10-K 1 rmi610k2005.txt REDWOOD MORTGAGE INVESTORS VI (a California Limited Partnership) Index to Form 10-K December 31, 2005 Part I Page No. ------------ Item 1 - Business 4 Item 2 - Properties 8 Item 3 - Legal Proceedings 8 Item 4 - Submission of Matters to a Vote of Security Holders (Partners) 8 Part II Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 8 Item 6 - Selected Financial Data 9 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 7a - Quantitative and Qualitative Disclosures About Market Risk 18 Item 8 - Financial Statements and Supplementary Data 20 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42 Item 9a - Controls and Procedures 42 Item 9b - Other Information 42 Part III Item 10 - Directors and Executive Officers of the Registrant 42 Item 11 - Executive Compensation 43 Item 12 - Security Ownership of Certain Beneficial Owners and Management 44 Item 13 - Certain Relationships and Related Transactions 44 Item 14 - Principal Accountant Fees and Services 44 Part IV Item 15 - Exhibits, Financial Statements and Schedules 45 Signatures 46 Certifications 47
1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Year Ended December 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number: 000-17573 REDWOOD MORTGAGE INVESTORS VI, a California Limited Partnership (Exact name of registrant as specified in its charter) California 94-3031211 (State or other jurisdiction of (I.R.S. Employer Identification) incorporation or organization) 900 Veterans Blvd., Suite 500, Redwood City, CA 94063 (address of principal executive offices) (zip code) (650) 365-5341 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12 (b) of the Act: NONE Securities registered pursuant to Section 12 (g) of the Act: Limited Partnership Units 2 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933, as amended. Yes No XX -------------- ------------- Indicate by check mark if the registrant is not required to file pursuant to Section 13 or Section 15(d) of the Securities Act of 1934, as amended. Yes No XX -------------- ------------- Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes XX No -------------- ------------- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No XX -------------- ------------- As of June 30, 2005, the aggregate value of limited partnership Units held by non-affiliates was $6,391,203. This calculation is based on the capital account balance of the limited partners and excludes limited partnership Units held by the general partners. Documents incorporated by reference: Portions of the Prospectus for Redwood Mortgage Investors VI, included as part of the form S-11 Registration Statement, SEC File No. 33-12519 dated September 3, 1987 and Supplement No. 6 dated May 16, 1989, are incorporated in Parts II, III, and IV. 3 Part I Item 1 - Business Redwood Mortgage Investors VI is a California Limited Partnership (the "Partnership"). Michael R. Burwell, an individual, and Gymno Corporation, a California corporation, are the general partners. The address of the general partners is 900 Veterans Blvd., Suite 500, Redwood City, California 94063. The Partnership's primary purpose is to invest its capital in first and second deeds of trust secured primarily by Northern California properties. Loans are arranged and serviced by Redwood Mortgage Corp., an affiliate of the general partners. The Partnership's objectives are to make investments which will: (i) provide the maximum possible cash returns which limited partners may elect to (a) receive as monthly, quarterly or annual cash distributions or (b) have earnings credited to their capital accounts and used to invest in Partnership activities; and (ii) preserve and protect the Partnership's capital. The Partnership's general business is more fully described under the section entitled "Investment Objectives and Criteria", pages 23-26 of the Prospectus, a part of the above-referenced Registration Statement, which is incorporated by reference. The Partnership was formed in September 1987, with an approved 120,000 Units of $100 each ($12,000,000). The Units were offered on a "best efforts" basis through broker/dealer member firms of the National Association of Securities Dealers, Inc. It immediately began issuing Units and began investing in loans in October 1987. The offering terminated in September 1989, and as of that date 97,725.94 limited partner Units were sold realizing proceeds of $9,772,594. At December 31, 2005, the Partnership had a balance of loans totaling $2,021,973 with interest rates thereon ranging from 8.50% to 10.50%. Currently first mortgage loans comprise 40.08% of the total amount of secured loan portfolio. Second mortgage loans comprise 59.92% of the secured loan portfolio. Single Family (1-4 units) homes, total 84.25% of the secured mortgage loans. Commercial secured loans decreased from last year, now comprising 15.75% of the portfolio, a decrease of 57.20% from 2004. The major concentration of secured loans, comprising 73.13% of the total secured loans, is in three of the six counties that comprise the San Francisco Bay Area. The balance is primarily in Northern California. Currently secured loan size is averaging $224,664 per loan. Some of the secured loans are fractionalized between affiliated partnerships with objectives similar to those of the Partnership to further reduce risk. Average equity per loan transaction, which is our loan plus any senior loans, divided by the property's appraised value, subtracted from 100%, stood at 34.05%, based on senior loans and appraised values at the inception of our loan. Generally, the more equity, the more protection for the lender. The Partnership's loan portfolio had no properties in foreclosure as of the end of December 2005. Delinquencies are discussed under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. For the year ended December 31, 2005 and 2004 the Partnership did not take back any collateral from defaulted borrowers. During the year 2002, the Partnership acquired a piece of real estate property through foreclosure. This property consisted of four townhouses. The Partnership commenced refurbishment of the units and concluded a sale of the units in March 2004. A second property, acquired in 2000, was a commercial property located in Walnut Creek, California. The property was sold during the fourth quarter of 2004. The Partnership realized a loss upon the sale of both of these properties totaling approximately $783,000, which had previously been reserved for. The Partnership also owns (through previous foreclosure in April, 1993) one other property; undeveloped land. The land is located in East Palo Alto. The land is owned with two other affiliated partnerships. The Partnership's net investment of $130,215 is 2.05% of Partnership assets. The general partners believe that the property is worth considerably more than its net investment, but it may take a considerable amount of additional time to sell the property and realize its full potential. The property is unique in that it may only be utilized for commercial or industrial uses. Until recently, land sales activity had been slow, but interest in land sales for commercial sites has been increasing. 4 The Partnership's revenues increased from $491,640 in 2003 to $538,737 in 2004 and decreased slightly to $522,282 in 2005. The increase from 2003 to 2004 was due primarily to the increase in the average interest rate on loans, which was 7.80% in 2003, 8.41% in 2004, and 9.12% in 2005. In addition, the increase in revenue in 2004 was due primarily to the receipt of a non-refundable deposit on the sale of a real estate held for sale property totaling $28,929. In 2005 the decrease from 2004 was primarily due to the collection of $44,318 in interest and $5,912 in late charges on a loan that was previously categorized as impaired; offset by a lower average outstanding loan balance, which was substantially affected by the pay off of two loans totaling $3,060,100 in November, 2005. As a result of this payoff the Partnership's loan balances declined from $5,599,663 to $2,172,419. The Partnership was unable to place the payoff proceeds of $3,060,100 on new notes immediately. Instead, the proceeds were deposited into the Partnership's money market account. Cash flow the Partnership generated from mortgage interest and loan pay-downs and pay-offs was used to meet limited partner capital and earnings liquidations. Withdrawals by limited partners were $506,503, $510,115 and $457,826 for the three years ended December 31, 2003, 2004 and 2005, respectively. During the year 2005, the Partnership's annualized yield on compounding accounts was 6.15% and on monthly distributing accounts it was 5.99%. Competition and General Economic Conditions. The Partnership's major competitors in providing mortgage loans are banks, savings and loan associates, thrifts, conduit lenders, mortgage brokers, and other entities both larger and smaller than the Partnership. The Partnership is competitive in large part because the general partners generate all of their loans. The general partners have been in the business of making or investing in mortgage loans in Northern California since 1978 and have developed a quality reputation and recognition within the field. Beginning in July of 2004, the Federal Reserve changed its interest rate policy from one of three years of continuously lowered interest rates, which hit a 40 year historic interest rate low, to one of tempered but gradual interest rate increases. In keeping with this new policy since July 2004, the Federal Reserve has increased the Federal Funds Rate by one quarter percentage point (1/4 of one percent) at each of its meetings to 5.25% as of December 31, 2005. This deliberate upward change in the Federal Funds Rate has caused short term interest rates to rise, and to a lesser degree, pushed longer term rates up as well. Nationally and more specifically in Northern California, the location of the majority of our lending activities, the economies have substantially recovered from the economic downturn lasting from 2000 through 2003. Employment and job creation has improved. During 2004 and 2005, the residential and commercial real estate markets in Northern California enjoyed solid price appreciation. During the latter half of 2005, long-term interest rates have begun to inch upward. Residential sales volumes have declined yet median home sales prices have remained at or near their record 2005 highs. While some concern exists as to whether real estate values will soften, interest rates continue to remain attractive by historical standards, unemployment remains low and the economy is strong. Management believes these factors will contribute to a real estate marketplace with lower appreciation in 2006 compared to 2004 and 2005. With less real estate transactions likely to exist competition for loans will be fierce. Since it appears that the bottom of the interest rate cycle was reached in 2004, we believe loan runoff to lower interest rates will be reduced allowing the partnership to retain its loans for longer periods. Excess cash will be invested in short-term alternative investments, such as money market funds yielding considerably less than the current loan investment portfolio. 5 Secured Loan Portfolio As of December 31, 2005, a summary of the Partnership's secured loan portfolio is set forth below. Loans as a Percentage of Appraised Value First Trust Deed Loans $ 810,359 Second Trust Deed Loans 1,211,614 --------------- Total loans $ 2,021,973 Priority Positions due other Lenders at Time of Loan 2,367,593 Total Debt $ 4,389,566 =============== Appraised Property Value at time of loan $ 6,655,409 Total Secured Loans as a % of Appraisal based on appraisals and prior liens at date of loan 65.95% Number of Secured Loans Outstanding 9 Average Secured Loan 224,664 Average Secured Loan as a % of Net Assets 3.53% Largest Secured Loan Outstanding 532,131 Largest Secured Loan as a % of Net Assets 8.37% Largest secured Loan as a % of Total Assets 8.36% Secured Loans as a Percentage of Total Loans Percent ----------------------------------------------------- --------------- First Trust Deeds 40.08% Second Trust Deeds 59.92% --------------- Total 100.00% =============== Secured Loans by Type of Property Amount Percent ----------------------------------------------------- --------------- ------------ Single Family (1-4 units) $ 1,703,472 84.25% Commercial 318,501 15.75% --------------- ------------ Total $ 2,021,973 100.00% =============== ============
6 The following is a distribution of secured loans outstanding as of December 31, 2005 by California Counties: Total California County Secured Loans Percent ------------------------------------------------------ ---------------- ------------- San Francisco Bay Area Counties San Mateo $ 544,069 26.91% Santa Clara 532,131 26.32% Alameda 402,432 19.90% ---------------- ------------- 1,478,632 73.13% San Francisco Bay Area Adjacent Counties Monterey 250,000 12.36% Stanislaus 174,432 8.63% ---------------- ------------- 424,432 20.99% Other California Counties Colusa 118,909 5.88% ---------------- ------------- 118,909 5.88% Total $ 2,021,973 100.00% ================ =============
