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REDWOOD MORTGAGE INVESTORS VI
(a California Limited Partnership)
Index to Form 10-K
December 31, 2002
Part I
Page No.
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Item 1 - Business 3
Item 2 - Properties 6
Item 3 - Legal Proceedings 6
Item 4 - Submission of Matters to a Vote of Security Holders (Partners) 6
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters 7
Item 6 - Selected Financial Data 7
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 7a - Quantitative and Qualitative Disclosures About Market Risk 16
Item 8 - Financial Statements and Supplementary Data 17
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 38
Part III
Item 10 - Directors and Executive Officers of the Registrant 38
Item 11 - Executive Compensation 38
Item 12 - Security Ownership of Certain Beneficial Owners and Management 39
Item 13 - Certain Relationships and Related Transactions 39
Item 14 - Controls and Procedures 39
Part IV
Item 15 - Exhibits, Financial Statements and Schedules, and Reports of Form 8-K 40
Signatures 41
Certifications 42
1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the year ended December 31, 2002 Commission File number 33-12519
- --------------------------------------------------------------------------------
REDWOOD MORTGAGE INVESTORS VI
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-3031211
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(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063
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(address of principal executive offices) (zip code)
Registrant's telephone number including area code (650) 365-5341
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12 (b) of the Act: None
Title of each class Name of each exchange on which registered
- --------------------------------------------------------------------------------
None None
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12 (g) of the Act: Limited
Partnership Units
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES XX NO
--------------- -------------
At the close of the sale of Units in 1989, the limited partnership Units
purchased by non-affiliates was 97,725.94 Units computed at $100.00 a Unit for
$9,772,594, excluding general partners' contribution of $9,772.
Documents incorporated by reference:
Portions of the Prospectus for Redwood Mortgage Investors VI, included as
part of the form S-11 Registration Statement, SEC File No. 33-12519 dated
September 3, 1987 and Supplement No. 6 dated May 16, 1989, incorporated in Parts
II, III, and IV.
2
Part I
Item 1 - Business
Redwood Mortgage Investors VI is a California Limited Partnership (the
"Partnership"). Michael R. Burwell, an individual, and Gymno Corporation, a
California corporation, are the general partners. The address of the general
partners is 900 Veterans Blvd., Suite 500, Redwood City, California 94063. The
Partnership's primary purpose is to invest its capital in first and second deeds
of trust secured by Northern California properties. Loans are arranged and
serviced by Redwood Mortgage Corp., an affiliate of the general partners. The
Partnership's objectives are to make investments which will: (i) provide the
maximum possible cash returns which limited partners may elect to (a) receive as
monthly, quarterly or annual cash distributions or (b) have earnings credited to
their capital accounts and used to invest in Partnership activities; and (ii)
preserve and protect the Partnership's capital. The Partnership's general
business is more fully described under the section entitled "Investment
Objectives and Criteria", pages 23-26 of the Prospectus, a part of the
above-referenced Registration Statement, which is incorporated by reference.
The Partnership was formed in September 1987, with an approved 120,000
Units of $100 each ($12,000,000). The Units were offered on a "best efforts"
basis through broker/dealer member firms of the National Association of
Securities Dealers, Inc. It immediately began issuing Units and began investing
in loans in October 1987. The offering terminated in September 1989, and as of
that date 97,725.94 Units were sold realizing proceeds of $9,772,594. At
December 31, 2002, the Partnership had a balance of loans totaling $5,183,100
with interest rates thereon ranging from 6.50% to 14.75%.
Currently First Trust Deeds comprise 84.74% of the total amount of secured
loan portfolio. Second Mortgage Trust Deeds comprise 15.26% of the secured loan
portfolio. Owner-occupied homes, combined with non-owner occupied homes, total
15.91% of the secured loans. Secured loans to apartments make up 10.93% of the
total secured loans portfolio. Commercial secured loan origination increased
from last year, now comprising 73.16% of the portfolio, an increase of 3.04%
from 2001. The major concentration of secured loans, comprising 88.52% of the
total loans, are in five counties of the San Francisco Bay Area. The balance, as
stated on page 5 of this report, are primarily in Northern California. Currently
secured loan size is averaging $235,595 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 20.32%. 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 2002.
Delinquencies are discussed under Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Partnership's revenues decreased from $477,929 in 2000 to $426,651 in
2001 and to $369,983 in 2002. This was due largely to the decline in the
Partnership's secured loan portfolio from $5,570,576 to $4,970,433 to $5,183,100
for the years 2000, 2001 and 2002, respectively, and an overall lowering of
interest rates on loans. Cash flow the Partnership generated from income,
mortgage interest and loan pay-offs was used primarily to meet limited partner
capital and earnings liquidations. For the three years ended December 31, 2002
withdrawals by limited partners were $1,079,696 in 2000, $836,749 in 2001 and
$602,753 in 2002.
During the year 2002, the Partnership's annualized yield on compounding
accounts was 5.40% and on monthly distributing accounts it was 5.30%.
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.
3
Mortgage interest rates have fallen during the last 18 to 24 months. This
has been partially due to actions by the Federal Reserve Bank to reduce the
discount rate on borrowings charged to member banks, a slowing economy and low
inflation rates. Although the general trend for interest rates has been down,
many lenders have tightened their credit and reduced their lending exposure in
various markets and property types. This credit tightening from competing
lenders would generally provide the Partnership with additional lending
opportunities at attractive rates. However, as a result of the slowing economy,
there are now fewer transactions in the marketplace, which could potentially
reduce the number of lending opportunities to the Partnership. Continued rate
reductions by the Federal Reserve Bank, a continued slowing economy, and
continued low inflation rates could have the effect of reducing mortgage yields.
In the future, when cash flow permits, currently existing loans with relatively
high yields could be replaced with loans with lower yields as they pay-off,
which in turn could reduce the net yield paid to the limited partners. In
addition, if there is less demand by borrowers for loans and, thus, fewer loans
for the Partnership to invest in, it will invest its excess cash in shorter-term
alternative investments yielding considerably less than the current investment
portfolio.
Loan Portfolio
As of December 31, 2002, a summary of the Partnership's secured loan
portfolio is set forth below.
Loans as a Percentage of Appraised Value
First Trust Deeds $4,392,120
Second Trust Deed Loans 790,980
----------------
Total loans $5,183,100
Priority Positions due other Lenders 2,779,170
Total Debt $7,962,270
================
Appraised Property Value at time of loan $9,992,743
Total Investments as a % of Appraisal 79.68%
Number of Secured Loans Outstanding 22
Average Investment 235,595
Average Investment as a % of Net Assets 3.48%
Largest Investment Outstanding 2,103,300
Largest Investment as a % of Net Assets 31.05%
Secured Loans as a Percentage of Total Loans Percent
----------------------------------------------------- -------------
First Trust Deeds 84.74%
Second Trust Deeds 15.26%
-------------
Total 100.00%
Secured Loans by Type of Property Amount Percent
----------------------------------------- ------------- -------------
Owner Occupied Homes $ 49,707 14.47%
Non-Owner Occupied Homes 74,674 1.44%
Apartments 566,600 10.93%
Commercial 3,792,119 73.16%
------------- -------------
Total $5,183,100 100.00%
============= =============
4
The following is a distribution of secured loans outstanding as of December
31, 2002 by Counties.
Total Mortgage
County Investments Percent
-------------------------- ----------------- -----------------
Santa Clara $2,211,565 42.67%
Alameda 1,203,972 23.23%
San Francisco 660,937 12.75%
San Mateo 406,549 7.84%
Sacramento 243,067 4.69%
Stanislaus 176,558 3.41%
Marin 105,000 2.03%
Shasta 77,485 1.49%
San Joaquin 76,250 1.47%
Sonoma 21,717 0.42%
----------------- -----------------
Total $5,183,100 100.00%
================= =================
Statement of Condition of loans:
Number of Loans in Foreclosure 0
Scheduled maturity dates of secured loans as of December 31, 2002 are as
follows:
Year Ending
December 31,
-------------------
2003 $ 681,176
2004 844,706
2005 145,125
2006 96,716
2007 3,259,940
Thereafter 155,437
---------------
$5,183,100
===============
The scheduled maturities for 2003 include one loan for $175,656,
representing 3.39% of the portfolio, was past maturity at December 31, 2002. Two
loans totaling $207,648 (4.01% of the secured loan portfolio) were categorized
as delinquent over 90 days. Several of these borrowers were in the process of
selling their property or refinancing the loans through other institutions, as
this was an opportune time for them to do so and take advantage of lower
interest rates. The Partnership allows borrowers to occasionally continue to
make the regular interest payments on debt past maturity for periods of time.
Interest payments on one of these loans were delinquent.
5
Item 2 - Properties
During 2002, the Partnership acquired one piece of real estate through
foreclosure. The Partnership, together with other partnerships, all affiliates
of the general partners, own the property. It is a 4 unit condominium complex.
Currently, renovation work is being carried out and the property is expected to
be put on the market by June 2003. As of December 31, 2002, balance outstanding
was $377,000. The general partners have examined the property with real estate
professionals, reviewed the appraisal and concluded the collateral appears
adequate to collect the amounts due.
