Item 1 - Business
Redwood Mortgage Investors VI is a California limited partnership (the Partnership), of which D. Russell Burwell, Michael R. Burwell and Gymno Corporation, a California corporation, are the General Partners. The address of the General Partners is 650 El Camino Real, Suite G, Redwood City, California 94063. The Partnerships primary purpose is to invest its capital in Mortgage Investments secured by Northern California properties. Mortgage Investments are arranged and serviced by Redwood Home Loan Co, dba Redwood Mortgage, an affiliate of the General Partners. The Partnership's objectives are to make investments, as referred to above, 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 Partnerships capital. The Partnerships 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 Mortgage Investments in October, 1987. The offering terminated in September, 1989, and as of that date 97,725.94 Units were sold realizing a proceed of $9,772,594. At December 31, 1997, the Partnership had a balance of Mortgage Investments totalling $8,104,984 with interest rates thereon ranging from 4.00% to 17.25%.
Currently First Trust Deeds comprise 56.61% of the Mortgage Investment portfolio. Second Mortgage Trust Deeds comprise 35.40% of Mortgage Investment portfolio, third Mortgage Trust Deeds have 4.90% and 4th Mortgage Trust Deeds have 3.09% of the Mortgage Investment portfolio. Owner-occupied homes, combined with non-owner occupied homes, total 17.73% of the Mortgage Investments. Mortgage Investments to apartments make up 9.77% of the total Mortgage Investments portfolio. Commercial Mortgage Investment origination increased from last year, now comprising 72.50% of the portfolio, an increase of 6.89%. The past year brought many outstanding low loan to value lending opportunities in the commercial segment of the market. The major concentration of Mortgage Investments, comprising of 81.28% of the total loans, are in seven counties of the Bay Area. The County of Stanislaus makes up 4.66% of the Mortgage Investment portfolio and the balance, as stated on page six of this report, are in primarily Northern California. Currently Mortgage Investment size is averaging $137,373 per Mortgage Investment. Some of the Mortgage Investments are fractionalized between affiliated partnerships with objectives similar to those of the Partnership to further reduce risk. Average equity per loan transaction stood at 35.52%. A 40% equity average on loan origination is generally considered very conservative. Generally, the more equity, the more protection for the lender. The Partnerships Mortgage Investment portfolio is in good condition with six properties in foreclosure as of the end of December, 1997, totalling $1,006,355.
Item 2
Item 2 - Properties
As of December 31, 1997, a summary of the Partnership's Mortgage Investment portfolio is set forth below.
Mortgage Investments as a Percentage of Total Mortgage Investments
First Trust Deeds $4,588,168.52 Appraised Value of Properties 6,828,071.00 Total Investment as a % of Appraisal 67.20% Second Trust Deed Mortgage Investments 2,869,543.28 Third Trust Deed Mortgage Investments 397,273.21 Fourth Trust Deed Mortgage Investments* 249,999.40 First Trust Deeds due other Lenders 9,906,794.00 Second Trust Deeds due other Lenders 990,064.00 Third Trust Deeds due other Lenders 178,571.00
Total Debt $19,180,413.41
Appraised Property Value $28,422,684.00 Total Investments as a % of Appraisal 67.48%
Number of Mortgage Investments Outstanding 59
Average Investment 137,372.62 Average Investment as a % of Net Assets 1.46% Largest Investment Outstanding 1,376,117.03 Largest Investment as a % of Net Assets 14.59%
Mortgage Investments as a Percentage of Total Mortgage Investments
First Trust Deeds 56.61% Second Trust Deeds 35.40% Third Trust Deeds 4.90% Fourth Trust Deeds 3.09% -------------------- 100.00% Total
Mortgage Investments by Type Amount Percent of Property
Owner Occupied Homes $1,057,067.24 13.04% Non-Owner Occupied Homes 380,141.84 4.69% Apartments 791,755.61 9.77% Commercial 5,876,019.72 72.50% ----------------- ----------- Total $8,104,984.41 100.00%
*Footnote on following page
The following is a distribution of loans outstanding as of December 31, 1997 by Counties.