Number of Loans in Foreclosure 0 Scheduled maturity dates of secured loans as of December 31, 2005 are as follows: Year Ending December 31, -------------------------- 2006 $ 424,432 2007 144,069 2008 400,000 2009 272,394 2010 781,078 -------------- $ 2,021,973 ============== The Partnership's largest loan in the principal amount of $532,131 represents 26.32% of outstanding secured loans and 8.36% of Partnership assets. Larger loans sometimes increase above 10% of the secured loan portfolio or Partnership assets as these amounts decrease due to limited partner withdrawals and loan payoffs and due to restructuring of existing loans. The Partnership had a substantial amount of its loan receivable balance from one borrower at December 31, 2004 and 2003. The borrower accounted for approximately 59% and 58% of the loan balances at such dates. This borrower had two loans secured by separate properties in the principal amounts of $2,103,000 and $956,800. These loans were paid off in November, 2005. In addition, an impaired loan with a principal balance of $96,716 paid off in November, 2005. The scheduled maturities for 2006 include two loans for $174,432, representing 8.63% of the secured loan portfolio, past maturity at December 31, 2005. The Partnership occasionally allows borrowers to continue to make the regular interest payments on debt past maturity for periods of time. In many instances the interest rate on these past maturity loans is higher than currently existing interest rates. Interest payments on these loans were current. 7 Item 2 - Properties The Partnership did not take back any collateral security from borrowers in 2005 or 2004. During 2002, the Partnership took back one piece of real estate collateral through foreclosure. The Partnership, together with other partnerships, all affiliates of the general partners, owned the property. The property was a 4 unit condominium complex. During the year 2003, renovation work was completed and the property was placed on the market for sale. A purchase offer was accepted and the escrow closed in March, 2004. As of December 31, 2003, the carrying value of this property was $454,862. A second property, acquired in 2000, was a commercial property located in Walnut Creek, California. The property was sold in October, 2004. The Partnership realized a loss upon the sale of both of these properties totaling approximately $783,000, which had been anticipated and the loss was offset against reserves previously set aside for these properties. The Partnership also owns, through previous foreclosures, one other property; undeveloped land. The land is located in East Palo Alto. The land is owned with two other affiliated partnerships. The Partnership's net investment in the land at December 31, 2005 is $130,215. The general partners believe that the property is worth considerably more than its net investment, but it may take a considerable amount of additional time to sell the property and realize its full potential. The property is unique in that it may only be utilized for commercial or industrial uses. Until recently, land sales activity had been slow, but interest in land sales for commercial sites has been increasing. Item 3 - Legal Proceedings In the normal course of business, the Partnership may become involved in various types of legal proceedings such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc., to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes, or to protect, or recoup its investment from the real property secured by the deeds of trust. None of these actions would typically be of any material importance. As of the date hereof, the Partnership is not involved in any legal proceedings other than those that would be considered part of the normal course of business. Item 4 - Submission of Matters to a Vote of Security Holders (Partners) No matters have been submitted to a vote of the Partnership. Part II Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 120,000 Units at $100 each (minimum 20 Units) were offered through broker-dealer member firms of the National Association of Securities Dealers on a "best efforts" basis (as indicated in Part I item 1). All Units were sold to California residents. Investors have the option of withdrawing earnings on a monthly, quarterly or annual basis or having their earnings retained in the Partnership. Limited partners may withdraw from the Partnership in accordance with the terms of the partnership agreement subject to early withdrawal penalties. There is no established public trading market for the Units. As of December 31, 2005, 368 limited partners had a capital balance of $6,346,746. A description of the Partnership's Units, transfer restrictions, and withdrawal provisions is more fully described under the section entitled "Description of Units" and "Summary of the Limited Partnership Agreement", pages 38-42 of the Prospectus, a part of the above-referenced Registration Statement, which is incorporated by reference. 8 Item 6 - Selected Financial Data Redwood Mortgage Investors VI began operations in October, 1987. Its financial condition and results of operation as of and for the five years ended December 31, 2005 were: Balance Sheets December 31, ------------------------------------------------------------------------------------- 2005 2004 2003 2002 2001 -------------- -------------- -------------- -------------- -------------- Cash $ 4,361,983 $ 1,090,027 $ 32,160 $ 341,127 $ 190,414 Loans Loans, secured by deeds of trust 2,021,973 5,225,128 5,255,620 5,183,100 4,970,433 Loans, unsecured, net 144,098 261,276 242,462 223,697 82,362 Interest and other receivables Accrued interest and late fees 22,138 61,364 54,562 61,384 797,105 Advances on loans 51 2,890 4,091 31,007 197,946 Less allowances for loan losses (315,379) (315,751) (279,865) (275,294) (370,612) Note receivable - Redwood Mortgage Corp. - - - - 178,200 Real estate held for sale, net 130,215 128,902 1,312,773 1,234,541 1,093,503 -------------- -------------- -------------- -------------- -------------- Total assets $ 6,365,079 $ 6,453,836 $ 6,621,803 $ 6,799,562 $ 7,139,351 ============== ============== ============== ============== ==============
Liabilities and Partners' Capital December 31, ------------------------------------------------------------------------------------- 2005 2004 2003 2002 2001 -------------- -------------- -------------- -------------- -------------- Liabilities Accounts payable $ - $ 11,487 $ 13,064 $ 11,953 $ 20,261 Deferred interest on loans - - - - 74,022 Payable to affiliates 8,572 12,541 12,496 14,643 35,632 -------------- -------------- -------------- -------------- -------------- Total liabilities 8,572 24,028 25,560 26,596 129,915 -------------- -------------- -------------- -------------- -------------- Partners' capital Limited partners' capital, subject to redemption 6,346,746 6,420,047 6,586,482 6,763,200 6,999,670 General partners' capital 9,761 9,761 9,761 9,766 9,766 -------------- -------------- -------------- -------------- -------------- Total partners' capital 6,356,507 6,429,808 6,596,243 6,772,966 7,009,436 -------------- -------------- -------------- -------------- -------------- Total liabilities and partners' capital $ 6,365,079 $ 6,453,836 $ 6,621,803 $ 6,799,562 $ 7,139,351 ============== ============== ============== ============== ==============
9 Statements of Income 2005 2004 2003 2002 2001 -------------- -------------- -------------- -------------- -------------- Gross revenue $ 522,282 $ 538,737 $ 491,640 $ 574,171 $ 735,900 Expenses 133,874 191,585 158,524 204,188 309,249 -------------- -------------- -------------- -------------- -------------- Net income $ 388,408 $ 347,152 $ 333,116 $ 369,983 $ 426,651 ============== ============== ============== ============== ============== Net income: to general partners (1%) $ 3,884 $ 3,472 $ 3,331 $ 3,700 $ 4,266 to limited partners (99%) 384,524 343,680 329,785 366,283 422,385 -------------- -------------- -------------- -------------- -------------- $ 388,408 $ 347,152 $ 333,116 $ 369,983 $ 426,651 ============== ============== ============== ============== ============== Net income per $1,000 invested by limited partners for entire period: - where income is compounded $ 62 $ 54 $ 50 $ 54 $ 59 ============== ============== ============== ============== ============== - where partner receives income in monthly distributions $ 60 $ 53 $ 49 $ 53 $ 58 ============== ============== ============== ============== ==============
Annualized yields when income is compounded or distributed monthly for the years 2001 through 2005 are outlined in the table below: Compounded Distributed --------------- --------------- 2001 5.95% 5.79% 2002 5.40% 5.27% 2003 5.00% 4.89% 2004 5.40% 5.27% 2005 6.15% 5.99% The average annualized yield, when income is compounded from inception through December 31, 2005 was 6.84%. The average annualized yield, when income is distributed monthly, from inception through December 31, 2005 was 6.60%. Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP Critical Accounting Policies. In preparing the financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet dates and revenues and expenses during the reporting periods. Such estimates relate principally to the determination of (1) the allowance for loan losses (i.e. the amount of allowance established against loans receivable as an estimate of potential loan losses) including the accrued interest and advances that are estimated to be unrecoverable based on estimates of amounts to be collected plus estimates of the value of the property as collateral and (2) the valuation of real estate acquired through foreclosure. At December 31, 2005, we owned one real property that we had acquired through foreclosure in a prior year. Loans and the related accrued interest, late fees and advances are analyzed on a periodic basis for recoverability. Delinquencies are identified and followed as part of the loan system. Delinquencies are determined based upon contractual terms. A provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral values, to provide for unrecoverable loans and receivables, including impaired loans, other loans, accrued interest, late fees and advances on loans and other accounts receivable (unsecured). The Partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined that the full amount is not collectible. 10 If the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement and the shortfall in the amounts due are not insignificant, the carrying amount of the investment shall be reduced to the present value of future cash flows discounted at the loan's effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral. If events and or changes in circumstances cause management to have serious doubts about the collectibility of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances, including accrued interest and advances. Recent trends in the economy have been taken into consideration in the aforementioned process of arriving at the allowance for loan losses. Actual results could vary from the aforementioned provisions for losses. Forward-Looking Statements. Certain statements in this Report on Form 10-K which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Company's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward-looking statements include statements regarding future interest rates and economic conditions and their effect on the Partnership and its assets, trends in the California real estate market, estimates as to the allowance for loan losses, estimates of future limited partner withdrawals, 2006 annualized yield estimates, the intention not to sell the Partnership's loan portfolio and the expectation that foreclosures will not have a material effect on liquidity. Actual results may be materially different from what is projected by such forward-looking statements. Factors that might cause such a difference include unexpected changes in economic conditions and interest rates, the impact of competition and competitive pricing and downturns in the real estate markets in which the Company has made loans. All forward-looking statements and reasons why results may differ included in this Form 10-K are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results may differ. Related Parties. The general partners of the Partnership are Gymno Corporation and Michael R. Burwell. Most Partnership business is conducted through Redwood Mortgage Corp., an affiliate of the general partners, which arranges, services and maintains the loan portfolio for the benefit of the Partnership. The fees received by the affiliate and general partners are paid pursuant to the partnership agreement and are determined at the sole discretion of the general partner subject to limitations imposed by the partnership agreement. In the past the general partners have elected not to take the maximum compensation. The following is a list of various Partnership activities for which related parties are compensated. o Mortgage Brokerage Commissions For fees in connection with the review, selection, evaluation, negotiation and extension of loans, an affiliate of the general partners may collect an amount equivalent to 12% of the loaned amount until 6 months after the termination date of the offering. Thereafter, the loan brokerage commissions (points) will be limited to an amount not to exceed 4% of the total Partnership assets per year. The loan brokerage commissions are paid by the borrowers, and thus, are not an expense of the Partnership. For the years ended December 31, 2005, 2004 and 2003, loan brokerage commissions paid by the borrowers were $52,248, $24,156 and $42,407, respectively. o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% on an annual basis) of the unpaid principal of the Partnership's loans are paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. Mortgage servicing fees of $56,508, $50,160 and $48,759 were incurred for the years ended December 31, 2005, 2004 and 2003, respectively. These servicing fees were charged at 1%, on an annual basis, of the outstanding principal balances. If the maximum mortgage servicing fee of 1.5%, on an annual basis, had been charged to the Partnership, then net income would have been reduced by approximately $28,254, $25,080 and $24,380 in 2005, 2004 and 2003, respectively. Reducing net income reduces the annualized yields. An increase or decrease in this fee within the limits set by the Partnership's agreement directly impacts the yield to the limited partners. 