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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 33-12519
REDWOOD MORTGAGE INVESTORS VI,
a California Limited Partnership
(Exact name of registrant as specified in its charter)
California 94-3031211
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063-1743
(Address of principal executive offices) (Zip Code)
(650) 365-5341
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes XX No
-------------- --------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No XX
-------------- -------------
1
Part I - Item I. FINANCIAL STATEMENTS
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
BALANCE SHEETS
MARCH 31, 2005 and DECEMBER 31, 2004 (unaudited)
ASSETS
March 31, December 31,
2005 2004
------------------- -----------------
Cash and cash equivalents $ 1,440,093 $ 1,090,027
------------------- -----------------
Loans
Loans, secured by deeds of trust 4,867,629 5,225,128
Loans, unsecured, net discount of $89,132 and $93,823 for
March 31, 2005 and December 31, 2004, respectively 265,967 261,276
------------------- -----------------
5,133,596 5,486,404
Less allowance for loan losses (320,442) (315,751)
------------------- -----------------
Net loans 4,813,154 5,170,653
------------------- -----------------
Interest and other receivables
Accrued interest and late fees 60,253 61,364
Advances on loans 1,675 2,890
------------------- -----------------
Total interest and other receivables 61,928 64,254
------------------- -----------------
Real estate held for sale, net 128,902 128,902
Prepaid expenses 1,632 -
------------------- -----------------
Total assets $ 6,445,709 $ 6,453,836
=================== =================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable $ 7,775 $ 11,487
Payable to affiliate 12,387 12,541
------------------- -----------------
Total liabilities 20,162 24,028
------------------- -----------------
Partners' capital
Limited partners' capital, subject to redemption 6,415,786 6,420,047
General partners' capital 9,761 9,761
------------------- -----------------
Total partners' capital 6,425,547 6,429,808
------------------- -----------------
Total liabilities and partners' capital $ 6,445,709 $ 6,453,836
=================== =================
The accompanying notes are an integral part of these financial statements.
2
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2005 and 2004 (unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------------------------
2005 2004
----------------- -----------------
Revenues
Interest on loans $ 128,735 $ 116,403
Interest - interest bearing accounts 2,797 262
Late charges, prepayment penalties and fees 1,997 13,541
----------------- -----------------
133,529 130,206
----------------- -----------------
Expenses
Mortgage servicing fees 12,952 8,930
Asset management fees 2,014 2,066
Clerical costs through Redwood Mortgage Corp. 2,711 -
Provision for losses on loans and real estate held for sale 4,691 6,487
Professional services 9,531 17,535
Other 2,675 13,572
----------------- -----------------
34,574 48,590
----------------- -----------------
Net income $ 98,955 $ 81,616
================= =================
Net income
General partners (1%) $ 990 $ 816
Limited partners (99%) 97,965 80,800
----------------- -----------------
$ 98,955 $ 81,616
================= =================
Net income per $1,000 invested by limited partners for entire period:
-where income is compounded and retained $ 15 $ 12
================= =================
-where partner receives income in monthly
distributions $ 15 $ 12
================= =================
The accompanying notes are an integral part of these financial statements.
3
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 and 2004 (unaudited)
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2005 2004
--------------- --------------
Cash flows from operating activities
Net income $ 98,955 $ 81,616
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses and real estate held for sale 4,691 6,487
Early withdrawal penalties credited to income (952) (3,693)
Amortization of discount on unsecured loans (4,691) (4,692)
Change in operating assets and liabilities
Accrued interest and advances on loans 2,326 (11,972)
Receivable from affiliate - (7,337)
Accounts payable and payable to affiliate (3,866) 4,889
Prepaid expenses (1,632) (2,722)
--------------- --------------
Net cash provided by operating activities 94,831 62,576
--------------- --------------
Cash flows from investing activities
Principal collected on loans 1,032,499 159,899
Loans originated (675,000) (187)
Payments for real estate held for sale - (770)
Proceeds from disposition of real estate - 452,056
--------------- --------------
Net cash provided by investing activities 357,499 610,998
--------------- --------------
Cash flows from financing activities
Partners' withdrawals (102,264) (138,296)
--------------- --------------
Net cash used in financing activities (102,264) (138,296)
--------------- --------------
Net increase in cash and cash equivalents 350,066 535,278
Cash and cash equivalents - beginning of year 1,090,027 32,160
--------------- --------------
Cash and cash equivalents - end of period $ 1,440,093 $ 567,438
=============== ==============
The accompanying notes are an integral part of these financial statements.
4
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
MARCH 31, 2005 (unaudited)
NOTE 1 - General
In the opinion of the management of the Partnership, the accompanying
unaudited financial statements contain all adjustments, consisting of normal,
recurring adjustments, necessary to present fairly the financial information
included therein. These financial statements should be read in conjunction with
the audited financial statements included in the Partnership's Form 10-K for the
fiscal year ended December 31, 2004 filed with the Securities and Exchange
Commission. The results of operations for the three month period ended March 31,
2005 are not necessarily indicative of the operating results to be expected for
the full year.
NOTE 2 - Summary of Significant Accounting Policies
Loans secured by deeds of trust
At March 31, 2005 and December 31, 2004, there was one loan categorized as
impaired by the Partnership for $96,716. In 2004, it was determined that a
reduction in the carrying value of this loan was no longer required. The
impaired loan had accrued interest, late charges and advances totaling $8,753
and $6,936 at March 31, 2005 and December 31, 2004, respectively. The average
recorded Investment in the impaired loan was $96,716 for the three month period
ended March 31, 2005 and for the year ended December 31, 2004.