The Partnership also owns two other properties; a commercial property and
the other land. The land is located in East Palo Alto. The land is owned with
two other affiliated partnerships. The Partnership's net investment at December
31, 2002 is $130,215. Currently there is not an active market for land sale. The
general partners are offering the property for sale but there has been little
activity, although some negotiations have ensued. The general partners believe
that the property is worth considerably more than its net investment.
Our final property is a commercial property located in Walnut Creek,
California. The property is currently for sale, but the market is soft and a
sale is not anticipated soon. Management has set aside loss reserves, which they
believe are adequate in amount to cover anticipated losses.
Item 3 - Legal Proceedings
In the normal course of business the Partnership may become involved in
various types of legal proceedings such as assignments of rents, bankruptcy
proceedings, appointments of receivers, unlawful detainers, judicial
foreclosures, etc., to enforce the provisions of the deeds of trust, collect the
debt owed under promissory notes or to protect/recoup its investment from the
real property secured by the deeds. The Partnership is a defendant along with
numerous defendants, including a developer, contractor, and other lenders, in a
lawsuit involving the Partnership's attempt to recover its investment in real
estate acquired through foreclosure. The plaintiff has not actively pursued the
case for some time and the statute of limitations will expire next year. The
general partners believe that the outcome of this litigation will have no effect
on the earnings of the Partnership.
Item 4 - Submission of Matters to a Vote of Security Holders (Partners)
No matters have been submitted to a vote of the Partnership.
6
Part II
Item 5 - Market for the Registrant's "Limited Partnership Units" and
Related Unitholder Matters
120,000 Units at $100 each (minimum 20 Units) were offered through
broker-dealer member firms of the National Association of Securities Dealers on
a "best efforts" basis (as indicated in Part I item 1). All Units were sold to
California residents. Investors have the option of withdrawing earnings on a
monthly, quarterly or annual basis or having their earnings retained in the
Partnership. Limited partners may withdraw from the Partnership in accordance
with the terms of the partnership agreement subject to early withdrawal
penalties. There is no established public trading market for the Units.
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
38042 of the Prospectus, a part of the above-referenced Registration Statement,
which is incorporated by reference.
Item 6 - Selected Financial Data
Redwood Mortgage Investors VI began operations in October, 1987. Its
financial condition and results of operation for the five years ended December
31, 2002 were:
Balance Sheets
December 31,
-----------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------- ------------- ------------- ------------ --------------
Cash $341,127 $190,414 $354,860 $1,120,295 $299,775
Loans
Loans, secured by deeds of trust 5,183,100 4,970,433 5,570,576 5,282,773 7,969,735
Loans, unsecured 223,697 82,362 82,362 - 23,775
Interest and other receivables
Accrued interest on loans 61,384 797,105 664,292 706,841 717,719
Advances on loans 31,007 197,946 133,647 137,930 162,083
Less allowances for loan losses (275,294) (370,612) (261,452) (303,249) (202,344)
Note receivable - Redwood Mortgage Corp - 178,200 125,000 300,000 -
Real estate owned (REO), net 1,234,541 1,093,503 767,583 133,300 169,922
Real estate owned in process - - - 668,132 -
-------------- ------------- ------------- ------------ --------------
Total assets $6,799,562 $7,139,351 $7,436,868 $8,046,022 $9,140,665
------------
============== ============= ============= ============ ==============
7
Liabilities and Partners' Capital
December 31,
-----------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
Liabilities
Notes payable - bank line of credit $ - $ - $ - $ - $ 390,000
Accounts payable 11,953 20,261 13,068 - 22,668
Deferred interest on loans - 74,022 - 15,676 20,463
Payable to affiliates 14,643 35,632 - - -
------------- ------------- ------------- ------------- -------------
Total liabilities 26,596 129,915 13,068 15,676 433,131
------------- ------------- ------------- ------------- -------------
Partners' capital
Limited partners' capital, subject to
redemption 6,763,200 6,999,670 7,414,034 8,020,580 8,697,768
General partners' capital 9,766 9,766 9,766 9,766 9,766
------------- ------------- ------------- ------------- -------------
Total partners' capital 6,772,966 7,009,436 7,423,800 8,030,346 8,707,534
------------- ------------- ------------- ------------- -------------
Total liabilities and partners' capital $6,799,562 $7,139,351 $7,436,868 $8,046,022 $9,140,665
============= ============= ============= ============= =============
Statements of Income
Gross revenue $ 574,171 $ 735,900 $ 785,209 $1,086,317 $ 871,861
Expenses 204,188 309,249 307,280 565,408 359,356
------------- ------------- ------------- ------------- -------------
Net income $ 369,983 $ 426,651 $ 477,929 $ 520,909 $ 512,505
============= ============= ============= ============= =============
Net income: to general partners (1%) $ 3,700 $ 4,266 $ 4,779 $ 5,209 $ 5,125
to limited partners (99%) 366,283 422,385 473,150 515,700 507,380
------------- ------------- ------------- ------------- -------------
$ 369,983 $ 426,651 $ 477,929 $ 520,909 $ 512,505
============= ============= ============= ============= =============
Net income per $1,000 invested by limited partners for entire period:
- where income is reinvested and
compounded $54 $59 $62 $62 $56
============= ============= ============= ============= =============
- where partner receives income in
monthly distributions $53 $58 $61 $61 $55
============= ============= ============= ============= =============
The annualized yield for 1999 was 6.24%, for 2000 the annualized yield was
6.22%, for 2001 the annualized yield was 5.95%, and for 2002 the annualized
yield was 5.40%. The average annualized yield from inception through December
31, 2002 was 7.04%.
8
Item 7 - Management Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP
Critical Accounting Policies.
In preparing the financial statements, management is required to make
estimates based on the information available that affect the reported amounts of
assets and liabilities as of the balance sheet date. 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, 2002, there were three
Real Estate Owned properties all acquired through foreclosure, one in 2002 and
the other two in prior years.
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. A provision is made for loan losses to adjust the allowance
for loan losses to an amount considered by management to be adequate, with due
consideration to collateral values, to provide for unrecoverable loans and
receivables, including impaired loans, other loans, accrued interest, late fees
and advances on loans and other accounts receivable (unsecured). The Partnership
charges off uncollectible loans and related receivables directly to the
allowance account once it is determined that the full amount is not collectible.
Statement of Financial Accounting Standards Nos. 114 and 118 provide that
if the probable ultimate recovery of the carrying amount of a loan, with due
consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement and the shortfall in
the amounts due are not insignificant, the carrying amount of the investment
shall be reduced to the present value of future cash flows discounted at the
loan's effective interest rate. If a loan is collateral dependent, it is valued
at the estimated fair value of the related collateral.
If events and or changes in circumstances cause management to have serious
doubts about the collectibility of the contractual payments, a loan may be
categorized as impaired and interest is no longer accrued. Any subsequent
payments on impaired loans are applied to reduce the outstanding loan balances,
including accrued interest and advances.
Recent trends in the economy have been taken into consideration in the
aforementioned process of arriving at the allowance for loan losses. Actual
results could vary from the aforementioned provisions for losses.
Forward Looking Statements.
Some of the information in the Form 10-K may contain forward looking
statements. Uses of words such as "will", "may", "anticipate", "estimate",
"continue" or other forward looking words, discuss future expectations or
predictions. The foregoing analysis of 2002 includes forward looking statements
and predictions about the possibility of future events, results of operations
and financial condition. As such, this analysis may prove to be inaccurate
because of assumptions made by the general partners or the actual development of
the future events. No assurance can be given that any of these statements or
predictions will ultimately prove to be correct or substantially correct.
Related Parties.
The general partners of the Partnership are Gymno Corporation and Michael
R. Burwell. Most Partnership business is conducted through Redwood Mortgage
Corp., an affiliate of the general partner, which arranges, services and
maintains the loan portfolio for the benefit of the Partnership. The fees
received by the affiliate are paid pursuant to the partnership agreement and are
determined at the sole discretion of the affiliate. In the past the affiliate
has elected not to take the maximum compensation. The following is a list of
various Partnership activities for which related parties are compensated.
9
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, the Partnership may
collect an amount equivalent to 12% of the loaned amount until 6 months after
the termination date of the offering. Thereafter, the loan brokerage commissions
(points) will be limited to an amount not to exceed 4% of the total Partnership
assets per year. The loan brokerage commissions are paid by the borrowers, and
thus, are not an expense of the Partnership. For the years ended December 31,
2000, 2001 and 2002, loan brokerage commissions paid by the borrowers were
$45,164, $46,581 and $22,611, 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 $48,556, $41,406 and $138,851 were incurred
for the years ended December 31, 2000, 2001 and 2002, respectively.
o Asset Management Fees The general partners receive monthly fees for
managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net
asset value' (3/8 of 1% on an annual basis). Management fees to the general
partners of $9,780, $9,115 and 8,677 were incurred by the Partnership for the
years ended December 31, 2000, 2001 and 2002, respectively.
o Other Fees The Partnership agreement provides that the general partners
may receive other fees such as reconveyance, mortgage assumption and mortgage
extension fees. Such fees are incurred by the borrowers and are paid to the
general partners.
o Income and Losses All income and losses are credited or charged to
partners in relation to their respective Partnership interests. The allocation
to the general partners (combined) shall be a total of 1%.
o Operating Expenses An affiliate of the Partnership, Redwood Mortgage
Corp., is reimbursed by the Partnership for all operating expenses actually
incurred by it on behalf of the Partnership, including without limitation,
out-of-pocket general and administration expenses of the Partnership, accounting
and audit fees, legal fees and expenses, postage and preparation of reports to
limited partners.
o Contributed Capital The general partners jointly and severally were to
contribute 1/10 of 1% in cash contributions as proceeds from the offerings are
received from the limited partners. As of December 31, 2001 and 2002, a general
partner, Gymno Corporation, had contributed $9,772 and $9,772 respectively, as
capital in accordance with Section 4.02(a) of the partnership agreement.