11 o Asset Management Fees The general partners receive monthly fees for managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net asset value' (3/8 of 1% on an annual basis). For the years ended December 31, 2005, 2004 and 2003 management fees totaled $24,092, $24,481 and $25,281, respectively. Of these fees the Partnership waived $12,061, $16,321 and $16,854 and paid $12,031, $8,160 and $8,427, respectively, to the general partners. o Other Fees The Partnership agreement provides that the general partners may receive other fees such as reconveyance, mortgage assumption and mortgage extension fees. Such fees are incurred by the borrowers and are paid to the general partners. o Income and Losses All income and losses are credited or charged to partners in relation to their respective Partnership interests. The allocation to the general partners (combined) shall not exceed 1%. o Operating Expenses An affiliate of the Partnership, Redwood Mortgage Corp., is reimbursed by the Partnership for all operating expenses actually incurred by it on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners. o Contributed Capital The general partners jointly and severally were to contribute 1/10 of 1% in cash contributions as proceeds from the offerings are received from the limited partners. As of December 31, 2004 and 2005, a general partner, Gymno Corporation, had contributed $9,772 as capital in accordance with Section 4.02(a) of the partnership agreement. Results of Operations - For the years ended December 31, 2005, 2004 and 2003 Changes in the Partnership's operating results for the years ended December 31, 2005 and 2004 are discussed below. Changes during the year ended December 31, 2005 2004 ------------- ------------ Net income increase/(decrease) $ 41,256 $ 14,036 ============= ============ Revenue Interest on loans (878) 34,936 Interest-interest bearing accounts 11,235 2,435 Late charges and other fees (26,812) 9,726 ------------- ------------ $ (16,455) $ 47,097 ------------- ------------ Expenses Mortgage servicing fees $ 6,348 $ 1,401 Asset management fees 3,871 (267) Clerical costs from Redwood Mortgage Corp. (3,587) (4,226) Provision for losses on loans and real estate held for sale (37,571) 31,301 Professional services (3,050) 7,153 Other (23,722) (2,301) ------------- ------------ $ (57,711) $ 33,061 ------------- ------------ Net income increase $ 41,256 $ 14,036 ============= ============ 12 The decrease in interest on loans of $878 for the year ended December 31, 2005 was primarily due to the decline in the average loan portfolio balance to $4,876,596 in 2005 from an average loan portfolio balance of $5,240,374 in 2004. The average interest rate on notes also decreased to 9.13% in 2005 from an average interest rate of 9.37% in 2004. The reduction in loan balances to $2,021,973 as of December 31, 2005 from $5,225,128 as of December 31, 2004 was primarily due to substantial pay-offs of loans and the Partnership's inability to fund new loans from the pay-off proceeds in 2005. Two loans totaling $3,060,100 that were major contributors of interest income to the Partnership were paid off in November, 2005. Contributing to 2005 income, an impaired loan totaling $96,716 paid-off in 2005 deriving interest of $43,021, which was not previously accrued. The receipt of interest from the previously impaired loan helped the Partnership minimize reduced interest income due to a lower average loan portfolio balance and a decreased average interest rate in 2005. The increase in interest on loans of $34,936 for the year ended December 31, 2004 was primarily due to an interest rate increase on two loans totaling $3,060,100 in 2004. This increase alone generated additional interest income of $32,514 to the Partnership. Interest income was $489,908, $490,786 and $455,850 for the years ended December 31, 2005, 2004 and 2003, respectively. The average interest rate in 2005 was 9.13% as compared to 9.37% for 2004 and 8.73% for 2003. The increase in interest-interest bearing accounts of $11,235 and $2,435 for the years ended December 31, 2005 and 2004, respectively, represents interest earned on a larger average balance deposit, which increased to $1,220,447 for the year ended December 31, 2005 from an average balance of $561,094 that existed in 2004 and from an average balance of $186,644 in 2003 The decrease in late charge revenue and other fees of $26,812 for the year ended December 31, 2005 was primarily due to non-refundable option payments received on a property held for sale. These payments totaled $28,929 in 2004 and the related real estate property was sold in December 2004. The decrease was also due to a decline in miscellaneous income to $8,440 in 2005 from $11,498 in 2004, due to reduced collection of prepayment penalties of $2,256 in 2005 as compared to $10,801 in 2004. However, these were offset by the collection of other fees totaling $6,184 in 2005 as compared to $697 in 2004 and the collection of late charges totaling $7,184 in 2005 as compared to $2,009 in 2004. The increase in late charge revenue and other fees of $9,726 for the year ended December 31, 2004 was due to the receipt of non-refundable option payments, on real estate held for sale of $28,929; offset by a decrease in late fees and miscellaneous income of $19,203. The increase in mortgage servicing fees of $6,348 for the year ended December 31, 2005 was primarily due to the payment of servicing fees of $9,439 on an impaired loan, which was collected in 2005. The increase in mortgage servicing fees of $1,401 for the year ended December 31, 2004 was due to an overall higher average loan portfolio balance of $5,240,374 in 2004 as compared to $5,219,360 in 2003; offset by the collection of delinquent interest from a loan that paid off in 2003. The increase in asset management fees of $3,871 for the year ended December 31, 2005 was primarily due to the Partnership paying the full 3/8% asset management fee during the final three months of 2005 instead of a reduced fee of 1/8% as agreed upon by the general partners. The decrease in asset management fees of $267 for the year ended December 31, 2004 was primarily due to declining balances of limited partners' capital, which were $6,420,047 and $6,586,482, at December 31, 2004 and 2003, respectively. The decrease in clerical costs of $3,587 and $4,226 for the years ended December 31, 2005 and 2004, respectively, was primarily attributable to reduced clerical costs in servicing this Partnership. The decrease in the provision for losses on loans and real estate held for sale of $37,571 for the year ended December 31, 2005 was due to the Partnership not allocating any additional provision and recording a recovery of $1,685 in 2005. There were two loans matured 90 days or more totaling $174,432, but no delinquent loans past due 90 days or more in interest payments as of December 31, 2005 and the Partnership felt that no further provision for loan loss was required. The increase in the provision for losses on loans and real estate held for sale of $31,301 for the year ended December 31, 2004 was deemed appropriate by Partnership's management due to the higher average loan portfolio balance of $5,240,374 and three delinquent loans past due 90 days or more in interest payments. Loan portfolio balances decreased to $2,021,973 in 2005 from the portfolio balance of $5,225,128 that existed in 2004 and a reserve for loan losses of $315,379 and $315,751 as of December 31, 2005 and 2004, respectively, was considered to be adequate. The decrease in professional services of $3,050 for the year ended December 31, 2005 was due to reduced fees and the timing of professional services in 2005. The increase in professional services of $7,153 for the year ended December 31, 2004 was primarily due to general accounting cost increases. 13 The decrease in other expenses of $23,722 and $2,295 for the years ended December 31, 2005 and 2004 was primarily due to the reduction in costs associated with the upkeep of existing real estate properties held for sale. In 2005 the upkeep cost was $8,507 as compared to $32,077 in 2004. As of September 2, 1989, the date the offering of the Partnership's limited partner Units was formally closed, the Partnership had sold 97,725.94 limited partner Units and its contributed capital totaled $9,772,594 of the approved $12,000,000 issue, in Units of $100 each. On December 31, 2005 the net capital of limited and general partners totaled $6,356,507. The Partnership began funding loans in October 1987. The Partnership's secured loans outstanding as of December 31, 2005, 2004 and 2003 were $2,021,973, $5,225,128 and $5,255,620, respectively. The average loan balances over this time period have remained relatively stable until November, 2005 when two loans totaling $3,060,100 were paid off and the loan portfolio balance reduced to $2,021,973. The cash from these loan pay-offs will primarily be used to make investments in new loan opportunities. It may take a number of months to find and select appropriate loan investments. The Partnership utilized income, loan pay offs and proceeds from the sale of real estate held for sale properties to meet limited partner capital liquidations and make additional loans. During the years ended December 31, 2005, 2004 and 2003 loan principal collections and sale proceeds of the properties exceeded limited partner liquidations. In 2005 the Partnership funded $1,858,250 in new loans versus pay-offs of $5,061,405. The Partnership was unable to immediately invest in excess of $3,000,000 in loan proceeds received from two loans in late 2005. Therefore, loans funded in 2005 appear substantially less than loan pay-offs. It is anticipated the cash held by the Partnership generated from these loan pay-offs will be invested in 2006. Loan balances decreased by $3,203,155 (61.30%) and $30,492 (0.58%) in 2005 and 2004, respectively. The Partnership's operating results and delinquencies are within the normal range of the general partners' expectations, based upon their experience in managing similar partnerships over the last twenty years. Foreclosures are a normal aspect of Partnership operations and the general partners anticipate that they will not have a material effect on liquidity. Cash is continually being generated from interest earnings, late charges, prepayment penalties, amortization of principal, proceeds from sale of real estate held and loan pay-offs. Currently, this amount exceeds Partnership expenses and earnings and partner liquidation requirements. As loan opportunities become available, excess cash and available funds are invested in new loans. Allowance for Losses. The general partners periodically review the loan portfolio, examining the status of delinquencies, the underlying collateral securing these loans, real estate held for sale expenses, sales activities, and borrower's payment records and other data relating to the loan portfolio. Data on the local real estate market and on the national and local economy are studied. Based upon this and other information, the allowance for loan losses is increased or decreased. Borrower foreclosures are a normal aspect of Partnership operations. The Partnership is not a credit based lender and hence while it reviews the credit history and income of borrowers, and if applicable, the income from income producing properties, the general partners expect that we will on occasion take back real estate security. During 2004 and 2005 the economy and the Northern California real estate market has strengthened. At December 31, 2005 the Partnership had no loans past due 90 days or more in interest payments. As of December 31, 2005 the Partnership has two loans which are making current monthly payments but are 90 days or more past maturity. These past maturity loans have a principal balance of $174,432. The Partnership does not have any filed notices of default, which would begin the foreclosure process at December 31, 2005. The Partnership occasionally enters into workout agreements with borrowers who are past maturity or delinquent in their regular payments. The Partnership had no workout agreements as of December 31, 2005. Typically, a workout agreement allows the borrower to extend the maturity date of the balloon payment and/or allows the borrower to make current monthly payments while deferring for periods of time, past due payments, or allows time to pay the loan in full. These workout agreements and foreclosures generally exist within our loan portfolio to greater or lesser degrees, depending primarily on the health of the economy. Management expects the number of foreclosures and workout agreements will rise during difficult times and conversely fall during good economic times. These workouts and delinquencies have been considered when management arrived at an appropriate allowance for loan losses and based on our experience, are reflective of our loan marketplace segment. Because of the number of variables involved, the magnitude of possible swings and the general partners' inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the general partners. 