At March 31, 2005 and December 31, 2004, the Partnership had one loan past
due 90 days or more in interest payments, which is also considered to be an
impaired loan, with an outstanding principal balance of $96,716. Additionally,
at March 31, 2005 and December 31, 2004, the Partnership had two loans past
maturity with outstanding principal balances of $175,780 and $175,865, for a
combined total of three loans during each period past due 90 days or more in
interest payments, and/or past maturity totaling $272,496 and $272,581,
respectively. In addition, accrued interest, late charges and advances on these
loans totaled $12,274 and $16,302 at March 31, 2005 and December 31, 2004,
respectively. The Partnership does not consider two of these loans to be
impaired because there is sufficient collateral to cover the amount outstanding
to the Partnership, and is still accruing interest on these loans. At March 31,
2005 and December 31, 2004, as presented in Note 6, the average loan to
appraised value of security based upon appraised values and prior liens at the
time the loans were consummated was 81.26% and 79.67%, respectively. When loans
are considered impaired, the allowance for loan losses is updated to reflect the
change in the valuation of collateral security. However, a low loan to value
ratio tends to minimize reductions for impairment.
Allowance for loan losses
The composition of the allowance for loan losses as of March 31, 2005 and
December 31, 2004 was as follows:
March 31, December 31,
2005 2004
-------------- --------------
Impaired loans $ - $ -
Specified loans 6,796 6,796
Unsecured loans 265,967 261,227
General 47,679 47,728
-------------- --------------
$ 320,442 $ 315,751
============== ==============
5
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
MARCH 31, 2005 (unaudited)
NOTE 2 - Summary of Significant Accounting Policies (continued)
Allowance for loan losses (continued)
Activity in the allowance for loan losses is as follows for the three
months ended March 31, 2005 and the year ended December 31, 2004:
March 31, December 31,
2005 2004
----------------- -----------------
Beginning balance $ 315,751 $ 279,865
Provision for loan losses 4,691 35,886
Write-offs - -
----------------- -----------------
$ 320,442 $ 315,751
================= =================
Income taxes
No provision for federal and state income taxes, except for a minimum state
tax of $800, is made in the financial statements since income taxes are the
obligation of the partners if and when income taxes apply.
Net income per $1,000 invested
Amounts reflected in the statements of income as net income per $1,000
invested by limited partners for the entire period are amounts allocated to
limited partners who held their investment throughout the period and have
elected to either leave their earnings to compound or have elected to receive
periodic distributions of their net income. Individual income is allocated each
month based on the limited partners' pro rata share of partners' capital.
Because the net income percentage varies from month to month, amounts per $1,000
will vary for those individuals who made or withdrew investments during the
period, or select other options.
Management estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions about the reported amounts of
assets and liabilities, and disclosures of contingent assets and liabilities, at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Such estimates relate principally to the
determination of the allowance for loan losses, including the valuation of
impaired loans and the valuation of real estate held for sale. Actual results
could differ significantly from these estimates.
Reclassifications
Certain reclassifications, not affecting previously reported net income or
total partners' capital, have been made to the previously issued financial
statements to conform to the current year classification.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
6
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
MARCH 31, 2005 (unaudited)
NOTE 3 - General Partners and Related Parties
The following are commissions and fees that are paid to the general
partners and affiliates.
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, Redwood Mortgage Corp., an affiliate of the general
partners, may collect an amount equivalent to 12% of the loaned amount until 6
months after the termination date of the offering. Thereafter, loan brokerage
commissions (points) will be limited to an amount not to exceed 4% of the total
Partnership assets per year. The loan brokerage commissions are paid by the
borrowers, and thus, are not an expense of the Partnership.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., an affiliate of the general
partners, based on the unpaid principal balance of the loan portfolio, or such
lesser amount as is reasonable and customary in the geographic area where the
property securing the mortgage is located. Once a loan is categorized as
impaired, mortgage servicing fees are no longer accrued. Additional servicing
fees are recorded upon the receipt of any subsequent payments on impaired loans.
Asset management fee
The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8
of 1% annually).
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. These fees are incurred by the
borrowers and paid to the general partners.
Operating expenses
The general partners or their affiliate, Redwood Mortgage Corp., are
reimbursed by the Partnership for all operating expenses incurred by them on
behalf of the Partnership, including without limitation, out-of-pocket general
and administration expenses of the Partnership, accounting and audit fees, legal
fees and expenses, postage and preparation of reports to limited partners.
NOTE 4 - 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 March 31, 2005 and December 31, 2004:
March 31, December 31,
2005 2004
--------------- ----------------
Costs of properties $ 130,215 $ 130,215
Reduction in value (1,313) (1,313)
--------------- ----------------
Real estate held for sale, net $ 128,902 $ 128,902
=============== ================
7
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
MARCH 31, 2005 (unaudited)
NOTE 5 - Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Secured loans carrying value was $4,867,629 and $5,225,128 at March 31,
2005 and December 31, 2004, respectively. The fair value of these loans of
$4,884,478 and $5,209,821, respectively, was estimated based upon projected cash
flows discounted at the estimated current interest rates at which similar loans
would be made. The applicable amount of the allowance for loan losses along with
accrued interest and advances related thereto should also be considered in
evaluating the fair value versus the carrying value.