Results of Operations - For the years ended December 31, 2000, 2001 and 2002
The net income decrease of $42,980 (8%) for the year ended December 31,
2000 versus December 31, 1999 was due primarily to a decrease in interest earned
on loans of $145,323, an increase in interest-interest bearing accounts of
$2,935, an increase in interest on promissory note of $16,091, a decrease in
mortgage servicer subsidy of $175,000; offset by significant expense increases
or (decreases) for the year ended December 31, 2000 included a decrease in
interest and credit line costs of ($14,714), and a decrease in the provision for
losses on loans and real estate acquired through foreclosure of ($244,131).
The net income decrease of $51,278 (11%) for the year ended December 31,
2001 versus December 31, 2000 was due primarily to a decrease in interest earned
on loans of $85,613, a decrease in late charges of $4,094, a decrease in
interest on promissory note of $11,179, and an increase of mortgage servicer
subsidy of $53,200; offset by significant expense increases or (decreases) for
the year ended December 31, 2001 versus December 31, 2000 of lower mortgage
servicing fees of ($7,150), and an increase in the provision for losses on loans
and real estate acquired through foreclosure of $7,609.
10
The income decrease of $56,668 (13%) for the year ended December 31, 2002
versus December 2001 was due primarily to an increase in interest earned on
loans of $40,515, a decrease in late charges of $18,480, and a decrease in
mortgage servicer subsidy of $178,200; offset by significant expense increases
or (decreases) for the year ended December 31, 2002 versus December 31, 2001 of
higher mortgage servicing fees of $97,445, a decrease in the provision for
losses on loans and real estate acquired through foreclosure of ($206,900), and
an increase in professional fees of $11,594.
The decrease in interest on loans of $145,323 and $85,613 for the years
ended December 31, 2000 and 2001 was due to less loans outstanding. The increase
in interest on loans of $40,515 for the year ended December 31, 2002 was due to
a higher average loan portfolio balance; offset by a lower average loan
portfolio interest rate.
The increase in interest-interest bearing accounts of $2,936 for the year
ended December 31, 2000 versus December 31, 1999 is due to increased cash during
2000 held in interest bearing accounts. The decrease in interest-interest
bearing accounts of $4,094 and $7,780 for the years ended December 31, 2001 and
2002 is due to lower interest rates being earned on interest bearing accounts.
The increase of $16,091 in interest on promissory note for 2000 versus 1999
is due to no promissory note being held in 1999. The decrease in interest on
promissory note of $11,179 for 2001 versus 2000 is due to a lower outstanding
balance in 2001 versus 2000. The increase in interest on promissory note for
2002 versus 2001 is due to a higher average balance outstanding in 2002 versus
2001.
The decrease in mortgage servicer subsidy of $175,000 for 2000 versus 1999
was due to lower subsidies by the mortgage servicer. The increase in mortgage
servicer subsidy of $53,200 in 2001 versus 2000 is due to an increased subsidy
by the mortgage servicer in 2001. The decrease in mortgage servicer subsidy of
$178,200 in 2002 versus 2001 is due to no subsidy being provided by mortgage
servicer in 2002.
The increase in late charge revenue of $189 for the year ended December 31,
2000 versus 1999 is reflective of more loans delinquent. The decrease in late
charge revenue of $1,623 and $18,480 for the year ended December 31, 2001 and
2002 reflects greater collection of past due borrower payments and less
delinquency.
Professional fees paid were $25,462, $19,866 and $31,460 for the years
2000, 2001 and 2002, respectively. The fluctuations relate mainly to the
increased costs and timing of services for audits, financial report writing and
tax filing.
The decrease in mortgage servicing fees of $1,594 and $7,150 for the years
ended December 31, 2000 and December 31, 2001 is primarily attributable to the
lower average loan portfolio balances during 2000 and 2001. The increase in
mortgage servicing fees of $97,445 in 2002 is due to the collection of
previously past due payments on impaired loans, which were collected in 2002.
The Partnership does not accrue servicing fees to Redwood Mortgage Corp. on
impaired loans. Rather, servicing fees are incurred as borrower payments are
received.
The decrease of $244,131 in provision for losses on loans and real estate
acquired through foreclosure for the year ended December 31, 2000 versus
December 31, 1999 reflects the general partners' estimate of an appropriate
allowance for anticipated losses. The increase of $7,609 in provision for losses
on loans and real estate acquired through foreclosure for the year ended
December 31, 2001 versus 2000 reflect the general partners' estimate that
reserves needed to be slightly increased to cover anticipated losses. The
decrease of $206,900 in provision for losses on loans and real estate acquired
through foreclosure for the year ended December 31, 2002 versus 2001 reflects
the general partners' estimate that the existing reserves are adequate as
complemented by a guarantee received from Redwood Mortgage Corp. relating to the
collectibility of certain Partnership loans.
As of September 2, 1989, the Partnership had sold 97,725.94 Units and its
contributed capital totaled $9,772,594 of the approved $12,000,000 issue, in
Units of $100 each. As of that date the offering was formally closed. On
December 31, 2002, the Partnership's net capital totaled $6,772,966.
11
The Partnership began funding loans in October 1987. The Partnership's
secured loans outstanding for the years ended December 31, 2000, 2001, and 2002
were $5,570,576, $4,970,433, and $5,183,100, respectively. The overall decrease
in loans outstanding from December 31, 2000 to December 31, 2002, was due
primarily to the Partnership utilizing loan payoffs to meet limited partner
capital liquidations, and an increase in Real Estate Owned or in process. During
the years 2000, 2001, and 2002, loan principal collections exceeded limited
partner liquidations.
Since January 2001, the Federal Reserve has been dramatically cutting its
core interest rates with eleven successive cuts, ranging from .25% to .50%. The
latest cut of .50% was made on November 7, 2002, which reduced the Federal Funds
Rate to 1.25% and the prime rate to 4.25%. The effect of the cuts has greatly
reduced short-term interest rates and to a lesser extent reduced long-term
interest rates. New loans will be originated at then existing interest rates. In
the future, the general partners anticipate that interest rates likely will
change from their current levels. The general partners cannot at this time
predict at what levels interest rates will be in the future. The general
partners anticipate that new loans will be placed at rates approximately 1%
lower than similar loans during 2002. The lowering of interest rates has
encouraged those borrowers that hold higher interest rate loans than those
currently available to seek refinancing of their existing obligations to take
advantage of these lower rates. The Partnership may face prepayments in the
existing portfolio from borrowers taking advantage of these lower rates.
However, demand for loans from qualified borrowers continues to be strong and as
prepayments occur, we expect to replace these loans with loans at somewhat lower
interest rates. At this time, the general partners believe that the average loan
portfolio interest rate will decline approximately .25% to .50% over the year
2003. Nevertheless, based upon the rates expected in connection with the
existing loans, and anticipated interest rates to be charged by the Partnership
and the general partners' experience, the general partners anticipate that the
annualized yield for compounding limited partners will range between 4.75% and
5.00% for the year 2003.
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-four years. Foreclosures are
a normal aspect of Partnership operations and the general partners anticipate
that they will not have a material effect on liquidity. As of December 31, 2002,
there were no properties in foreclosure. As of December 31, 2000, 2001 and 2002,
the Partnership's real estate owned account balance was $767,583, $1,093,503 and
$1,234,541, respectively. The increase was due to the acquisition of security on
delinquent loans. The Partnership intends to sell these properties.
Cash is continually being generated from interest earnings, late charges,
prepayment penalties, and amortization of principal and loan pay-offs.
Currently, this amount exceeds Partnership expenses and earnings and partner
liquidation requirements. As loan opportunities become available, excess cash
and available funds are invested in new loans.
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the
status of delinquencies, the underlying collateral securing these loans, REO
expenses, sales activities, and borrower's payment records and other data
relating to the loan portfolio. Data on the local real estate market, and on the
national and local economy are studied. Based upon this information and more,
loan loss reserves are increased or decreased. Borrower foreclosures are a
normal aspect of Partnership operations. The Partnership is not a credit based
lender and hence while it reviews the credit history and income of borrowers,
and if applicable, the income from income producing properties, the general
partners expect that we will on occasion take back real estate security. During
2001, and continuing in 2002, the Northern California real estate market slowed
and the national and local economies have slipped into recession. As of December
31, 2002, no notices of default were filed. The Partnership also entered into
workout agreements with borrowers who are past maturity or delinquent in their
regular payments. The Partnership had workout agreements on approximately 2
loans totaling $176,560 (3.41% of the loan portfolio) as of December 31, 2002.
Typically, a workout agreement allows the borrower to extend the maturity date
of the balloon payment and allows the borrower to make current monthly payments
while deferring for periods of time, past due payments, or allows time to pay
the loan in full. These workout agreements and foreclosures generally exist
within our loan portfolio to greater or lesser degrees, depending primarily on
the health of the economy. The number of foreclosures and workout agreements
will rise during difficult times and conversely fall during good economic times.
