Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
Commission File No. 000-49775
---------
Belport Capital Fund LLC (the Fund)
-----------------------------------
(Exact name of registrant as specified in its charter)
Securities registered pursuant to Section 12(g) of the Act:
Delaware 04-3551830
-------- ----------
(State of organization) (I.R.S. Employer Identification No.)
The Eaton Vance Building
255 State Street
Boston, Massachusetts 02109
--------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 617-482-8260
------------------------------ ------------
Limited Liability Company Interests in the Fund (Shares)
--------------------------------------------------------
(Title of class)
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 [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
YES [X] NO [ ]
Aggregate market value of the Shares held by non-affiliates of registrant, based
on the closing net asset value on June 30, 2003 was $1,382,456,965. Calculation
of holdings by non-affiliates is based upon the assumption, for these purposes
only, that the registrant's manager, its executive officers and directors and
persons holding 5% or more of the registrant's Shares are affiliates.
Incorporation by Reference:
---------------------------
The financial statements contained in registrant's Form 10-K filed with the
Securities and Exchange Commission on March 27, 2003 have been incorporated into
the following Parts of this report: Part II and Part IV.
The Exhibit Index is located on page 66.
Belport Capital Fund LLC
Index to Form 10-K
Item Page
PART I
------
1 Business............................................................. 1
Fund Overview..................................................... 1
Structure of the Fund.......................................... 1
Fund Management................................................ 1
The Fund's Offering............................................ 2
The Fund's Investment in Belvedere Capital Fund Company LLC and
Tax-Managed Growth Portfolio...................................... 2
Belvedere Company.............................................. 2
The Portfolio.................................................. 2
The Portfolio's Investment Objective and Policies.............. 3
The Portfolio's Tax-Sensitive Management Strategies............ 3
The Fund's Real Estate Investments through Belport Realty
Corporation....................................................... 4
Real Estate Joint Venture Investments.......................... 4
Partnership Preference Units................................... 6
Organization of Belport Realty and the
Real Estate Joint Ventures .................................... 6
Fund Borrowings................................................... 6
Interest Rate Swap Agreements.................................. 7
The Eaton Vance Organization...................................... 7
Conflicts of Interest .......................................... 7
2 Properties........................................................... 7
3 Legal Proceedings.................................................... 8
4 Submission of Matters to a Vote of Security Holders.................. 8
PART II
-------
5 Determining Net Asset Value, Market for Fund Shares
and Related Shareholder Matters...................................... 8
Market Information, Restrictions on Transfers and
Redemption of Shares............................................. 8
Transfers of Fund Shares....................................... 8
Redemption of Fund Shares...................................... 8
Determining Net Asset Value ................................... 9
Historic Net Asset Values ..................................... 10
Record Holders of Shares of the Fund.............................. 10
Distributions..................................................... 10
Income and Capital Gain Distributions...........................10
Special Distributions...........................................11
6 Selected Financial Data.............................................. 12
Table of Selected Financial Data...................................12
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................12
Results of Operations............................................. 13
Performance of the Fund........................................ 13
Performance of the Portfolio................................... 13
Performance of Real Estate Investments......................... 14
Performance of Interest Rate Swap Agreements................... 15
Liquidity and Capital Resources................................... 15
Outstanding Borrowings......................................... 15
Liquidity...................................................... 15
Off-Balance Sheet Arrangements.................................... 16
The Fund's Contractual Obligations................................ 16
Critical Accounting Estimates .................................... 17
7A Quantitative and Qualitative Disclosures About Market Risk........... 19
Quantitative Information About Market Risk........................ 19
Interest Rate Risk............................................. 19
Qualitative Information About Market Risk......................... 20
Risks Associated with Equity Investing......................... 20
Risks of Investing in Foreign Securities....................... 20
Risks of Certain Investment Techniques......................... 20
Risks of Real Estate Investments............................... 21
Risks of Interest Rate Swap Agreements......................... 23
Risks of Leverage.............................................. 23
8 Financial Statements and Supplementary Data.......................... 24
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures................................. 25
9A Controls and Procedures.............................................. 25
PART III
--------
10 Directors and Executive Officers..................................... 25
Management........................................................ 25
Compliance with Section 16(a) of the Securities
Exchange Act of 1934............................................. 26
Code of Ethics.................................................... 26
11 Executive Compensation................................................26
12 Security Ownership of Certain Beneficial Owners and Management....... 26
Security Ownership of Certain Beneficial Owners................... 26
Security Ownership of Management.................................. 27
Changes in Control................................................ 27
13 Certain Relationships and Related Transactions........................27
The Fund's Investment Advisory and Administrative Fee............. 27
Belport Realty's Management Fee................................... 27
The Portfolio's Investment Advisory Fee........................... 28
Servicing Fees Paid by the Fund................................... 28
Servicing Fees Paid by Belvedere Company.......................... 28
Distribution Fees Paid to EV Distributors......................... 28
Redemption Fees................................................... 28
Certain Real Estate Investment Transactions....................... 28
14 Principal Accountant Fees and Services............................... 29
PART IV
-------
15 Exhibits, Financial Statements and Reports on Form 8-K.............. 29
APPENDIX A ............................................................... 31
FINANCIAL STATEMENTS....................................................... 32
SIGNATURES ............................................................... 65
EXHIBIT INDEX.............................................................. 66
PART I
------
ITEM 1. BUSINESS.
- ------------------
FUND OVERVIEW. Belport Capital Fund LLC (the Fund) is a private investment
company organized by Eaton Vance Management (Eaton Vance) to provide
diversification and tax-sensitive investment management to investors holding
large and concentrated positions in equity securities of selected public
companies. The Fund's investment objective is to achieve long-term, after-tax
returns for persons who have invested in the Fund (Shareholders). The Fund, a
Delaware limited liability company, commenced its investment operations on March
14, 2001. Limited liability company interests of the Fund (Shares) were issued
to Shareholders at five closings during 2001. At each Fund closing, the Fund
accepted contributions of stock from investors in exchange for Shares of the
Fund. The Fund discontinued offering Shares on December 18, 2001 and, while the
Fund is not prohibited from doing so, no future offering is anticipated. As of
December 31, 2003, the Fund had net assets of approximately $1.6 billion.
STRUCTURE OF THE FUND. The Fund is structured to provide tax-free
diversification and tax-sensitive investment management to Shareholders. To meet
the objective of tax-free diversification, the Fund must satisfy specific
requirements of the Internal Revenue Code of 1986, as amended (the Code). In
order for the contributions of appreciated stock to the Fund by Shareholders to
be nontaxable, not more than 80% of the Fund's assets (calculated in the manner
prescribed) may consist of "stocks and securities" as defined in the Code. To
meet this requirement, the Fund invests at least 20% of its assets as so
determined in certain real estate investments (see "The Fund's Real Estate
Investments through Belport Realty Corporation" below). The Fund invests up to
80% of its assets in a diversified portfolio of common stocks (see "The Fund's
Investment in Belvedere Capital Fund Company LLC and Tax-Managed Growth
Portfolio" below). The Fund acquired its real estate investments with borrowed
funds, as described below under "Fund Borrowings". See Appendix A for a chart
detailing the investment structure of the Fund.
In its investment program, the Fund balances investment considerations and tax
considerations, and takes into account the taxes payable by Shareholders on
allocated investment income and realized capital gains. See "The Fund's
Investment in Belvedere Capital Fund Company LLC and Tax-Managed Growth
Portfolio" below.
There is no trading market for the Fund's Shares. As described further under
"Redemption of Fund Shares" in Item 5(a), Fund Shares may be redeemed on any
business day. The Fund satisfies redemption requests principally by distributing
securities, but may also distribute cash. The value of securities and cash
distributed to satisfy a redemption will equal the net asset value of the number
of Shares redeemed less any applicable redemption fee. Under most circumstances,
a redemption from the Fund that is met by distributing securities as described
herein will not result in the recognition of capital gains by the Fund or by the
redeeming Shareholder. The redeeming Shareholder would generally recognize
capital gains upon the sale of the securities received upon the redemption.
The Fund intends to distribute each year the amount of its net investment income
for such year, if any. The Fund also intends to make annual capital gain
distributions equal to approximately 18% of the amount of its net realized
capital gains, if any, other than precontribution gain. The Fund's distributions
generally are based on determinations of net investment income and net realized
capital gains for federal income tax purposes. Such amounts may differ from net
investment income (or loss) and net realized gain (or loss) as set forth in the
Fund's consolidated financial statements due to differences in the treatment of
various income, gain, loss, expense and other items for federal income tax
purposes and under generally accepted accounting principles. The Fund's income
distributions are not expected to be significant. The Fund intends to pay any
distributions on the last business day of each fiscal year of the Fund (which
concludes on December 31) or shortly thereafter. See "Distributions" in Item
5(c).
FUND MANAGEMENT. The manager of the Fund is Eaton Vance, a Massachusetts
business trust registered as an investment adviser. Eaton Vance and its
subsidiary, Boston Management and Research (Boston Management), provide
management and advisory services to the Fund, its real estate subsidiary and the
investment portfolio in which the Fund invests. Eaton Vance and Boston
Management provide advisory, administration and/or management services to over
170 investment companies, as well as individual and institutional investors. As
of December 31, 2003, Eaton Vance and its affiliates managed approximately $80
billion on behalf of clients. The fees payable to the Eaton Vance organization,
as well as other fees payable by the Fund, are described in Item 13 below. The
Eaton Vance organization is subject to certain conflicts of interest in
providing services to the Fund, its subsidiaries and the investment portfolio in
which the Fund invests. See "The Eaton Vance Organization - Conflicts of
Interest" below.
1
THE FUND'S OFFERING. Shares of the Fund were privately offered and sold only to
"accredited investors" as defined in Rule 501(a) under the Securities Act of
1933, as amended, (the Securities Act) who were "qualified purchasers" (as
defined in Section 2(a)(51)(A) of the Investment Company Act of 1940, as amended
(the 1940 Act)). The offering was conducted by Eaton Vance Distributors, Inc., a
wholly-owned subsidiary of Eaton Vance (EV Distributors), as placement agent and
by certain subagents appointed by EV Distributors. The Shares were offered and
sold in reliance upon an exemption from registration provided by Rule 506 under
the Securities Act. The Fund issued Shares to Shareholders at closings taking
place on March 14, 2001, May 23, 2001, July 26, 2001, October 4, 2001 and
December 18, 2001. At the five closings, an aggregate of 17,842,860 Shares were
issued in exchange for Shareholder contributions totaling approximately $1.8
billion.
The Fund is registered under the Securities Exchange Act of 1934, as amended,
(the 1934 Act) and files periodic reports (such as reports on Form 10-Q and Form
10-K) thereunder. Copies of the reports filed by the Fund are available: at the
public reference room of the Securities and Exchange Commission (SEC) in
Washington, DC (call 1-202-942-8090 for information on the operation of the
public reference room); on the EDGAR Database on the SEC's Internet site
(http://www.sec.gov); or, upon payment of copying fees, by writing to the SEC's
public reference section, Washington, DC 20549-0102, or by electronic mail at
publicinfo@sec.gov. The Fund does not have a website. The Fund intends to
provide Shareholders with an annual and semiannual report containing the Fund's
consolidated financial statements, audited by the Fund's independent auditor in
the case of the annual report.
THE FUND'S INVESTMENT IN BELVEDERE CAPITAL FUND COMPANY LLC AND TAX-MANAGED
GROWTH PORTFOLIO. At each Fund closing, all of the securities accepted for
contribution to the Fund were contributed by the Fund to Belvedere Capital Fund
Company LLC, a Massachusetts limited liability company (Belvedere Company), in
exchange for shares of Belvedere Company. Belvedere Company, in turn,
immediately thereafter contributed the securities received from the Fund to
Tax-Managed Growth Portfolio (the Portfolio) in exchange for an interest in the
Portfolio. The Portfolio is a diversified, open-end management investment
company registered under the 1940 Act with net assets of approximately $17.6
billion as of December 31, 2003. As of December 31, 2003, the Fund's investment
in the Portfolio through Belvedere Company had a value of approximately $1.6
billion (equal to approximately 73.0% of the Fund's total assets on a
consolidated basis).
BELVEDERE COMPANY. Belvedere Company was organized in 1997 by Eaton Vance to
offer tax-free diversification and tax-sensitive investment management to
certain qualified investors who contributed diversified portfolios of equity
securities. As of December 31, 2003, the investment assets of Belvedere Company
consisted exclusively of an interest in the Portfolio with a value of
approximately $11.1 billion. As of such date, the Fund owned approximately 14.5%
of Belvedere Company's outstanding shares. The other investors in Belvedere
Company include six other investment funds sponsored by the Eaton Vance
organization (investment fund investors), as well as qualified individual
investors who acquired shares of Belvedere Company in exchange for portfolios of
acceptable securities (non-investment fund investors).
Belvedere Company considers for acceptance equity securities that (i) are listed
on the New York Stock Exchange, the American Stock Exchange, the NASDAQ National
Market or a major foreign exchange, (ii) have a trading price of at least $10.00
per share and (iii) are issued by issuers having an equity market capitalization
of at least $500 million. Because Belvedere Company only accepts contributions
of diversified baskets of securities (as described below), it is not subject to
the requirement that not more than 80% of it assets consist of "stocks and
securities" as defined in the Code. For investors that own a diversified basket
of securities, investing in Belvedere Company (rather than in the Fund) avoids
the costs and risks of investing in real estate and the associated financial
leverage to which the Fund is subject.
Belvedere Company provides a vehicle through which investment fund and
non-investment fund investors contributing a "diversified basket of securities"
can acquire an indirect interest in the Portfolio. A "diversified basket of
securities" means a group of securities that is diversified such that not more
than 25% of the value of the securities are investments in the securities of any
one issuer and not more than 50% of the value of the securities are investments
in the securities of five or fewer issuers. The securities contributed to
Belvedere Company at each Fund closing constituted a diversified basket of
securities. Because the Fund is required to hold a percentage of its investments
in non-Portfolio assets in order to meet certain tax requirements (see
"Structure of the Fund" above and "The Fund's Real Estate Investments through
Belport Realty Corporation" below), it could not satisfy the conditions of the
1940 Act for investing directly in the Portfolio.
THE PORTFOLIO. The Portfolio was organized in 1995 by Eaton Vance as the
successor to the investment operations of Eaton Vance Tax-Managed Growth Fund
1.0 (Tax-Managed Growth 1.0), a mutual fund established in 1966 by Eaton Vance
and managed from inception for long-term, after-tax returns. As of December 31,
2003, investors in the Portfolio included six investors in addition to Belvedere
2
Company and Tax-Managed Growth 1.0, each of which has acquired or is acquiring
on a continuous basis interests in the Portfolio with cash. All investors in the
Portfolio are sponsored by or affiliated with Eaton Vance. As of December 31,
2003, Belvedere Company owned approximately 63.0% of the Portfolio.