14 As of December 31, 2005, 2004 and 2003 the Partnership's real estate held for sale balance was $130,215, $128,902 and $1,312,773, respectively. The decrease in the real estate held for sale balance of $1,183,871 from December 31, 2003 to December 31, 2004 was due to the sale of two of the properties. During 2002, the Partnership took back one piece of real estate collateral through foreclosure. The Partnership, together with other partnerships, all affiliates of the general partners, owned the property. The property was a 4 unit condominium complex. During the year 2003, renovation work was completed and the property was placed on the market for sale. A purchase offer was accepted and the escrow closed in March, 2004. The Partnership sustained a loss of approximately $5,800, which had been anticipated and reserved for. In October 2004, the Partnership sold another real estate held for sale property at a loss of approximately $778,500 which was previously fully reserved for. The Partnership has not taken back any collateral security from borrowers in 2004 or 2005. The Partnership's real estate held for sale inventory was reduced to one property. This remaining property is an undeveloped piece of land. The land is located in East Palo Alto, California. The Partnership has held its interest in this land since April, 1993. The land is owned with two other affiliated partnerships. The general partners believe that the property is worth considerably more than its net investment, but it may take a considerable amount of additional time to sell the property and realize its full potential. The property is unique in that it may only be utilized for commercial or industrial uses. Until recently, land sales activity had been slow, but interest in land sales for commercial sites has been increasing. Management recorded ($1,685) and $35,886 as (recovery)/provision for loan losses for the year ended December 31, 2005 and 2004, respectively. As of December 31, 2005, the allowance for loan losses totaling $315,379 is considered to be adequate. The Partnership may restructure loans. This is done through the modification of an existing loan or by re-writing a whole new loan. It could involve, among other changes, an extension in maturity date, a reduction in repayment amount, a reduction in interest rate, or granting an additional loan. In 2002, the Partnership restructured four previously impaired loans into two new loans with a lower interest rate. The amount restructured was $3,060,100. These two restructured loans were paid off in November, 2005. During 2002, Redwood Mortgage Corp. provided an indemnity to the Partnership whereby it has agreed to indemnify and hold harmless, the Partnership from any expenses or losses (in excess of the then established reserves) incurred by the Partnership with respect to these four restructured loans. Two of these four loans have been paid off and a partial paydown has also been received against the other two. The balance remaining is fully reserved for in the Partnership's allowance for loan losses. Borrower Liquidity and Capital Resources. The Partnership relies upon loan payoffs and borrowers' mortgage payments for the source of funds for loans. Over the past several years, mortgage interest rates have decreased somewhat from those available at the inception of the Partnership. If interest rates were to increase substantially, the yield of the Partnership's loans may provide lower yields than other comparable debt-related investments. Additionally, since the Partnership has historically made primarily fixed rate loans, if interest rates were to rise, the likely result would be a slower prepayment rate for the Partnership. This could cause a lower degree of liquidity as well as a slowdown in the ability of the Partnership to invest in loans at the then current interest rates. Conversely, in the event interest rates were to decline, the Partnership could see significant borrower prepayments, which, if the Partnership can only obtain the then existing lower rates of interest may cause a dilution of the Partnership's yield on loans, thereby lowering the Partnership's overall yield to the limited partners. Cash is constantly being generated from borrower payments of interest, principal and loan payoffs. Currently, cash flow exceeds Partnership expenses and earnings distribution requirements. At the time of subscription to the Partnership, limited partners must elect either to receive monthly, quarterly or annual cash distributions from the Partnership, or to compound earnings in their capital account. If one initially elects to receive monthly, quarterly or annual distributions, such election, once made, is irrevocable. Earnings allocable to limited partners who elect to compound earnings in their capital account, will be retained by the Partnership for making further loans or for other proper Partnership purposes, and such amounts will be added to such limited partners' capital accounts. For the years ended December 31, 2005, 2004 and 2003 the Partnership made distributions of earnings to limited partners of $146,271, $120,015 and $115,254, respectively. Distribution of earnings to limited partners for the years ended December 31, 2005, 2004 and 2003 to limited partners' capital accounts and not withdrawn was $238,253, $223,665 and $214,531, respectively. As of December 31, 2005, 2004 and 2003 limited partners electing to withdraw earnings represented 40%, 34% and 35%, respectively, of the limited partners' outstanding capital accounts. This percentage range has remained relatively stable. 15 The Partnership also allows the limited partners to withdraw their capital account subject to certain limitations and penalties (see liquidation provisions of Partnership Agreement). For the years ended December 31, 2005, 2004 and 2003 $30,322, $142,997 and $93,770, respectively, were liquidated subject to the 10% and/or 8% penalty for early withdrawal. These withdrawals are within the normally anticipated range that the general partners would expect in their experience in this and other partnerships. The general partners expect that a small percentage of limited partners will elect to liquidate their capital accounts over one year with a 10% and/or 8% early withdrawal penalty. In originally conceiving the Partnership, the general partners wanted to provide limited partners needing their capital returned a degree of liquidity. Generally, limited partners electing to withdraw over one year need to liquidate investments to raise cash. The demand the Partnership is experiencing in withdrawals by limited partners electing a one year liquidation program represents a small percentage of limited partner capital as of December 31, 2005, 2004 and 2003, respectively, and is expected by the general partners to commonly occur at these levels. Additionally, for the years ended December 31, 2005, 2004 and 2003 $281,232, $247,103 and $297,479, respectively, were liquidated by limited partners who have elected a liquidation program over a period of five years or longer. Once the initial five-year hold period has passed, the general partners expect to see an increase in liquidations due to the ability of limited partners to withdraw without penalty. This ability to withdraw after five years by limited partners has the effect of providing limited partner liquidity. The general partners expect a portion of the limited partners to take advantage of this provision. This has the anticipated effect of the Partnership growing, primarily through reinvestment of earnings in years one through five. The general partners expect to see increasing numbers of limited partner withdrawals in years five through eleven, at which time the bulk of those limited partners who have sought withdrawal will have been liquidated. After year eleven, liquidation generally subsides. Actual liquidation of both capital and earnings for the three years ended December 31, 2005 was: Years ended December 31, --------------------------------------------------- 2005 2004 2003 -------------- --------------- -------------- Earnings $ 146,271 $ 120,015 $ 115,254 Capital* 311,554 390,100 391,249 -------------- --------------- -------------- Total $ 457,825 $ 510,115 $ 506,503 ============== =============== ============== *These amounts represent gross of early withdrawal penalties. In some cases in order to satisfy Broker Dealers and other reporting requirements, the general partners have valued the limited partners' interest in the Partnership on a basis which utilizes a per Unit system of calculation, rather than based upon the investors' capital account. This information has been reported in this manner in order to allow the Partnership to integrate with certain software used by the Broker Dealers and other reporting entities. In those cases, the Partnership will report to Broker Dealers, Trust Companies and others a "reporting" number of Units based upon a $1.00 per Unit calculation. The number of reporting Units provided will be calculated based upon the limited partner's capital account value divided by $1.00. Each investor's capital account balance is set forth periodically on the Partnership account statement provided to investors. The reporting Units are solely for Broker Dealers requiring such information for their software programs and do not reflect actual Units owned by a limited partner or the limited partners' right or interest in cash flow or any other economic benefit in the Partnership. Each investor's capital account balance is set forth periodically on the Partnership account statement provided to investors. The amount of Partnership earnings each investor is entitled to receive is determined by the ratio that each investor's capital account bears to the total amount of all investor capital accounts then outstanding. The capital account balance of each investor should be included on any NASD member client account statement in providing a per Unit estimated value of the client's investment in the Partnership in accordance with NASD Rule 2340. While the general partners have set an estimated value for the Partnership Units, such determination may not be representative of the ultimate price realized by an investor for such Units upon sale. No public trading market exists for the Partnership's Units and none is likely to develop. Thus, there is no certainty that the Units can be sold at a price equal to the stated value of the capital account. Furthermore, the ability of an investor to liquidate his or her investment is limited subject to certain liquidation rights provided by the Partnership, which may include early withdrawal penalties (See the section of the Prospectus entitled "Risk Factors - Purchase of Units is a long term investment"). 16 Current Economic Conditions. During 2005, the United States economy as a whole performed well. Gross Domestic Product estimates for 2005 of 3.5% show a slight slowdown from the 4.2% Gross Domestic Product of 2004. The United States average annual unemployment rate for 2005 was 4.9% and has trended downward throughout 2005. Regionally, the San Francisco Bay Area demonstrated a very similar unemployment rate with an average annual unemployment rate of 5.1% for 2005 down 0.9% from 2004. The rate of inflation concerns many with energy costs having risen significantly over the last year. The consumer price index rose 3.4% in 2005 compared to 3.3% for 2004. These statistics indicate an economy that is continuing to grow, which is good for both mortgage lenders and the real estate industry as a whole. The 10 year treasury rate is hovering around 4.5% at year end but is expected to increase in the future. Should this occur, real estate markets may slow due to the higher costs of money. The Partnership makes loans primarily in Northern California. As such the regional real estate market is of primary concern to the Partnership. As of December 31, 2005, approximately 73.13% ($1,478,632) of the loans held by the Partnership were in three San Francisco Bay Area Counties. The remainder of the loans held was secured primarily by Northern California real estate outside of the San Francisco Bay Area. In general, California residential real estate continued to appreciate in value during 2005. In California the median price of a single family home in December, 2005 was $548,430 which was 15.6% higher than in December, 2004. In the nine county San Francisco Bay Area, the median price of a single-family home in December, 2005 was $633,000 14.3% above the December, 2004 median single-family home sales price of $554,000. The total sales volumes, the number of homes sold, has recently been declining. This slow down in the number of homes sold has not significantly impacted residential sales prices. Mortgage interest rates for both fixed and adjustable rate loans have been rising, decreasing housing affordability. Rising interest rates and decreasing sales volumes will likely slow down the rate of housing appreciation we have seen over the last two years. Nonetheless, a strong residential real estate marketplace exists and as such increases lending opportunities and assists in providing adequate equity to help repay mortgage debt should borrowers become delinquent in their payments. Commercial real estate in the San Francisco Bay Area continued its rebound. Occupancy rates and rents increased during 2005 in most markets throughout the San Francisco Bay Area. CB Richard Ellis reports that San Francisco Class A office rents averaged $34.54, up from $32.52 in 2004 and that vacancy decreased from 15.4% in 2004 to approximately 12% in 2005. The San Francisco leasing market absorbed an estimated 1.5 million square feet net during 2005 according to Grubb and Ellis. Sales of San Francisco commercial office buildings are brisk with record per square foot prices being attained and 2005 being a record volume sales year (Grubb & Ellis Research Fourth Quarter 2005). A healthy commercial real estate market increases lending opportunities and assists in providing adequate equity to repay mortgage debt should borrowers become delinquent in their payments. For Partnership loans outstanding as of December 31, 2005, the Partnership had an average loan to value ratio of 65.95%, computed based on appraised values and senior liens as of the date the loan was made. This percentage does not account for any increases or decreases in property values since the date the loan was made, nor does it include any reductions in principal on senior indebtedness through amortization of payments after the loan was made. Management expects this loan to value ratio will assist the Partnership in weathering loan delinquencies and foreclosures should they eventuate. Contractual Obligations Table. - None 17 Item 7a - Quantitative and Qualitative Disclosures About Market Risk The following table contains information about the cash held in money market accounts, and loans held in the Partnership's portfolio as of December 31, 2005. The presentation, for each category of information, aggregates the assets and liabilities by their maturity dates for maturities occurring in each of the years 2006 through 2010 and separately aggregates the information for all maturities arising after 2010. The carrying values of these assets and liabilities approximate their fair values as of December 31, 2005: 2006 2007 2008 2009 2010 Thereafter Total ------------------------------------------------------------------------------------------ Interest earning assets: Money market accounts $4,348,435 $4,348,435 Average interest rate 1.50% 1.50% Loans secured by deeds of trust $ 424,432 144,069 400,000 272,394 781,078 - $2,021,973 Average interest rate 9.12% 10.50% 8.50% 9.25% 9.25% - 9.16%