Santa Clara $2,429,517.98 29.98% Alameda 1,411,853.00 17.42% San Mateo 1,251,050.75 15.44% Contra Costa 769,133.16 9.49% Sacramento 644,935.35 7.96% San Francisco 403,829.99 4.98% Stanislaus 377,552.00 4.66% Sonoma 301,043.99 3.71% El Dorado 214,773.21 2.65% Ventura 91,000.00 1.12% Shasta 81,751.22 1.01% Monterey 71,428.57 0.88% Santa Cruz 36,159.93 0.44% Solano 20,955.26 0.26% ------------------- -----------
Total $8,104,984.41 100.00%
* Redwood Mortgage Investors VI, together with other Redwood partnerships hold a second and a fourth trust deed against the secured property. In addition, the principals behind the borrower corporation have given personal guarantees as collateral. The overall loan to value ratio on this loan is 76.52%. In addition to the borrower paying an interest rate of 12.25%, the Partnership and other lenders will also participate in profits. The General Partners have had previous loan activity with this borrower which had been concluded successfully, with extra earnings earned for the other partnerships involved.
Statement of Condition of Mortgage Investments:
Number of Mortgage Investments in Foreclosure 6
Item 3
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. Management anticipates that the ultimate outcome of these legal matters will not have a material adverse effect on the net assets of the Partnership in light of the Partnership's allowance for doubtful accounts. As of the date hereof, the Partnership is not involved in any legal proceedings other than those that would be considered part of the normal course of business.
Item 4
Item 4 - Submission of matters to vote of Security Holders (Partners).
No matters have been submitted to a vote of the Partnership.
Part II
Item 5
Item 5 - Market for the Registrants Partners Capital and Related 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 have been sold only in California. Investors have the option of withdrawing earnings on a monthly, quarterly or annual basis or reinvesting and compounding earnings. 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 38-42 of the Prospectus, a part of the above-referenced Registration statement, which is incorporated by reference.
As of December 31, 1997, there were 742 holders of record of the Partnerships Units. A decrease of 19 from 1996.
Item 6
Item 6 - Selected Financial Data
Redwood Mortgage Investors VI began operations in October 1987. Its financial condition and results of operation for three years to December 31, 1997 were:
Item 7
Item 7 - Managements Discussion and Analysis of Financial Condition and Results of Operations
On September 2, 1989, the Partnership had sold 97,725.94 Units and its contributed capital totalled $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, 1997, the Partnerships net capital totalled $9,431,453.
The Partnership began funding Mortgage Investments in October 1987. The Partnerships Mortgage Investments outstanding for the years ended December 31, 1995, 1996 and 1997 were $10,402,491, $9,313,924 and $8,104,984, respectively. The decrease in Mortgage Investments outstanding of $1,088,567 from December 31, 1995 to December 31, 1996, was due primarily to the Partnership utilizing Mortgage Investment payoffs to meet Limited Partner capital liquidations. The decrease in Mortgage Investments outstanding of $1,208,940 from December 31, 1996 to December 31, 1997, was again due primarily to the Partnership utilizing Mortgage Investment payoffs to meet Limited Partner capital liquidations. During the years 1996 and 1997, Mortgage Investment principal collections exceeded Limited Partner liquidations.
Currently, mortgage interest rates are lower than those prevalent at the inception of the Partnership. New Mortgage Investments will be originated at these lower interest rates. The result is to reduce the average return across the entire Mortgage Investment portfolio held by the Partnership. In the future, 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. Although the rates charged by the Partnership are influenced by the level of interest rates in the market, the General Partners do not anticipate that rates charged by the Partnership to is borrowers will change significantly from the beginning of 1998 over the next 12 months. Based upon the rates payable in connection with the existing Mortgage Investments, the current and anticipated interest rates to be charged by the Partnership and the General Partners experience, the General Partners anticipate that the annualized yield next year will range only slightly higher from its current rate.