The Fund invests in the Portfolio (on an indirect basis through Belvedere
Company) because it is a well-established investment portfolio that has an
investment objective and policies that are compatible to those of the Fund.
Investing in the Portfolio enables the Fund to participate in a substantially
larger and more diversified investment portfolio than it could achieve by
managing the contributed securities directly. The audited financial statements
of the Portfolio for the year ended December 31, 2003 are included in the Fund's
annual report to Shareholders and incorporated by reference into Item 8 below.
The Portfolio's audited financial statements include information about the
assets and liabilities of the Portfolio, including Portfolio expenses. For a
discussion of the Portfolio's performance for the year ended December 31, 2003,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7. For the investment advisory fee payable by the Portfolio,
see "The Portfolio's Investment Advisory Fee" in Item 13.
THE PORTFOLIO'S INVESTMENT OBJECTIVE AND POLICIES. The investment objective of
the Portfolio is to achieve long-term, after-tax returns for its investors by
investing in a diversified portfolio of equity securities. The Portfolio
primarily invests in common stocks of domestic and foreign growth companies that
are considered to be high in quality and attractive in their long-term
investment prospects. The Portfolio seeks to invest in a broadly diversified
portfolio of stocks and to invest primarily in established companies with
characteristics of above-average growth, predictability and stability that are
acquired with the expectation of being held for a period of years. Under normal
market conditions, the Portfolio invests primarily in common stocks. The
Portfolio has acquired securities through contributions from Belvedere Company
and Tax-Managed Growth 1.0, and by purchasing securities with cash invested in
the Portfolio by other investors.
Although the Portfolio may, in addition to investing in common stocks, invest in
investment-grade preferred stocks and debt securities, purchases of such
securities are normally limited to securities convertible into common stocks and
temporary investments in short-term notes and government obligations. During
periods in which the investment adviser to the Portfolio believes that returns
on common stock investments may be unfavorable, the Portfolio may invest a
portion of its assets in U.S. government obligations and high quality short-term
notes. The Portfolio's holdings represent a number of different industries. Not
more than 25% of the Portfolio's assets may be invested in the securities of
issuers having their principal business activity in the same industry,
determined as of the time of acquisition of any such securities.
THE PORTFOLIO'S TAX-SENSITIVE MANAGEMENT STRATEGIES. In its operations, the
Portfolio seeks to achieve long-term, after-tax returns in part by minimizing
the taxes incurred by investors in the Portfolio in connection with the
Portfolio's investment income and realized capital gains. Taxes on investment
income are minimized by investing primarily in lower-yielding securities and
stocks that pay dividends that qualify for favorable federal tax treatment.
Taxes on realized capital gains are minimized by avoiding or minimizing the sale
of securities holdings with large accumulated capital gains. The Portfolio
generally seeks to avoid realizing short-term capital gains.
When a decision is made to sell a particular appreciated security, the Portfolio
will select for sale the share lots resulting in the most favorable tax
treatment, generally those with holding periods sufficient to qualify for
long-term capital gain treatment that have the highest cost basis. The Portfolio
may, when deemed prudent by its investment adviser, sell securities to realize
capital losses that can be used to offset realized gains. While the Portfolio
generally retains the securities contributed to the Portfolio by Belvedere
Company, the Portfolio has the flexibility to sell contributed securities.
Securities acquired by the Portfolio with cash may be sold in accordance with
the tax-management strategies described above. In lieu of selling a security,
the Portfolio may hedge its exposure to that security by using the techniques
described below. The Portfolio also disposes of contributed securities through
its practice of settling redemptions by investors in the Portfolio that
contributed securities primarily by a distribution of securities as described in
Item 5(a) under "Redemption of Fund Shares." As described in Item 5(a), settling
redemptions with securities may result in certain tax benefits to the Portfolio,
Belvedere Company, the Fund and the redeeming Shareholder.
To protect against price declines in securities holdings with large accumulated
capital gains, the Portfolio may use various investment techniques, including,
but not limited to, the purchase of put options on securities held, equity
collars (combining the purchase of a put option and the sale of a call option),
equity swaps, covered short sales, forward sales of stocks held, and the
purchase and sale of futures contracts on stocks and stock indexes and options
thereon. By using these techniques rather than selling such securities, the
Portfolio may, within certain limits, reduce its exposure to price declines in
the securities without realizing substantial capital gains under current tax
law.
The Portfolio's ability to utilize covered short sales, certain equity swaps,
forward sales, futures and certain equity collar strategies as a tax-efficient
management technique with respect to holdings of appreciated securities is
3
limited to circumstances in which the hedging transaction is closed out within
30 days after the end of the taxable year of the Portfolio in which the hedging
transaction was initiated and the underlying appreciated securities position is
held unhedged for at least the next 60 days after such hedging transaction is
closed. In addition, dividends received on stock for which the Portfolio is
obligated to make related payments (pursuant to a short sale or otherwise) with
respect to positions in substantially similar or related property are subject to
federal income tax at ordinary rates and do not qualify for favorable tax
treatment. Also, holding periods required to receive tax-advantaged treatment of
qualified dividends on a stock holding are suspended whenever the Portfolio has
an option or contractual obligation to sell or an open short sale of
substantially identical stock, is the grantor of an option to buy substantially
identical stock or has diminished risk of loss in such stock by holding
positions with respect to substantially similar or related property. The use of
these investment techniques may require the Portfolio to commit or make
available cash and, therefore, may not be available at such times as the
Portfolio has limited holdings of cash. During 2003, the Portfolio held covered
short positions that were closed in January. The Portfolio did not otherwise
employ any of the techniques described above on securities holdings during the
year ended December 31, 2003.
THE FUND'S REAL ESTATE INVESTMENTS THROUGH BELPORT REALTY CORPORATION. Separate
from its investment in the Portfolio through Belvedere Company, the Fund invests
in certain real estate investments through its subsidiary, Belport Realty
Corporation (Belport Realty). The ownership structure of Belport Realty is
described below under "Organization of Belport Realty and the Real Estate Joint
Ventures". As referred to above under "Fund Overview - Structure of the Fund",
the Fund invests in real estate investments to satisfy certain requirements of
the Code for contributions of appreciated stocks to the Fund by Shareholders to
be nontaxable. As of December 31, 2003, the consolidated real estate investments
of Belport Realty totaled approximately $578.0 million and represented 26.2% of
the Fund's assets on a consolidated basis. The Fund acquired its real estate
investments with borrowed funds, as described below under "Fund Borrowings". The
Fund seeks a return on its real estate investments over the long-term that
exceeds the cost of the borrowings incurred to acquire such investments.
At December 31, 2003, Belport Realty invested in real estate joint ventures
(Real Estate Joint Ventures) that are controlled by Belport Realty and in a
portfolio of income-producing preferred equity interests in real estate
operating partnerships that generally are affiliated with and controlled by real
estate investment trusts (REITs) that are publicly traded (Partnership
Preference Units). Belport Realty also owns an interest in Bel Holdings, LLC, a
limited liability company formed in 2003 and treated as a partnership for tax
purposes (Bel Holdings). At December 31, 2003, Bel Holdings' sole investment was
Partnership Preference Units issued by Vornado Realty, L.P. Belport Realty
acquired units of Bel Holdings for cash and at December 31, 2003 owned 23.1% of
Bel Holdings' outstanding units. Information included herein about Belport
Realty's Partnership Preference Units includes the Partnership Preference Units
held directly by Belport Realty and indirectly through Bel Holdings. As of
December 31, 2003, approximately 83.9% of the consolidated real estate
investments of Belport Realty was investments in Real Estate Joint Ventures and
approximately 16.1% was investments in Partnership Preference Units.
In the future, Belport Realty may invest in other types of real estate
investments, such as interests in real properties subject to long-term leases
(Net Leased Properties). Belport Realty may purchase real estate investments
from, and sell them to, other investment funds sponsored by the Eaton Vance
organization and REIT subsidiaries of such investment funds that are similar to
Belport Realty. During the year ended December 31, 2003, Belport Realty sold
Partnership Preference Units to one such REIT subsidiary and Belport Realty
recognized gains of approximately $4.7 million on such transaction. See "Certain
Real Estate Investment Transactions" in Item 13.
Boston Management serves as manager of Belport Realty. In that capacity, Boston
Management manages the investment and reinvestment of Belport Realty's assets
and administers its affairs. See Item 13 for a description of the management fee
payable by Belport Realty to Boston Management.
REAL ESTATE JOINT VENTURE INVESTMENTS. At December 31, 2003, Belport Realty
owned a controlling interest in two Real Estate Joint Ventures, Bel Multifamily
Property Trust (Bel Multifamily) and Monadnock Property Trust LLC (Monadnock).
With respect to each Real Estate Joint Venture, Belport Realty owns a majority
economic interest therein and controls a majority of its board of managers or
trustees. Belport Realty's approval is required for all major decisions
affecting each Real Estate Joint Venture.
The day-to-day operating management of the real properties owned by each Real
Estate Joint Venture is provided by the real estate operating company (the
Operating Partner) that is the principal minority investor in the Real Estate
Joint Venture or an affiliated company thereof. Each Operating Partner (or its
4
affiliate) receives a property management fee for the services rendered to such
properties. For the year ended December 31, 2003, property management fees
relating to real properties held through the Real Estate Joint Ventures were
approximately $2.6 million.
At December 31, 2003, the assets of the Real Estate Joint Ventures consisted of
a total of 23 multifamily residential communities acquired from or in
conjunction with the Operating Partner of the respective Real Estate Joint
Venture. See Item 2. Distributable cash flows from each Real Estate Joint
Venture are allocated in a manner that provides Belport Realty: 1) a priority
position versus the Operating Partner with respect to a fixed annual preferred
return; and 2) participation on a pro rata or reduced basis in distributable
cash flows in excess of the annual preferred return of Belport Realty and a
subordinated preferred return of the Operating Partner.
Financing for the Real Estate Joint Ventures consists primarily of fixed-rate
secured mortgage debt obligations of the Real Estate Joint Ventures that
generally are without recourse to Belport Realty and the Fund as described in
"Risks of Real Estate Investments" in Item 7A(b). Both Belport Realty and the
respective Operating Partner invested equity in the Real Estate Joint Ventures.
Belport Realty's equity in the Real Estate Joint Ventures was acquired using the
proceeds of Fund borrowings. At acquisition, Belport Realty's equity investment
in Bel Multifamily and Monadnock was approximately $49.1 million and
approximately $75.9 million, respectively.
A board of managers or trustees controlled by Belport Realty oversees the
performance of the Operating Partner and controls the major decisions of each
Real Estate Joint Venture. In the case of Monadnock, Belport Realty controls
three of the five seats on the board of managers. In the case of Bel
Multifamily, Belport Realty controls three of the four seats on the board of
trustees. The persons serving as managers or trustees on behalf of Belport
Realty are employees of Boston Management. See "Directors and Executive
Officers" in Item 10. No director of Belport Realty or manager or trustee of a
Real Estate Joint Venture is a Shareholder of the Fund, except James B. Hawkes
(a Director of Belport Realty) as described in Item 12. Each Operating Partner
of Belport Realty's Real Estate Joint Ventures also serves as an operating
partner of other Real Estate Joint Ventures that are majority owned by REIT
subsidiaries of other similarly-structured investment funds sponsored by the
Eaton Vance organization. Eaton Vance has no financial interest in the Real
Estate Joint Ventures.
The Operating Partner of Bel Multifamily is ERP Operating Limited Partnership
(ERP), an affiliate of Equity Residential. Equity Residential is a publicly
owned, self-administered and self-managed REIT. Equity Residential is the
largest publicly traded apartment company in America. As of December 31, 2003,
Equity Residential owned or had investments in 968 apartment communities in 34
states consisting of 207,506 apartment units. Equity Residential's corporate
headquarters are located in Chicago, Illinois. Equity Residential's common
shares are traded on the New York Stock Exchange under the symbol "EQR". ERP
owns 25% of the issued and outstanding shares of Bel Multifamily that are
entitled to vote for election of trustees of Bel Multifamily. Belport Realty
owns the balance of such shares.
The Operating Partner of Monadnock is Archstone-Smith Operating Trust.
Archstone-Smith Trust (Archstone-Smith), the sole trustee of Archstone-Smith
Operating Trust, is a publicly owned REIT and a recognized leader in apartment
investment and operations with a current market capitalization of $10.3 billion
as of December 31, 2003. Archstone-Smith owns and operates a portfolio of
high-rise and garden apartment communities concentrated in the greater
Washington, D.C. metropolitan area, Southern California, the San Francisco Bay
area, Chicago, Boston, Southeast Florida, Seattle and the greater New York City
metropolitan area. As of December 31, 2003, Archstone-Smith owned or had an
ownership position in 249 communities, representing 88,183 units, including
units under construction. Archstone-Smith's corporate headquarters are located
in Englewood, Colorado. Archstone-Smith is traded on the New York Stock Exchange
under the symbol "ASN". Archstone-Smith owns 25% of the issued and outstanding
shares of Monadnock that are entitled to Board representation. Belport Realty
owns the balance of such shares.
The Real Estate Joint Ventures each include a buy/sell provision that can be
exercised by either Belport Realty or the Operating Partner after a fixed period
of years. Pursuant to the buy/sell provision entered into at the time Bel
Multifamily was established, either Belport Realty or the Bel Multifamily
Operating Partner can give notice on or after February 22, 2010 either to buy
the other's equity interest in Bel Multifamily or to sell its own equity
interest in Bel Multifamily. Monadnock has a similar buy/sell provision between
Belport Realty and the Monadnock Operating Partner. The Monadnock buy/sell
provision can be invoked on or after September 13, 2010.