NOTE 6 - Asset Concentrations and Characteristics
Loans are secured by recorded deeds of trust. At March 31, 2005 and
December 31, 2004, there were 15 and 14 secured loans outstanding respectively,
with the following characteristics:
March 31, December 31,
2005 2004
----------------- ----------------
Number of secured loans outstanding 15 14
Total secured loans outstanding $ 4,867,629 $ 5,225,128
Average secured loan outstanding $ 324,509 $ 373,223
Average secured loan as percent of total secured loans 6.67% 7.14%
Average secured loan as percent of partners' capital 5.05% 5.80%
Largest secured loan outstanding $ 2,103,300 $ 2,103,300
Largest secured loan as percent of total secured loans 43.21% 40.25%
Largest secured loan as percent of partners' capital 32.73% 32.71%
Largest secured loan as percent of total assets 32.63% 32.59%
Number of counties where security is located (all California) 9 8
Largest percentage of secured loans in one county 45.38% 42.28%
Average secured loan to appraised value of security based on appraised
values and prior liens at time
loan was consummated 81.26% 79.67%
Number of secured loans in foreclosure status None None
Amounts of secured loans in foreclosure None None
* At loan inception this loan represented 8.8% of outstanding loans and
8.7% of partners' capital.
Over time, loans may increase above 10% of the secured loan portfolio or
Partnership assets as the loan portfolio and assets of the Partnership decrease
due to limited partner withdrawals and/or loan payoffs.
8
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
MARCH 31, 2005 (unaudited)
NOTE 6 - Asset Concentrations and Characteristics (continued)
The following categories of secured loans were held at March 31, 2005 and
December 31, 2004:
March 31, December 31,
2005 2004
-------------- --------------
First trust deeds $ 3,978,987 $ 4,212,912
Second trust deeds 888,642 1,012,216
-------------- --------------
Total loans 4,867,629 5,225,128
Prior liens due other lenders at time of loan 4,257,542 3,026,354
-------------- --------------
Total debt $ 9,125,171 $ 8,251,482
============== ==============
Appraised property value at time of loan $ 11,229,338 $ 10,356,549
-------------- --------------
Total loans as percent of appraisals 81.26% 79.67%
-------------- --------------
Secured loans by type of property
Owner occupied homes $ 693,918 $ 627,579
Non-owner occupied homes 265,706 689,017
Apartments 96,716 96,716
Commercial 3,811,289 3,811,816
-------------- --------------
$ 4,867,629 $ 5,225,128
============== ==============
Scheduled maturity dates of secured loans as of March 31, 2005 are as follows:
Year Ending December 31,
-----------------------------------
2005 $ 191,485
2006 671,716
2007 3,205,056
2008 -
2009 343,996
Thereafter 455,376
---------------
$ 4,867,629
===============
The remaining scheduled maturities for 2005 include two loans totaling
$175,780, which were past maturity at March 31, 2005. Interest payments on both
of these loans were current at March 31, 2005.
At times, the Partnership's cash deposits exceeded federally insured
limits. Management believes deposits are maintained in financially secure
financial institutions.
9
REDWOOD MORTGAGE INVESTORS VI
(A California Limited Partnership)
Notes to Financial Statements
MARCH 31, 2005 (unaudited)
NOTE 6 - Asset Concentrations and Characteristics (continued)
The Partnership has a substantial amount of its loan receivable balance
from one borrower at March 31, 2005 and December 31, 2004. This borrower
accounted for approximately 63% and 59% of the loan balances at such dates,
respectively. This borrower accounted for approximately 53% and 57% of interest
revenue for the three month period ended March 31, 2005 and year ended December
31, 2004, respectively. At March 31, 2005 and December 31, 2004, the collateral
value securing these loans was less than the principal balance due under the
loans. Redwood Mortgage Corp. has provided an indemnity to the Partnership
whereby it has agreed to indemnify and hold harmless, the Partnership from any
expenses or losses incurred by the Partnership by reason of the Partnership's
inability to collect all principal due under the loans after the Partnership has
exhausted all reserves set aside for these loans and all remedies available to
it including foreclosure of the underlying collateral. Therefore, these loans
are not considered impaired solely because the value of the collateral securing
the loans is less than the principal due to the Partnership.
NOTE 7 - Commitments and Contingencies
Workout agreements
The Partnership has negotiated various contractual workout agreements with
borrowers. Under the terms of these workout agreements the Partnership is not
obligated to make any additional monetary advances for the maintenance or repair
of the collateral securing the loans as of March 31, 2005 and December 31, 2004.
There are one and three loans totaling $96,716 and $272,581 in workout
agreements as of March 31, 2005 and December 31, 2004, respectively.
Legal proceedings
The Partnership is involved in various legal actions arising in the normal
course of business. In the opinion of management, such matters will not have a
material effect upon the financial position of the Partnership.
Part I - Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP
Critical Accounting Policies.
In preparing the financial statements, management is required to make
estimates based on the information available that affect the reported amounts of
assets and liabilities as of the balance sheet dates and revenues and expenses
for the reporting periods. Such estimates relate principally to the
determination of (1) the allowance for loan losses (i.e. the amount of allowance
established against loans receivable as an estimate of potential loan losses)
including the accrued interest and advances that are estimated to be
unrecoverable based on estimates of amounts to be collected plus estimates of
the value of the property as collateral and (2) the valuation of real estate
held for sale. At March 31, 2005, there was one real estate property held for
sale, acquired through foreclosure in a prior year.
Loans and the related accrued interest, late fees and advances are analyzed
on a regular basis for recoverability. Delinquencies are identified and followed
as part of the loan system. Delinquencies are determined based upon contractual
terms. A provision is made for loan losses to adjust the allowance for loan
losses to an amount considered by management to be adequate, with due
consideration to collateral values, and to provide for unrecoverable loans and
receivables, including impaired loans, other loans, accrued interest, late fees
and advances on loans and other accounts receivable (unsecured). The Partnership
charges off uncollectible loans and related receivables directly to the
allowance account once it is determined that the full amount is not collectible.
10
If the probable ultimate recovery of the carrying amount of a loan, with
due consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement and the shortfall in
the amounts due are not insignificant, the carrying amount of the loan is
reduced to the present value of future cash flows discounted at the loan's
effective interest rate. If a loan is collateral dependent, it is valued at the
estimated fair value of the related collateral.