The number and amount of foreclosures existing at December 31, 2002, in
management's opinion, does not have a material effect on our results of
operations or liquidity. These workouts have been considered when management
arrived at appropriate loan loss reserves and based on our experience, are
reflective of our loan marketplace segment. Because of the number of variables
involved, the magnitude of possible swings and the general partners inability to
12
control many of these factors, actual results may and do sometimes differ
significantly from estimates made by the general partners. Management provided
$193,427, $201,036, and ($5,864) as provision for loan losses for the years
ended December 31, 2000, 2001, and 2002, respectively. The increase in allowance
for 2000 and 2001 was to build up reserve for any potential loss in the future.
During 2002, the Partnership restructured four previously impaired loans into
two new loans with a lower interest rate. The amount restructured was
$3,060,100. Had the loans been current in accordance with their original terms
and had they been outstanding throughout the entire year, the Partnership would
have recognized gross interest income of $267,946 for 2002. The Partnership
recognized $172,131 of interest income on the restructured loans for 2002. As of
December 31, 2002, there is a collateral shortfall on the restructured loans
ranging from approximately $194,000 to $337,000 that has not been reserved for.
Redwood Mortgage Corp. has guaranteed to cover any losses sustained by the
Partnership related to these restructured loans. Management believes that
reserves previously set aside are adequate.
As of December 31, 2002, there is a collateral shortfall on the
certain loans ranging from approximately $194,000 to $337,000 that has not
been reserved for. Redwood Mortgage Corp. has guaranteed to cover any losses
sustained by the Partnership related to these loans.
Borrower Liquidity and Capital Resources.
At the time of subscription to the Partnership, limited partners made an
irrevocable decision to either take distributions of earnings monthly, quarterly
or annually or to compound earnings in their capital account. For the years
ended December 31, 2000, 2001, and 2002, the Partnership made distributions of
earnings to limited partners after allocation of syndication costs of $192,356,
$164,787, and $130,296, respectively. Distribution of earnings to limited
partners for the years ended December 31, 2000, 2001, and 2002, to limited
partners' capital accounts and not withdrawn, was $280,794, $257,598, and
$235,987, respectively. As of December 31, 2000, 2001, and 2002, limited
partners electing to withdraw earnings represented 37%, 37%, and 35%,
respectively, of the limited partners outstanding capital accounts.
The Partnership also allows the limited partners to withdraw their capital
account subject to certain limitations (see liquidation provisions of
Partnership Agreement). For the years ended December 31, 2000, 2001, and 2002,
$200,417, $187,804, and $78,674, 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,
2000, 2001, and 2002, respectively, and is expected by the general partners to
commonly occur at these levels.
Additionally, for the years ended December 31, 2000, 2001, and 2002,
$686,923, $484,158, and $393,784, respectively, were liquidated by limited
partners who have elected a liquidation program over a period of five years or
longer. Once the initial five-year hold period has passed, the general partners
expect to see an increase in liquidations due to the ability of limited partners
to withdraw without penalty. This ability to withdraw after five years by
limited partners has the effect of providing limited partner liquidity. The
general partners expect a portion of the limited partners to take advantage of
this provision. This has the anticipated effect of the Partnership growing,
primarily through reinvestment of earnings in years one through five. The
general partners expect to see increasing numbers of limited partner withdrawals
in years five through eleven, at which time the bulk of those limited partners
who have sought withdrawal will have been liquidated. After year eleven,
liquidation generally subsides and the Partnership capital again tends to
increase.
13
Actual liquidation of both capital and earnings from year five (1992) through
year fourteen (2002), is shown hereunder:
Years ended December 31,
1992 1993 1994 1995 1996 1997
-------------- -------------- ------------- --------------- ---------------- --------------
Earnings $ 323,037 $ 377,712 $ 303,014 $ 303,098 $ 294,678 $ 257,670
Capital *232,370 *528,737 *729,449 *892,953 *1,183,099 *1,297,410
-------------- -------------- ------------- --------------- ---------------- --------------
Total $ 555,407 $ 906,449 $1,032,463 $1,196,051 $1,477,777 $1,555,080
============== ============== ============= =============== ================ ==============
1998 1999 2000 2001 2002
-------------- ------------- ------------- --------------- ---------------
Earnings $ 235,837 $ 217,526 $ 192,356 $ 164,787 $ 130,296
Capital *1,060,109 *975,362 *887,340 *671,962 *472,457
-------------- ------------- ------------- --------------- ---------------
Total $1,295,946 $1,192,888 $1,079,696 $ 836,749 $ 602,753
============== ============= ============= =============== ===============
*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").
Current Economic Conditions.
The Partnership makes loans primarily in Northern California. As of
December 31, 2002, approximately 88.52%, ($4,588,023) of the loans held by the
Partnership were in five San Francisco Bay Area Counties. The remainder of the
loans held were secured primarily by Northern California real estate outside the
San Francisco Bay Area. Like the rest of the nation, the San Francisco Bay Area
has also felt the recession and accompanying slow down in economic growth and
increasing unemployment. The technology companies of Silicon Valley, the airline
industry, the tourism industry and other industries are feeling the effects of
the overall United States recession, which includes lower earnings, losses and
layoffs.
As contained in a collection of real estate statistics listed in the San
Francisco Chronicle dated December 20, 2002 Bay Area home prices rose again in
November 2002. The article states, "Despite a struggling economy, the median
home price in the Bay Area in November rose 13% on a year-over-year basis,
though the price has leveled since its all-time high this summer, a real estate
information firm reported Thursday. Driven by historically low interest rates,
14
the number of homes sold increased 24.4% between November 2001 and November
2002; however, that comparison is somewhat skewed given that sales plunged after
September 11, 2001. The median home price in the nine Bay Area counties was
$416,000 in November, compared with $368,000 last November, said DataQuick
Information Systems in La Jolla (San Diego County). Compared with October, the
median rose 2%, and the number of sales fell 12.8%. In July and August, the Bay
Area median hit a record high $417,000. Last fall, in the wake of a sagging
economy and the terrorist attacks, home prices and sales cooled considerably.
But beginning in January, prices and sales shot up around the country as
interest rates plummeted and consumers looked for an alternative to the gyrating
stock market. At the same time, many economists have suggested a housing bubble
is brewing and predict home prices may fall, particularly in expensive markets
such as San Francisco and Boston. The median price of a single-family home
nationwide is $159,600, according to the National Association of Realtors.
(DataQuick's figures include both single-family homes and condos.) `The days of
rapid appreciation have ended,' said Ken Rosen, a real estate and economics
professor at UC Berkeley. He noted that home prices have appreciated far faster
than personal income in the Bay Area in recent years. `Next year, we may see a
small rise (in home prices), but there could be some significant weakness if
interest rates go up and the economy gets worse,' Rosen said. On the other hand,
DataQuick researcher John Karevoll said he sees no evidence of a major price dip
in the Bay Area despite an uptick in the number of notices of default, the first
step in the foreclosure process. `Housing is in a fairly good state,' Karevoll
said. `Default activity would have to double for it to be a concern.' The
typical monthly mortgage payment Bay Area residents committed to in November was
$1,843. The peak was $2,124 in May 2000. Marin County posted the highest median
home price - $602,000 - in November. Solano County had the lowest median price -
$291,000 - but it experienced the biggest year-over-year percentage price
increase. In November 2001, the county's median was $247,000. The median is the
price at which half of sales are above and half are below. Sales in Santa Clara
County, where the high-tech tumble has pushed unemployment to 7.8%, showed the
largest jump, from 1,284 last November to 1,894 last month. But that falls short
of the county's typical November sales count of between 1,900 and 2,300. Re/Max
real estate agent Bruce Scheer in Cupertino said DataQuick's numbers don't tell
the whole story. Although sales in the county are up nearly 48% year over year,
the number of homes on the market is up more than 60%. `There's a lot more
inventory, and sales have slowed,' Scheer said, `I think people are worried that
the economy is going to get worse, and they think that if they wait to sell
their home, they'll get less for it.'"
The San Francisco Chronicle dated December 20, 2002 further analyzed the
home sale price by county comparing sales of November 2001 versus November 2002
as follows:
Homes sold Percent Median* Percent
County Nov. `01 Nov. `02 Change Nov. `01 Nov. `02 Change
- -------------------- ----------- ---------- ------------- ----------- ------------- ------------
Alameda 1,309 1,771 35.3% $352 $407 15.6%
Contra Costa 1,464 1,599 9.2 308 352 4.3
Marin 309 334 8.1 513 602 17.3
Napa 159 171 7.5 341 398 16.7
San Francisco 355 493 38.9 492 568 15.4
San Mateo 531 620 16.8 490 522 6.5
Santa Clara 1,284 1,894 47.5 421 446 5.9
Solano 635 733 15.4 247 291 17.8
Sonoma 598 650 8.7 319 342 7.2
=========== ========== ============= =========== ============= ============
Bay Area 6,644 8,265 24.4% $368 $416 13.0%
*in thousands
For the Partnership, these statistics imply that the values of homes
secured by mortgages should remain firm and assist in reducing losses if the
take back of collateral through the foreclosure process should eventuate.