Market Risk. The Partnership's primary market risk in terms of its profitability is the exposure to fluctuations in earnings resulting from fluctuations in general interest rates. The majority of the Partnership's mortgage loans earn interest at fixed rates. Changes in interest rates may also affect the value of the Partnership's investment in mortgage loans and the rates at which the Partnership reinvests funds obtained from loan repayments and new capital contributions from limited partners. If interest rates increase, the interest rates the Partnership obtains from reinvested funds will generally increase, but the value of the Partnership's existing loans at fixed rates will generally tend to decrease. The risk is mitigated by the fact that the Partnership does not intend to sell its loan portfolio, rather such loans are held until they are paid off. If interest rates decrease, the amounts becoming available to the Partnership for investment due to repayment of Partnership loans may be reinvested at lower rates than the Partnership had been able to obtain in prior investments, or than the rates on the repaid loans. In addition, interest rate decreases may encourage borrowers to refinance their loans with the Partnership at a time where the Partnership is unable to reinvest in loans of comparable value. The Partnership does not hedge or otherwise seek to manage interest rate risk. The Partnership does not enter into risk sensitive instruments for trading purposes. PORTFOLIO REVIEW - For the years ended December 31, 2005, 2004 and 2003 Loan Portfolio The Partnership's loan portfolio consists primarily of short-term (one to five years), fixed rate loans secured by real estate. As of December 31, 2005, 2004 and 2003 the Partnership's loans secured by real property collateral in four of the six San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara and Alameda) represented $1,478,632 (73%), $4,632,774 (89%) and $4,905,347 (93%), respectively, of the outstanding secured loan portfolio. The remainder of the portfolio represented loans secured by real estate located primarily in Northern California. 18 As of December 31, 2005, 2004 and 2003 the Partnership held 9, 14 and 16 secured loans, respectively, in the following categories: December 31, ------------------------------------------------------------------------------------------ 2005 2004 2003 --------------------------- --------------------------- --------------------------- Single family (1-4 units) $1,703,472 84.25% $1,316,596 25.20% $1,505,710 28.65% Apartments (5+ units) - - 96,716 1.85% 136,841 2.60% Commercial 318,501 15.75% 3,811,816 72.95% 3,613,069 68.75% ------------ ----------- ------------ ----------- ------------ ---------- Total $2,021,973 100.00% $5,225,128 100.00% $5,255,620 100.00% ============ =========== ============ =========== ============ ==========
As of December 31, 2005, the Partnership held 9 loans secured by deeds of trust. The following table sets forth the priorities, asset concentrations and maturities of the loans held by the Partnership as of December 31, 2005: PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS As of December 31, 2005 # of Loans Amount Percent ------------ -------------- ------------- 1st Mortgages 5 $ 810,359 40% 2nd Mortgages 4 1,211,614 60% ============ ============== ============= Total 9 $2,021,973 100% Maturing 12/31/06 and prior 3 $ 424,432 21% Maturing prior to 12/31/07 1 144,069 7% Maturing prior to 12/31/08 1 400,000 20% Maturing after 12/31/08 4 1,053,472 52% ============ ============== ============= Total 9 $ 2,021,973 100% Average Loan $ 224,664 11.11% Largest Loan 532,131 26.32% Smallest Loan 30,536 1.51% Average Loan-to-Value, based upon appraisals and senior liens at date of inception of loan 65.95%
The Partnership's largest loan in the principal amount of $532,131 represents 26.32% of outstanding secured loans and 8.36% of Partnership assets. Larger loans can sometimes represent over 10% of the secured loan portfolio or Partnership assets as these amounts decrease due to limited partner withdrawals and loan payoffs and also as a result of the restructuring several loans into one loan. ASSET QUALITY A consequence of lending activities is that occasionally losses will be experienced and that the amount of such losses will vary from time to time, depending upon the risk characteristics of the loan portfolio as affected by economic conditions and the financial experiences of borrowers. Many of these factors are beyond the control of the general partners. There is no precise method of predicting specific losses or amounts that ultimately may be charged off on particular segments of the loan portfolio, especially in light of the current economic environment. 19 The conclusion that a loan may become uncollectible, in whole or in part, is a matter of judgment. Although institutional lenders are subject to requirements and regulations that, among other things, require them to perform ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and to obtain and maintain current information regarding their borrowers and the securing properties, the Partnership is not subject to these regulations and has not adopted certain of these practices. Rather, the general partners, in connection with the periodic closing of the accounting records of the Partnership and the preparation of the financial statements, determine whether the allowance for loan losses is adequate to cover potential loan losses of the Partnership. As of December 31, 2005 the general partners have determined that the allowance for loan losses of $315,379 (4.96% of net assets) is adequate in amount. Because of the number of variables involved, the magnitude of the swings possible and the general partners' inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the general partners. As of December 31, 2005, there were two loans matured 90 days or more totaling $174,432, but no loans were delinquent in interest payments or principal over 90 days. The Partnership may also make loans requiring periodic disbursements of funds. These loans include ground up construction of buildings and loans for rehabilitation of existing structures. Interest on these loans is computed at simple interest method and only on the amounts disbursed on a daily basis. As of December 31, 2005 there were no such loans. Item 8 - Financial Statements and Supplementary Data A - Financial Statements The following financial statements of Redwood Mortgage Investors VI are included in Item 8: o Report of Independent Registered Public Accounting Firm o Balance Sheets - December 31, 2005 and 2004 o Statements of Income for the years ended December 31, 2005, 2004 and 2003 o Statements of Changes in Partners' Capital for the years ended December 31, 2005, 2004 and 2003 o Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 o Notes to Financial Statements B - Financial Statement Schedules The following financial statement schedules of Redwood Mortgage Investors VI are included in Item 8: o Schedule II - Valuation and Qualifying Accounts o Schedule IV - Mortgage Loans on Real Estate All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 20 REDWOOD MORTGAGE INVESTORS VI (A CALIFORNIA LIMITED PARTNERSHIP) FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION AS OF DECEMBER 31, 2005 AND 2004 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2005 21 TABLE OF CONTENTS Page No. --------------- Report of Independent Registered Public Accounting Firm 23 Balance Sheets 24 Statements of Income 25 Statements of Changes in Partners' Capital 26 Statements of Cash Flows 27 Notes to Financial Statements 28 Supplemental Schedules Schedule II - Valuation and Qualifying Accounts 39 Schedule IV - Mortgage Loans on Real Estate 40 Rule 12-29 Loans on Real Estate 22 ARMANINO McKENNA LLP CERTIFIED PUBLIC ACCOUNTANTS 12667 Alcosta Blvd., Suite 500 San Ramon, CA 94583 (925) 790-2600 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Partners Redwood Mortgage Investors VI Redwood City, California We have audited the accompanying balance sheets of Redwood Mortgage Investors VI (a California limited partnership) as of December 31, 2005 and 2004 and the related statements of income, changes in partners' capital and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of Redwood Mortgage Investors VI's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Redwood Mortgage Investors VI is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Redwood Mortgage Investors VI's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Redwood Mortgage Investors VI as of December 31, 2005 and 2004 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedules II and IV are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARMANINO McKENNA LLP San Ramon, California March 3, 2006 23 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Balance Sheets December 31, 2005 and 2004 ASSETS 2005 2004 -------------- -------------- Cash and cash equivalents $ 4,361,983 $ 1,090,027 -------------- -------------- Loans Loans, secured by deeds of trust 2,021,973 5,225,128 Loans, unsecured, net of discount of $107,034 and $93,822 in 2005 and 2004, respectively 144,098 261,276 Allowance for loan losses (315,379) (315,751) -------------- -------------- Net loans 1,850,692 5,170,653 -------------- -------------- Interest and other receivables Accrued interest and late fees 22,138 61,364 Advances on loans 51 2,890 -------------- -------------- Total interest and other receivables 22,189 64,254 -------------- -------------- Real estate held for sale, net 130,215 128,902 -------------- -------------- Total assets $ 6,365,079 $ 6,453,836 ============== ==============
LIABILITIES AND PARTNERS' CAPITAL Liabilities Accounts payable $ - $ 11,487 Payable to affiliate 8,572 12,541 -------------- -------------- Total liabilities 8,572 24,028 -------------- -------------- Partners' capital Limited partners' capital, subject to redemption 6,346,746 6,420,047 General partners' capital 9,761 9,761 -------------- -------------- Total partners' capital 6,356,507 6,429,808 -------------- -------------- Total liabilities and partners' capital $ 6,365,079 $ 6,453,836 ============== ==============
The accompanying notes are an integral part of these financial statements 24 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Statements of Income December 31, 2005 and 2004 2005 2004 2003 ----------- ------------ ----------- Revenues Interest on loans $ 489,908 $ 490,786 $ 455,850 Interest - interest bearing accounts 16,750 5,515 3,080 Late fees, prepayment penalties and fees 15,624 42,436 32,710 ----------- ------------ ----------- 522,282 538,737 491,640 ----------- ------------ ----------- Expenses Mortgage servicing fees 56,508 50,160 48,759 Asset management fees 12,031 8,160 8,427 Clerical costs from Redwood Mortgage Corp. 9,212 12,799 17,025 Provisions for (recovery of) losses on loans and real estate held for sale (1,685) 35,886 4,585 Professional services 41,706 44,756 37,603 Other 16,102 39,824 42,125 ----------- ------------ ----------- 133,874 191,585 158,524 ----------- ------------ ----------- Net income $ 388,408 $ 347,152 $ 333,116 =========== ============ =========== Net income General partners (1%) $ 3,884 $ 3,472 $ 3,331 Limited partners (99%) 384,524 343,680 329,785 ----------- ------------ ----------- $ 388,408 $ 347,152 $ 333,116 =========== ============ =========== Net income per $1,000 invested by limited partners for entire period Where income is reinvested $ 62 $ 54 $ 50 Where partner receives income in monthly distributions $ 60 $ 53 $ 49
The accompanying notes are an integral part of these financial statements 25 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Statements of Changes in Partners' Capital For the Years Ended December 31, 2005, 2004 and 2003 Limited General Partners Partners Total -------------- ------------- -------------- Balances at December 31, 2002 $ 6,763,200 $ 9,766 $ 6,772,966 Net income 329,785 3,331 333,116 Early withdrawal penalties (7,502) - (7,502) Partners' withdrawals (499,001) (3,336) (502,337) -------------- ------------- -------------- Balances at December 31, 2003 6,586,482 9,761 6,596,243 Net income 343,680 3,472 347,152 Early withdrawal penalties (10,801) - (10,801) Partners' withdrawals (499,314) (3,472) (502,786) -------------- ------------- -------------- Balances at December 31, 2004 6,420,047 9,761 6,429,808 Net income 384,524 3,884 388,408 Early withdrawal penalties (2,256) - (2,256) Partners' withdrawals (455,569) (3,884) (459,453) -------------- ------------- -------------- Balances at December 31, 2005 $ 6,346,746 $ 9,761 $ 6,356,507 ============== ============= ==============