If events and or changes in circumstances cause management to have serious
doubts about the collectibility of the contractual payments, a loan may be
categorized as impaired and interest is no longer accrued. Any subsequent
payments on impaired loans are applied to reduce the outstanding loan balances,
including accrued interest and advances.
Recent trends in the economy have been taken into consideration in the
aforementioned process of arriving at the allowance for loan losses. Actual
results could vary from the aforementioned provisions for losses.
Forward Looking Statements.
Certain statements in this Report on Form 10-Q which are not historical
facts may be considered forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended, including statements regarding the
Partnership's expectations, hopes, intentions, beliefs and strategies regarding
the future. Forward-looking statements include statements regarding future
interest rates and economic conditions and their effect on the Partnership and
its assets, trends in the California real estate market, estimates as to the
allowance for loan losses, estimates of future limited partner withdrawals and
2005 annualized yield estimates. Actual results may be materially different from
what is projected by such forward-looking statements. Factors that might cause
such a difference include unexpected changes in economic conditions and interest
rates, the impact of competition and competitive pricing and downturns in the
real estate markets in which the Partnership has made loans. All forward-looking
statements and reasons why results may differ included in this Form 10-Q are
made as of the date hereof, and we assume no obligation to update any such
forward-looking statement or reason why actual results may differ.
Related Parties.
The general partners of the Partnership are Gymno Corporation and Michael
R. Burwell. Most Partnership business is conducted through Redwood Mortgage
Corp., an affiliate of the general partners, which arranges, services and
maintains the loan portfolio for the benefit of the Partnership. Michael R.
Burwell is President and Chief Financial Officer of Redwood Mortgage Corp. and
Gymno Corporation. The fees received by the affiliate are paid pursuant to the
Partnership Agreement and are determined at the sole discretion of the
affiliate. In the past the affiliate has elected not to take the maximum
compensation. The following is a list of various Partnership activities for
which related parties are compensated.
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, Redwood Mortgage
Corp. may collect an amount equivalent to 12% of the loaned amount until 6
months after the termination date of the offering. Thereafter, the loan
brokerage commissions (points) will be limited to an amount not to exceed 4% of
the total Partnership assets per year. The loan brokerage commissions are paid
by the borrowers, and thus, are not an expense of the Partnership. Loan
brokerage commissions paid by the borrowers were $17,750 and $0 for the three
month periods ended March 31, 2005 and 2004, 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 $12,952 and $8,930 were incurred for the
three month periods ended March 31, 2005 and 2004, 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 $2,014 and $2,066 were incurred for the three month periods ended
March 31, 2005 and 2004, respectively.
11
o Other Fees The Partnership Agreement provides that the general partners
may receive other fees such as processing and escrow, reconveyance, mortgage
assumption and mortgage extension fees. Such fees are incurred by the borrowers
and are paid to the general partners. Such fees aggregated $1,435 and $60 for
the three months ended March 31, 2005 and 2004, respectively.
o Income and Losses All income and losses are credited or charged to
partners in relation to their respective Partnership interests. The allocation
to the general partners (combined) shall be a total of 1%, which was $990 and
$816 for the three months ended March 31, 2005 and 2004, respectively.
o Operating Expenses An affiliate of the Partnership, Redwood Mortgage
Corp. is reimbursed by the Partnership for all operating expenses actually
incurred by it on behalf of the Partnership, including without limitation,
out-of-pocket general and administration expenses of the Partnership, accounting
and audit fees, legal fees and expenses, postage and preparation of reports to
limited partners. Such reimbursement was $2,711 for the three months ended March
31, 2005. Redwood Mortgage Corp. waived reimbursement from the Partnership of
costs incurred during the three months ended March 31, 2004.
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 March 31, 2005 and December 31, 2004,
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 three months ended March 31, 2005 and 2004
Changes in the Partnership's operating results for the three month periods
ended March 31, 2005 versus 2004 are discussed below:
Changes during the three months ended
March 31, 2005 versus 2004
----------------------------------------
Net income increase/(decrease) $ 17,339
==================
Revenue
Interest on loans 12,332
Interest - interest bearing accounts 2,535
Late charges and other fees (11,544)
------------------
$ 3,323
------------------
Expenses
Mortgage servicing fees $ 4,022
Asset management fees (52)
Clerical costs through Redwood Mortgage Corp. 2,711
Provision for losses on loans and real estate held for sale (1,796)
Professional services (8,004)
Other (10,897)
------------------
$ (14,016)
------------------
Net income increase/(decrease) $ 17,339
==================
The increase in interest on loans of $12,332 for the three months ended
March 31, 2005 was primarily due to an increase in the average loan portfolio
balance to $5,322,104 as of March 31, 2005 versus $5,147,037 as of March 31,
2004.
The decrease in late charge revenue and other fees of $11,544 for the three
month period ended March 31, 2005 versus March 31, 2004 is due to the
Partnership no longer receiving non-refundable option payments on a property
sold in October, 2004; during the three months ended March 31, 2005, it received
$9,643 of such option payments. The decrease was also due in part to a reduction
in early withdrawal penalties of $2,741. These amounts were offset by an
increase in late fees and miscellaneous income of $837.
12
The increase in interest-bearing accounts of $2,535 for the three months
ended March 31, 2005 versus March 31, 2004 was due to a higher average balance
of deposits the Partnership had in the interest bearing account during the three
months ended March 31, 2005 versus 2004. The Partnership maintained an average
balance of $1,253,071 in the bank account during the first quarter of 2005
compared to an average balance of $299,799 during the corresponding quarter of
2004.