15
Opportunities exist which the Partnership may advantage itself of. Office
vacancy is very high. The San Francisco Business Times dated October 10, 2002
states "Grubb & Ellis has reported a slight decrease in office vacancy in San
Francisco for the third quarter, breaking a two-year losing streak. The
commercial real estate firm said vacancy dropped to 21.9% with 127,000 square
feet of positive absorption. Colin Yasukochi, research director of Grubb &
Ellis' San Francisco office, said office demand has turned positive for the
first time in two years. He reported 1.3 million square feet of gross leasing
activity in the quarter. The five biggest deals of the quarter:
o Zurich Insurance took 77,000 square feet at 560 Mission street;
o Gensler Architecture signed a 57,000-square-foot lease at 2 Harrison Street;
o Law firm Clifford Chance opening its Bay Area headquarters at One market with
47,000 square feet;
o Bank of the West and PayMap each signed leases of at least 50,000
square feet.
`The sustained gross leasing activity bodes well for more positive news in
the fourth quarter,' Yasukochi said. `However, over 650,000 square feet of
mostly vacant new space scheduled for delivery in that same quarter will likely
cause vacancy to rise.' He predicts a sustained recovery is two to three years
away."
To the Partnership, stabilizing vacancy rates may mean we are at the
vacancy rate bottom. High levels of space exist and as tenants leases expire
they may be able to negotiate lower rental rates. This could lead to lower cash
flows for owners, which may mean we could experience higher delinquencies or
foreclosures on commercial properties.
On or about March 19, 2003, the United States entered into an armed
conflict with Iraq. While the general partners do not anticipate that this
conflict will affect the real estate market in Northern California, a prolonged
military conflict could have adverse effects on the economy of the Untied
States, which could eventually impact the local real estate market.
For Partnership loans outstanding, as of December 31, 2002, the Partnership
had an average loan to value ratio computed as of the date the loan was made of
79.68%. 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 through amortization of payments after the loan was
made.
Item 7a - Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in money
market accounts, and secured loans held in the Partnership's portfolio as of
December 31, 2002. The presentation, for each category of information,
aggregates the assets and liabilities by their maturity dates for maturities
occurring in each of the years 2003 through 2007 and separately aggregates the
information for all maturities arising after 2007. The carrying values of these
assets and liabilities approximate their fair market values as of December 31,
2002:
2003 2004 2005 2006 2007 Thereafter Total
------------ ----------- ------------ ----------- ------------ ------------ -------------
Interest earning assets:
Money market accounts $322,722 $ 322,722
Average interest rate 1.00% 1.00%
Loans secured by deeds
of trust $681,176 844,706 145,125 96,716 3,259,940 155,437 $5,183,100
Average interest rate 10.69% 10.66% 9.35% 6.50% 7.68% 10.61% 8.68%
Market Risk.
The Partnership's primary market risk in terms of its profitability is the
exposure to fluctuations in earnings resulting from fluctuations in general
interest rates. The majority of the Partnership's mortgage loans (100% as of
December 31, 2002) 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
16
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.
Item 8 - Financial Statements and Supplementary Data
A - Financial Statements
The following financial statements of Redwood Mortgage Investors VI are
included in Item 8:
o Independent Auditors' Report
o Balance Sheets - December 31, 2002, and December 31, 2001
o Statements of Income for the years ended December 31, 2002, 2001 and 2000
o Statements of Changes in Partners' Capital for the years ended December
31, 2002, 2001 and 2000
o Statements of Cash Flows for the years ended December 31, 2002, 2001 and
2000
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.
17
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2002
18
ARMANINO McKENNA LLP
CERTIFIED PUBLIC ACCOUNTANTS
12667 Alcosta Boulevard, Suite 500
San Ramon, CA 94583
(925) 790-2600
INDEPENDENT AUDITORS' REPORT
To the Partners
Redwood Mortgage Investors VI
Redwood City, California
We have audited the accompanying balance sheets of Redwood Mortgage
Investors VI (a California limited partnership) as of December 31, 2002 and 2001
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, 2002. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Redwood Mortgage Investors
VI as of December 31, 2002 and 2001, and the results of its operations and cash
flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. Schedules II and IV are presented
for purposes of additional analysis and are not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARMANINO McKENNA LLP
San Ramon, California
February 21, 2003
19
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
2002 2001
----------- -----------
Cash and cash equivalents $ 341,127 $ 190,414
----------- -----------
Loans
Loans, secured by deeds of trust 5,183,100 4,970,433
Loans, unsecured, net discount of $131,352 in 2002 223,697 82,362
Allowance for loan losses (275,294) (370,612)
----------- -----------
Net loans 5,131,503 4,682,183
----------- -----------
Interest and advances
Accrued interest and late fees 61,384 797,105
Advances on loans 31,007 197,946
----------- -----------
92,391 995,051
----------- -----------
Note receivable - Redwood Mortgage Corp. - 178,200
Real estate held for sale, net 1,234,541 1,093,503
----------- -----------
Total assets $ 6,799,562 $ 7,139,351
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable $ 11,953 $ 20,261
Payable to affiliate 14,643 35,632
Deferred interest - 74,022
----------- -----------
Total liabilities 26,596 129,915
----------- -----------
Partners' capital
Limited partners' capital, subject to redemption
120,000 Units authorized in 2002 and 2001,
97,725.94 Units outstanding in 2002 and 2001 6,763,200 6,999,670
General partners' capital 9,766 9,766
----------- -----------
Total partners' capital 6,772,966 7,009,436
----------- -----------
Total liabilities and partners' capital $ 6,799,562 $ 7,139,351
=========== ===========
The accompanying notes are an integral part of these financial statements.
20
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
YEARS ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000
--------------- ---------------- ---------------
Revenues
Interest on loans $ 552,898 $ 512,383 $ 597,996
Interest - interest bearing accounts 5,147 12,927 17,021
Interest on promissory note 7,128 4,912 16,091
Late fees, prepayment penalties, and fees 8,998 27,478 29,101
Mortgage servicer subsidy - 178,200 125,000
--------------- ---------------- ---------------
574,171 735,900 785,209
--------------- ---------------- ---------------
Expenses
Mortgage servicing fees 138,851 41,406 48,556
Asset management fees 8,677 9,115 9,780
Clerical costs from Redwood Mortgage Corp. 22,872 28,156 19,647
Provisions for (recovery of) losses on loans and real estate (5,864) 201,036 193,427
Professional services 31,460 19,866 25,462
Other 8,192 9,670 10,408
--------------- ---------------- ---------------
204,188 309,249 307,280
--------------- ---------------- ---------------
Net income $ 369,983 $ 426,651 $ 477,929
=============== ================ ===============
Net income
General partners (1%) $ 3,700 $ 4,266 $ 4,779
Limited partners (99%) 366,283 422,385 473,150
--------------- ---------------- ---------------
$ 369,983 $ 426,651 $ 477,929
=============== ================ ===============
Net income per $1,000 invested by limited partners for entire period
Where income is reinvested and compounded $ 54 $ 59 $ 62
=============== ================ ===============
Where partner receives income in monthly distributions $ 53 $ 58 $ 61
=============== ================ ===============
The accompanying notes are an integral part of these financial statements.
21
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Limited General
Partners Partners Total
------------------- ------------------ ------------------
Balances at December 31, 1999 $ 8,020,580 $ 9,766 $ 8,030,346
Net income 473,150 4,779 477,929
Early withdrawal penalties (16,335) - (16,335)
Partners' withdrawals (1,063,361) (4,779) (1,068,140)
------------------- ------------------ ------------------
Balances at December 31, 2000 7,414,034 9,766 7,423,800
Net income 422,385 4,266 426,651
Early withdrawal penalties (15,024) - (15,024)
Partners' withdrawals (821,725) (4,266) (825,991)
------------------- ------------------ ------------------
Balances at December 31, 2001 6,999,670 9,766 7,009,436
Net income 366,283 3,700 369,983
Early withdrawal penalties (6,287) - (6,287)
Partners' withdrawals (596,466) (3,700) (600,166)
------------------- ------------------ ------------------
Balances at December 31, 2002 $ 6,763,200 $ 9,766 $ 6,772,966
=================== ================== ==================
The accompanying notes are an integral part of these financial statements.
22
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED December 31, 2002, 2001 AND 2000
2002 2001 2000
------------------ ------------------ ------------------
Cash flows from operating activities
Net income $ 369,983 $ 426,651 $ 477,929
Adjustments to reconcile net income to net cash provided
by operating activities
Provision (recovery) for loan losses and real estate (5,864) 201,036 193,427
Early withdrawal penalties credited to income (6,287) (15,024) (16,335)
Mortgage servicer subsidy - (178,200) (125,000)
Change in operating assets and liabilities
Loans, unsecured 82,362 - (82,362)
Accrued interest and late fees (162,674) (168,444) 42,549
Advances on loans 74,251 (28,667) (67,318)
Accounts payable (8,308) 7,192 13,068
Payable to affiliate (20,989) 35,632 -
Deferred interest (74,022) 74,022 (15,676)
------------------ ------------------ ------------------
Net cash provided by operating activities 248,452 354,198 420,282
------------------ ------------------ ------------------
Cash flows from investing activities
Principal collected on loans 1,265,798 2,548,178 2,058,681
Loans originated (900,418) (1,838,265) (2,352,060)
Note receivable payments 178,200 125,000 300,000
Payments on real estate (41,153) 60,872 (129,557)
Proceeds from disposition of real estate - (588,438) 5,359
------------------ ------------------ ------------------
Net cash provided by (used in) investing activities 502,427 307,347 (117,577)
------------------ ------------------ ------------------
Cash flows from financing activities
Partners' withdrawals (600,166) (825,991) (1,068,140)
------------------ ------------------ ------------------
Net cash used in financing activities (600,166) (825,991) (1,068,140)
------------------ ------------------ ------------------
Net increase (decrease) in cash and cash equivalents 150,713 (164,446) (765,435)
Cash and cash equivalents at beginning of year 190,414 354,860 1,120,295
------------------ ------------------ ------------------
Cash and cash equivalents at end of year $ 341,127 $ 190,414 $ 354,860
================== ================== ==================
The accompanying notes are an integral part of these financial statements.