A purchase or sale pursuant to a buy/sell provision would be made at a
negotiated price. The agreement containing the buy/ sell provision applicable to
a Real Estate Joint Venture continues indefinitely, but could be terminated upon
the receipt of the requisite approval of the owners of the voting interests in
the Real Estate Joint Venture. The sale to Belport Realty by the Operating
Partner of the Operating Partner's interest in Bel Multifamily or Monadnock
would not affect the REIT qualification of Bel Multifamily or Monadnock. If
Belport Realty were to dispose of its interest in a Real Estate Joint Venture
5
pursuant to a buy/sell provision, or otherwise, it may acquire an interest in a
different real estate investment to replace the investment sold.
PARTNERSHIP PREFERENCE UNITS. Belport Realty's investments in Partnership
Preference Units represent preferred equity interests in real estate operating
partnerships that are affiliated with publicly traded REITs. The assets of the
partnerships that issued the Partnership Preference Units owned by Belport
Realty on December 31, 2003 consisted of direct or indirect ownership interests
in real properties, including multifamily properties, office and industrial
properties and self-storage facilities. The Partnership Preference Units owned
by Belport Realty as of December 31, 2003 are described in Item 7A and in the
consolidated portfolio of investments included in the Fund's consolidated
financial statements, which are incorporated by reference into Item 8. Eaton
Vance is not, and has not been, involved in the management or operation of the
real estate operating partnerships that issued the Partnership Preference Units
owned by Belport Realty.
The Partnership Preference Units held by Belport Realty were issued by
partnerships that are not publicly-traded partnerships within the meaning of
Code Section 7704(b). The Partnership Preference Units are perpetual life
instruments (subject to call provisions) and are not, by their terms, readily
convertible or exchangeable into cash or securities of the affiliated public
company. Partnership Preference Units are not rated by a nationally-recognized
rating agency, and such interests may not be as high in quality as issues that
are rated investment grade.
Each issue of Partnership Preference Units held by Belport Realty pays regular
quarterly distributions at fixed rates from the net profits of the issuing
partnership, with preferential rights over common and other subordinated units.
None of the issues of Partnership Preference Units is or will be registered
under the Securities Act and each issue is thus subject to restrictions on
transfer.
ORGANIZATION OF BELPORT REALTY AND THE REAL ESTATE JOINT VENTURES. Belport
Realty and each Real Estate Joint Venture operate in such a manner as to qualify
for taxation as REITs under the Code. As REITs, Belport Realty and each Real
Estate Joint Venture generally are not subject to federal income tax on that
portion of their ordinary income or taxable gain that is distributed to
stockholders each year. The Fund owns 100% of the common stock issued by Belport
Realty, and intends to hold all of Belport Realty's common stock at all times.
Belport Realty and the respective Operating Partner own all of the common shares
or similar interests of each Real Estate Joint Venture.
Belport Realty and each Real Estate Joint Venture also have issued preferred
shares to satisfy certain provisions of the Code, which require (among other
things) that a REIT be beneficially owned in the aggregate by 100 or more
persons. The preferred shares of each such entity are owned by approximately 105
charitable organizations that received the preferred shares as gifts. Each
charitable organization that received preferred stock was an "accredited
investor" (as defined in the Securities Act) with total assets in excess of $5
million at the time the organization received the preferred shares. Eaton Vance
selected the charitable organizations from the charities for which it has
matched employee contributions and/or suggestions from its employees or the
Operating Partners. As of December 31, 2003, the total value of the preferred
shares outstanding of Belport Realty, Bel Multifamily and Monadnock was
$210,000, $220,000 and $216,000, respectively. Dividends on preferred shares are
cumulative and payable annually at a dividend rate of 8% per year. The dividends
paid on preferred shares have priority over payments on common shares. For the
year ended December 31, 2003, Belport Realty, Bel Multifamily and Monadnock paid
or accrued distributions to preferred shareholders of $16,800, $17,600 and
$17,280, respectively.
FUND BORROWINGS. To finance its real estate investments held through Belport
Realty, the Fund has entered into credit arrangements with DrKW Holdings, Inc.
(the DrKW Credit Facility) and Merrill Lynch Mortgage Capital, Inc. (the MLMC
Credit Facility) (collectively, the Credit Facility). The Credit Facility is
secured by a pledge of the Fund's assets, excluding the assets of Bel
Multifamily and Monadnock, and expires in June 2010. At December 31, 2003, the
total principal amount outstanding under the Credit Facility was $230.5 million.
The Credit Facility is also used to provide for selling commissions,
organizational expenses and any short-term liquidity needs of the Fund. Under
certain circumstances, the Fund may increase the size of the Credit Facility and
the amount of outstanding borrowings thereunder.
Borrowings under the DrKW Credit Facility accrue interest at a rate of one-month
LIBOR plus 0.20% per annum. As of December 31, 2003, outstanding borrowings
under the DrKW Credit Facility totaled $230.5 million.
The Fund may borrow up to $54.0 million under the MLMC Credit Facility, of which
up to $10 million may be letters of credit. Borrowings under the MLMC Credit
Facility accrue interest at a rate of one-month LIBOR plus 0.38% per annum. As
of December 31, 2003, there were no outstanding borrowings under the MLMC Credit
Facility. There was a $1.6 million letter of credit issued as of December 31,
2003. The unused loan commitment amount totaled $52.4 million. A commitment fee
6
of 0.10% per annum is paid on the unused commitment amount. The Fund pays all
fees associated with issuing letters of credit.
Obligations under the Credit Facility are without recourse to Fund Shareholders.
As described above, financing for the Real Estate Joint Ventures consists
primarily of fixed-rate secured mortgage debt obligations of the Real Estate
Joint Ventures that are without recourse to Fund Shareholders and are generally
without recourse to Belport Realty and the Fund as described under "Risks of
Real Estate Investments" in Item 7A(b).
INTEREST RATE SWAP AGREEMENTS. The Fund has entered into interest rate swap
agreements with Merrill Lynch Capital Services, Inc. (MLCS) to fix the cost of
borrowings under the Credit Facility used to acquire Belport Realty's equity in
its real estate investments. Pursuant to the interest rate swap agreements, the
Fund makes cash payments to MLCS at fixed rates in exchange for floating rate
payments from MLCS that fluctuate with one-month LIBOR. The interest rate swap
agreements entered into with respect to Belport Realty's real estate investments
extend until June 25, 2010 and provide for the Fund to make payments to MLCS at
fixed rates averaging 4.08%. See Note 7 to the Fund's consolidated financial
statements incorporated by reference into Item 8.
THE EATON VANCE ORGANIZATION. The Eaton Vance organization sponsors the Fund.
Eaton Vance serves as the Fund's manager. Boston Management serves as the Fund's
investment adviser and as manager of Belport Realty. EV Distributors served as
the Fund's placement agent. The Fund's business affairs are conducted by Eaton
Vance (as its manager) and its investment operations are conducted by Boston
Management (as its adviser). The Fund's officers are employees of Eaton Vance.
Eaton Vance, Boston Management and EV Distributors are indirect wholly-owned
subsidiaries of Eaton Vance Corp., a publicly-traded holding company that,
through its affiliates and subsidiaries, engages primarily in investment
management, administration and marketing activities.
As noted above, the Fund pursues its objective primarily by investing in
Belvedere Company. Belvedere Company invests exclusively in the Portfolio.
Boston Management acts as investment adviser of the Portfolio and manager of
Belvedere Company. EV Distributors acts as placement agent for Belvedere Company
and the Portfolio. As of December 31, 2003, the assets of the Fund represented
approximately 2.8% of assets under management by Eaton Vance and its affiliates.
The offices of the Fund, Eaton Vance, Boston Management and EV Distributors are
located at 255 State Street, Boston, Massachusetts 02109.
CONFLICTS OF INTEREST. Boston Management and other Eaton Vance affiliates are
subject to certain conflicts of interests in their dealings with the Fund,
Belport Realty, Belvedere Company and the Portfolio. Also investing in the
Portfolio are other investment companies sponsored by Eaton Vance. Portfolio
management activities with respect to securities contributed to the Portfolio
may have different tax consequences for the contributing investor in the
Portfolio than for other investors in the Portfolio. Boston Management manages
the Portfolio in pursuit of long-term, after-tax returns for all investors in
the Portfolio and, with respect to contributed securities, takes into account
the tax position of the contributing investor in the Portfolio. Whenever
conflicts of interest arise, Eaton Vance, Boston Management and other Eaton
Vance affiliates will endeavor to exercise their discretion in a manner that
they believe is equitable to all interested persons.
Belport Realty may purchase real estate investments from the REIT subsidiaries
of other funds similar in purpose to the Fund that are sponsored by the Eaton
Vance organization. Belport Realty may also co-invest with such entities in real
estate investments and sell real estate investments to such entities. In any
such transaction, the assets purchased and sold will be valued in good faith by
Boston Management, after consideration of factors, data and information that
Boston Management considers relevant. Transaction prices generally include an
allocation of the original costs incurred in creating and acquiring the
transferred assets. Real estate investments are often difficult to value and
others could in good faith arrive at valuations different from those of Boston
Management.
ITEM 2. PROPERTIES.
- --------------------
The Fund does not own any physical properties, other than indirectly through
Belport Realty's investments. As of December 31, 2003, Belport Realty held
investments in Partnership Preference Units of four issuers. At December 31,
2003, Belport Realty owned majority interests in Bel Multifamily and Monadnock,
whose assets are reflected in the consolidated financial statements of the Fund.
Bel Multifamily owns eleven multifamily residential properties located in seven
states (Washington, Missouri, North Carolina, Arizona, Florida, Georgia and
Texas). Monadnock owns twelve multifamily residential properties located in
eight states (Texas, Arizona, Georgia, North Carolina, Oregon, Utah, Tennessee
and Florida).
7
ITEM 3. LEGAL PROCEEDINGS.
- ---------------------------
Although in the ordinary course of business, the Fund, Belport Realty and
Belport Realty's controlled subsidiaries may become involved in legal
proceedings, the Fund is not aware of any material pending legal proceedings to
which any of them is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the quarter ended
December 31, 2003.
PART II
-------
ITEM 5. DETERMINING NET ASSET VALUE, MARKET FOR FUND SHARES AND RELATED
SHAREHOLDER MATTERS.
- ------------------------------------------------------------------------
This Item and other Items in this report contain summaries of certain provisions
contained in the Limited Liability Company Agreement of the Fund (the LLC
Agreement), which was filed as an exhibit to the Fund's registration statement
on Form 10. All such summaries are qualified in their entirety by the actual
provisions of the LLC Agreement, which are incorporated by reference herein.
(A) MARKET INFORMATION, RESTRICTIONS ON TRANSFERS AND REDEMPTION OF SHARES.
- ---------------------------------------------------------------------------
TRANSFERS OF FUND SHARES. There is no established public trading market for the
Shares of the Fund. Other than transfers to the Fund in a redemption, transfers
of Shares are expressly prohibited by the LLC Agreement of the Fund without the
consent of Eaton Vance. Eaton Vance's consent to a transfer may be withheld in
its sole discretion for any reason or for no reason.
The Shares have not been and will not be registered under the Securities Act,
and may not be resold unless an exemption from such registration is available.
Shareholders have no right to require registration of the Shares and the Fund
does not intend to register the Shares under the Securities Act or take any
action to cause an exemption (whether pursuant to Rule 144 of the Securities Act
or otherwise) to be available.
The Fund is not and will not be registered under the 1940 Act, and no transfer
of Shares may be made if, as determined by Eaton Vance or counsel to the Fund,
such transfer would result in the Fund being required to be registered under the
1940 Act. In addition, no transfer of Shares may be made unless, in the opinion
of counsel for the Fund, such transfer would not result in termination of the
Fund for purposes of Section 708 of the Code or result in the classification of
the Fund as an association or a publicly traded partnership taxable as a
corporation under the Code.
In no event shall all or any part of a Shareholder's Shares be assigned to a
minor or an incompetent, unless in trust for the benefit of such person. Shares
may be sold, transferred, assigned or otherwise disposed of by a Shareholder
only if it is determined by Eaton Vance or counsel to the Fund that such
transfer, assignment or disposition would not violate federal securities or
state securities or "blue sky" laws (including investor qualification
standards).
There are no outstanding options or warrants to purchase, or securities
convertible into, Shares of the Fund. Shares of the Fund cannot be sold pursuant
to Rule 144 under the Securities Act, and the Fund does not propose to publicly
offer any of its Shares at any time.
REDEMPTION OF FUND SHARES. Shares of the Fund may be redeemed on any business
day. The redemption price of Shares that are redeemed is based on the Fund's net
asset value next computed after receipt of the redemption request. Shares
redeemed within three years of issuance are generally subject to a redemption
fee equal to 1% of the net asset value of the Shares redeemed. See Item 13.
The Fund satisfies redemption requests principally by distributing securities
drawn from the Portfolio, but may also distribute cash. If requested by a
redeeming Shareholder, the Fund will satisfy a redemption request by
distributing securities that were contributed by the redeeming Shareholder,
provided that such securities are held in the Portfolio at the time of
redemption. The securities contributed by a Shareholder will not be distributed
to any other Shareholder in the Fund (or to any other investor in Belvedere
Company or the Portfolio) during the first seven years following their
contribution unless the contributing Shareholder has withdrawn from the Fund.
8
Under most circumstances, a redemption from the Fund that is settled with
securities as described herein will not result in the recognition of capital
gains by the Fund or by the redeeming Shareholder. The redeeming Shareholder
would generally recognize capital gains upon the sale of the securities received
through redemption. If a redeeming Shareholder receives cash in addition to
securities to settle a redemption, the amount of cash received will be taxable
to the Shareholder to the extent it exceeds such Shareholder's tax basis in Fund
Shares. Shareholders should consult their tax advisors about the tax
consequences of redeeming Fund Shares.
A Shareholder redemption request within seven years of a contribution of
securities by such Shareholder will ordinarily be satisfied by distributing
securities that were contributed by such Shareholder, prior to distributing to
such Shareholder any other securities held in the Portfolio. Securities
contributed by a Shareholder may be distributed to other Shareholders in the
Fund (or to other investors in Belvedere Company or the Portfolio) after a
holding period of at least seven years and, if so distributed, would not be
available to meet subsequent redemption requests made by the contributing
Shareholder.
If requested by a redeeming Shareholder making a redemption of at least $1
million occurring more than seven years after such Shareholder's final
contribution of securities to the Fund, the Fund will generally distribute to
the redeeming Shareholder a diversified basket of securities representing a
range of industry groups that is drawn from the Portfolio, but the selection of
individual securities would be made by Boston Management in its sole discretion.