The increase in loan servicing fees of $4,022 for the three month period
ended March 31, 2005 versus March 31, 2004 is primarily attributable to a higher
average loan portfolio balance during the first quarter of 2005, as stated
above.
The decrease in the provision for losses on loans and real estate held for
sale of $1,796 for the three month period ended March 31, 2005 versus March 31,
2004 is due to a reduction in the outstanding loan portfolio and in the balance
of real estate owned.
The decrease in professional services of $8,004 for the three month period
ended March 31, 2005, was due to the timing of billing and payment of
professional fees pertaining to the audit and tax return processing in 2005 as
compared to 2004.
The decrease in other expenses of $10,897 for the three month period ended
March 31, 2005 was related to the reduction in costs associated with the upkeep
of real estate properties held for sale. Two real estate sales transactions
occurred in 2004 which brought the real estate owned inventory from three
properties, with value totaling $857,911 as of March 31, 2004 to one with a
value totaling $128,902 as of March 31, 2005.
Partnership capital decreased from $6,429,808 at December 31, 2004 to
$6,425,547 at March 31, 2005. The decrease is attributable to continued earnings
and capital liquidations.
The Partnership began funding loans in October 1987. The Partnership's
secured loans outstanding as of March 31, 2005 and December 31, 2004 were
$4,867,629 and $5,225,128, respectively. The overall decrease in loans
outstanding at March 31, 2005 from December 31, 2004, was primarily due to the
Partnership's inability to fund more loans to replace those that were being paid
off at an accelerated pace during the first quarter of 2005. The Partnership
placed $675,000 of new loans in the quarter ended March 31, 2005 but received
principal payoffs from borrowers of $1,032,499.
The Partnership's operating results and delinquencies are within the normal
range of the general partners' expectations, based upon their experience in
managing similar partnerships over the last twenty-six years. Foreclosures are a
normal aspect of Partnership operations and the general partners anticipate that
they will not have a material effect on liquidity. As of March 31, 2005, there
were no properties in foreclosure. As of March 31, 2005 and 2004, the
Partnership's real estate held for sale account balance was $128,902 and
$857,911, respectively. The decrease was due to the sale of one of the
properties in October of 2004.
Cash is continually being generated from interest earnings, late charges,
prepayment penalties, amortization of principal, proceeds from sale of real
estate held and loan pay-offs. Currently, this amount exceeds Partnership
expenses and earnings and partner liquidation requirements. As loan
opportunities become available, excess cash and available funds are invested in
new loans.
13
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the
status of delinquencies, the underlying collateral securing these loans, real
estate held for sale expenses, sales activities, and borrower's payment records
and other data relating to the loan portfolio. Data on the local real estate
market and on the national and local economy are studied. Based upon this
information and more, the allowance for loan losses is increased or decreased.
Borrower foreclosures are a normal aspect of Partnership operations. The
Partnership is not a credit based lender and hence while it reviews the credit
history and income of borrowers, and if applicable, the income from income
producing properties, the general partners expect that we will on occasion take
back real estate security. During 2002 and 2003 the economy stabilized. During
2004 and 2005 the economy and the Northern California real estate market has
strengthened. At March 31, 2005 the Partnership had two loans past maturity 90
days or more totaling $175,780, but these loans were current in interest
payments. In addition to the above, the Partnership considers one loan to be
impaired, which means that interest is no longer being accrued and that payments
received will be applied to reduce the outstanding loan balances, including
accrued interest and advances. The principal balance of the impaired loan is
$96,716. The Partnership does not have any filed notices of default, which would
begin the foreclosure process at March 31, 2005. The Partnership has a workout
agreement on this impaired loan totaling $96,716 (1.99% of the secured loan
portfolio) as of March 31, 2005. Typically, a workout agreement allows the
borrower to extend the maturity date of the balloon payment and/or allows the
borrower to make current monthly payments while deferring for periods of time,
past due payments, or allows time to pay the loan in full. These workout
agreements and foreclosures generally exist within our loan portfolio to greater
or lesser degrees, depending primarily on the health of the economy. The number
of foreclosures and workout agreements will rise during difficult times and
conversely fall during good economic times. The one workout agreement existing
at March 31, 2005, in management's opinion, does not have a material effect on
our results of operations or liquidity. This workout agreement has been
considered when management arrived at an appropriate allowance for loan losses
and based on our experience, are reflective of our loan marketplace segment.
Because of the number of variables involved, the magnitude of possible swings
and the general partners' inability to control many of these factors, actual
results may and do sometimes differ significantly from estimates made by the
general partners.
As of March 31, 2005 and 2004, the Partnership's real estate held for sale
balance was $128,902 and $857,911, respectively. The decrease in real estate
held for sale balance of $729,009 as of March 31, 2005 is due to the sale of one
of the properties in October 2004, at a loss of approximately $778,500 which,
was previously fully reserved for. The Partnership has not taken back any
collateral security from borrowers in 2004 or 2005. The Partnership's real
estate held for sale inventory has been reduced to one property. This remaining
property is an undeveloped piece of land, which is located in East Palo Alto,
California. The Partnership has held its interest in this land since April,
1993. The land is owned with two other affiliated partnerships. Currently, the
Partnership is not in contract or negotiating with any interested parties for
the sale of this property. The general partners believe that the property is
worth considerably more than its net investment, but it may take a considerable
amount of additional time to sell the property and realize its full potential.
The property is unique in that it may only be utilized for commercial or
industrial uses. Until recently, land sales activity had been slow, but interest
in land sales for commercial sites has been increasing.