Each year, the Partnership negotiates a line of credit with a commercial bank which is secured by its Mortgage Investment portfolio. The outstanding balance of the bank line of credit was $2,041,011, $1,530,511 and $899,011 for the years ended December 1995, 1996, and 1997 respectively. The interest rate on the bank line of credit has remained at Prime plus one percent for the preceding three years. For the years ended December 31, 1997, 1996 and 1995, interest on Note Payable-Bank was $133,577, $158,175 and $212,915 respectively. The primary reason for this decrease was that the Partnership had a lower overall credit facility utilization from 1995 to 1996 and from 1996 to 1997. As of December 31, 1997, the Partnership has borrowed $899,011 at an interest rate of Prime plus one percent. This added source of funds will help in maximizing the Partnership yield by allowing the Partnership to minimize the amount of funds in lower yield investment accounts when appropriate Mortgage Investments are not currently available and because the Mortgage Investments made by the Partnership usually bear interest at a rate in excess of the rate payable to the bank which extended the line of credit, the amount to be retained by the Partnership, after payment of the line of credit cost, will be greater than without the use of the line of credit.
The Partnership's operating results and delinquencies are within the normal range of the General Partners expectations, based upon their experience in managing similar Partnerships over the last twenty years. Foreclosures are a normal aspect of partnership operations and the General Partners anticipate that they will not have a material effect on liquidity. As of December 31, 1997, there were six properties in foreclosure. Cash is continually being generated from interest earnings, late charges, prepayment penalties, amortization of notes and pay-off of notes. Currently, this amount exceeds Partnership expenses and earnings and principal payout requirements. As Mortgage Investment opportunities become available, excess cash and available funds are invested in new Mortgage Investments.
The General Partners regularly review the Mortgage Investment portfolio, examining the status of delinquencies, the underlying collateral securing these Mortgage Investments, REO expenses, sales activities, and borrowers payment records and other data relating to the Mortgage Investment portfolio. Data on the local real estate market, and on the national and local economy are studied.
Based upon this information and more, Mortgage Investment loss reserves and allowance for doubtful accounts are increased or decreased. 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. Management provided $344,807, $312,684 and $268,101 as provision for doubtful accounts for the years ended December 31, 1995, December 31, 1996 and December 31, 1997, respectively. The decrease in the provision reflects the decrease in the amount of REO, unsecured receivables and the decreasing levels of delinquency within the portfolio. Additionally, the General Partners felt that the bottom of the real estate cycle had been reached, reflecting a decreasing need to set aside reserves for the continuously declining real estate values as had been the case in the early 1990s in the California real estate market. During the year 1997, the Partnership reduced the REO balance from $1,501,712 as of December 31, 1995, to $306,319 through December 31, 1997. This reduction will assist the Partnership in increasing yields in 1998, as assets previously lying idle, may now produce current income.
The Northern California recession reached bottom in 1993. Since then, the California economy has been improving, slowly at first, but now, more vigorously. A wide variety of indicators suggest that the economy in California was strong in 1997, and the State is well - positioned for fast growth. This improvement is reflective in increasing property values, in job growth, personal income growth, etc., which should translate into more loan activity. Which of course, is healthy for the Partnerships lending activity.
The Partnerships interest in land, acquired through foreclosure, located in East Palo Alto with costs totalling $708,141 and $496,040 for the years ended December 31, 1997 and 1996, respectively has been invested with that of two other Partnerships in a partnership which is in the process of obtaining approval for constructing approximately 63 single family homes for sale. (The Development). The proposed Development has gained significant public awareness. Incorporated into the proposed Development are various mitigation measures not limited to, mitigation of hazardous materials existing on the property, endangered species, and proximity to the San Francisco Baylands. The preceding issues and others have sparked significant public controversy. Opposition both for and against the proposed Development exists. Notwithstanding the above, the General Partners believe that pursuit of the proposed Development approval to be in the interest of the Partnership. This investment has been classified in the financial statements as Investment in Partnership.
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, 1995, December 31, 1996, and 1997, the Partnership made distributions of earnings to Limited Partners after allocation of syndication costs of, $296,915, $288,796 and $252,378 respectively. Distribution of Earnings to Limited Partners after allocation of syndication costs for the years ended December 31, 1995, December 31, 1996 and December 31, 1997, to Limited Partners capital accounts and not withdrawn was $315,250, $293,484 and $271,517 respectively. As of December 31, 1995, December 31, 1996 and December 31, 1997, Limited Partners electing to withdraw earnings represented 50 %, 49 % and 46% 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, 1995, December 31, 1996, and December 31, 1997, $43,364, $96,362 and $159,732 respectively, were liquidated subject to the 10% 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% 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 investment to raise cash. The trend 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, 1995, December 31, 1996 and December 31, 1997, respectively and is expected by the General Partners to commonly occur at these levels.