No interests in Real Estate Joint Ventures, Partnership Preference Units or
other real estate investments held by Belport Realty will be distributed to meet
a redemption request, and "restricted securities" will be distributed only to
the Shareholder who contributed such securities or such Shareholder's successor
in interest.
Other than as set forth above, the allocation of each redemption between
securities and cash and the selection of securities to be distributed will be at
the sole discretion of Boston Management. Distributed securities may include
securities contributed by Shareholders as well as other readily marketable
securities held in the Portfolio. The value of securities and cash distributed
to meet a redemption will equal the net asset value of the number of Shares
being redeemed less any applicable redemption fee. The Fund's Credit Facility
prohibits the Fund from honoring redemption requests while there is an event of
default outstanding under the Credit Facility.
The Fund may compulsorily redeem all or a portion of the Shares of a Shareholder
if the Fund has determined that such redemption is necessary or appropriate to
avoid registration of the Fund or Belvedere Company under the 1940 Act, or to
avoid adverse tax or other consequences to the Portfolio, Belvedere Company, the
Fund or Fund Shareholders, including those arising as the result of applicable
anti-money laundering requirements. No redemption fee is payable in the event of
a compulsory redemption.
A capital account for each Shareholder is maintained on the books of the Fund.
The account reflects the value of such Shareholder's interest in the Fund, which
is adjusted for profits, liabilities and distributions allocable to such account
in accordance with Article 6 of the Fund's LLC Agreement.
Subject to the consent of the manager of the Fund, a Shareholder may make an
estate freeze election pursuant to which all or a portion of such Shareholder's
Shares will be divided into Preferred Shares and Common Shares (Estate Freeze
Shares). Such division will be made in accordance with the terms of the LLC
Agreement. Estate Freeze Shares are not transferable without the consent of the
Fund's manager and have no redemption rights or voting or consent rights.
DETERMINING NET ASSET VALUE. Boston Management, as investment adviser, is
responsible for determining the value of the Fund's assets. The Fund's
custodian, Investors Bank & Trust Company, calculates the value of the assets of
the Fund, Belvedere Company and the Portfolio each day that the New York Stock
Exchange (NYSE) is open for trading, as of the close of regular trading on the
NYSE. The Fund's net asset value per Share is calculated by dividing the value
of the Fund's total assets, less its liabilities, by the number of Shares
outstanding.
The Fund's net assets are valued in accordance with the Fund's valuation
procedures and reflect the value of its directly-held assets and liabilities, as
well as the net asset value of the Fund's investment in the Portfolio held
through Belvedere Company and in real estate investments held through Belport
Realty. The Trustees of the Portfolio have established procedures for the fair
valuation of the Portfolio's assets under normal market conditions. Pursuant to
these procedures, marketable securities listed on U.S. securities exchanges
generally are valued at the last sale price on the day of the valuation or, if
there were no sales, at the mean between the closing bid and asked prices
therefor on the exchange where such securities are principally traded.
Marketable securities listed on the NASDAQ National Market System generally are
valued at the NASDAQ official closing price. Unlisted or listed securities for
which closing sale prices are not available are valued at the mean between the
last available bid and asked prices. Exchange-traded options are valued at the
last sale price for the day of valuation as quoted on the principal exchange or
board of trade on which the options are traded, or in the absence of a sale on
9
such day, at the mean between the latest bid and asked prices therefor. Futures
positions on securities or currencies are generally valued at closing settlement
prices. Short-term debt securities with a remaining maturity of 60 days or less
are valued at amortized cost. If short-term debt securities were acquired with a
remaining maturity of more than 60 days, their amortized cost value will be
based on their value on the sixty-first day prior to maturity. Other fixed
income and debt securities, including listed securities and securities for which
price quotations are available, will normally be valued on the basis of
valuations furnished by a pricing service.
The daily valuation of foreign securities held by the Portfolio generally is
determined as of the close of trading on the principal exchange on which such
securities trade. Events occurring after the close of trading on foreign
exchanges may result in adjustments to the valuation of foreign securities to
more accurately reflect their fair value as of the close of regular trading on
the NYSE. The Portfolio may rely on an independent fair valuation service in
adjusting the valuations of foreign securities. Foreign securities and
currencies held by the Portfolio are valued in U.S. dollars, as calculated by
the Portfolio's custodian based on foreign currency exchange rate quotations
supplied by an independent quotation service. All other securities are valued at
fair value as determined in good faith by or at the direction of the Portfolio's
Trustees considering relevant factors, data and information including the market
value of freely tradable securities of the same class in the principal market on
which such securities are normally traded.
The Fund's real estate investments are valued each day as determined in good
faith by Boston Management, as investment adviser to Belport Realty, after
consideration of relevant factors, data and information. The procedures for
valuing Belport Realty's assets are described under "Critical Accounting
Estimates" in Item 7 and under "Risks of Real Estate Investments" in Item 7A.
Boston Management values the Fund's interest rate swap agreements based upon
dealer and counterparty quotes and pricing models which take into consideration
the market trading prices of interest rate swap agreements that have similar
terms to the Fund's interest rate swap agreements. Fixed liabilities of the Fund
generally are stated at principal value.
HISTORIC NET ASSET VALUES. Set forth below are the high and low net asset values
per Share (NAVs) of the Fund for each full quarter during the two years ended
December 31, 2003 and 2002, the closing NAV on the last business day of each
full quarter, and the percentage change in NAV during each such quarter.
NAV at Quarterly %
Quarter Ended High NAV Low NAV Quarter End Change in NAV(1)
- ------------- -------- ------- ----------- -----------------
12/31/03 $ 94.92 $86.15 $94.92 12.77%
9/30/03 $ 87.79 $82.13 $84.17 2.72%
6/30/03 $ 85.07 $72.88 $81.94 13.58%
3/31/03 $ 80.15 $68.33 $72.14 -6.01%
12/31/02 $ 81.14 $68.38 $76.75 6.35%
9/30/02 $ 85.53 $69.36 $72.17 -16.33%
6/30/02 $ 98.35 $84.77 $86.26 -12.39%
3/31/02 $100.13 $92.71 $98.46 0.09%
(1) Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that Shares, if redeemed, may be worth
more or less than their original cost. Changes in NAV are historical.
Performance is for the stated time period only; due to market volatility,
the Fund's current performance may be lower or higher. For more information
about the performance of the Fund, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7.
(B) RECORD HOLDERS OF SHARES OF THE FUND.
- ------------------------------------------
As of March 1, 2004, there were 670 record holders of Shares of the Fund.
(C) DISTRIBUTIONS.
- -------------------
INCOME AND CAPITAL GAIN DISTRIBUTIONS. The Fund intends to distribute each year
the amount of its net investment income for such year, if any. The Fund also
intends to make annual capital gain distributions equal to approximately 18%
(reduced from 22% to reflect the reduction in federal long-term capital gains
rates) of the amount of its net realized capital gains, if any, other than
precontribution gain allocated to a Shareholder in connection with a taxable
tender offer or other taxable corporate event for a security contributed to the
Fund by that Shareholder or that Shareholder's predecessor in interest. The
Fund's net investment income and net realized gains include the Fund's allocated
share of the net investment income and net realized gains of Belport Realty,
Belvedere Company and, indirectly, the Portfolio. The Fund's distributions
10
generally are based on determinations of net investment income and net realized
capital gains for federal income tax purposes. Such amounts may differ from net
investment income (or loss) and net realized gain (or loss) as set forth in the
Fund's consolidated financial statements due to differences in the treatment of
various income, gain, loss, expense and other items for federal income tax
purposes and under generally accepted accounting principles. Because the
Portfolio invests primarily in lower yielding securities, seeks to avoid net
realized short-term capital gains and bears certain ongoing expenses, it is not
expected that income distributions will be significant. The Fund intends to pay
distributions (if any) on the last business day of each fiscal year of the Fund
(which concludes on December 31) or shortly thereafter. The Fund's distribution
rates with respect to realized gains may be adjusted in the future to reflect
changes in the effective maximum marginal individual federal tax rate applicable
to long-term capital gains.
Shareholder distributions with respect to net investment income and realized
post-contribution gains are made pro rata in proportion to the number of Shares
held as of the record date of the distribution. All distributions (including
Special Distributions described below) are paid by the Fund in cash.
Distributions are generally not taxable to the recipient Shareholder unless the
distributions exceed the recipient Shareholder's tax basis in Fund Shares. The
Fund's Credit Facility prohibits the Fund from making any distribution to
Shareholders while there is an event of default outstanding under the Credit
Facility.
On January 14, 2004, the Fund made a distribution of $0.76 per Share to
Shareholders of record on January 13, 2004. On January 17, 2003, the Fund made a
distribution of $0.72 per Share to Shareholders of record on January 16, 2003.
The Fund made no distributions in 2002.
SPECIAL DISTRIBUTIONS. In addition to the income and capital gain distributions
described above, the Fund also makes distributions whenever a Shareholder
recognizes a precontribution gain (other than precontribution gain allocated to
a Shareholder in connection with a tender offer or other extraordinary corporate
event involving a security contributed by such Shareholder) (a Special
Distribution). Special Distributions generally equal approximately 18% of the
amount of realized precontribution gains plus approximately 4% of the allocated
precontribution gain or such other percentage as deemed appropriate to
compensate Shareholders receiving such distributions for taxes that may be due
in connection with the precontribution gain and Special Distributions. Special
Distributions will be made solely to the Shareholders to whom the
precontribution gain is allocated. The Fund does not intend to make Special
Distributions to a Shareholder in respect of realized precontribution gain
allocated to a Shareholder in connection with a tender offer or other
extraordinary corporate event involving a security contributed by such
Shareholder. For the year ended December 31, 2003, the Fund made Special
Distributions of approximately $17. There were no Special Distributions for the
year ended December 31, 2002.
11
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------
TABLE OF SELECTED FINANCIAL DATA. The consolidated data referred to below
reflects the Fund's historical results for the years ended December 31, 2003 and
2002, and for the period from March 14, 2001 through December 31, 2001. The
following information should be read in conjunction with all of the consolidated
financial statements and related notes incorporated by reference into Item 8.
The other consolidated data referred to below is as of each period end.
Year Ended Year Ended Period Ended
December 31, 2003 December 31, 2002(1) December 31, 2001(1)
----------------- -------------------- --------------------
Total investment income $ 86,922,971 $ 87,158,378 $ 48,271,188
Interest expense $ 28,950,162 $ 30,092,621 $ 19,060,292
Net expenses (including interest expense) $ 64,831,145 $ 64,822,836 $ 40,039,651
Net investment income $ 19,648,844 $ 18,908,498 $ 5,631,643
Minority interests in net income of controlled subsidiaries $ (2,442,982) $ (3,427,044) $ (2,599,894)
Net realized loss $ (10,022,550) $ (18,022,339) $ (2,424,250)
Net change in unrealized appreciation (depreciation) $ 309,086,814 $ (379,891,616) $ (17,999,161)
Net increase (decrease) in net assets from operations $ 318,713,108 $ (379,005,457) $ (14,791,768)
Total assets $2,208,386,444 $1,976,399,942 $2,391,474,863
Loan payable $ 230,500,000 $ 226,000,000 $ 231,000,000
Mortgages payable $ 361,107,500 $ 361,107,500 $ 361,107,500
Net assets $1,584,853,412 $1,324,642,064 $1,749,157,864
Shares outstanding 16,697,292 17,258,094 17,782,241
Net asset value and redemption price per Share $ 94.92 $ 76.75 $ 98.37
Net increase (decrease) in net assets from operations per Share $ 18.89 $ (21.62) $ (1.604)
Distribution paid per Share(2) $ 0.72(3)(4) $ 0.00(3) $ 0.026
(1) Certain amounts have been reclassified to conform with the current year
presentation. The Fund commenced operations on March 14, 2001.
(2) The Fund also makes Special Distributions, which are not made on a pro rata
basis. See Item 5(c). During the period ended December 31, 2001, the Fund
made Special Distributions of $0.026 per Share. Special Distributions in
2003 amounted to less than $0.001 per Share.
(3) On January 17, 2003, the Fund made a distribution of $0.72 per Share to
Shareholders of record on January 16, 2003.
(4) On January 14, 2004, the Fund made a distribution of $0.76 per Share to
Shareholders of record on January 13, 2004.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
-----------------------------------------------------------------------
THE INFORMATION IN THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE FEDERAL SECURITIES LAWS. FORWARD-LOOKING STATEMENTS TYPICALLY ARE
IDENTIFIED BY USE OF TERMS SUCH AS "MAY," "WILL," "SHOULD," "MIGHT," "EXPECT,"
"ANTICIPATE," "ESTIMATE," AND SIMILAR WORDS, ALTHOUGH SOME FORWARD-LOOKING
STATEMENTS ARE EXPRESSED DIFFERENTLY. THE ACTUAL RESULTS OF THE FUND COULD
DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS DUE TO
A NUMBER OF FACTORS. THE FUND UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS, OR OTHERWISE, EXCEPT AS REQUIRED BY APPLICABLE LAW. FACTORS THAT COULD
AFFECT THE FUND'S PERFORMANCE INCLUDE A DECLINE IN THE U.S. STOCK MARKETS OR IN
GENERAL ECONOMIC CONDITIONS, ADVERSE DEVELOPMENTS AFFECTING THE REAL ESTATE
INDUSTRY, OR FLUCTUATIONS IN INTEREST RATES. SEE "QUALITATIVE INFORMATION ABOUT
MARKET RISK" IN ITEM 7A BELOW.
The following discussion should be read in conjunction with the Fund's
consolidated financial statements and related notes incorporated by reference
into Item 8.
12
(A) RESULTS OF OPERATIONS.