Management provided $4,691 and $6,487 as provision for loan losses for the
three month periods ended March 31, 2005 and 2004. The provision for loan losses
builds up the allowance for potential losses. During 2002, Redwood Mortgage
Corp. provided an indemnity to the Partnership whereby it has agreed to
indemnify and hold harmless, the Partnership from any expenses or losses
incurred by the Partnership by reason of the Partnership's inability to collect
all principal due under certain loans after the Partnership has exhausted all
reserves set aside for these loans and all remedies available to it including
foreclosure of the underlying collateral. Therefore, these loans are not
considered impaired solely because the value of the collateral securing the
loans is less than the principal due to the Partnership.
14
PORTFOLIO REVIEW - For the three months ended March 31, 2005 and 2004
Loan Portfolio
The Partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of March 31, 2005 and
2004 the Partnership's loans secured by real property collateral in the four San
Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, and Alameda)
represented $4,025,437 (83%) and $4,745,676 (93%), respectively, of the
outstanding secured loan portfolio. The remainder of the portfolio represented
loans secured by real estate located primarily in Northern California.
As of March 31, 2005 and 2004, the Partnership held 15 and 14 loans
respectively in the following categories:
March 31, March 31,
2005 2004
----------------------------- ------------------------------
Single family homes(1-4 units) $ 959,624 19.71% $ 1,346,629 26.43%
Apartments (5+ units) 96,716 1.99% 136,841 2.68%
Commercial 3,811,289 78.30% 3,612,438 70.89%
------------- ------------ -------------- ------------
Total $ 4,867,629 100.00% $ 5,095,908 100.00%
============= ============ ============== ============
As of March 31, 2005, the Partnership held 15 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the loans held by the Partnership as of March 31, 2005:
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of March 31, 2005
# of Loans Amount Percent
------------ -------------- -------------
1st Mortgages 8 $ 3,978,987 82%
2nd Mortgages 7 888,642 18%
============ ============== =============
Total 15 $ 4,867,629 100%
Maturing 12/31/05 and prior 3 $ 191,485 4%
Maturing prior to 12/31/06 3 671,716 14%
Maturing prior to 12/31/07 3 3,205,056 66%
Maturing after 12/31/07 6 799,372 16%
============ ============== =============
Total 15 $ 4,867,629 100%
Average Loan $ 324,509 7%
Largest Loan 2,103,300 43%
Smallest Loan 31,431 0.65%
Average Loan-to-Value, based upon appraisals
and senior liens at date of inception of loan 81.26%
The Partnership's largest loan in the principal amount of $2,103,300
represents 43.21%% of outstanding secured loans and 32.63% of Partnership
assets. Larger loans sometimes increase above 10% of the secured loan portfolio
or Partnership assets as these amounts decrease due to limited partner
withdrawals and loan payoffs and due to restructuring of existing loans. In this
instance all of these factors affected this loan. Chief among them was a
restructure of two loans with outstanding principal plus accrued interest, late
fees and advances into one new loan with an outstanding balance of $2,103,300.
15
The Partnership has a substantial amount of its loan receivable balance
from one borrower at March 31, 2005 and 2004. The borrower accounted for
approximately 63% and 59% of the loan balances at such dates. This borrower has
two loans secured by separate properties in the principal amounts of $2,103,300
and $956,800 as of March 31, 2005. Neither of these loans are past due in
principal or 90 days or more past due in interest.
Liquidity and Capital Resources.
The Partnership relies upon loan payoffs and borrowers' mortgage payments
for the source of funds for loans. Recently, mortgage interest rates have
decreased somewhat from those available at the inception of the Partnership. If
interest rates were to increase substantially, the yield of the Partnership's
loans may provide lower yields than other comparable debt-related investments.
Additionally, since the Partnership has made primarily fixed rate loans, if
interest rates were to rise, the likely result would be a slower prepayment rate
for the Partnership. This could cause a lower degree of liquidity as well as a
slowdown in the ability of the Partnership to invest in loans at the then
current interest rates. Conversely, in the event interest rates were to decline,
the Partnership could experience significant borrower prepayments, which, if the
Partnership can only obtain the then existing lower rates of interest may cause
a dilution of the Partnership's yield on loans, thereby lowering the
Partnership's overall yield to the limited partners. Cash is constantly being
generated from borrower interest payments, late charges, amortization of loan
principal and loan payoffs. Currently, cash flow exceeds Partnership expenses,
earnings and limited partner capital payout requirements. Excess cash flow will
be invested in new loan opportunities, when available, and in other Partnership
business.
At the time of subscription to the Partnership, limited partners made a
decision to either take distributions of earnings monthly, quarterly or annually
or to compound earnings in their capital account. For the three month periods
ended March 31, 2005 and 2004, the Partnership made distributions of earnings to
limited partners of $32,692 and $27,786, respectively. Distribution of earnings
to limited partners for the three month periods ended March 31, 2005 and 2004,
to limited partners' capital accounts and not withdrawn, was $65,273 and
$53,014, respectively. As of March 31, 2005 and 2004, limited partners electing
to withdraw earnings represented 34% and 34% of the limited partners'
outstanding capital accounts, respectively.
The Partnership also allows the limited partners to withdraw their capital
account subject to certain limitations. For the three month periods ended March
31, 2005 and 2004, $14,027 and $56,207, 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 March 31, 2005
and 2004, respectively, and is expected by the general partners to commonly
occur at these levels.
Additionally, for the three month periods ended March 31, 2005 and 2004,
$55,511 and $57,177, 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.
16
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.
Current Economic Conditions.
Since January, 2001, and through December 31, 2003, the Federal Reserve
reduced interest rates significantly by cutting the Federal Funds Rate to 1.00%.