Additionally, for the years ended December 31, 1995 and December 31, 1996 and December 31, 1997, $849,589, $1,086,737 and $1,137,677 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 (which has), 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 which the General Partners then expect a portion of the Limited Partners to avail themselves of. 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.
Actual liquidation of both capital and earnings from year five (1992) through year ten (1997) is shown hereunder:
Item 8
Item 8 - Financial Statements and Supplementary Data
Redwood Mortgage Investors VI, a California Limited Partnerships list of Financial Statements and Financial Statement schedules:
A- Financial Statements
Independent Auditors Report, Balance Sheets - December 31, 1997, and December 31, 1996, Statements of Income for the three years ended December 31, 1997, Statements of Changes in Partners Capital for the three years ended December 31, 1997, Statements of Cash Flows for the three years ended December 31, 1997, Notes to Financial Statements - December 31, 1997.
B. - Financial Statement Schedules
The following financial statement schedules of Redwood Mortgage Investors VI are included in Item 8.
Schedule II Amounts receivable from related parties and underwriters, promoters, and employees other than related parties Schedule VIII Valuation of Qualifying Accounts Schedule IX Short Term Borrowings Schedule XII Mortgage Investments 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.
REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) FINANCIAL STATEMENTS DECEMBER 31, 1997 (with Auditors Report Thereon)
PARODI & CROPPER CERTIFIED PUBLIC ACCOUNTANTS 3658 Mount Diablo Blvd., Suite #205 Lafayette California 94549 (510) 284-3590
INDEPENDENT AUDITORS REPORT
THE PARTNERS REDWOOD MORTGAGE INVESTORS VI
We have audited the financial statements and related schedules of REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) listed in Item 8 on form 10-K including balance sheets as of December 31, 1997 and 1996 and the statements of income, changes in partners capital and cash flows for the three years ended December 31, 1997. These financial statements are the responsibility of the Partnerships management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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, 1997 and 1996, and the results of its operations and cash flows for the three years ended December 31, 1997 in conformity with generally accepted accounting principles. Further, it is our opinion that the schedules referred to above present fairly the information set forth therein in compliance with the applicable accounting regulations of the Securities and Exchange Commission.
/S/ Parodi & Cropper PARODI & CROPPER
Lafayette, California February 27, 1998
REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997
NOTE 1 - ORGANIZATION AND GENERAL Redwood Mortgage Investors VI, (the Partnership) is a California Limited Partnership, of which the General Partners are D. Russell Burwell, Michael R. Burwell and Gymno Corporation, a California corporation owned and operated by the individual General Partners. The partnership was organized to engage in business as a mortgage lender for the primary purpose of making Mortgage Investments secured by Deeds of Trust on California real estate. Mortgage Investments are being arranged and serviced by Redwood Home Loan Co. (RHL Co.), dba Redwood Mortgage, an affiliate of the General Partners. The offering was closed with contributed capital totaling $9,781,366.
Each months income is distributed to partners based upon their proportionate share of partners capital. Some partners have elected to withdraw income on a monthly, quarterly or annual basis.
A. Sales Commissions - Formation Loan Sales commissions ranging from 0% (units sold by General Partners) to 10% of gross proceeds were paid by Redwood Mortgage., an affiliate of the General Partners that arranges and services the Mortgage Investments. To finance the sales commissions, the Partnership loaned to Redwood Mortgage $623,255 (the Formation Loan) relating to contributed capital of $9,781,366. The Formation Loan is unsecured, and is being repaid, without interest, in ten annual installments of principal, commencing December 31, 1989.
The following reflects transactions in the Formation Loan account through December 31, 1997:
Amount loaned during 1987,1988 and 1989 $623,255 Less: Cash repayments $513,295 Allocation of early withdrawal penalties 50,439 563,734 ============ ---------
Balance December 31, 1997 $59,521 ========
The Formation Loan, which is receivable from Redwood Mortage, an affiliate of the General Partners, has been deducted from Limited Partners capital in the balance sheet. As amounts are collected from Redwood Mortgage, the deduction from capital will be reduced.