- --------------------------
Increases and decreases in the Fund's net asset value per Share are derived from
net investment income or loss, and realized and unrealized gains and losses on
investments. The Fund's net investment income (or loss) is determined by
subtracting the Fund's total expenses from its investment income and then
deducting the minority interest in net income of Belport Realty's controlled
subsidiaries. The Fund's investment income includes the net investment income
allocated to the Fund from Belvedere Company, rental income from the properties
owned by Belport Realty's controlled subsidiaries, partnership income allocated
to the Partnership Preference Units owned by Belport Realty and interest earned
on the Fund's short-term investments (if any). The net investment income of
Belvedere Company allocated to the Fund includes dividends and interest
allocated to Belvedere Company by the Portfolio less the expenses of Belvedere
Company allocated to the Fund. The Fund's total expenses include the Fund's
investment advisory and administrative fees, property management fees,
distribution and servicing fees, interest expense from mortgages owned by
Belport Realty's controlled subsidiaries, interest expense on the Credit
Facility, property and maintenance expenses and property taxes and insurance
expenses relating to the properties owned by Belport Realty's controlled
subsidiaries, and other miscellaneous expenses. The Fund's realized and
unrealized gains and losses are the result of transactions in, or changes in
value of, security investments held through the Fund's indirect interest
(through Belvedere Company) in the Portfolio, real estate investments held
through Belport Realty, the Fund's interest rate swap agreements and any other
direct investments of the Fund, as well as periodic payments made by the Fund
pursuant to interest rate swap agreements.
The realized and unrealized gains and losses on investments and interest rate
swap agreements have the most significant impact on the Fund's net asset value
per Share and result primarily from sales of such investments and changes in
their underlying value. The investments of the Portfolio consist primarily of
common stocks of domestic and foreign growth companies that are considered to be
high in quality and attractive in their long-term investment prospects. Because
the securities holdings of the Portfolio are broadly diversified, the
performance of the Portfolio cannot be attributed to one particular stock or one
particular industry or market sector. The performance of the Portfolio and the
Fund are substantially influenced by the overall performance of the U.S. stock
market, as well as by the relative performance versus the overall market of
specific stocks and classes of stocks in which the Portfolio maintains large
positions.
PERFORMANCE OF THE FUND.(1) The Fund's investment objective is to achieve
long-term, after-tax returns for Shareholders. Eaton Vance, as the Fund's
manager, measures the Fund's success in achieving its objective based on the
investment returns of the Fund, using the Standard & Poor's 500 Composite Index
(the S&P 500) as the Fund's primary performance benchmark. The S&P 500 is a
broad-based unmanaged index of common stocks commonly used as a measure of U.S.
stock market performance. Eaton Vance's primary focus in pursuing total return
is on the Fund's common stock portfolio, which consists of its indirect interest
in the Portfolio. In measuring the performance of the Fund's real estate
investments, Eaton Vance considers whether, through current returns and changes
in valuation, the real estate investments achieve returns that over the
long-term exceed the cost of the borrowing incurred to acquire such investments
and thereby add to Fund returns. The Fund has entered into interest rate swap
agreements to fix the cost of its borrowings under the Credit Facility used to
acquire Belport Realty's equity in its real estate investments and to mitigate
in part the impact of interest rate changes on the Fund's net asset value.
The Fund's total return for the year ended December 31, 2003 was 24.81%. This
return reflects an increase in the Fund's net asset value per Share from $76.75
to $94.92 and a distribution of $0.72 per Share during the period. For
comparison, the S&P 500 had a total return of 28.67% over the same period. The
combined impact on performance of the Fund's investment activities outside of
the Portfolio was modestly positive for the year ended December 31, 2003. The
performance of the Fund exceeded that of the Portfolio by approximately 0.9% for
the year.
The Fund had a total return of -21.98% for the year ended December 31, 2002.
This return reflected a decrease in the Fund's net asset value per Share from
$98.37 to $76.75. For comparison, the S&P 500 had a total return of -22.09% over
the same period. For the year ended December 31, 2002, the performance of the
Fund trailed that of the Portfolio by approximately 2.5%.
PERFORMANCE OF THE PORTFOLIO. U.S. equities experienced a successful 2003 with
most major indices posting their first annual gains since 1999. Strength in the
broader market was a function of a favorable economic environment: historically
low inflation and interest rates coupled with robust earnings growth and
continued consumer strength. While the Portfolio's performance for the year
ended December 31, 2003 of 23.88% was strong, the Portfolio trailed the S&P 500,
- --------------------------
(1) Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that Shares, when redeemed, may be worth
more or less than their original cost. Returns are calculated by
determining the percentage change in net asset value with all distributions
reinvested. Performance is for the stated time period only; due to market
volatility, the Fund's current performance may be lower or higher. The
performance of the Fund and the Portfolio is compared to that of their
benchmark, the S&P 500. It is not possible to invest directly in an Index.
13
which had a total return of 28.67% for the year. The total return of the
Portfolio for the year ended December 31, 2002 was -19.52%.
The Portfolio's sector allocation in 2003 was substantially unaltered from 2002
in that the Portfolio continued to maintain overweighted positions in the
industrial, consumer discretionary and financials sectors. Although these
sectors generally performed well during 2003, the sub-par performance of the
Portfolio's holdings across the constituent industries, and multi-line retail
and aerospace/defense names in particular, hindered its performance. The
Portfolio's continued underweight of the best performing sector of the year,
information technology, was another factor contributing to the Portfolio's
relative underperformance versus the S&P 500. As in 2002, lack of earnings
visibility and unattractive valuations caused Boston Management, the Portfolio's
investment adviser, to remain cautious on the technology sector. A similar
rationale prompted a de-emphasis of the telecommunications sector, the
underweighting of which had a positive impact on the Portfolio's return in 2003.
During the year, Boston Management increased the Portfolio's allocation to more
economically sensitive sectors, such as consumer discretionary and energy, from
2002 levels. This shift, particularly with respect to investments in
pro-cyclical industries such as consumer electronics, energy services, and oil
and gas, was particularly beneficial. Financial and health care investments also
contributed to relative performance in 2003, with strong performance by consumer
finance, pharmaceuticals and biotechnology investments. While the Portfolio
remained underweighted in the materials and the utilities sectors during 2003,
stock selections in the electric and gas utilities groups positively impacted
returns for the year.
Unlike in 2002, the market favored lower quality and higher volatility
securities in 2003, something that is not unusual when coming out of an economic
slowdown or bear market. The Portfolio's policy of investing primarily in higher
quality securities and its valuation discipline contributed to its
underperformance versus its benchmark and the Portfolio's more aggressive peers
during the past year. Looking forward, Boston Management believes the economic
recovery will continue at a sustainable pace, and that the market will better
reward quality companies that can consistently deliver earnings. The longer-term
success of the Portfolio will be determined by the performance of U.S. equity
markets and the ability of Boston Management's research staff to deliver
superior stock selection versus the Portfolio's benchmark. Higher quality
investments are gradually gaining strength in the market, and the Portfolio's
investment focus will continue to be in companies with strong business
franchises and solid long-term earnings prospects.
PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate investments held
through Belport Realty include majority interests in Real Estate Joint Ventures
and investments in Partnership Preference Units. During the year ended December
31, 2003, the Fund's real estate operations continued to be impacted by weak
multifamily market fundamentals. Rental income from real estate operations
decreased to $65.6 million for the year ended December 31, 2003 from $67.5
million for the year ended December 31, 2002, a decline of $1.9 million or 3%.
This decrease in rental income resulted primarily from increased rent
concessions and/or reduced apartment rental rates and lower occupancy levels at
properties owned by the Fund's Real Estate Joint Ventures, a trend that
continued from 2002.
Property operating expenses increased to $28.0 million for the year ended
December 31, 2003 from $26.8 million for the year ended December 31, 2002, an
increase of $1.2 million or 4% (property operating expenses are before certain
operating expenses of Belport Realty of approximately $3.8 million for the year
ended December 31, 2003 and approximately $3.5 million for the year ended
December 31, 2002). The increase was principally due to a 4% increase in
property tax and insurance expenses, and a 6% increase in property and
maintenance expenses during 2003. While the U.S. economy showed signs of
strength during the year ended December 31, 2003, significant employment growth
has not occurred in most markets and low interest rates have contributed to
continued apartment move-outs (due to new home purchases) and ongoing
development of new multifamily properties. As a result, Boston Management,
Belport Realty's manager, expects that real estate operating results in 2004
will be modestly below the levels of 2003.
In May 2003, Belport Realty sold its investment in Bel Oakbrook LLC (that was
acquired in March 2003) to another investment fund advised by Boston Management
and recognized a gain of $0.3 million on the transaction. At December 31, 2003,
the estimated fair value of the real properties held through Belport Realty was
$484.7 million compared to $494.0 million at December 31, 2002, a decrease of
$9.3 million or 2%. The decrease in estimated real property value was due to
declines in near-term earnings expectations. The Fund saw unrealized
depreciation in the estimated fair value of its other real estate investments
(which includes Belport Realty's interests in Real Estate Joint Ventures) of
approximately $6.6 million during the year ended December 31, 2003 compared to
approximately $19.2 million in unrealized depreciation for the year ended
December 31, 2002. Despite weak market conditions, declines in asset values for
multifamily properties have generally been modest as lower capitalization rates
have partially offset lower income level expectations. The capitalization rate,
14
a term commonly used in the real estate industry, is the rate of return
percentage applied to actual or estimated income levels to determine the value
of a real estate investment.
During the year ended December 31, 2003, Belport Realty sold certain of its
Partnership Preference Units to another investment fund advised by Boston
Management, recognizing gains of $4.7 million on the transactions. In November
2003, Belport Realty acquired an interest in additional Partnership Preference
Units for approximately $18.5 million. During the year ended December 31, 2003,
Belport Realty's investments in Partnership Preference Units continued to
benefit from low interest rates and tighter spreads on real estate securities.
At December 31, 2003, the estimated fair value of Belport Realty's Partnership
Preference Units totaled $93.3 million compared to $96.5 million at December 31,
2002, a decrease of $3.2 million or 3%. The decrease was due to fewer
Partnership Preference Units being held at December 31, 2003, offset in part by
increases in the per unit value of the Partnership Preference Units held by
Belport Realty and by the purchase of Partnership Preference Units in November
2003. Belport Realty saw unrealized appreciation in the estimated fair value of
its Partnership Preference Units of approximately $1.9 million during the year
ended December 31, 2003 compared to unrealized appreciation of approximately
$4.0 million for the year ended December 31, 2002.
Distributions received from Partnership Preference Units for the year ended
December 31, 2003 totaled $8.2 million compared to $8.8 million for the year
ended December 31, 2002, a decrease of $0.6 million or 7%. The decrease was due
to fewer Partnership Preference Units being held during the year ended December
31, 2003.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the year ended December 31,
2003, net realized and unrealized losses on the Fund's interest rate swap
agreements totaled approximately $5.5 million, compared to approximately $32.0
million of net realized and unrealized losses for the year ended December 31,
2002. Net realized and unrealized losses on swap agreements in 2003 consisted of
$2.8 million of net realized and unrealized gains due to changes in swap
agreement valuations, offset by $8.3 million of periodic payments made pursuant
to outstanding swap agreements (and classified as net realized losses on
interest rate swap agreements in the Fund's consolidated statement of
operations). In 2002, the Fund had net realized and unrealized losses of $24.0
million due to swap agreement valuation changes and $8.0 million of swap
agreement periodic payments. The positive contribution to 2003 Fund performance
from changes in swap agreement valuations was attributable to a rise in swap
rates during the year and swap agreements entered into by the Fund approaching
their optional termination dates. The impact on 2002 Fund performance from
changes in swap valuations was due primarily to a decline in swap rates during
the year.
On October 1, 2003, the Fund terminated all of its then outstanding swap
agreements and entered into new agreements to fix the cost of a substantial
portion of Fund borrowings under the Credit Facility. The Fund realized a loss
of approximately $25.4 million on the swap agreement terminations.
(B) LIQUIDITY AND CAPITAL RESOURCES.
- ------------------------------------
OUTSTANDING BORROWINGS. As of December 31, 2003, the Fund had outstanding
borrowings of $230.5 million and unused loan commitments of $52.4 million under
the Credit Facility. The Credit Facility is used primarily to finance the Fund's
equity in its real estate investments and will continue to be used for such
purpose in the future. The Credit Facility may also be used for any short-term
liquidity needs of the Fund. In the future, the Fund may increase the size of
the Credit Facility (subject to lender consent) and the amount of outstanding
borrowings thereunder for these purposes.
As of December 31, 2003, Bel Multifamily had outstanding borrowings consisting
of fixed-rate secured mortgage debt obligations of $143.8 million. As of such
date, Monadnock had outstanding borrowings consisting of fixed-rate secured
mortgage debt obligations of $217.3 million.
LIQUIDITY. The Fund may redeem shares of Belvedere Company at any time. Both
Belvedere Company and the Portfolio normally follow the practice of satisfying
redemptions by distributing securities drawn from the Portfolio. Belvedere
Company and the Portfolio may also satisfy redemptions by distributing cash. As
of December 31, 2003, the Portfolio had cash and short-term investments totaling
$122.4 million. The Portfolio participates in a $150 million multi-fund
unsecured line of credit agreement with a group of banks. The Portfolio may
temporarily borrow from the line of credit to satisfy redemption requests in
cash or to settle investment transactions. The Portfolio had no outstanding
borrowings at December 31, 2003. To ensure liquidity for investors in the
Portfolio, the Portfolio may not invest more than 15% of its net assets in
illiquid assets. As of December 31, 2003, illiquid assets (consisting of
restricted securities not available for current public sale) constituted 0.3% of
the net assets of the Portfolio.
15
The liquidity of Belport Realty's Real Estate Joint Venture investments is
extremely limited, and relies principally upon buy/sell arrangements with the
Operating Partners that may be exercised on or after February 22, 2010 (for Bel
Multifamily) and September 13, 2010 (for Monadnock). See "Real Estate Joint
Venuture Investments" under "The Fund's Real Estate Investments through Belport
Realty Corporation" in Item 1. Transfers of Belport Realty's interest in the
Real Estate Joint Ventures to parties other than the relevant Operating Partner
are restricted by terms of the operating management agreements, buy/sell
arrangements with the Operating Partners, and lender consent requirements. The
Partnership Preference Units held by Belport Realty are not registered under the
Securities Act and are subject to substantial restrictions on transfer. As such,
they are illiquid.
(C) OFF-BALANCE SHEET ARRANGEMENTS.
- -----------------------------------
The Fund is required to disclose off-balance sheet arrangements that either
have, or are reasonably likely to have, a current or future effect on its
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to Shareholders. An off-balance sheet arrangement includes any
contractual arrangement to which an unconsolidated entity is a party and under
which the Fund has certain specified obligations. As of December 31, 2003, the
Fund did not have any such off-balance sheet arrangements.
(D) THE FUND'S CONTRACTUAL OBLIGATIONS.