The accompanying notes are an integral part of these financial statements 26 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Statements of Cash Flows For the Years Ended December 31, 2005, 2004 and 2003 2005 2004 2003 -------------- -------------- -------------- Cash flows from operating activities Net income $ 388,408 $ 347,152 $ 333,116 Adjustments to reconcile net income to net cash provided by operating activities Provision (recovery) for loan losses and real estate (1,685) 35,886 4,585 Early withdrawal penalties credited to income (2,256) (10,801) (7,502) Change in discount on unsecured loans 13,212 (18,765) (18,765) Change in operating assets and liabilities Loans, unsecured 103,966 (49) 0 Accrued interest and late fees 39,226 (6,802) 6,822 Advances on loans 2,839 1,201 26,916 Accounts payable (11,487) (1,577) 1,111 Payable to affiliate (3,969) 45 (2,147) -------------- -------------- -------------- Net cash provided by operating activities 528,254 346,290 344,136 -------------- -------------- -------------- Cash flows from investing activities Principal collected on loans 5,061,405 899,907 1,564,808 Loans originated (1,858,250) (869,415) (1,637,342) Payments on real estate held for sale - - (78,232) Proceeds from disposition of real estate - 1,183,871 - -------------- -------------- -------------- Net cash provided by (used in) investing activities 3,203,155 1,214,363 (150,766) -------------- -------------- -------------- Cash flows from financing activities Partners' withdrawals (459,453) (502,786) (502,337) -------------- -------------- -------------- Net increase (decrease) in cash and cash equivalents 3,271,956 1,057,867 (308,967) Cash and cash equivalents at beginning of year 1,090,027 32,160 341,127 -------------- -------------- -------------- Cash and cash equivalents at end of year $ 4,361,983 $ 1,090,027 $ 32,160 ============== ============== ==============
The accompanying notes are an integral part of these financial statements 27 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003 1. Organization and General Redwood Mortgage Investors VI (the "Partnership"), a California Limited Partnership, was organized in 1987. The general partners are Michael R. Burwell, an individual, and Gymno Corporation, a California corporation. The Partnership was organized to engage in business as a mortgage lender for the primary purpose of making loans secured by deeds of trust on California real estate. Loans are being arranged and serviced by Redwood Mortgage Corp., an affiliate of the general partners. The Partnership is scheduled to terminate on December 31, 2027, unless sooner terminated as provided in the Partnership Agreement. 2. Summary of Significant Accounting Policies Management estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Such estimates relate principally to the determination of the allowance for loan losses, including the valuation of impaired loans and the valuation of real estate held for sale. Actual results could differ significantly from these estimates. Loans, secured by deeds of trust Loans generally are stated at their outstanding unpaid principal balance with interest thereon being accrued as earned. If the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement, and the shortfall in the amounts due are not insignificant, the carrying amount of the loan is reduced to the present value of future cash flows discounted at the loan's effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral. If events and or changes in circumstances cause management to have serious doubts about the collectibility of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances, including accrued interest and advances. At December 31, 2004, there was one loan categorized as impaired by the Partnership for $96,716. The impaired loan had accrued interest, late charges and advances totaling $6,936 at December 31, 2004. There were no loans categorized as impaired as of December 31, 2005. The average recorded investment in impaired loans was $48,358 and $96,716 for the years ended December 31, 2005 and 2004, respectively. At December 31, 2005 and 2004, the Partnership had two and three loans past maturity or past due 90 days or more in interest payments or principal, including one impaired loan in 2004, totaling $174,432 and $272,581, respectively. In addition, accrued interest, late charges and advances on these loans totaled $0 and $4,249 at December 31, 2005 and 2004, respectively. The Partnership does not consider any of the 2005 and two of the 2004 loans to be impaired because there is sufficient collateral to cover the amount outstanding to the Partnership, and is still accruing interest on these loans. At December 31, 2005 and 2004, as presented in Note 8, the average loan to appraised value of security based upon appraised values and prior indebtedness at the time the loans were consummated was 65.95% and 79.67% respectively. When loans are considered impaired, the allowance for loan losses is updated to reflect the change in the valuation of collateral security. However, a low loan to value ratio tends to minimize reductions for impairment. 28 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003 2. Summary of Significant Accounting Policies (continued) Allowance for loan losses Loans and the related accrued interest, late fees and advances are analyzed on a periodic basis for recoverability. Delinquencies are identified and followed as part of the loan system. Delinquencies are determined based upon contractual terms. A provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral values, to provide for unrecoverable loans and receivables, including impaired loans, other loans, accrued interest, late fees and advances on loans and other accounts receivable (unsecured). The Partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined that the full amount is not collectible. The composition of the allowance for loan losses was as follows: December 31, December 31, ------------------------------ ------------------------------- 2005 2004 ------------------------------ ------------------------------- Percent of Percent of loans in loans in each each category category to total to total Amount loans Amount loans -------------- ------------- ------------- ------------- Balance at End of Year Applicable to: -------------------------------------------- Domestic Real estate - mortgage Single family (1-4 units) $ 138,375 84.25% $ 9,875 25.20% Apartments - - 3,385 1.85% Commercial 32,906 15.75% 41,264 72.95% Land - - - - -------------- ------------- ------------- ------------- Total real estate - mortgage $ 171,281 100% $ 54,524 100% ============== ============= ============= ============= Unsecured loans $ 144,098 100% $ 261,227 100% -------------- ------------- ------------- ------------- Total unsecured loans $ 144,098 100% $ 261,227 100% ============== ============= ============= ============= Total allowance for losses $ 315,379 100% $ 315,751 100% ============== ============= ============= =============
29 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003 2. Summary of Significant Accounting Policies (continued) Allowance for loan losses (continued) Activity in the allowance for loan losses is as follows: Years Ended December 31, --------------------------------------------------- 2005 2004 2003 -------------- -------------- -------------- Balance at beginning of year $ 315,751 $ 279,865 $ 275,294 Charge-offs Domestic Real estate - mortgage Single family (1-4 units) - - - Apartments - - (14) Commercial - - - Land - - - -------------- -------------- --------------- - - (14) -------------- -------------- --------------- Recoveries Domestic Real estate - mortgage Single family (1-4 units) - - - Apartments - - - Commercial - - - Land - - - -------------- -------------- --------------- - - - -------------- -------------- --------------- Net charge-offs - - (14) -------------- -------------- --------------- Additions/(recovery) charge to operations (1,685) 35,886 4,585 -------------- -------------- --------------- Transfer from real estate held for sale reserve 1,313 - - -------------- -------------- --------------- Balance at end of year $ 315,379 $ 315,751 $ 279,865 ============== ============== =============== Ratio of net charge-offs during the period to average secured loans outstanding during the period 0% 0% .01% ============== ============== ===============
30 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003 2. Summary of Significant Accounting Policies (continued) Cash and cash equivalents The Partnership considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be cash equivalents. Real estate held for sale Real estate held for sale includes real estate acquired through foreclosure and is stated at the lower of the recorded investment in the property, plus any senior indebtedness, or at the property's estimated fair value, less estimated costs to sell. The Partnership periodically compares the carrying value of real estate to expected future undiscounted cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to fair value. Income taxes No provision for federal and state income taxes, except for a minimum state tax of $800, is made in the financial statements since income taxes are the obligation of the partners if and when income taxes apply. Net income per $1,000 invested Amounts reflected in the statements of income as net income per $1,000 invested by limited partners for the entire period are amounts allocated to limited partners who held their investment throughout the period and have elected to either leave their earnings to compound or have elected to receive monthly distributions of their net income. Individual income is allocated each month based on the limited partners' pro rata share of partners' capital. Because the net income percentage varies from month to month, amounts per $1,000 will vary for those individuals who made or withdrew investments during the period, or select other options. Late fee revenue Late fees are generally charged at 6% of the monthly installment payment past due. During 2005, 2004 and 2003, late fee revenue of $7,184, $2,009, and $7,379, respectively, was recorded. The Partnership has a late fee receivable at December 31, 2005 and 2004 of $978 and $2,356, respectively. Recently issued accounting pronouncements In June 2005, the FASB issued FAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB No. 3, Reporting Accounting Changes in Interim Financial Statements. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. FAS 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable. It is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after June 1, 2005. The Partnership does not expect the effect of FAS 154 will have material impact on its financial statements. 31 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003 3. Other Partnership Provisions The Partnership is a California limited partnership. The rights, duties and powers of the general and limited partners of the Partnership are governed by the limited partnership agreement and Sections 15611 et seq. of the California Corporations Code. The general partners are in complete control of the Partnership business, subject to the voting rights of the limited partners on specified matters. Any one of the general partners acting alone has the power and authority to act for and bind the Partnership. A majority of the outstanding limited partnership interests may, without the permission of the general partners, vote to: (i) terminate the Partnership, (ii) amend the limited partnership agreement, (iii) approve or disapprove the sale of all or substantially all of the assets of the Partnership and (iv) remove or replace one or all of the general partners. The approval of the majority of limited partners is required to elect a new general partner to continue the Partnership business where there is no remaining general partner after a general partner ceases to be a general partner other than by removal. Election to receive monthly, quarterly or annual distributions At subscription, investors elected to receive monthly, quarterly or annual distributions of earnings allocations, or to allow earnings to compound. Subject to certain limitations, a compounding investor may subsequently change his election, but an investor's election to have cash distributions is irrevocable. Profits and losses Profits and losses are allocated among the limited partners according to their respective capital accounts monthly after 1% of the profits and losses are allocated to the general partners. Liquidity, capital withdrawals and early withdrawals There are substantial restrictions on transferability of Partnership units and accordingly an investment in the Partnership is non-liquid. Limited partners had no right to withdraw from the Partnership or to obtain the return of their capital account for at least one year from the date of purchase of Partnership units. In order to provide a certain degree of liquidity to the limited partners after the one-year period, limited partners may withdraw all or part of their capital accounts from the Partnership in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given, subject to a 10% early withdrawal penalty. The 10% penalty is applicable to the amount withdrawn as stated in the notice of withdrawal and will be deducted from the capital account. 