B. Other Organizational and Offering Expenses Organizational and offering expenses, other than sales commissions, (including printing costs, attorney and accountant fees, and other costs), paid by the Partnership from the offering proceeds totaled $360,885 or 3.69% of the gross proceeds contributed by the Partners. Such costs have been fully amortized and allocated to the Partners.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Accrual Basis
Revenues and expenses are accounted for on the accrual basis of accounting wherein income is recognized as earned and expenses are recognized as incurred. Once a Mortgage Investment is categorized as impaired, interest is no longer accrued thereon.
REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997
B. Management Estimates
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 and revenues and expenses for the related periods. Such estimates relate principally to the determination of the allowance for doubtful accounts, including the valuation of impaired mortgage investments, and the valuation of real estate acquired through foreclosure. Actual results could differ significantly from these estimates.
C. Mortgage Investments, Secured by Deeds of Trust
The Partnership has both the intent and ability to hold the Mortgage Investments to maturity, i.e., held for long-term investment. They are therefore valued at cost for financial statement purposes with interest thereon being accrued by the simple interest method.
Financial Accounting Standards Board Statements (SFAS) 114 and 118 (effective January 1, 1995) provide that if the probable ultimate recovery of the carrying amount of a Mortgage Investment, with due consideration for the fair value of collateral, is less than the recorded investment and related amounts due and the impairment is considered to be other than temporary, the carrying amount of the investment (cost) shall be reduced to the present value of future cash flows. The adoption of these statements did not have a material effect on the financial statements of the Partnership because that was the valuation method previously used on impaired loans.
At December 31, 1997, 1996 and 1995, reductions in the cost of Mortgage Investments categorized as impaired by the Partnership totalled $0, $13,006 and $45,933, respectively. The reduction in stated value was accomplished by increasing the allowances for doubtful accounts.
As presented in Note 10 to the financial statements as of December 31, 1997, the average mortgage investment to appraised value of security at the time the loans were consummated was 67.48%. When a loan is valued for impairment purposes, an updating is made in the valuation of collateral security. However, a low loan to value ratio tends to minimize reductions for impairment.
D. Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents include interest bearing and non-interest bearing bank deposits.
E. Real Estate Owned, Held for Sale
Real estate owned, held for sale, includes real estate acquired through foreclosure and is stated at the lower of the recorded investment in the property, net of any senior indebtedness, or at the propertys estimated fair value, less estimated costs to sell.
REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997
The following schedule reflects the costs of real estate acquired through foreclosure and the recorded reductions to estimated fair values, less estimated costs to sell as of December 31, 1997 and 1996:
Effective January 1, 1996, the Partnership adopted the provisions of statement No 121 (SFAS 121) of the Financial Accounting Standards Board, Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be disposed of. The adoption of SFAS 121 did not have a material impact on the Partnerships financial position because the methods indicated were essentially those previously used by the Partnership.
F. Investment in Partnership (see note 5)
The Partnership accounts for its investment in a partnership as an investment in real estate, which is at the lower of costs or fair value, less estimated costs to sell. At December 31, 1997, cost is considered less than fair value and the investment is stated at cost in the financial statements.
G. Income Taxes
No provision for Federal and State income taxes is made in the financial statements since income taxes are the obligation of the partners if and when income taxes apply.
H. Organization and Syndication Costs
The Partnership bears its own organization and syndication costs (other than certain sales commissions and fees described above) including legal and accounting expenses, printing costs, selling expenses, a 1% wholesale brokerage fee and filing fees. Organizational costs of $14,750 were capitalized and were amortized over a five year period. Syndication costs of $346,135 were charged against partners capital and were allocated to individual partners consistent with the Partnership Agreement.