- ---------------------------------------
The following table sets forth the amounts of payments due under the specified
contractual obligations outstanding on December 31, 2003:
Payments due:
- -----------------------------------------------------------------------------------------------------------------
Less than 1 More than 5
Type of Obligation Total Year 1-3 Years 3-5 Years Years
- -----------------------------------------------------------------------------------------------------------------
Long Term Debt:
Mortgage Debt(1) $361,107,500 $ -- $ -- $ -- $361,107,500
Borrowings under Credit Facility(2) $230,500,000 $ -- $ -- $ -- $230,500,000
Purchase Obligations(3)
Other Long Term Liabilities:
Interest Rate Swap Agreements(4) $ 50,516,130 $7,793,063 $15,586,126 $15,586,126 $ 11,550,815
- -----------------------------------------------------------------------------------------------------------------
Total $642,123,630 $7,793,063 $15,586,126 $15,586,126 $603,158,315
- -----------------------------------------------------------------------------------------------------------------
(1) The rental property held by Belport Realty is financed through mortgages
issued to each Real Estate Joint Venture. Each mortgage is secured by the
underlying rental property and is generally without recourse to the other
assets of the Fund or Belport Realty as described in "Risks of Real Estate
Investments" in Item 7A(b). The mortgages mature in 2009 and 2011. Mortgage
obligations cannot be prepaid or otherwise disposed of without incurring a
substantial prepayment penalty or without the sale of the associated rental
property.
(2) To finance its real estate investments held through Belport Realty, the
Fund has entered into a Credit Facility with $230.5 million of borrowings
outstanding as of December 31, 2003. The Credit Facility is secured by a
pledge of the Fund's assets, excluding the assets of Bel Multifamily and
Monadnock, and expires in June 2010. The Credit Facility is primarily used
to finance the Fund's equity in its real estate investments and will
continue to be used for such purpose in the future.
(3) The Fund and Belport Realty have entered into agreements with certain
service providers pursuant to which the Fund and Belport Realty pay fees as
a percentage of assets. These fees include fees paid to Eaton Vance and its
affiliates (which are described in Item 13). These agreements generally
continue indefinitely unless terminated by the Fund or Belport Realty (as
applicable) or the service provider. For the year ended December 31, 2003,
these fees equaled approximately 1.09% of the Fund's net assets. Because
these fees are based on the Fund's assets (which will fluctuate over time)
it is not possible to specify the dollar amounts payable in the future.
(4) The Fund has entered into interest rate swap agreements to fix the cost of
borrowings under the Credit Facility used to acquire Belport Realty's
equity in its real estate investments. Pursuant to the interest rate swap
agreements, the Fund makes cash payments to MLCS at fixed rates in exchange
for floating rate payments from MLCS that fluctuate with one-month LIBOR.
The amounts disclosed in the table represent the fixed interest amounts
payable by the Fund. The periodic floating rate payments that the Fund
expects to receive pursuant to the agreements will reduce the fixed
interest cost to the Fund. The swap agreements expire on June 25, 2010.
16
(E) CRITICAL ACCOUNTING ESTIMATES.
- ----------------------------------
The Fund's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the Fund to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Estimates are deemed critical when a
different estimate could have reasonably been used or where changes in the
estimate are reasonably likely to occur from period to period, and where such
different or changed estimates would materially impact the Fund's financial
condition, changes in financial condition or results of operations. The Fund's
significant accounting policies are discussed in Note 2 of the notes to
consolidated financial statements; critical estimates inherent in these
accounting policies are discussed in the following paragraphs.
The Fund has determined that the valuation of the Fund's real estate investments
(including Real Estate Joint Ventures and Partnership Preference Units) are
critical estimates. The Fund's investments in real estate are an important
component of its total investment program. Market prices for these investments
are not readily available and therefore they are stated in the Fund's
consolidated financial statements at estimated fair value. The estimated fair
value of an investment represents the amount at which Boston Management (as
manager of Belport Realty) believes the investment could be sold in a current
transaction between willing parties in an orderly disposition, that is, other
than in a forced or liquidation sale. The Fund reports the estimated fair value
of its real estate investments on its consolidated statement of assets and
liabilities with any changes to estimated fair value charged to unrealized
appreciation or depreciation in the Fund's consolidated statement of operations.
The need to estimate the fair value of the Fund's real estate investments
introduces uncertainty into the Fund's reported financial condition and
performance because:
* such assets are, by their nature, difficult to value and estimated
values may not accurately reflect what the Fund could realize in a
current sale between willing parties;
* property appraisals and other factors used to determine the estimated
fair value of the Fund's real estate investments depend on estimates
of future operating results and supply and demand assumptions that may
not reflect actual performance;
* property appraisals and other factors used to determine the estimated
fair value of the Fund's real estate investments are not continuously
updated and therefore may not be current as of specific dates; and
* if the Fund were forced to sell illiquid assets on a distressed basis,
the proceeds may be substantially less than stated values.
As of December 31, 2003, the estimated fair value of the Fund's real estate
investments represented 26.2% of the Fund's total assets. Adjusting for the
minority interests of the Operating Partners of the Real Estate Joint Ventures
as of December 31, 2003, the Fund's real estate investments represented 30.7% of
the Fund's net assets. The estimated fair value of the Fund's real estate
investments may change due to changes in market conditions and changes in
valuation assumptions made by property appraisers and third party valuation
service providers as described below.
As noted in Item 1, to satisfy certain requirements of the Code the Fund invests
at least 20% of its assets (calculated in the manner prescribed) in real estate
investments (the 20% requirement). Should the estimated fair value of the Fund's
real estate investments decrease, the Fund may be required to acquire additional
real estate investments to satisfy the 20% requirement. Because the Fund
acquires real estate investments with borrowings, acquisitions of additional
real estate investments would increase the Fund's obligations under the Credit
Facility and thereafter reduce the amounts otherwise available to the Fund
thereunder. Should the estimated fair value of the Fund's real estate
investments increase, real estate investments could represent a larger
percentage of the Fund's investment portfolio.
PARTNERSHIP PREFERENCE UNITS. Boston Management, as manager of Belport Realty,
determines the estimated fair value of the Fund's Partnership Preference Units
based on analysis and calculations performed primarily on a monthly basis by a
third party service provider. The service provider calculates an estimated price
and yield (before accrued distributions) for each issue of Partnership
Preference Units based on descriptions of such issue provided by Boston
Management and certain publicly available information including, but not limited
to, the trading prices of publicly issued debt and/or preferred stock
instruments of the same or similar issuers, which may be adjusted to reflect the
illiquidity and other structural characteristics of the Partnership Preference
Units (such as call provisions). Daily valuations of Partnership Preference
17
Units are determined by adjusting prices from the service provider to account
for accrued distributions under the terms of the Partnership Preference Units.
If changes in relevant markets, events that materially affect an issuer or other
events that have a significant effect on the price or yield of Partnership
Preference Units occur, relevant prices or yields may be recalculated to take
such occurrences into account.
Valuations of Partnership Preference Units are inherently uncertain because they
are based on adjustments from the market prices of publicly-traded debt and/or
preferred stock instruments of the same or similar issuers to account for the
Partnership Preference Units' illiquidity, structural features (such as call
provisions) and other relevant factors. Each month Boston Management reviews the
analysis and calculations performed by the service provider. Boston Management
generally relies on the assumptions and judgments made by the service provider
in estimating the fair value of the Partnership Preference Units. If the
assumptions and estimates used by the service provider to calculate prices for
Partnership Preference Units were to change, it may materially impact the
estimated fair value of the Fund's holdings of Partnership Preference Units.
REAL ESTATE JOINT VENTURES. Boston Management determines the estimated fair
value of the Fund's interest in each Real Estate Joint Venture based primarily
on annual appraisals of the multifamily properties owned by such Real Estate
Joint Venture and an allocation of the equity value of the Real Estate Joint
Venture between the Fund and the Operating Partner. Appraisals of Real Estate
Joint Venture properties may be conducted more frequently than once a year if
Boston Management determines that significant changes in economic circumstances
that may materially impact estimated property values have occurred since the
most recent appraisal.
In deriving the estimated value of a property, an appraiser considers numerous
factors, including the expected future cash flows from the property, recent sale
prices for similar properties and, if applicable, the replacement cost of the
property in order to derive an indication of the amount that a prudent, informed
purchaser-investor would pay for the property. More specifically, the appraiser
considers the revenues and expenses of the property and the estimated future
growth or decline thereof, which may be based on tenant quality, property
condition, neighborhood change, market trends, interest rates, inflation rates
or other factors deemed relevant by the appraiser. The appraiser estimates
operating cash flows from the property and the sale proceeds of a hypothetical
transaction at the end of a hypothetical holding period. The cash flows are
discounted to their present values using a market-derived discount rate and are
added together to obtain a value indication. This value indication is compared
to the value indication that results from applying a market-derived
capitalization rate to a single years' stabilized net operating income for the
property. The assumed capitalization rate may be extracted from local market
transactions or, when transaction evidence is lacking, obtained from trade
sources. The appraiser considers the value indications derived by these two
methods, as well as the value indicated by recent market transactions involving
similar properties, in order to produce a final value estimate for the property.
Appraisals of properties owned by each Real Estate Joint Venture are conducted
by independent appraisers who are licensed in their respective states and not
affiliated with Eaton Vance or the Operating Partners. Each appraisal is
conducted in accordance with the Uniform Standards Board and the Code of
Professional Appraisal Practice of the Appraisal Institute (as well as other
relevant standards). Boston Management reviews the appraisal of each property
and generally relies on the assumptions and judgments made by the appraiser.
Property appraisals are inherently uncertain because they apply assumed discount
rates, capitalization rates, growth rates and inflation rates to the appraiser's
estimated stabilized cash flows, and due to the unique characteristics of a
property, which may affect its value but may not be taken into account. If the
assumptions and estimates used by the appraisers to determine the value of the
properties owned by the Fund's Real Estate Joint Ventures were to change, it may
materially impact the estimated fair value of the Fund's Real Estate Joint
Ventures.
Boston Management determines the estimated fair value of the Fund's equity
interest in each Real Estate Joint Venture based on an estimate of the
allocation of equity interests between the Fund and the Operating Partner, as
calculated by a third party service provider. The service provider uses a
financial model that considers the (i) terms of the joint venture agreement
relating to allocation of distributable cash flow, (ii) the duration of the
joint venture; and (iii) the projected property values and cash flows from the
properties based on estimates made by the appraisers. The estimated allocation
of equity interests between the Fund and the Operating Partner of a Real Estate
Joint Venture is prepared quarterly and reviewed by Boston Management. Interim
valuations of Real Estate Joint Venture assets may be adjusted to reflect
significant changes in economic circumstances, and the results of operations and
distributions. If the estimate of the allocation of equity interests in the Real
Estate Joint Ventures were to change (because, for example, the appraisers'
estimate of property values or projected cash flows of the Real Estate Joint
Ventures changed), it may materially impact the estimated fair value of the
Fund's Real Estate Joint Ventures.
18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- ---------------------------------------------------------------------
(A) QUANTITATIVE INFORMATION ABOUT MARKET RISK.
- -----------------------------------------------
INTEREST RATE RISK. The Fund's primary exposure to interest rate risk arises
from its real estate investments that are financed by the Fund with floating
rate borrowings under the Fund's Credit Facility and by fixed-rate secured
mortgage debt obligations of the Real Estate Joint Ventures. Partnership
Preference Units are fixed rate instruments whose values will generally increase
when interest rates rise and decrease when interest rates fall. The interest
rates on borrowings under the Fund's Credit Facility are reset at regular
intervals based on one-month LIBOR. The Fund has entered into interest rate swap
agreements to fix the cost of its borrowings under the Credit Facility used to
acquire Belport Realty's equity in its real estate investments and to mitigate
in part the impact of interest rate changes on the Fund's net asset value. Under
the terms of the interest rate swap agreements, the Fund makes cash payments at
fixed rates in exchange for floating rate payments that fluctuate with one-month
LIBOR. The Fund's interest rate swap agreements will generally increase in value
when interest rates rise and decrease in value when interest rates fall. In the
future, the Fund may use other interest rate hedging arrangements (such as caps,
floors and collars) to fix or limit borrowing costs. The use of interest rate
hedging arrangements is a specialized activity that can expose the Fund to
significant loss.
The following table summarizes the contractual maturities and weighted-average
interest rates associated with the Fund's significant non-trading financial
instruments. The Fund has no market risk sensitive instruments held for trading
purposes. This information should be read in conjunction with Notes 7 and 8 to
the Fund's consolidated financial statements incorporated by reference into Item
8.
Interest Rate Sensitivity
Cost, Principal (Notional) Amount
by Contractual Maturity and Callable Date
for the Twelve Months Ended December 31,*
Estimated
2004 2005-2007 2008 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
- -----------------------------------
Long-term debt:
- -----------------------------------
Fixed-rate mortgages $361,107,500 $361,107,500 $394,000,000
Average interest rate 6.78% 6.78%
- -----------------------------------
Variable-rate Credit Facility $230,500,000 $230,500,000 $230,500,000
Average interest rate 1.32% 1.32%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative financial
instruments:
- -----------------------------------
Pay fixed/receive variable interest
rate
swap agreements $190,887,000 $190,887,000 $ 1,763,670
Average pay rate 4.08% 4.08%
Average receive rate 1.32% 1.32%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive investments:
- -----------------------------------
Fixed-rate Partnership Preference
Units:
- -----------------------------------
Essex Portfolio, L.P., 7.875% Series
B Cumulative Redeemable Preferred
Units, Callable 2/6/03, Current
Yield: 8.17%(1) $17,908,335 $ 17,908,335 $ 21,681,990
19
Estimated
2004 2005-2007 2008 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
PSA Institutional Partners, L.P.,
9.50% Series N Cumulative Redeemable
Perpetual Preferred Units, Callable
3/17/05, Current Yield: 9.13% $34,905,000 $ 34,905,000 $ 33,800,000
Prentiss Properties Acquisition
Partners, L.P., 8.30% Series B
Cumulative Redeemable Perpetual
Preferred Units, Callable
6/25/03, Current Yield: 8.45% $16,087,188 $ 16,087,188 $ 19,160,700
Vornado Realty, L.P., 7% Series D-10
Cumulative Redeemable Preferred
Units, Callable 11/17/08, Current
Yield: 6.95%(2) $ 18,432,891 $ 18,432,891 $ 18,634,421
* The investments listed reflect holdings as of December 31, 2003. The Fund's
current holdings may differ.