From July 1, 2004 through March 31, 2005, the Federal Reserve increased the
Federal Funds Rate four times by one quarter percentage point (1/4 of one
percent) each time to 2.75%. The effect of these changes has greatly reduced
short-term interest rates and to a lesser extent reduced long-term interest
rates. The recent upward movement in the Federal Funds Rate during 2004 and 2005
has raised short-term rates but has not yet raised long-term interest rates
significantly. New loans will be originated at then existing interest rates. In
the future the general partners anticipate that interest rates likely will
change from their current levels. The general partners cannot, at this time,
predict at what levels interest rates will be in the future. The general
partners anticipate that new loans will be placed during 2005 at rates slightly
higher to those that prevailed in 2004. The lowering of interest rates has
encouraged those borrowers that have mortgages with higher interest rates than
those currently available to seek refinancing of their obligations. 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, the general partners
expect to replace paid off loans with loans at somewhat lower interest rates. At
this time, the general partners believe that the average loan portfolio interest
rate will remain relatively stable over the year 2005. Based upon the rates
payable in connection with the existing loans, and anticipated interest rates to
be charged by the partnership and the general partners' experience, the general
partners anticipate that the annualized yield will range between 5.75% and 6.50%
in 2005.
The Partnership makes loans primarily in Northern California. As of March
31, 2005, approximately 83%, ($4,025,437) of the loans held by the Partnership
were in four San Francisco Bay Area Counties. The remainder of the loans held
was secured primarily by Northern California real estate outside of the San
Francisco Bay Area. Like the rest of the nation, the San Francisco Bay Area has
felt the slow down in economic growth and increasing unemployment.
Recently the national and Northern California economies seem to be
improving. Job creation remains a concern, as little job creation seems to be
evident. The partnership makes loans primarily in Northern California and real
estate values of residential, commercial, multi-family properties and of land
are of particular interest to the partnership. Real estate is the primary
security for the partnership's loans.
The residential real estate market in California continues to appreciate.
The San Francisco Chronicle dated March 11, 2005 reported that "Median prices
for existing homes in the Bay Area hit an all-time-high of $569,000 in February,
rocketing 19.5% from $476,000 in February 2004 and up 2.3% from $556,000 in
January. Prices are increasing at their fastest pace in four years, according to
DataQuick Information Systems, a La Jolla (San Diego County) real estate market
17
research firm. `It's stronger than we'd anticipated,' said John Karevoll, a
DataQuick analyst. `These numbers show there's still gas in the tank, and the
market has a way to go before it levels off. We did not anticipate a downturn
but thought we'd be coming in for a soft landing.' Instead, prices for
single-family homes continued to soar. Home buyers in the nine-county Bay Area
snapped up 4,905 resale single-family residences in February, a slight decline
form 4,925 last February. The highest median price was in Marin County, at
$808,000, followed by San Mateo at $711,000 and San Francisco at $701,000,
according to DataQuick. Experts said low inventory continues to fuel the frenzy.
`The bottom line is lots of buyers and very few homes,' said Joan Underwood, a
broker with Marvin Gardens who specializes in El Cerrito and Richmond Annex.
Another factor in the increase is that interest rates are inching higher.
Everyone who looks at the market says the price acceleration can't last, but
real estate agents and other experts said they expect a gradual leveling rather
than a bubble bursting. Meanwhile, there still seems to be plenty of life in the
market. The record February prices, which reflect homes that were on the market
in historically slow December and January, are likely to be exceeded once the
spring season gets in full swing."
On the commercial front the San Francisco Business Times for April 8-14,
2005 reports that "Big spenders are rolling back into San Francisco and up the
city's highrises to lease the swankiest view space. And the price is rising
fast. In the past few months a handful of firms, including hedge fund Caxton
Associates LLC and law firm McKenna Long & Aldridge, LLP have leased prime view
space. Those firms did deals for the 33rd floor of the Transamerica pyramid and
the 41st floor of 101 California Street for $60 and $53 per square foot,
respectively - a major pop from the mid-$40s range similar space commanded less
than a year ago. `Asking rental quotes in the $50s or even the $60s doesn't
elicit the broker pushback it would have in 2004,' said Jim Ousman, managing
director of leasing for Equity Office Properties. `That's an indication this
higher-end space is priced accordingly.' As the rest of the San Francisco office
market struggles with vacancy rates that remain in the high teens and average
rents stuck at around $30, the vacancy rate for view space - the upper floors of
the best highrises - is an estimated 5%, according to a recent study by Cushman
& Wakefield. Prices are being rapidly marked up to leverage that scarcity.
Leasing agents representing landlords say the rise is being largely driven by
tenant demand. Whether these high rents for high-class space will have a
trickle-down effect on the less desirable space is unclear. The average asking
rents of Class A space in the central business district last quarter increased
roughly 3% to $30 a square foot, according to averages from Grubb & Ellis Co.
and CB Richard Ellis research reports. Some pockets are a little hotter,
however, like at 50 California Street where rents have increased 20% over the
past six months to as high as the mid $40 range."
As discussed above, the commercial property market in the San Francisco Bay
Area has recently been improving. Increased occupancies in commercial properties
enables owners to better handle their debt payments. Improved occupancies also
stabilize commercial real estate values, which benefits the partnership.
For Partnership loans outstanding as of March 31, 2005, the Partnership had
an average loan to value ratio of 81.26%, computed based on appraised values and
senior liens as of the date the loan was made. This percentage does not account
for any increases or decreases in property values since the date the loan was
made, nor does it include any reductions in principal on senior indebtedness
through amortization of payments after the loan was made. This loan to value
ratio will assist the Partnership in weathering loan delinquencies and
foreclosures should they eventuate.