23
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 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 owned and
operated on an equal 50/50% basis by Michael R. Burwell and Russell Burwell, a
former general partner. 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 offering of
Partnership Units was closed in 1989, with contributed capital totaling
$9,772,594.
The Partnership is scheduled to terminate on December 31, 2027, unless
sooner terminated as provided.
note 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 date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Such estimates relate principally to the
determination of the allowance for loan losses, including the valuation of
impaired loans and the valuation of real estate held for sale. Actual results
could differ significantly from these estimates.
Loans, secured by deeds of trust
Loans generally are stated at their outstanding unpaid principal balance
with interest thereon being accrued by the effective interest method.
Statement of Financial Accounting Standards Nos. 114 and 118 provide that
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. At December 31, 2002 and 2001, loans
categorized as impaired by the Partnership were $96,716 and $2,467,891,
respectively, with a reduction in the carrying value of the impaired loans of
$6,620, and $287,985, respectively. The reduction in the carrying value of the
impaired loans is included in the allowance for loan losses. The impaired loans
have accrued interest, late charges and advances totaling $10,973 and $828,967
at December 31, 2002 and 2001. The average recorded investment in the impaired
loans was $1,282,304, $2,468,698 and $2,470,686 for the three years ended 2002,
2001 and 2000, respectively.
24
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 2 - Summary of Significant Accounting Policies (continued)
Loans, secured by deeds of trust (continued)
At December 31, 2002 and 2001, the Partnership had two loans past due 90
days or more totaling $207,648 and $144,916 (4.01% and 2.92% of the secured loan
portfolio), respectively. The Partnership does not consider these loans to be
impaired because there is sufficient collateral to cover the amount outstanding
to the Partnership, and is still accruing interest on these loans. At December
31, 2002 and 2001, as presented in Note 10, the average loan to appraised value
of security at the time the loans were consummated was 79.68% and 75.20%,
respectively. When loans are considered impaired, the allowance for loan losses
is updated to reflect the change in the valuation of collateral security.
However, a low loan to value ratio tends to minimize reductions for impairment.
During 2002, the Partnership restructured four previously impaired loans
into two new loans with a lower interest rate. The amount restructured was
$3,060,100. Had the loans been current in accordance with their original terms
and had they been outstanding throughout the entire year, the Partnership would
have recognized gross interest income of $267,946 for 2002. The Partnership
recognized $172,131 of interest income on the restructured loans for 2002. As of
December 31, 2002, there is a collateral shortfall on the certain loans ranging
from approximately $194,000 to $337,000 that has not been reserved for. Redwood
Mortgage Corp. has guaranteed to cover any losses sustained by the Partnership
related to these loans.
Allowance for loan losses
Loans and the related accrued interest, late fees and advances are analyzed
on a continuous basis for recoverability. Delinquencies are identified and
followed as part of the loan system. Delinquencies are determined based upon
contractual terms. A provision is made for loan losses to adjust the allowance
for loan losses to an amount considered by management to be adequate, with due
consideration to collateral values, to provide for unrecoverable loans and
receivables, including impaired loans, other loans, accrued interest, late fees
and advances on loans and other accounts receivable (unsecured). The Partnership
charges off uncollectible loans and related receivables directly to the
allowance account once it is determined that the full amount is not collectible.
The composition of the allowance for loan losses as of December 31, 2002
and 2001 was as follows:
2002 2001
--------------- --------------
Impaired loans $ 6,620 $ 287,985
Specified loans 44,977 -
General - 265
Unsecured loans 223,697 82,362
--------------- --------------
$ 275,294 $ 370,612
=============== ==============
25
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 2 - Summary of Significant Accounting Policies (continued)
Allowance for loan losses (continued)
Activity in the allowance for loan losses is as follows for the years ended
December 31:
2002 2001 2000
------------ ------------ -----------
Beginning balance $ 370,612 $ 261,452 $ 303,249
Provision for loan losses 3,083 109,160 34,738
Recoveries (8,947) - -
Restructures (48,009) - -
Write-offs (41,445) - (76,535)
------------ ------------ -----------
$ 275,294 $ 370,612 $ 261,452
============ ============ ===========
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.
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposition of Long Lived Assets," 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 estimated fair value. During 2002, the
Partnership transferred $249,999 from the allowance for loan losses to the
allowance for losses on real estate held for sale.
Income taxes
No provision for federal and state income taxes, except for a minimum state
tax of $800, is made in the financial statements since income taxes are the
obligation of the partners if and when income taxes apply.
Net income per $1,000 invested
Amounts reflected in the statements of income as net income per $1,000
invested by limited partners for the entire period are amounts allocated to
limited partners who held their investment throughout the period and have
elected to either leave their earnings to compound or have elected to receive
periodic distributions of their net income. Individual income is allocated each
month based on the limited partners' pro rata share of partners' capital.
Because the net income percentage varies from month to month, amounts per $1,000
will vary for those individuals who made or withdrew investments during the
period, or select other options.
26
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 2 - Summary of Significant Accounting Policies (continued)
Late fee revenue
Late fees are generally charged at 6% of the monthly installment payment
past due. During 2002, 2001 and 2000, late fee revenue of $1,947, $10,959, and
$5,219, respectively, was recorded. The Partnership has a late fee receivable at
December 31, 2002 and 2001 of $968 and $9,800, respectively.
Reclassification
Certain reclassifications, not affecting previously reported net income or
total partners' capital, have been made to the previously issued financial
statements to conform to the current year classification.
Recently issued accounting pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation 46 "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" (FIN 46). FIN 46 is effective immediately for any
variable interest entities created after January 31, 2003 and is effective
beginning in the third quarter of 2002 to any variable interest entities created
prior to the issuance of the interpretation. FIN 46 provides a new framework to
identify variable interest entities and to determine when an entity should
include the assets, liabilities, non-controlling interests and the results of
activities of a variable interest entity in its financial statements. The
implementation of FIN 46 is not anticipated to have any significant effect on
the Partnership.
note 3 - Other Partnership Provisions
The Partnership is a California limited partnership. The rights, duties and
powers of the general and limited partners of the Partnership are governed by
the limited partnership agreement and Sections 15611 et seq. of the California
Corporations Code.
The general partners are in complete control of the Partnership business,
subject to the voting rights of the limited partners on specified matters. Any
one of the general partners acting alone has the power and authority to act for
and bind the Partnership.
A majority of the outstanding limited partnership interests may, without
the permission of the general partners, vote to: (i) terminate the Partnership,
(ii) amend the limited partnership agreement, (iii) approve or disapprove the
sale of all or substantially all of the assets of the Partnership and (iv)
remove or replace one or all of the general partners.
The approval of all 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.
27
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 3 - Other Partnership Provisions (continued)
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
Liquidity, capital withdrawals and early withdrawals
There are substantial restrictions on transferability of Partnership Units
and accordingly an investment in the Partnership is non-liquid. Limited partners
had no right to withdraw from the Partnership or to obtain the return of their
capital account for at least one year from the date of purchase of Partnership
Units, which in all instances had occurred as of December 31, 2002.
In order to provide a certain degree of liquidity to the limited partners
after the one-year period, limited partners may withdraw all or part of their
capital accounts from the Partnership in four quarterly installments beginning
on the last day of the calendar quarter following the quarter in which the
notice of withdrawal is given, subject to a 10% early withdrawal penalty. The
10% penalty is applicable to the amount withdrawn as stated in the notice of
withdrawal and will be deducted from the capital account.
After five years from the date of purchase of the Units, limited partners
have the right to withdraw from the Partnership, on an installment basis.
Generally, this is done over a five-year period in twenty quarterly
installments. Once a limited partner has been in the Partnership for the minimum
five-year period, no penalty will be imposed if withdrawal is made in twenty
quarterly installments or longer. Notwithstanding the five-year (or longer)
withdrawal period, the general partners may liquidate all or part of a limited
partner's capital account in four quarterly installments beginning on the last
day of the calendar quarter following the quarter in which the notice of
withdrawal is given. This withdrawal is subject to a 10% early withdrawal
penalty applicable to any sums withdrawn prior to the time when such sums could
have been withdrawn without penalty.
The Partnership will not establish a reserve from which to fund withdrawals
and, accordingly, the Partnership's capacity to return a limited partner's
capital account is restricted to the availability of Partnership cash flow.
Furthermore, no more than 20% of the total limited partners' capital accounts
outstanding at the beginning of any year shall be liquidated during any calendar
year.
note 4 - General Partners and Related Parties
The following are commissions and fees that are paid to the general
partners and affiliates.