(1) On January 8, 2004, the call date was changed to 12/31/09.
(2) As described under "The Fund's Real Estate Investments through Belport
Realty Corporation - Partnership Preference Units", Belport Realty's
interest in these Partnership Preference Units is held through Bel
Holdings.
(B) QUALITATIVE INFORMATION ABOUT MARKET RISK.
- ----------------------------------------------
RISKS ASSOCIATED WITH EQUITY INVESTING. The value of Fund Shares may not
increase and may decline. The performance of the Fund fluctuates. The Fund
invests primarily in a diversified portfolio of common stocks and is thereby
subject to general stock market risk. There can be no assurance that the
performance of the Fund will match that of the U.S. stock market or that of
other equity funds. In managing the Portfolio for long-term, after-tax returns,
Boston Management generally seeks to avoid or minimize sales of securities with
large accumulated capital gains, including contributed securities. Such
securities constitute a substantial portion of the assets of the Portfolio.
Although the Portfolio may utilize certain management strategies in lieu of
selling appreciated securities, the Portfolio's, and hence the Fund's, exposure
to losses during stock market declines may nonetheless be higher than funds that
do not follow a general policy of avoiding sales of highly-appreciated
securities.
RISKS OF INVESTING IN FOREIGN SECURITIES. The Portfolio invests in securities
issued by foreign companies and the Fund may acquire foreign investments.
Foreign investments involve considerations and possible risks not typically
associated with investing in the United States. The value of foreign investments
to U.S. investors may be adversely affected by changes in currency rates.
Foreign brokerage commissions, custody fees and other costs of investing are
generally higher than in the United States, and foreign investments may be less
liquid, more volatile and subject to more government regulation than in the
United States. Foreign investments could be adversely affected by other factors
not present in the United States, including expropriation, confiscatory
taxation, lack of uniform accounting and auditing standards, armed conflict, and
potential difficulty in enforcing contractual obligations. These risks can be
more significant for investments in emerging markets.
RISKS OF CERTAIN INVESTMENT TECHNIQUES. In managing the Portfolio, Boston
Management may purchase or sell derivative instruments (which derive their value
by reference to other securities, indexes, instruments or currencies) to hedge
against securities price declines and currency movements and to enhance returns.
Such transactions may include, without limitation, the purchase and sale of
futures contracts on stocks and stock indexes and options thereon; the purchase
of put options and the sale of call options on securities held; equity swaps;
forward sales of stocks; and the purchase and sale of forward currency exchange
contracts and currency futures. The Portfolio may make short sales of securities
provided that it holds an equal amount of the security sold short (or securities
convertible into or exchangeable for an equal amount of the securities sold
short without payment of additional consideration) or cash or other liquid
securities in an amount equal to the current market value of the securities sold
short. The Portfolio may also lend portfolio securities.
20
The use of these investment techniques is a specialized activity that may be
considered speculative and which can expose the Fund and the Portfolio to
significant risk of loss. Successful use of these investment techniques is
subject to the ability and performance of the investment adviser. The Fund's and
the Portfolio's ability to achieve their investment objectives may be adversely
affected by the use of these techniques. The writer of an option or a party to
an equity swap may incur losses that substantially exceed the payments, if any,
received from a counterparty. Forward sales, swaps, caps, floors, collars and
over-the-counter options are private contracts in which there is also a risk of
loss in the event of a default on an obligation to pay by the counterparty. Such
instruments may be difficult to value, may be illiquid and may be subject to
wide swings in valuation caused by changes in the price of the underlying
security, index, instrument or currency. In addition, if the Fund or the
Portfolio has insufficient cash to meet margin, collateral or settlement
requirements, it may have to sell assets to meet such requirements.
Alternatively, should the Fund or the Portfolio fail to meet these requirements,
the counterparty or broker may liquidate positions of the Fund or the Portfolio.
The Portfolio may also have to sell or deliver securities holdings in the event
that it is not able to purchase securities on the open market to cover its short
positions or to close out or satisfy an exercise notice with respect to options
positions it has sold. In any of these cases, such sales may be made at prices
or in circumstances that Boston Management considers unfavorable.
The Portfolio's ability to utilize covered short sales, certain equity swaps,
forward sales, futures and certain equity collar strategies (combining the
purchase of a put option and the sale of a call option) as a tax-efficient
management technique with respect to holdings of appreciated securities is
limited to circumstances in which the hedging transaction is closed out within
30 days of the end of the taxable year of the Portfolio in which the hedging
transaction was initiated and the underlying appreciated securities position is
held unhedged for at least the next 60 days after such hedging transaction is
closed. In addition, dividends received on stock for which the Portfolio is
obligated to make related payments (pursuant to a short sale or otherwise) with
respect to positions in substantially similar or related property are subject to
federal income taxation at ordinary rates and do not qualify for favorable tax
treatment. There can be no assurance that counterparties will at all times be
willing to enter into covered short sales, forward sales of stocks, interest
rate hedges, equity swaps and other derivative instrument transactions on terms
satisfactory to the Fund or the Portfolio. The Fund's and the Portfolio's
ability to enter into such transactions may also be limited by covenants under
the Fund's Credit Facility, the federal margin regulations and other laws and
regulations. The Portfolio's use of certain investment techniques may be
constrained because the Portfolio is a diversified, open-end management
investment company registered under the 1940 Act and because other investors in
the Portfolio are regulated investment companies under Subchapter M of the Code.
Moreover, the Fund and the Portfolio are subject to restrictions under the
federal securities laws on their ability to enter into transactions in respect
of securities that are subject to restrictions on transfer pursuant to the
Securities Act.
RISKS OF REAL ESTATE INVESTMENTS. The success of Belport Realty's real estate
investments depends in part on many factors related to the real estate market.
These factors include, without limitation, general economic conditions, the
supply and demand for different types of real properties, the financial health
of tenants, the timing of lease expirations and terminations, fluctuations in
rental rates and operating costs, exposure to adverse environmental conditions
and losses from casualty or condemnation, fluctuations in interest rates,
availability of financing, managerial performance, government rules and
regulations, and acts of God (whether or not insured against). There can be no
assurance that Belport Realty's ownership of real estate investments will be an
economic success.
The success of investments in Partnership Preference Units depends upon factors
relating to the issuing partnerships that may affect such partnerships'
profitability and their ability to make distributions to holders of Partnership
Preference Units. Belport Realty's interests in the Real Estate Joint Ventures
and Partnership Preference Units are not registered under the federal securities
laws and are subject to restrictions on transfer. Due to their illiquidity, they
may be difficult to value and the ongoing value of the investments is uncertain.
Investments in Partnership Preference Units are valued primarily by referencing
market trading prices for comparable preferred equity securities or other
fixed-rate instruments having similar investment characteristics. The valuations
of Partnership Preference Units fluctuate over time to reflect, among other
factors, changes in interest rates, changes in the perceived riskiness of such
units (including call risk), changes in the perceived riskiness of comparable or
similar securities trading in the public market and the relationship between
supply and demand for comparable or similar securities trading in the public
market. Increases in interest rates and increases in the perceived riskiness of
such units or comparable or similar securities will adversely affect the
valuation of the Partnership Preference Units. Fluctuations in the value of
Partnership Preference Units derived from changes in general interest rates can
be expected to be offset in part (but not entirely) by changes in the value of
interest rate swap agreements or other interest rate hedges entered into by the
Fund with respect to its borrowings under the Credit Facility. Because the
Partnership Preference Units are not rated by a nationally-recognized rating
agency, they may be subject to more credit risk than securities that are rated
investment grade.
21
The performance of the Real Estate Joint Ventures is substantially influenced by
the property management capabilities of the Operating Partners and conditions in
the specific real estate sub-markets in which the properties owned by the Real
Estate Joint Ventures are located. The Operating Partners are subject to
substantial conflicts of interest in structuring, operating and winding up the
Real Estate Joint Ventures. Each Operating Partner had an economic incentive to
maximize the prices at which it sold properties to a Real Estate Joint Venture
and has a similar incentive to minimize the prices at which it may acquire
properties from a Real Estate Joint Venture. The Operating Partners may devote
greater attention or more resources to managing their wholly-owned properties
than properties held by the Real Estate Joint Ventures. Future investment
opportunities identified by the Operating Partners will more likely be pursued
independently, rather than through, the Real Estate Joint Ventures. Financial
difficulties encountered by the Operating Partners in their other businesses may
interfere with the operations of the Real Estate Joint Ventures.
Belport Realty's investments in the Real Estate Joint Ventures may be
significantly concentrated in terms of geographic regions, property types and
operators, increasing the Fund's exposure to regional, property type and
operator specific risks. Given a lack of stand-alone operating history and
relatively high financial leverage, the Real Estate Joint Ventures will not be
equivalent in quality to real estate companies whose preferred equity or senior
debt securities are rated investment grade. Distributable cash flows from the
Real Estate Joint Ventures may not be sufficient for Belport Realty to receive
its fixed annual preferred return, or any returns in excess thereof.
The debt of the Real Estate Joint Ventures owned by Belport Realty on December
31, 2003 is fixed-rate, secured by the underlying properties and generally
without recourse to Belport Realty and the Fund. In the case of Bel Multifamily,
Belport Realty and the Fund may be directly or indirectly responsible for
certain liabilities constituting exceptions to the generally non-recourse nature
of the mortgage indebtedness, including liabilities associated with fraud,
misrepresentation, misappropriation of funds, or breach of material covenants,
and liabilities arising from environmental conditions involving or affecting
Real Estate Joint Venture properties. The Fund and Belport Realty have received
indemnification from the Operating Partner of Bel Multifamily for certain of
such potential liabilities. The availability of financing and other financial
conditions can have a material impact on property values and therefore on the
value of Real Estate Joint Venture assets. Mortgage debt of the Real Estate
Joint Ventures normally cannot be refinanced prior to maturity without
substantial penalties.
The ongoing value of Belport Realty's investments in the Real Estate Joint
Ventures is substantially uncertain. The real property held through Belport
Realty's Real Estate Joint Ventures is stated at estimated fair value based on
independent valuations, assuming an orderly disposition of assets, that is,
other than in a forced or liquidation sale. Independent valuations include
property appraisals performed by appraisers that are licensed in their
respective states and not affiliated with Eaton Vance or the Operating Partners
of the Real Estate Joint Ventures. Such appraisals are performed in accordance
with the Uniform Standards of Professional Appraisal Practice of the Appraisal
Standards Board, as well as the Code of Professional Ethics and Standards of
Professional Appraisal Practice of the Appraisal Institute (and other relevant
standards).
Detailed investment evaluations are performed at least annually and reviewed
periodically. The value of each Real Estate Joint Venture is estimated using the
real property valuations and an allocation of the equity value of the Real
Estate Joint Venture between Belport Realty and the Operating Partner based on
the terms of the Real Estate Joint Venture. Interim valuations reflect results
of operations and distributions, and may be adjusted to reflect significant
changes in economic circumstances since the most recent independent valuation.
The policies for valuing real estate investments involve significant judgments
that are based upon a number of factors, which may include, without limitation,
general economic conditions, the supply and demand for different types of real
properties, the financial health of tenants, the timing of lease expirations and
terminations, fluctuations in rental rates and operating costs, exposure to
adverse environmental conditions and losses from casualty or condemnation,
interest rates, availability of financing, managerial performance and government
rules and regulations. Given that such valuations include many assumptions,
including, but not limited to, an orderly disposition of assets, values may
differ from amounts ultimately realized.
Investments in Net Leased Properties will be subject to general real estate
market risks similar to Real Estate Joint Ventures. Net Leased Properties will
also be subject to risks specific to this type of investment, including a
concentration of risk exposure to specific real estate submarkets and individual
properties and tenants. Principal among the risks of investing in Net Leased
Properties is the risk that a major tenant fails to satisfy its lease
obligations due to financial distress or other reasons. A tenant's failure to
meet its lease obligations would expose Belport Realty to substantial loss of
income without a commensurate reduction in debt service costs and other
expenses, and would transfer to Belport Realty all the costs, expenses and
liabilities of property ownership and management borne by the tenant under the
terms of the lease. Re-leasing a property could involve considerable time and
expense. Re-leasing opportunities may be limited by the nature and location of
22
the property, which may not be well suited to the needs of other possible
tenants. Even if a property is re-leased, the property may not generate
sufficient rental income to cover debt service and other expenses.
Net Leased Properties are generally illiquid, and the ongoing value of an
investment in Net Leased Properties will be substantially uncertain. Net Leased
Properties will be stated at estimated fair values based on annual appraisals.
These appraisals are conducted by independent, licensed appraisers in a manner
similar to the appraisals of properties owned by the Real Estate Joint Ventures
(described above). Because the value of Net Leased Properties will reflect in
part the creditworthiness of their principal tenants, any reduction in the
credit standing of a major tenant could have an adverse effect on the appraised
value of a property and the value realized upon the disposition of such
property. Tenants may hold rights to renew or extend expiring leases, and
exercise of such rights would extend Belport Realty's risk exposure to a
particular tenant beyond the initial lease term. Tenants may also hold options
to purchase Net Leased Properties, including options to purchase at below market
levels. The value received upon the disposition of Net Leased Properties will
depend on real estate market conditions, lease and mortgage terms, tenant credit
quality, tenant purchase options, lender approvals and other factors affecting
valuation as may then apply. Because sales of Net Leased Properties are not
expected to occur for many years, market conditions and other valuation factors
at the time of sale cannot be predicted. Since valuations of Net Leased
Properties assume an orderly disposition of assets, amounts realized in a
distressed sale may differ substantially from stated values. Mortgage debt
associated with Net Leased Properties normally cannot be refinanced prior to
maturity without substantial penalties. The terms of outstanding leases and
mortgage debt obligations and restrictions on refinancing such debt will limit
Belport Realty's ability to dispose of Net Leased Properties.
Because the mortgage debt obligations of Net Leased Properties will generally be
without recourse to Belport Realty, the Fund and Shareholders, the potential
loss from investments in Net Leased Properties is normally limited to the amount
of equity invested in such properties by Belport Realty. The Fund and Belport
Realty may, however, be directly or indirectly responsible for certain
liabilities constituting exceptions to the generally non-recourse nature of the
mortgage indebtedness, including liabilities associated with fraud,
misrepresentation, misappropriation of funds, or breach of material covenants,
and liabilities arising from environmental conditions involving or affecting the
Net Leased Properties, increasing the potential for loss under extraordinary
circumstances. To the extent practicable, the Fund and Belport Realty will seek
indemnification for certain of such potential liabilities.