32 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003 3. Other Partnership Provisions (continued) Liquidity, capital withdrawals and early withdrawals (continued) After five years from the date of purchase of the units, limited partners have the right to withdraw from the Partnership, on an installment basis. Generally, this is done over a five-year period in twenty quarterly installments. Once a limited partner has been in the Partnership for the minimum five-year period, no penalty will be imposed if withdrawal is made in twenty quarterly installments or longer. Notwithstanding the five-year (or longer) withdrawal period, the general partners may liquidate all or part of a limited partner's capital account in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given. This withdrawal is subject to a 10% early withdrawal penalty applicable to any sums withdrawn prior to the time when such sums could have been withdrawn without penalty. The Partnership will not establish a reserve from which to fund withdrawals and, accordingly, the Partnership's capacity to return a limited partner's capital account is restricted to the availability of Partnership cash flow. Furthermore, no more than 20% of the total limited partners' capital accounts outstanding at the beginning of any year shall be liquidated during any calendar year. 4. General Partners and Related Parties The following are commissions and fees that are paid to the general partners and affiliates: Mortgage brokerage commissions For fees in connection with the review, selection, evaluation, negotiation and extension of loans, an affiliate of the general partners may collect an amount equivalent to 12% of the loaned amount until 6 months after the termination date of the offering. Thereafter, loan brokerage commissions (points) will be limited to an amount not to exceed 4% of the total Partnership assets per year. The loan brokerage commissions are paid by the borrowers, and thus, are not an expense of the Partnership. In 2005, 2004 and 2003, loan brokerage commissions paid by the borrowers were $52,248, $24,156, and $42,407, respectively. Mortgage servicing fees Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the unpaid principal are paid to Redwood Mortgage Corp., an affiliate of the general partners, based on the unpaid principal balance of the loan portfolio, or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. Once a loan is categorized as impaired, mortgage servicing fees are no longer accrued. Additional service fees are recorded upon the receipt of any subsequent payments on impaired loans. Mortgage servicing fees of $56,508, $50,160, and $48,759, were incurred for 2005, 2004 and 2003, respectively. The Partnership has a payable to Redwood Mortgage Corp. for servicing fees of $8,572 and $12,541 at December 31, 2005 and 2004, respectively. Asset management fee The general partners receive monthly fees for managing the Partnership's loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8 of 1% annually). Asset management fees of $12,031, $8,160, and $8,427 were incurred for 2005, 2004 and 2003, respectively. Other fees The Partnership Agreement provides for other fees such as reconveyance, mortgage assumption and mortgage extension fees. These fees are incurred by the borrowers and paid to parties related to the general partners. 33 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003 4. General Partners and Related Parties (continued) Operating expenses Redwood Mortgage Corp. is reimbursed by the Partnership for all operating expenses incurred by it on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners. During 2005, 2004 and 2003, operating expenses totaling $9,212, $12,799 and $17,025, respectively, were reimbursed to Redwood Mortgage Corp. 5. Real Estate Held for Sale The following schedule reflects the costs of real estate acquired through foreclosure and the recorded reductions to estimated fair values, including estimated costs to sell, as of December 31, 2005 and 2004: 2005 2004 --------------- -------------- Costs of properties $ 130,215 $ 130,215 Reduction in value - (1,313) --------------- -------------- Real estate held for sale, net $ 130,215 $ 128,902 =============== ============== 6. Income Taxes The following reflects a reconciliation of partners' capital reflected in the financial statements to the tax basis of Partnership capital: 2005 2004 -------------- -------------- Partners' capital per financial statements $ 6,356,507 $ 6,429,808 Allowance for loan losses and real estate 315,379 317,064 -------------- -------------- Partners' capital tax basis $ 6,671,886 $ 6,746,872 ============== ============== In 2005 and 2004, approximately 72% of taxable income was allocated to tax-exempt organizations (e.g., retirement plans). - 34 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003 7. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of financial instruments: (a) Cash and cash equivalents - The carrying amount equals fair value. All amounts, including interest-bearing accounts are subject to immediate withdrawal. (b) Secured loans carrying value was $2,021,973 and $5,225,128 at December 31, 2005 and 2004, respectively. The fair value of these loans of $2,078,582 and $5,209,821, respectively, was estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans would be made. The applicable amount of the allowance for loan losses along with accrued interest and advances related thereto should also be considered in evaluating the fair value versus the carrying value. 8. Asset Concentrations and Characteristics Most loans are secured by recorded deeds of trust. At December 31, 2005 and 2004, there were 9 and 14 secured loans outstanding respectively, with the following characteristics: 2005 2004 --------------- -------------- Number of secured loans outstanding 9 14 Total secured loans outstanding $ 2,021,973 $ 5,225,128 Average secured loan outstanding $ 224,664 $ 373,223 Average secured loan as percent of total secured loans 11.11% 7.14% Average secured loan as percent of partners' capital 3.53% 5.80% Largest secured loan outstanding $ 532,131 $ 2,103,300 Largest secured loan as percent of total secured loans 26.32% 40.25% Largest secured loan as percent of partners' capital 8.37% 32.71% Largest secured loan as percent of total assets 8.36% 32.59% Number of counties where security is located (all California) 6 8 Largest percentage of secured loans in one county 26.91% 42.28% Average secured loan to appraised value of security based on appraised values and prior liens at time loan was consummated 65.95% 79.67% Number of secured loans in foreclosure - - Amounts of secured loans in foreclosure $ - $ -
35 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003 8. Asset Concentrations and Characteristics (continued) The following categories of secured loans were held at December 31, 2005 and 2004: 2005 2004 --------------- --------------- First trust deeds $ 810,359 $ 4,212,912 Second trust deeds 1,211,614 1,012,216 --------------- --------------- Total loans 2,021,973 5,225,128 Prior liens due other lenders at time of loan 2,367,593 3,026,354 --------------- --------------- Total debt $ 4,389,566 $ 8,251,482 =============== =============== Appraised property value at time of loan $ 6,655,409 $ 10,356,549 =============== =============== Total loans as a percent of appraisals 65.95% 79.67% =============== =============== Loans by type of property Single family (1-4 units) $ 1,703,472 $ 1,316,596 Apartments - 96,716 Commercial 318,501 3,811,816 --------------- --------------- $ 2,021,973 $ 5,225,128 =============== ===============
Interest rates on the loans range from 8.50% to 10.50% at December 31, 2005, and 6.50% to 10.50% at December 31, 2004. Scheduled maturity dates of secured loans as of December 31, 2005 are as follows: Year Ending December 31, ---------------------------------- 2006 $ 424,432 2007 144,069 2008 400,000 2009 272,394 2010 781,078 --------------- $ 2,021,973 =============== 36 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003 8. Asset Concentrations and Characteristics (continued) The remaining scheduled maturities for 2006 include $174,432 in two loans, which were 90 days past maturity at December 31, 2005. None of these loans had interest payments categorized as delinquent over 90 days. Occasionally, the Partnership allows borrowers to continue to make the payments on debt past maturity for periods of time. Cash deposits at December 31, 2005, exceeded federal insurance limits (up to $100,000 per bank) by approximately $4,364,000. The Partnership has a substantial amount of its loan receivable balance due from one borrower at December 31, 2004. This borrower accounted for approximately 59% of the secured loan balance at December 31, 2004 and approximately 57% and 47% of interest on loans for the years ended December 31, 2004 and 2003, respectively. During 2005, these loans were repaid in full. At December 31, 2004, the collateral value securing these loans was less than the principal balance due under the loans. Redwood Mortgage Corp. had provided an indemnity to the Partnership whereby it has agreed to indemnify and hold harmless the Partnership from any expenses or losses incurred by the Partnership by reason of the Partnership's inability to collect all principal due under the loans after the Partnership has exhausted all reserves set aside for these loans and all remedies available to it including foreclosure of the underlying collateral. Therefore, these loans were not considered impaired solely because the value of the collateral securing the loans was less than the principal due to the Partnership. The Partnership also has 71% of its receivable balance due from four borrowers at December 31, 2005. These borrowers accounted for approximately 15% of interest revenue for the year ended December 31, 2005. 9. Commitments and Contingencies Workout agreements The Partnership has negotiated various contractual workout agreements with borrowers. The Partnership is not obligated to fund additional money as of December 31, 2005. There are no loans in a workout agreement as of December 31, 2005. Legal proceedings The Partnership is involved in various legal actions arising in the normal course of business. In the opinion of management, such matters will not have a material effect upon the financial position of the Partnership. 37 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003 10. Selected Financial Information (Unaudited) Calendar Quarter ----------------------------------------------------------- First Second Third Fourth Annual ------------ ----------- ----------- ------------ ------------ Revenues 2005 $ 133,529 $ 131,659 $ 196,607 $ 60,487 $ 522,282 2004 $ 130,206 $ 140,121 $ 135,904 $ 132,506 $ 538,737 Expenses 2005 $ 34,574 $ 36,084 $ 100,647 $ (37,431) $ 133,874 2004 $ 48,590 $ 59,237 $ 50,429 $ 33,329 $ 191,585 Net income allocated to general partners 2005 $ 990 $ 955 $ 960 $ 979 $ 3,884 2004 $ 816 $ 809 $ 855 $ 992 $ 3,472 Net income allocated to limited partners 2005 $ 97,965 $ 94,620 $ 95,000 $ 96,939 $ 384,524 2004 $ 80,800 $ 80,075 $ 84,620 $ 98,185 $ 343,680 Net income per $1,000 invested where income is Reinvested 2005 $ 15 $ 15 $ 15 $ 17 $ 62 2004 $ 12 $ 12 $ 13 $ 17 $ 54 Withdrawn 2005 $ 15 $ 15 $ 15 $ 15 $ 60 2004 $ 12 $ 12 $ 13 $ 16 $ 53
38 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Schedule II Valuation and Qualifying Accounts For the Three Years Ended December 31, 2003, 2004 and 2005 Col. C - Additions Col. B ------------------------------- Col. E Balance at Charged to Charged Balance Col. A Beginning Costs and to Other Col. D at End Description of Period Expenses Accounts Deductions of Period ---------------------------------------- -------------- ------------- -------------- ------------- -------------- Year Ended December 31, 2003 Deducted from asset accounts Allowance for doubtful accounts $ 275,294 $ 4,585 $ - (a) $ (14) (a) $ 279,865 Cumulative write-down of real estate held for sale (REO) 784,191 - - - 784,191 -------------- ------------- -------------- ------------- -------------- $ 1,059,485 $ 4,585 $ - (a) $ (14) (a) $ 1,064,056 ============== ============= ============== ============= ============== Year Ended December 31, 2004 Deducted from asset accounts Allowance for doubtful accounts $ 279,865 $ 35,886 $ - $ - $ 315,751 Cumulative write-down of real estate held for sale (REO) 784,191 - - (782,878) (b) 1,313 -------------- ------------- -------------- ------------- -------------- $ 1,064,056 $ 35,886 $ - $(782,878) $ 317,064 ============== ============= ============== ============= ============== Year Ended December 31, 2005 Deducted from asset accounts Allowance for doubtful accounts $ 315,751 $ (1,685) $ 1,313 $ - $ 315,379 Cumulative write-down of real estate held for sale (REO) 1,313 - (1,313) - - -------------- ------------- -------------- ------------- -------------- $ 317,064 $ (1,685) $ - $ - $ 315,379 ============== ============= ============== ============= ==============
Note (a) - Represents write-offs of loans. Note (b) - Represents sales of REO. 39 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Schedule IV Mortgage Loans on Real Estate Rule 12-29 Loans on Real Estate December 31, 2005 Col. H Principal Col. F Amount Face Col. G of Loans Col. C Col. D Amount of Carrying Subject to Col. I Col. J Col. B Final Periodic Col. E Mortgage Amount of Delinquent Type California Col. A Interest Maturity Payment Prior Original Mortgage Principal of Geographic Descrip. Rate Date Terms Liens Amount Investment or Interest Lien Location ----------------------------------------------------------------------------------------------------------------------------------- Comm. 10.00% 12/1/2003 $ 1,276 $ - $ 145,455 $ 143,896 $ 143,896 1st Stanislaus Comm. 10.00% 12/1/2003 284 208,012 32,323 30,536 30,536 2nd Stanislaus Comm. 10.50% 10/01/07 1,345 - 147,000 144,069 - 1st San Mateo Res. 9.25% 08/01/09 1,275 - 155,000 153,485 - 1st Alameda Res. 8.50% 09/01/06 1,417 - 250,000 250,000 - 1st Monterey Res. 9.25% 09/01/09 987 - 120,000 118,909 - 1st Colusa Res. 9.25% 06/01/10 2,057 198,779 250,000 248,947 - 2nd Alameda Res. 8.50% 07/01/08 2,833 500,000 400,000 400,000 - 2nd San Mateo Res. 9.25% 08/01/10 4,387 1,460,802 533,250 532,131 - 2nd Santa Clara --------------------------------------------------------- Total $ 2,367,593 $2,033,028 $2,021,973 $ 174,432 =========================================================