I. Allowance for Doubtful Accounts
Mortgage Investments and the related accrued interest, fees and advances are analyzed on a continuous basis for recoverability. Delinquencies are identified and followed as part of the Mortgage Investment system. A provision is made for doubtful accounts to adjust the allowance for doubtful accounts to an amount considered by management to be adequate with due consideration to collateral value to provide for unrecoverable accounts receivable, including impaired Mortgage Investments, unspecified mortgage investments, accrued interest and advances on Mortgage Investments, and other accounts receivable (unsecured). The composition of the allowance for doubtful accounts as of December 31, 1997 and 1996 was a follows:
REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997
December 31, ----------------------------------------------- 1997 1996 --------------- ---------------
Impaired Mortgage Investments $0 $13,006 Unspecified Mortgage Investments 13,432 59,844 Accounts receivable, unsecured 15,182 180,000 -------------- --------------- $28,614 $252,850 =============== ===============
J. 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 actual amounts allocated to Limited Partners who have their investment throughout the period and have elected to either leave their earnings to compound or have elected to receive monthly distributions of their net income. Individual income is allocated each month based on the Limited partners pro rata share of Partners Capital. Because the net income percentage varies from month to month, amounts per $1,000 will vary for those individuals who made or withdrew investments during the period, or select other options. However, the net income per $1,000 average invested has approximated those reflected for those whose investments and options have remained constant.
NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES
The following are commissions and/or fees which are paid to the General Partners and/or related parties.
A. Mortgage Brokerage Commissions
Mortgage brokerage commissions for services in connection with the review, selection, evaluation, negotiation and extension of the Mortgage Investments were limited up to 12% of the principal amount of the loans through the period ending 6 months after the termination date of the offering. Thereafter, commissions are limited to an amount not to exceed 4% of the total Partnership assets per year. Such commissions are paid by the borrowers, thus, not an expense of the Partnership.
B. Mortgage Servicing Fees
Monthly mortgage servicing fees are paid to Redwood Mortgage up to 1/8 of 1% (1.5% annual) of the unpaid principal, or such lesser amount as is reasonable and customary in the geographic area where the property securing the Mortgage Investment is located. Mortgage servicing fees of $39,918, $44,565, and $42,056 were incurred for years 1997, 1996 and 1995, respectively.
REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997
C. Asset Management Fee
The General Partners are authorized to receive monthly fees for managing the Partnerships Mortgage Investment portfolio and operations of up to 1/32 of 1% (3/8 of 1% annual). There were no management fees incurred for years 1997, 1996 and 1995, respectively.
D. Other Fees
The Partnership Agreement provides for other fees such as reconveyance, mortgage assumption and mortgage extension fees. These fees are paid by the borrowers to parties related to the General Partners.
E. Income and Losses
All income is credited or charged to partners in relation to their respective partnership interests. The partnership interest of the General Partners (combined) is a total of 1%.
F. Operating Expenses
The General Partners or their affiliate (Redwood Mortgage) are reimbursed by the Partnership for all operating expenses actually 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. In 1995, 1996, and 1997, clerical costs totaling $23,341, $31,838 and $27,786 respectively, were reimbursed to Redwood Mortgage and are included in expenses in the Statements of Income.
NOTE 4 OTHER PARTNERSHIP PROVISIONS
A. Term of the Partnership
The term of the Partnership is approximately 40 years, unless sooner terminated as provided. The provisions provided for no capital withdrawal for the first five years, subject to the penalty provision set forth in (D) below. Thereafter, investors have the right to withdraw over a five-year period, or longer.
B. Election to Receive Monthly, Quarterly or Annual Distributions
Upon subscriptions, investors elected either to receive monthly, quarterly or annual distributions of earnings allocations, or to allow earnings to compound for at least a period of 5 years.
C. Profits and Losses
Profits and losses are allocated monthly among the Limited Partners according to their respective capital accounts after 1% is allocated to the General Partners.
D. Withdrawal From Partnership
A Limited Partner had no right to withdraw from the Partnership or to obtain the return of his capital account for at least five years after such units are purchased which in all instances had occurred by December 31, 1997. After that time, at the election of the Partner, capital accounts can be returned over a five year period in 20 equal quarterly installments or such longer period as is requested.
REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997
Notwithstanding the above, in order to provide a certain degree of liquidity to the Limited Partners, the General Partners will liquidate a Limited Partners entire 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. Such liquidations shall, however, be subject to a 10% early withdrawal penalty applicable to any sums withdrawn prior to the time when such sums otherwise could have been withdrawn pursuant to the liquidation procedure set forth above. The 10% early withdrawal penalty will be received by the Partnership, and a portion of the sums collected as such penalty will be applied toward the next installment(s) of principal under the Formation Loan owed to the Partnership by Redwood Mortgage. Such portion shall be determined by the ratio between the initial amount of Formation Loan and the total amount of other organization and syndication costs incurred by the Partnership in this offering. The balance of any such early withdrawal penalties shall be retained by the Partnership for its own account and applied against syndication costs. Since the syndication costs have been fully amortized as of December 31, 1993, the early withdrawal penalties gained in the future will be applied on the same basis as before with the amount otherwise being credited to the syndication costs being credited to income for the period.
The Partnership will not establish a reserve from which to fund withdrawals and, accordingly, the Partnerships capacity to return a Limited Partners 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 5 - INVESTMENT IN PARTNERSHIP
The Partnerships interest in land acquired through foreclosure, located in East Palo Alto with costs totalling $708,141 has been invested with that of two other Partnerships (total cost to date, primarily land, of $1,458,721) in a partnership which is in the process of constructing approximately 63 single family homes for sale. Redwood Mortgage Investors V, VI, and VII have first priority on return of investment plus interest thereon, in addition to a share of profits realized.
NOTE 6 - NOTE PAYABLE BANK - LINE OF CREDIT
The Partnership has a bank line of credit secured by its Mortgage Investment portfolio up to $2,500,000 at 1% over prime. The balances were $1,530,511 and $899,011 at December 31, 1996 and 1997, respectively, and the interest rate at December 31, 1997 was 9.5% (8.50% prime + 1%). The line of credit expires December 31, 1998.
NOTE 7 - LEGAL PROCEEDINGS
The Partnership is not a defendant in any legal actions. However, legal actions against borrowers and other involved parties have been initiated by the Partnership to help assure payments against unsecured accounts receivable totaling $161,414.
Management anticipates that the ultimate outcome of the legal matters will not have a material adverse effect on the net assets of the Partnership, with due consideration having been given in arriving at the allowance for doubtful accounts.
REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 8 - INCOME TAXES
The following reflects a reconciliation from net assets (Partners Capital) reflected in the financial statements to the tax basis of those net assets:
In 1997, approximately 72% of taxable income was allocated to tax exempt organizations i.e., retirement plans. Such plans do not have to file income tax returns unless their unrelated business income exceeds $1,000. Applicable amounts become taxable when distribution is made to participants.
NOTE 9 - 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, are subject to immediate withdrawal.
(b) The Carrying Value of Mortgage Investments - (see note 2 (c)) is $8,104,984. The December 31, 1997 fair value of these investments of $8,110,440 is 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 doubtful accounts along with accrued interest and advances related thereto should also be considered in evaluating the fair value versus the carrying value.
REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997
NOTE 10- ASSET CONCENTRATIONS AND CHARACTERISTICS
The Mortgage Investments are secured by recorded deeds of trust. At December 31, 1997, there were 59 Mortgage Investments outstanding with the following characteristics:
Number of Mortgage Investments outstanding 59 Total Mortgage Investments outstanding $8,104,984
Average Mortgage Investment outstanding $137,373 Average Mortgage Investment as percent of total 1.69% Average Mortgage Investment as percent of Partners Capital 1.46%
Largest Mortgage Investment outstanding $1,376,117 Largest Mortgage Investment as percent of total 16.98% Largest Mortgage Investment as percent of Partners Capital 14.59%
Number of counties where security is located (all California) 14 Largest percentage of Mortgage Investments in one county 29.98% Average Mortgage Investment to appraised value of security at time Mortgage Investment was consummated 67.48% Number of Mortgage Investments in foreclosure 6
The following categories of mortgage investments are pertinent at December 31, 1997 and 1996:
REDWOOD MORTGAGE INVESTORS VI (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997
Scheduled maturity dates of mortgage investments as of December 31, 1997 are as follows:
Year Ending December 31, -------------------
1998 $3,799,251 1999 2,004,478 2000 276,160 2001 493,558 2002 424,620 Thereafter 1,106,917 ================ $8,104,984 ================
The scheduled maturities for 1998 include $1,545,198 in Mortgage Investments which are past maturity at December 31, 1997. $54,493 of those Mortgage Investments were categorized as delinquent over 90 days.
