partners, in connection with the periodic closing of the accounting records of the Partnership and the preparation of the financial statements, determine whether the allowance for loan losses is adequate to cover potential loan losses of the Partnership. As of June 30, 2005 the general partners have determined that the allowance for loan losses and real estate owned of $325,134 (5.08% of net assets) is adequate in amount. Because of the number of variables involved, the magnitude of the swings possible and the general partners' inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the general partners. As of June 30, 2005, two loans were past maturity over 90 days amounting to $175,714. In addition, two loans totaling $216,257 were past due 90 days or more in interest payments. One of these loans for $96,716 was subject to a workout agreement, which requires the borrower to make regular monthly loan payments. This loan is the only loan categorized as impaired. The Partnership also owns (through previous foreclosure) one property; an undeveloped commercial property located in East Palo Alto, California. The land is owned with two other affiliated Partnerships. The Partnership's net investment in the land at June 30, 2005 is $130,215, or 2.03% of Partnership assets. The general partners believe that the property is worth considerably more than its net investment. There are no ongoing negotiations for the sale of this property. Part I - Item 4. CONTROLS AND PROCEDURES As of June 30, 2005, the Partnership carried out an evaluation, under the supervision and with the participation of the general partners of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the general partners concluded that the Partnership's disclosure controls and procedures are effective in timely alerting the general partners to material information relating to the Partnership that is required to be included in our periodic filings with the Securities and Exchange Commission. There were no significant changes in the Partnership's internal control over financial reporting during the Partnership's first six months that have materially affected, or are reasonably likely to materially affect, the Partnership's internal control over financial reporting. 20 Part II - OTHER INFORMATION Item 1. Legal Proceedings The Partnership periodically is a defendant in various legal actions. Please refer to Note 7 of Financial Statements. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Not Applicable Item 3. Defaults upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits 31.1 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 21 Signatures Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized on the 15th day of August 2005. REDWOOD MORTGAGE INVESTORS VI By: /S/ Michael R. Burwell ----------------------------------- Michael R. Burwell, General Partner By: Gymno Corporation, General Partner By: /S/ Michael R. Burwell --------------------------------------------- Michael R. Burwell, President, Secretary/Treasurer & Chief Financial Officer 22 Exhibit 31.1 GENERAL PARTNER CERTIFICATION I, Michael R. Burwell, General Partner, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage Investors VI, a California Limited Partnership (the "Registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial data; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. /s/ Michael R. Burwell - ----------------------------------- Michael R. Burwell, General Partner August 15, 2005 23 Exhibit 31.2 PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION I, Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage Investors VI, a California Limited Partnership (the "Registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial data; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. /s/ Michael R. Burwell - ----------------------------- Michael R. Burwell, President, Secretary/Treasurer and Chief Financial Officer, of Gymno Corporation, General Partner August 15, 2005 24 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Redwood Mortgage Investors VI (the "Partnership") on Form 10-Q for the period ending June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the Partnership, certify, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership at the dates and for the periods indicated. /s/ Michael R. Burwell - ----------------------------------- Michael R. Burwell, General Partner August 15, 2005 25 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Redwood Mortgage Investors VI (the "Partnership") on Form 10-Q for the period ending June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President, Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General Partner of the Partnership, certify that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership at the dates and for the periods indicated. /s/ Michael R. Burwell - ------------------------------------ Michael R. Burwell, President, Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General Partner August 15, 2005 26 -----END PRIVACY-ENHANCED MESSAGE-----