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, the Partnership may collect an amount equivalent to 12%
of the loaned amount until 6 months after the termination date of the offering.
Thereafter, loan brokerage commissions (points) will be limited to an amount not
to exceed 4% of the total Partnership assets per year. The loan brokerage
commissions are paid by the borrowers, and thus, are not an expense of the
Partnership. In 2002, 2001 and 2000, loan brokerage commissions paid by the
borrowers were $22,611, $46,581, and $45,164, respectively.
28
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 4 - General Partners and Related Parties (continued)
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., based on the unpaid
principal balance of the loan portfolio, or such lesser amount as is reasonable
and customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued. Additional service fees are recorded upon the receipt of any
subsequent payments on impaired loans. Mortgage servicing fees of $138,851,
$41,406, and $48,556, were incurred for 2002, 2001 and 2000, respectively. The
Partnership has a payable to Redwood Mortgage Corp. for servicing fees of
$14,643 and $35,632 at December 31, 2002 and 2001, respectively.
Asset management fee
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8
of 1% annually). Asset management fees of $8,677, $9,115, and $9,780 were
incurred for 2002, 2001 and 2000, 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 the general partners.
Operating expenses
The general partners or their affiliate, Redwood Mortgage Corp., are
reimbursed by the Partnership for all operating expenses incurred by them on
behalf of the Partnership, including without limitation, out-of-pocket general
and administration expenses of the Partnership, accounting and audit fees, legal
fees and expenses, postage and preparation of reports to limited partners.
During 2002, 2001 and 2000, operating expenses totaling $22,872, $28,156 and
$19,647, respectively, were reimbursed to Redwood Mortgage Corp.
note 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, 2002 and 2001:
2002 2001
---------------- ----------------
Costs of properties $2,018,732 $1,627,696
Reduction in value (784,191) (534,193)
---------------- ----------------
Real estate held for sale $1,234,541 $1,093,503
================ ================
29
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 6 - Note Receivable - Redwood Mortgage Corp.
In 2001 and 2000, Redwood Mortgage Corp., an affiliate of the general
partners, which arranges and services the loans of the Partnership, committed to
subsidize certain loan losses of the Partnership. At December 31, 2001, this
commitment was evidenced by a note receivable of $178,200. The note bears
interest at 8% and was repaid in 2002. Mortgage servicer subsidies for 2001 and
2000, were $178,200 and $125,000, respectively. There was no subsidy in 2002;
however, Redwood Mortgage Corp. has guaranteed the recoverability of certain
loan amounts to the Partnership as of December 31, 2002 (see Note 2).
note 7 - Income Taxes
The following reflects a reconciliation of partners' capital reflected in
the financial statements to the tax basis of Partnership capital:
2002 2001
-------------- --------------
Partners' capital per financial statements $6,772,966 $7,009,436
Allowance for loan losses and real estate 1,059,485 904,804
-------------- --------------
Partners' capital tax basis $7,832,451 $7,914,240
============== ==============
In 2002 and 2001, approximately 73% of taxable income was allocated to
tax-exempt organizations (e.g., retirement plans). Such organizations generally
do not have to file income tax returns.
note 8 - Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments:
(a) Cash and cash equivalents - The carrying amount equals fair value. All
amounts, including interest-bearing accounts are subject to immediate
withdrawal.
(b) Secured loans carrying value was $5,183,100 and $4,970,433 at December
31, 2002 and 2001, respectively. The fair value of these loans of $4,862,646 and
$5,036,556, 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.
30
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 9 - Non-cash Transactions
During 2002, the Partnership restructured four loans that resulted in an
increase to loans receivable of $920,346 and a decrease to the allowance for
loan losses, accrued interest and advances of $21,707, $849,365 and $92,688,
respectively.
During 2002, the Partnership foreclosed on a property that resulted in an
increase to real estate held for sale of $349,883 and a decrease to loans
receivable and accrued interest of $300,853 and $49,030, respectively.
During 2002, the Partnership originated two unsecured, non-interest bearing
loans, which resulted in an increase to unsecured loans and the allowance for
loan losses of $355,049 and $223,697, respectively. The Partnership imputed
interest on these loans at 10.5% per annum, which resulted in a decrease to
unsecured loans of $131,352 and an increase to discount on loans of $131,352.
note 10 - Asset Concentrations and Characteristics
Most loans are secured by recorded deeds of trust. At December 31, 2002 and
2001, there were 22 and 27 secured loans outstanding respectively, with the
following characteristics:
2002 2001
--------------- ----------------
Number of secured loans outstanding 22 27
Total secured loans outstanding $5,183,100 $4,970,433
Average secured loan outstanding $ 235,595 $ 184,090
Average secured loan as percent of total 4.55% 3.70%
Average secured loan as percent of partners' capital 3.48% 2.63%
Largest secured loan outstanding $2,103,300 $1,376,117
Largest secured loan as percent of total 40.58% 27.69%
Largest secured loan as percent of partners' capital 31.05% 19.63%
Number of counties where security is located (all California) 10 10
Largest percentage of secured loans in one county 42.67% 40.75%
Average secured loan to appraised value of security at time
loan was consummated 79.68% 71.27%
Number of secured loans in foreclosure - 3
Amounts of secured loans in foreclosure $ - $ 439,311
31
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 10 - Asset Concentrations and Characteristics (continued)
The following categories of secured loans were held at December 31, 2002
and 2001:
2002 2001
--------------- ----------------
First trust deeds $ 4,392,120 $ 3,770,088
Second trust deeds 790,979 1,136,481
Third trust deeds 63,864
-
--------------- ----------------
Total loans 5,183,100 4,970,433
Prior liens due other lenders 2,779,170 5,627,002
--------------- ----------------
Total debt $ 7,962,270 $10,597,435
=============== ================
Appraised property value at time of loan $ 9,992,743 $14,868,548
=============== ================
Total investments as a percent of appraisals 79.68% 71.27%
=============== ================
Investments by type of property
Owner occupied homes $ 749,707 $ 741,154
Non-owner occupied homes 74,674 181,952
Apartments 566,600 562,015
Commercial 3,792,119 3,485,312
--------------- ----------------
$ 5,183,100 $ 4,970,433
=============== ================
Scheduled maturity dates of secured loans as of December 31, 2002 are as
follows:
Year Ending December 31,
-------------------------------------
2003 $ 681,176
2004 844,706
2005 145,125
2006 96,716
2007 3,259,940
Thereafter 155,437
------------------
$5,183,100
==================
The remaining scheduled maturities for 2003 include one loan totaling
$175,656 (3.39%), which was past maturity at December 31, 2002. This loan was
categorized as delinquent over 90 days.
Cash deposits at December 31, 2002 of $563,965, before clearing deposits in
transit and outstanding checks, were in one bank. The balances exceeded FDIC
insurance limits (up to $100,000 per bank) by $463,965.
The Partnership has a substantial amount of its loan receivable balance
from one borrower at December 31, 2002 and 2001. This borrower accounted for
approximately 62% and 42% of the loan balances at such dates. This borrower
accounted for approximately 31%, 35% and 21% of interest revenue for the years
ended December 31, 2002, 2001 and 2000, respectively.
32
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
note 11 - 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, 2002. There are approximately two loans totaling $176,560 in
workout agreements as of December 31, 2002.
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.
33
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
December 31, 2002, 2001 and 2000
Note 12 - Selected Financial Information (Unaudited)
Calendar Quarter
---------------------------------------------------------------------
First Second Third Fourth Annual
-------------- --------------- --------------- -------------- -------------
Revenues
2002 as previously stated $275,176 $120,559 $125,341 $113,750 $634,826
Adjustment (60,655) - - - (60,655)
-------------- --------------- --------------- -------------- -------------
2002 restated 214,521 120,559 125,341 113,750 574,171
2001 143,077 142,581 134,603 315,639 735,900
2000 150,583 172,579 158,243 303,804 785,209
Expenses
2002 as previously stated 177,383 26,094 34,988 26,378 264,843
Adjustment (60,655) - - - (60,655)
------------- --------------- --------------- -------------- -------------
2002 restated 116,728 26,094 34,988 26,378 204,188
2001 30,562 34,253 29,249 215,185 309,249
2000 25,204 52,044 41,218 188,814 307,280
Net income allocated to
general partners
2002 978 945 903 874 3,700
2001 1,125 1,083 1,054 1,004 4,266
2000 1,254 1,205 1,170 1,150 4,779
Net income allocated to
limited partners
2002 96,815 93,520 89,450 86,498 366,283
2001 111,390 107,245 104,300 99,450 422,385
2000 124,125 119,330 115,855 113,840 473,150
Net income per $1,000 invested
Where income is reinvested
2002 14 13 13 19 59
2001 15 15 14 15 59
2000 15 15 15 17 62
Where income is withdrawn
2002 14 13 13 18 58
2001 15 15 14 14 58
2000 15 15 15 16 61
The adjustments above represent correction of amounts missposted to interest
revenue and the provision for loan losses in the first quarter of 2002.
34
SCHEDULE II
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
VALUATION AND QUALIFYING ACCOUNTS
December 31, 2002
Col A Col B Col. C Col. D Col E.