Five Mortgage Investments with principal outstanding of $365,982 had interest payments overdue in excess of 90 days.
The cash balance at December 31, 1997 of $331,143 was in one bank with interest bearing balances totalling $290,650. The balances exceeded FDIC insurance limits (up to $100,000 per bank) by $231,143. And when deposits in the Partnerships bank accounts increases significantly beyond the insured limit, the funds are either placed in new Mortgage Investments or used to pay down on the line of credit balance.
The above schedule represents the Formation Loan borrowed by Redwood Mortgage from the Partnership to pay for the selling commissions on units. It is an unsecured loan and bears no interest. It is being repaid to the Partnership in ten equal annual installments of principal only which began December 31, 1989.
* The amount written off represents the proportionate amount of early withdrawal penalties allocated to the Formation Loan, as provided for in the Prospectus.
Item 9
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
The Partnership has neither changed its accountants nor does it have any disagreement on any matter of accounting principles or practices and financial statement disclosures.
Part III
Item 10
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 three General Partners of which two individuals are D. Russell Burwell and Michael R. Burwell. The third General Partner is Gymno Corporation, a California corporation, formed in 1986. The Burwells are the two shareholders of this corporation on an equal (50-50) basis. A description of the General Partners is set forth on page 22 of the Prospectus under the section Management.
Item 11
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, 1997. All such compensation is in compliance with the guidelines and limitations set forth in the Prospectus.
Entity Receiving Description of Compensation and Services Rendered Amount Compensation - --------------------------------------------------------------------- ---------- I. Redwood Mortgage Mortgage Servicing Fee for servicing Mortgage Investments $39,918
General Partners &/or Affiliates Asset Management Fee for managing assets $0
General Partners 1% interest in profits $5,292
II. FEES PAID BY BORROWERS ON MORTGAGE INVESTMENTS PLACED BY COMPANIES RELATED TO THE GENERAL PARTNERS WITH THE PARTNERSHIP (EXPENSES OF BORROWERS NOT OF THE PARTNERSHIP):
Redwood Mortgage Mortgage Brokerage Commissions for services in connection with the review, selection, evaluation, negotiation, and extension of the Mortgage Investments paid by the borrowers and not by the Partnership $10,000
Redwood Mortgage 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 $273
III. IN ADDITION, THE GENERAL PARTNER AND/OR RELATED COMPANIES PAY CERTAIN EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE STATEMENT OF INCOME....................................................$27,786
Item 12
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
Item 13 - Certain Relationships and Related Transactions
Refer to footnote 3 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.
Part IV
Item 14
Item 14 - Exhibits, Financial Statements and 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) 24.1 Consent of Parodi & Cropper (1) 24.2 Consent of Stephen C. Ryan & Associates (1)
All of these exhibits were previously filed as the exhibits to Registrants 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.
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 25th day of March, 1998.
REDWOOD MORTGAGE INVESTORS VI
By: /S/ D. Russell Burwell --------------------------------------------- D. Russell Burwell, General Partner
By: /S/ Michael R. Burwell --------------------------------------------- Michael R. Burwell, General Partner
By: Gymno Corporation, General Partner
By: /S/ D. Russell Burwell --------------------------------------------- D. Russell Burwell, President
By: /S/ Michael R. Burwell --------------------------------------------- Michael R. Burwell, Secretary/Treasurer
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 25th day of March, 1998.
Signature Title Date
/S/ D. Russell Burwell - ----------------------- D. Russell Burwell General Partner March 25, 1998
/S/ Michael R. Burwell - ----------------------- Michael R. Burwell General Partner March 25, 1998
/S/ D. Russell Burwell - ----------------------- D. Russell Burwell President of Gymno Corporation, March 25, 1998 (Principal Executive Officer); Director of Gymno Corporation
/S/ Michael R. Burwell - ----------------------- Michael R. Burwell Secretary/Treasurer of Gymno March 25, 1998 Corporation (Principal Financial and Accounting Officer); Director of Gymno Corporation