Part I - Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table contains information about the cash held in money
market accounts, and loans held in the Partnership's portfolio as of March 31,
2005. The presentation, for each category of information, aggregates the assets
and liabilities by their maturity dates for maturities occurring in each of the
years 2005 through 2009 and separately aggregates the information for all
maturities arising after 2009. The carrying values of these assets and
liabilities approximate their fair market values as of March 31, 2005:
2005 2006 2007 2008 2009 Thereafter Total
---------------------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $ 1,050,464 $1,050,464
Average interest rate 1.20% 1.20%
Unsecured loans $ 265,967 $ 265,967
Average Interest Rate 0% 0%
Loans secured by deeds
of trust $ 191,485 671,716 3,205,056 - 343,996 455,376 $4,867,629
Average interest rate 10.00% 9.18% 9.07% - 9.35% 9.09% 9.14%
18
Market Risk.
The Partnership's primary market risk in terms of its profitability is the
exposure to fluctuations in earnings resulting from fluctuations in general
interest rates. The majority of the Partnership's mortgage loans earn interest
at fixed rates. Changes in interest rates may also affect the value of the
Partnership's investment in mortgage loans and the rates at which the
Partnership reinvests funds obtained from loan repayments and new capital
contributions from limited partners. If interest rates increase, the interest
rates the Partnership obtains from reinvested funds will generally increase, but
the value of the Partnership's existing loans at fixed rates will generally tend
to decrease. The risk is mitigated by the fact that the Partnership does not
intend to sell its loan portfolio, rather such loans are held until they are
paid off. If interest rates decrease, the amounts becoming available to the
Partnership for investment due to repayment of Partnership loans may be
reinvested at lower rates than the Partnership had been able to obtain in prior
investments, or than the rates on the repaid loans. In addition, interest rate
decreases may encourage borrowers to refinance their loans with the Partnership
at a time where the Partnership is unable to reinvest in loans of comparable
value.
The Partnership does not hedge or otherwise seek to manage interest rate
risk. The Partnership does not enter into risk sensitive instruments for trading
purposes.
ASSET QUALITY
A consequence of lending activities is that occasionally losses will be
experienced and that the amount of such losses will vary from time to time,
depending upon the risk characteristics of the loan portfolio as affected by
economic conditions and the financial experiences of borrowers. Many of these
factors are beyond the control of the general partners. There is no precise
method of predicting specific losses or amounts that ultimately may be charged
off on particular segments of the loan portfolio, especially in light of the
current economic environment.
The conclusion that a loan may become uncollectible, in whole or in part,
is a matter of judgment. Although institutional lenders are subject to
requirements and regulations that, among other things, require them to perform
ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and
to obtain and maintain current information regarding their borrowers and the
securing properties, the Partnership is not subject to these regulations and has
not adopted certain of these practices. Rather, the general partners, in
connection with the periodic closing of the accounting records of the
Partnership and the preparation of the financial statements, determine whether
the allowance for loan losses is adequate to cover potential loan losses of the
Partnership. As of March 31, 2005 the general partners have determined that the
allowance for loan losses and real estate owned of $321,755 (5.01% of net
assets) is adequate in amount. Because of the number of variables involved, the
magnitude of the swings possible and the general partners' inability to control
many of these factors, actual results may and do sometimes differ significantly
from estimates made by the general partners. As of March 31, 2005, two loans
were past maturity over 90 days amounting to $175,780. In addition, one loan,
for $96,716 was subject to a workout agreement, which requires the borrower to
make regular monthly loan payments. This loan is delinquent in interest payments
over 90 days and is the only loan categorized as impaired.
The Partnership also owns (through previous foreclosure) one property; an
undeveloped commercial property located in East Palo Alto, California. The land
is owned with two other affiliated Partnerships. The Partnership's net
investment in the land at March 31, 2005 is $128,902, or 2.00% of Partnership
assets. The general partners believe that the property is worth considerably
more than its net investment. There are no ongoing negotiations for the sale of
this property. Part I - Item 4. CONTROLS AND PROCEDURES
As of March 31, 2005, the Partnership carried out an evaluation, under the
supervision and with the participation of the general partners of the
effectiveness of the design and operation of the Partnership's disclosure
controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act
of 1934, as amended. Based upon that evaluation, the general partners concluded
that the Partnership's disclosure controls and procedures are effective in
timely alerting the general partners to material information relating to the
Partnership that is required to be included in our periodic filings with the
Securities and Exchange Commission. There were no significant changes in the
Partnership's internal control over financial reporting during the Partnership's
first fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Partnership's internal control over financial reporting.
19
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership periodically is a defendant in various legal
actions. Please refer to Note 7 of Financial Statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits
31.1 Certification of General Partner pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of General Partner pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of General Partner pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of General Partner pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
20
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 16th day of May
2005.
REDWOOD MORTGAGE INVESTORS VI
By: /S/ Michael R. Burwell
---------------------------------------------
Michael R. Burwell, General Partner
By: Gymno Corporation, General Partner
By: /S/ Michael R. Burwell
--------------------------------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer
21
Exhibit 31.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VI, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's most
recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting;
and
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of Registrant's board of
directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial data; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, General Partner
May 16, 2005
22
Exhibit 31.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VI, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's most
recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting;
and
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of Registrant's board of
directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial data; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, President, Secretary/Treasurer and
Chief Financial Officer, of Gymno
Corporation, General Partner
May 16, 2005
23
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VI
(the "Partnership") on Form 10-Q for the period ending March 31, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the
Partnership, certify, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership at the dates and for the periods indicated.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, General Partner
May 16, 2005
24
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VI
(the "Partnership") on Form 10-Q for the period ending March 31, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General
Partner of the Partnership, certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership at the dates and for the periods indicated.
/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial
Officer of Gymno Corporation, General Partner
May 16, 2005
25