Note: Most loans have balloon payments due at maturity 40 REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) Schedule IV Mortgage Loans on Real Estate Rule 12-29 Loans on Real Estate December 31, 2005 Reconciliation of carrying amount (cost) of loans at close of periods Year ended December 31, ------------------------------------------------- 2005 2004 2003 -------------- ------------- -------------- Balance at beginning of year $ 5,225,128 $ 5,255,620 $ 5,183,100 -------------- ------------- -------------- Additions during period New loans 1,858,250 869,415 1,637,342 Other - - - -------------- ------------- -------------- Total additions 1,858,250 869,415 1,637,342 -------------- ------------- -------------- Deductions during period Collections of principal 5,061,405 899,907 1,564,808 Foreclosures - - - Cost of loans sold - - - Amortization of premium - - - Other - - 14 -------------- ------------- -------------- Total deductions 5,061,405 899,907 1,564,822 -------------- ------------- -------------- Balance at close of year $ 2,021,973 $ 5,225,128 $ 5,255,620 ============== ============= ==============
41 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no disagreements with the Partnership's independent registered public accounting firm during the years ended December 31, 2005 and 2004. Item 9a. - Controls and Procedures The Partnership carried out an evaluation, under the supervision and with the participation of the general partners of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the general partners concluded that the Partnership's disclosure controls and procedures were effective in timely alerting the general partners to material information related to the Partnership that is required to be included in our periodic filings with the Securities and Exchange Commission. There were no significant changes in the Partnership's internal control over financial reporting during the Partnership's fourth fiscal quarter that have materially affected, or are likely to materially affect, the Partnership's internal control over financial reporting. Item 9b. - Other Information None Part III Item 10 - Directors and Executive Officers of the Registrant The Partnership has no Officers or Directors. Rather, the activities of the Partnership are managed by the two general partners, one of whom is an individual, Michael R. Burwell. The second general partner is Gymno Corporation, a California corporation, formed in 1986. Mr. Burwell is one of the two shareholders of Gymno Corporation, a California corporation, and has a 50% interest in the corporation. The General Partners. Michael R. Burwell. Michael R. Burwell, age 49, General Partner, past member of Board of Trustees and Treasurer, Mortgage Brokers Institute (1984-1986); President, Director, Chief Financial Officer, Redwood Mortgage Corp. (1979-present); Director, Secretary and Treasurer A & B Financial Services, Inc. (1980-present); President, Director, Chief Financial Officer and Secretary (since 1986) of Gymno Corporation; President, Director, Secretary and Treasurer of The Redwood Group, Ltd. (1979-present). Mr. Burwell is licensed as a real estate sales person. Gymno Corporation. Gymno Corporation, General Partner, is a California corporation formed in 1986 for the purpose of acting as a general partner of this Partnership and of other limited partnerships formed by the individual general partners. The shares in Gymno Corporation are held equally by Michael R. Burwell and the Burwell trusts. Michael R. Burwell is a director of Gymno and the director position held by D. Russell Burwell is currently vacant. Michael R. Burwell is its President, Chief Financial Officer and Secretary. Michael R. Burwell has a controlling interest in this company through his ownership of stock and as trustee of the Burwell trusts. Financial Oversight by General Partners. The partnership does not have a board of directors or an audit committee. Accordingly, the general partners serve the equivalent function of an audit committee for, among other things, the following purposes: appointment, compensation, review and oversight of the work of our independent public accountants, and establishing the enforcing of the Code of Ethics. However, since the partnership does not have an audit committee and the general partners are not independent of the partnership, the partnership does not have an "audit committee financial expert." 42 Code of Ethics. The general partners have adopted a Code of Ethics applicable to the general partners and to any agents, employees or independent contractors engaged by the general partners to perform the functions of a principal financial officer, principal accounting officer or controller of the partnership, if any. You may obtain a copy of this Code of Ethics, without charge, upon request by calling our Investor Services Department at (650) 365-5341. Item 11 - Executive Compensation COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP As indicated above in item 10, the Partnership has no officers or directors. The Partnership is managed by the general partners. There are certain fees and other items paid to management and related parties. A more complete description of management compensation is found in the Prospectus, pages 11-12, under the section "Compensation of the General Partners and the Affiliates", which is incorporated by reference. Such compensation is summarized below. The following compensation has been paid to the general partners and affiliates for services rendered during the year ended December 31, 2005. All such compensation is in compliance with the guidelines and limitations set forth in the partnership agreement. Entity Receiving Compensation Description of Compensation and Services Rendered Amount ---------------------------------------------------------------------------------------------------------------------- I. Redwood Mortgage Corp. Loan Servicing Fee for servicing loans...................................$56,508 General Partners &/or Affiliates Asset Management Fee for managing assets.................................$12,031 General Partners 1% interest in profits....................................................$3,884
II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY COMPANIES RELATED TO THE GENERAL PARTNERS (EXPENSES OF BORROWERS NOT OF THE PARTNERSHIP) Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in connection with the review, selection, evaluation, negotiation, and extension of the loans paid by the borrowers and not by the Partnership................................................................$52,248 Redwood Mortgage Corp. Processing and Escrow Fees for services in connection with notary, document preparation, credit investigation, and escrow fees payable by the borrowers and not by the Partnership....................$2,000 Gymno Corporation Reconveyance Fee..............................................................$371
III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE STATEMENT OF INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . .$9,212 43 Item 12 - Security Ownership of Certain Beneficial Owners and Management The general partners receive a combined total of a 1% interest in Partnership income and losses and distributions of cash available for distribution. Item 13 - Certain Relationships and Related Transactions Refer to footnotes 3 and 4 of the Notes to Financial Statements in Part II item 8, which describes related party fees and data. Also refer to sections of the Prospectus "Compensation of General Partners and Affiliates", page 11, and "Conflicts of Interest", page 13, as part of the above-referenced Registration Statement, which is incorporated by reference. Item 14 - Principal Accountant Fees and Services Fees for services performed for the Partnership by the principal accountant for 2005 and 2004 are as follows: Audit Fees The aggregate fees billed during the years ended December 31, 2005 and 2004 for professional services rendered for the audit of the Partnership's annual financial statements included in the Partnership's Annual Report on Form 10-K and review of financial statements included in the Partnership's Quarterly Reports on Form 10-Q were $33,523 and $37,136, respectively. Audit Related Fees There were no fees billed during the years ended December 31, 2005 and 2004 for audit-related services. Tax fees The aggregate fees billed for tax services for the years ended December 31, 2005 and 2004 were $3,661 and $3,478, respectively. These fees relate to professional services rendered primarily for tax compliance. All Other Fees There were no other fees billed during the years ended December 31, 2005 and 2004. All audit and non-audit services are approved by the general partner prior to the accountant being engaged by the Partnership. 44 Part IV Item 15 - Exhibits and Financial Statements Schedules A. Documents filed as part of this report: 1. The Financial Statements are listed in Part II, Item 8 under A-Financial Statements. 2. The Financial Statement Schedules are listed in Part II, Item 8 under B-Financial Statement Schedules. 3. Exhibits. Exhibit No Description of Exhibits ---------------- ------------------------------------------------------------ 3.1 Limited Partnership Agreement 3.2 Form of Certificate of Limited Partnership Interest 3.3 Certificate of Limited Partnership 10.1 Escrow Agreement 10.2 Servicing Agreement 10.3 (a) Form of Note secured by Deed of Trust which provides for principal and interest payments (b) Form of Note secured by Deed of Trust which provides principal and interest payments and right of assumption (c) Form of Note secured by Deed of Trust which provides for interest only payments (d) Form of Note 10.4 (a) Deed of Trust and Assignment of Rents to accompany Exhibits 10.3 (a) and (c) (b) Deed of Trust and Assignment of Rents to accompany Exhibits 10.3 (b) (c) Deed of Trust to accompany Exhibit 10.3 (d) 10.5 Promissory Note for Formation Loan 10.6 Agreement to Seek a Lender 31.1 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 All of the above exhibits other than 31.1, 31.2, 32.1 and 32.2, were previously filed as the exhibits to Registrant's Statement on Form S-11 (Registration No. 33-12519) and incorporated by reference herein. B. See (A) 3 above C. See (A) 2 above. Additional reference is made to prospectus (S-11) dated September 3, 1987 to pages 56 through 59 and supplement #6 dated May 16, 1989 pages 16-18, for financial data related to Gymno Corporation, a general partner. 45 Signatures Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized on the 30th day of March, 2006. REDWOOD MORTGAGE INVESTORS VI By: /S/ Michael R. Burwell --------------------------------------------- Michael R. Burwell, General Partner By: Gymno Corporation, General Partner By: /S/ Michael R. Burwell ------------------------------------------ Michael R. Burwell, President, Secretary & Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacity indicated on the 30th day of March, 2005. Signature Title Date /S/ Michael R. Burwell ----------------------- Michael R. Burwell General Partner March 30, 2006 /S/ Michael R. Burwell ----------------------- Michael R. Burwell President, Secretary & Chief March 30, 2006 Financial Officer of Gymno Corporation (Principal Financial and Accounting Officer); Director of Gymno Corporation 46 Exhibit 31.1 GENERAL PARTNER CERTIFICATION I, Michael R. Burwell, General Partner, certify that: 1. I have reviewed this annual report on Form 10-K of Redwood Mortgage Investors VI, a California Limited Partnership (the "Registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the Registrant's control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. /s/ Michael R. Burwell ---------------------------- Michael R. Burwell, General Partner March 30, 2006 47 Exhibit 31.2 PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION I, Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner, certify that: 1. I have reviewed this annual report on Form 10-K of Redwood Mortgage Investors VI, a California Limited Partnership (the "Registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the Registrant's control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. /s/ Michael R. Burwell --------------------------- Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner March 30, 2006 48 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Redwood Mortgage Investors VI (the "Partnership") on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the Partnership, certify that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership at the dates and for the periods indicated. This Certification has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission. /s/ Michael R. Burwell ----------------------------- Michael R. Burwell, General Partner March 30, 2006 49 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Redwood Mortgage Investors VI (the "Partnership") on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner of the Partnership, certify that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership at the dates and for the periods indicated. This Certification has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission. /s/ Michael R. Burwell ----------------------------- Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner March 30, 2006 50