Description Balance at Additions Deductions Balance at
---------------------------------
Beginning Charged Charged End of Period
of Period to to
Costs & Other
Expenses Accounts
- --------------------------------------------------------------------------------------------------------------------
Year ended
12/31/02
Deducted from
asset accounts
Allowance for
loan losses $ 370,612 $ (5,864) $ (48,009)(a) $ (41,445)(b) $ 275,294
Cumulative
write-down of
real estate
held for
sale (REO) 534,193 - 249,998(a) - 784,191
--------------- -------------- ---------------- ----------------- -----------------
$ 904,805 $ (5,864) $ 210,936 $ (41,445) (b) $1,059,485
=============== ============== ================ ================= =================
Note (a) - Represents restructuring of loans.
Note (b) - Represents write-offs of loans.
35
SCHEDULE IV
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
mortgage loans on real estate
rule 12-29 loans on real estate
December 31, 2002
Col. A Col. B Col. C Col. D Col. E Col. F Col. G Col. H Col. I Col. J
Desc. Interest Final Period Prior Face Amt. Carry Amt. Principal Type Geographic
Rate Maturity Payment Liens Mortgage Mortgage or interest Lien Location
Amount
Delinquent
- --------------------------------------------------------------------------------------------------------------------
Apts 7.00% 08/01/03 $ 1,022 $ - $ 153,660 $ 146,029 $ - 1st Sacramento
Apts. 10.50% 06/01/03 667 - 76,250 76,250 1st San Joaquin
Apts. 10.50% 12/01/04 1,750 - 200,000 200,000 1st Alameda
Apts. 6.50% 05/01/06 541 89,904 100,000 96,716 34,072 2nd Sacramento
Apts. 7.00% 02/10/05 234 80,250 40,125 40,125 2nd San Francisco
Apts. 9.00% 02/01/99 38 153,534 5,122 322 2nd Sacramento
Apts. 13.00% 11/01/03 759 341,094 60,000 7,158 2nd San Francisco
Comm. 9.00% 05/10/02 671 - 83,333 77,485 1st Shasta
Comm. 10.00% 12/01/03 1,276 - 145,455 144,566 1st Stanislaus
Comm. 10.00% 07/01/11 997 - 109,769 108,265 1st Santa Clara
Comm. 7.50% 02/28/07 13,146 - 2,103,300 2,103,300 1st Santa Clara
Comm. 7.50% 02/28/07 5,980 - 956,800 956,800 1st Alameda
Comm. 10.50% 10/01/07 1,345 - 147,000 146,883 1st San Mateo
Comm. 12.00% 02/01/11 756 - 63,000 47,172 1st Alameda
Comm. 14.75% 09/01/95 2,242 250,000 185,000 175,656 189,108 2nd San Mateo
Comm. 10.00% 12/01/01 284 208,012 32,323 31,992 1,986 2nd Stanislaus
Res. 8.00% 09/30/03 171 - 23,259 21,716 1st Sonoma
Res. 11.00% 02/01/04 3,380 - 363,700 363,654 1st San Francisco
Res. 11.00% 11/01/04 485 394,955 285,000 31,053 2nd San Mateo
Res. 10.25% 08/01/04 2,135 714,286 250,000 250,000 2nd San Francisco
Res. 10.50% 10/01/07 485 81,786 53,000 52,958 2nd San Mateo
Res. 10.25% 12/01/05 897 465,349 105,000 105,000 2nd Marin
---------------------------------------------------------------
Total $39,262 $2,779,170 $5,541,096 $5,183,100 $225,166
===============================================================
Notes: Loans classified as impaired had principal balances totaling
$96,716. Impaired loans are defined as loans where the costs of related balances
exceeds the anticipated fair value less costs to collect. Interest is no longer
accrued thereon.
Amounts reflected in column G (carrying amount of loans) represent both
costs and the tax basis of the loans.
36
Schedule IV
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
mortgage loans on real estate
rule 12-29 loans on real estate (continued)
December 31, 2002
Reconciliation of carrying amount (cost) of loans at close of periods
Year ended December 31,
-------------------------------------------------------------------
2002 2001 2000
------------------ ------------------ -------------------
Balance at beginning of year $4,970,433 $5,570,576 $5,282,773
------------------ ------------------ -------------------
Additions during period:
New loans 900,418 1,838,265 2,352,060
Other 920,346 109,770 82,362
------------------ ------------------ -------------------
Total Additions 1,820,764 1,948,035 2,434,422
------------------ ------------------ -------------------
Deductions during period:
Collections of principal 1,265,798 2,548,178 2,058,681
Foreclosures 300,854 - -
Cost of loans sold - - -
Amortization of Premium - - -
Other 41,445 - 87,938
------------------ ------------------ -------------------
Total Deductions 1,608,097 2,548,178 2,146,619
------------------ ------------------ -------------------
Balance at close of year $5,183,100 $4,970,433 $5,570,576
================== ================== ===================
37
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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, is 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.
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, 2002. All
such compensation is in compliance with the guidelines and limitations set forth
in the Prospectus.
Entity Receiving Compensation Description of Compensation and Services Rendered Amount
----------------------------------------------------------------------------------------------------------
I. Redwood Mortgage Corp. Loan Servicing Fee for servicing loans..........................$138,851
General Partners &/or Affiliates Asset Management Fee for managing assets..........................$8,677
General Partners 1% interest in profits............................................$3,700
II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY
COMPANIES RELATED TO THE GENERAL PARTNERS (EXPENSES OF BORROWERS NOT OF THE
PARTNERSHIP)
Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in connection
with the review, selection, evaluation, negotiation, and extension
extension of the loans paid by the borrowers and not by the
Partnership..............................................................$22,611
Redwood Mortgage Corp. Processing and Escrow Fees for services in connection with
notary, document preparation, credit investigation, and escrow
fees payable by the borrowers and not by the Partnership..................$1,389
Gymno Corporation Reconveyance Fee............................................................$288
38
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 . . . . . . . . . . . . . . . . . . . . . . . . . . $22,872
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 - Controls and Procedures
Based on their evaluation of the effectiveness of the Partnership's
disclosure controls and procedures, as of a date within 90 days prior to the
date of the filing of this report, the President and Chief Financial Officer of
Gymno Corporation, the Partnership's corporate general partner, has concluded
that the Partnership's disclosure controls and procedures are effective and
sufficient to ensure that the Partnership record, process, summarize, and report
information required to be disclosed in its periodic reports filed under the
Securities Exchange Act within the time periods specified by the Securities and
Exchange Commission's rules and forms.
Subsequent to the date of such evaluation, there have not been any
significant changes in the Partnership's internal controls or in other factors
that could significantly affect these controls, including any corrective action
with regard to significant deficiencies and material weaknesses.
39
Part IV
Item 15 - Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(A) Documents filed as part of this report:
1. The Financial Statements are listed in Part II, Item 8 under A-Financial
Statements.
2. The Financial Statement Schedules are listed in Part II, Item 8
under B-Financial Statement Schedules.
3. Exhibits.
Exhibit No. Description of Exhibits
3.1 Limited Partnership Agreement
3.2 Form of Certificate of Limited Partnership Interest
3.3 Certificate of Limited Partnership
10.1 Escrow Agreement (1)
10.2 Servicing Agreement (1)
10.3 (a) Form of Note secured by Deed of Trust which provides for
principal and interest payments (1)
(b) Form of Note secured by Deed of Trust which provides
principal and interest payments and right of assumption (1)
(c) Form of Note secured by Deed of Trust which provides for
interest only payments (1)
(d) Form of Note (1)
10.4 (a) Deed of Trust and Assignment of Rents to accompany Exhibits
10.3 (a) and (c) (1)
(b) Deed of Trust and Assignment of Rents to accompany Exhibits
10.3 (b) (1)
(c) Deed of Trust to accompany Exhibit 10.3 (d) (1)
10.5 Promissory Note for Formation Loan (1)
10.6 Agreement to Seek a Lender (1)
All of these exhibits were previously filed as the exhibits to Registrant's
Statement on Form S-11 (Registration No. 33-12519) and incorporated by reference
herein.
(B) Reports on form 8-K
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
(C) See (A) 3 above
(D) See (A) 2 above. Additional reference is made to prospectus (S-11)
dated September 3, 1987 to pages 56 through 59 and supplement #6 dated
May 16, 1989 pages 16-18, for financial data related to Gymno
Corporation, a general partner.
40
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 31st day of March,
2003.
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 31st day of March, 2003.
Signature Title Date
/S/ Michael R. Burwell
- -------------------------------
Michael R. Burwell General Partner March 31, 2003
/S/ Michael R. Burwell
- -------------------------------
Michael R. Burwell President, Secretary & Chief March 31, 2003
Financial Officer of Gymno
Corporation (Principal Financial
and Accounting Officer);
Director of Gymno Corporation
41
Exhibit 99.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VI, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, General Partner
March 31, 2003
42
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VI (the
"Partnership") on Form 10-K for the period ending December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the
Partnership, certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, General Partner
March 31, 2003
43
Exhibit 99.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage
Investors VI, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Michael R. Burwell
- ---------------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 31, 2003
44
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VI (the
"Partnership") on Form 10-K for the period ending December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President and Chief Financial
Officer of Gymno Corporation, General Partner of the Partnership, certify that
to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Michael R. Burwell
- ---------------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 31, 2003
45