Because all or substantially all of the rental payments on Net Leased Properties
generally will be dedicated to servicing the associated mortgage debt, during
the initial lease term Belport Realty will not generate significant cash flow
from investments in Net Leased Properties to offset Belport Realty's operating
expenses and the cost of Fund borrowings used to finance Belport Realty's equity
in the Net Leased Properties. Such costs and expenses must be provided from
other sources of cash flow for Belport Realty and the Fund, which may include
additional Fund borrowings under the Credit Facility. Realized returns on
investments in Net Leased Properties generally will be deferred until the
properties are sold or re-leased following the initial lease term.
Fluctuations in the value of Partnership Preference Units and Belport Realty's
equity in Real Estate Joint Ventures and any Net Leased Properties acquired in
the future that are derived from other factors besides general interest rate
movements (including issuer-specific and sector-specific credit concerns,
property or tenant-specific concerns, and changes in interest rate spread
relationships) will not be offset by changes in the value of interest rate swap
agreements or other interest rate hedges entered into by the Fund. Changes in
the value of real estate investments not offset by changes in the valuation of
interest rate swap agreements or other interest rate hedges entered into by the
Fund will cause the performance of the Fund to deviate from the performance of
the Portfolio. Over time, the performance of the Fund can be expected to be more
volatile than the performance of the Portfolio. See "Critical Accounting
Estimates" in Item 7.
RISKS OF INTEREST RATE SWAP AGREEMENTS. Interest rate swap agreements are
subject to changes in valuation caused principally by movements in interest
rates. Interest rate swap agreements are private contracts in which there is a
risk of loss in the event of a default on an obligation to pay by the
counterparty. Interest rate swap agreements may be difficult to value and may be
illiquid. Fluctuations in the value of Partnership Preference Units derived from
changes in general interest rates can be expected to be offset in part (but not
entirely) by changes in the value of interest rate swap agreements or other
interest rate hedges that may be entered into by the Fund with respect to its
borrowings.
RISKS OF LEVERAGE. Although intended to add to returns, the borrowing of funds
to purchase real estate investments exposes the Fund to the risk that the
returns achieved on the real estate investments will be lower than the cost of
borrowing to purchase such assets and that the leveraging of the Fund to buy
such assets will therefore diminish the returns achieved by the Fund as a whole.
In addition, there is a risk that the availability of financing will be
interrupted at some future time, requiring the Fund to sell assets to repay
outstanding borrowings or a portion thereof. It may be necessary to make such
23
sales at unfavorable prices. The Fund's obligations under the Credit Facility
are secured by a pledge of its assets, excluding the assets of Bel Multifamily
and Monadnock. In the event of default, the lender could elect to sell assets of
the Fund without regard to consequences of such action for Shareholders. The
rights of the lender to receive payments of interest on and repayments of
principal of borrowings under the Credit Facility are senior to the rights of
the Shareholders.
Under the terms of the Credit Facility, the Fund is not permitted to make
distributions of cash or securities while there is an event of default
outstanding under the Credit Facility. During such periods, the Fund would not
be able to honor redemption requests or make cash distributions. In addition,
the rights of lenders under the mortgages used to finance Real Estate Joint
Venture properties are senior to Belport Realty's right to receive distributions
from the Real Estate Joint Ventures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
The Fund's consolidated financial statements for the year ended December 31,
2003, together with the auditors' report thereon, appearing on pages 32 through
64 hereof, are incorporated herein by reference. The Fund's consolidated
financial statements and auditors report thereon for the year ended December 31,
2002, appearing on pages 31 through 90 of the Fund's Form 10-K filed with the
Securities and Exchange Commission on March 27, 2003, are also incorporated
herein by reference. The Portfolio's audited financial statements accompany the
Fund's consolidated financial statements and are also incorporated herein by
reference. The following is a summary of unaudited quarterly results of
operations of the Fund for the the years ended December 31, 2003 and 2002.
2003
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------------------
Investment income $ 21,888,930 $ 21,888,125 $21,524,327 $ 21,621,589
Minority interest in net income of controlled subsidiaries $ (658,259) $ (544,906) $ (642,577) $ (597,240)
Net investment income(2) $ 5,159,887 $ 4,365,508 $ 5,189,602 $ 4,933,847
Net increase (decrease) in net assets from operations $(67,319,500) $167,810,183 $38,047,334 $180,175,091
Per share data:(1)
Investment income $ 1.27 $ 1.28 $ 1.27 $ 1.29
Net investment income(2) $ 0.30 $ 0.26 $ 0.31 $ 0.29
Net increase (decrease) in net assets from operations $ (3.91) $ 9.83 $ 2.25 $ 10.75
2002
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------------------
Investment income $21,521,757 $ 21,858,495 $ 21,581,592 $22,196,534
Minority interest in net income of controlled subsidiaries $(1,068,174) $ (899,444) $ (776,108) $ (683,318)
Net investment income(3) $ 4,310,053 $ 4,678,918 $ 4,443,299 $ 5,476,228
Net increase (decrease) in net assets from operations $ 1,329,864 $(214,813,792) $(245,284,671) $79,763,142
Per share data:(1)
Investment income $ 1.21 $ 1.24 $ 1.24 $ 1.28
Net investment income(3) $ 0.24 $ 0.27 $ 0.26 $ 0.32
Net increase (decrease) in net assets from operations $ 0.07 $ (12.20) $ (14.08) $ 4.59
(1) Based on average Shares outstanding.
(2) Net investment income is presented without reduction for interest expense
on interest rate swap agreements. Such amounts were previously presented as
a reduction to net investment income. For the quarters ended March 31,
2003, June 30, 2003 and September 30, 2003 interest expense on swap
agreements in the amount of $2,166,915, $2,203,828 and $2,366,173,
respectively, is presented as a realized loss (see Note 2 to the Fund's
consolidated financial statements incorporated herein by reference).
(3) Net investment income is presented without reduction for interest expense
on interest rate swap agreements. Such amounts were previously presented as
a reduction to net investment income. For the quarters ended March 31,
2002, June 30, 2002, September 30, 2002 and December 31, 2002 interest
expense on swap agreements in the amount of $2,036,074, $1,821,933,
$2,039,806 and $2,068,804 respectively, is presented as a realized loss
(see Note 2 to the Fund's consolidated financial statements incorporated
herein by reference).
24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
---------------------------------------------------------------
There have been no changes in, or disagreements with, accountants on accounting
and financial disclosures.
ITEM 9A. CONTROLS AND PROCEDURES.
- ----------------------------------
Eaton Vance, as the Fund's manager, conducted an evaluation of the effectiveness
of the Fund's disclosure controls and procedures (as defined by Rule 13a-15(e)
of the 1934 Act) as of the end of the period covered by this report, with the
participation of the Fund's Chief Executive Officer and Chief Financial Officer.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Fund's disclosure controls and procedures were
effective. There were no changes in the Fund's internal control over financial
reporting that occurred during the quarter ended December 31, 2003 that have
materially affected, or are reasonably likely to materially affect, the Fund's
internal control over financial reporting.
As the Fund's manager, the complete and entire management, control and operation
of the Fund are vested in Eaton Vance. The Fund's Chief Executive Officer and
Chief Financial Officer intend to report to the Board of Directors of Eaton
Vance, Inc. (the sole trustee of Eaton Vance) any significant deficiency in the
design or operation of internal control over financial reporting which could
adversely affect the Fund's ability to record, process, summarize and report
financial data, and any fraud, whether or not material, that involves management
or other employees who have a significant role in the Fund's internal control
over financial reporting.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
- -------------------------------------------
(A) MANAGEMENT.
- ---------------
Pursuant to the Fund's LLC Agreement, the Fund's manager, Eaton Vance, has the
authority to conduct the Fund's business. Eaton Vance appointed Thomas E. Faust
Jr. and Michelle A. Alexander to serve indefinitely as the Fund's Chief
Executive Officer and Chief Financial Officer, respectively, on October 16,
2002. Information about Mr. Faust appears below. Ms. Alexander, 34, is a Vice
President of Eaton Vance and Boston Management. She also serves as Chief
Financial Officer of Belair Capital Fund LLC, Belcrest Capital Fund LLC, Belmar
Capital Fund LLC and Belrose Capital Fund LLC and as an officer of various
investment companies managed by Eaton Vance or Boston Management, Ms. Alexander
has been an employee of Eaton Vance since 1997. As members of the Eaton Vance
organization, Mr. Faust and Ms. Alexander receive no compensation from the Fund
for serving as Fund officers. There are no other officers of the Fund. The Fund
does not have a board of directors or similar governing body.
The Board of Directors of Eaton Vance, Inc., the sole trustee of Eaton Vance,
oversees the accounting and financial reporting processes of the Fund and audits
of the Fund's financial statements. The Fund's audit committee financial expert
(as that term is defined in Item 7(d)(3)(iv) of Schedule 14A under the Exchange
Act) is William M. Steul. Mr. Steul is a senior officer of Eaton Vance and, as
such, is not independent of Fund management. Information about Mr. Steul appears
below.
Boston Management is investment adviser to the Fund and the Portfolio and
manager of Belport Realty. The portfolio manager of the Fund and the Portfolio
is Duncan W. Richardson, Senior Vice President and Chief Equity Investment
Officer of Eaton Vance and Boston Management. Mr. Richardson has been employed
by the Eaton Vance organization since 1987 and has served as portfolio manager
of the Fund since its inception and of the Portfolio and its predecessor since
1990. A majority of Mr. Richardson's time is spent managing the Portfolio and
related entities. Boston Management has an experienced team of analysts that
provides Mr. Richardson with research and recommendations on investments.
The directors of Belport Realty are Mr. Faust, James B. Hawkes and Alan R.
Dynner, each of whom is described below. William R. Cross, Vice President of
Belport Realty, is primarily responsible for providing research and analysis
relating to the Fund's real estate investments held through Belport Realty. Mr.
Cross is a Vice President of Eaton Vance and Boston Management and has been
employed by the Eaton Vance organization since 1996. Mr. Cross, David Carlson
and Mr. Dynner serve as managers or trustees of the Real Estate Joint Ventures
owned by Belport Realty. Mr. Dynner is also Vice President and Secretary of each
Real Estate Joint Venture and Mr. Cross serves as Chairman of Monadnock and
Chairman and President of Bel Multifamily. Mr. Carlson is a Vice President of
25
Eaton Vance and Boston Management and has been employed by the Eaton Vance
organization since 2001. Prior to joining Eaton Vance, Mr. Carlson was President
of ILM Holding, Inc., a real estate holding company. Information about Mr.
Dynner appears below.
As disclosed under "The Eaton Vance Organization" in Item 1, Eaton Vance and
Boston Management are indirect wholly-owned subsidiaries of Eaton Vance Corp.
The non-voting common stock of Eaton Vance Corp. is listed and traded on the
NYSE. All shares of the voting common stock of Eaton Vance Corp. are held in a
voting trust, the voting trustees of which are senior officers of the Eaton
Vance organization. Eaton Vance, Inc., a wholly-owned subsidiary of Eaton Vance
Corp., is the sole trustee of Eaton Vance and of Boston Management, each of
which is a Massachusetts business trust. The names of the executive officers and
the directors of Eaton Vance, Inc. and their ages and principal occupations (in
addition to their responsibilities described above) are set forth below.
James B. Hawkes (62) is Chairman, President and Chief Executive Officer of Eaton
Vance, Boston Management, Eaton Vance Corp. and Eaton Vance, Inc. and a Director
of Eaton Vance Corp. and Eaton Vance, Inc. He is Vice President and Director of
EV Distributors. He is also a Trustee and an officer of various investment
companies managed by Eaton Vance or Boston Management and has been employed by
Eaton Vance since 1970.
Thomas E. Faust Jr. (45) is Executive Vice President and Chief Investment
Officer of Eaton Vance, Boston Management, Eaton Vance Corp. and Eaton Vance,
Inc., and a Director of Eaton Vance Corp. He is also Chief Executive Officer of
Belair Capital Fund LLC, Belcrest Capital Fund LLC, Belmar Capital Fund LLC and
Belrose Capital Fund LLC and is an officer of various investment companies
managed by Eaton Vance or Boston Management. Mr. Faust has been employed by
Eaton Vance since 1985.
Alan R. Dynner (63) is Vice President, Chief Legal Officer and Secretary of
Eaton Vance, Boston Management, Eaton Vance Corp., EV Distributors and Eaton
Vance, Inc. He is also an officer of various investment companies managed by
Eaton Vance or Boston Management and has been employed by Eaton Vance since
1996.
William M. Steul (61) is Vice President and Chief Financial Officer of Eaton
Vance, Boston Management, Eaton Vance Corp. and Eaton Vance, Inc. and a Director
of Eaton Vance, Inc. He is also Vice President of EV Distributors. He has been
employed by Eaton Vance since 1994.
(B) COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.
- -------------------------------------------------------------------------
Section 16(a) of the 1934 Act requires the Fund's officers and directors and
persons who own more than ten percent of the Fund's Shares to file forms
reporting their affiliation with the Fund and reports of ownership and changes
in ownership of the Fund's Shares with the SEC. Eaton Vance, as manager of the
Fund, and the Directors and executive officers of Eaton Vance, Inc., the sole
trustee of Eaton Vance, also comply with Section 16(a). These persons and
entities are required by SEC regulations to furnish the Fund with copies of all
Section 16(a) forms they file. To the best of the Fund's knowledge, based solely
on a review of the copies of such reports furnished to the Fund, during the year
ended December 31, 2003 all Section 16(a) filing requirements applicable to such
persons and entities were complied with for such year, except that each of James
B. Hawkes, Alan R. Dynner and William M. Steul, in their capacities as Directors
and/or executive officers of Eaton Vance, Inc., failed to file one Form 3. The
Form 3s filed for Messrs. Dynner and Steul reported no transactions in Fund
Shares and the Form 3 filed for Mr. Hawkes reported a purchase of 103,077.69
Shares.
(C) CODE OF ETHICS.
- -------------------
The Fund has adopted a Code of Ethics that applies to the principal executive
officer and principal financial officer (who is also the Fund's principal
accounting officer). A copy of the Code of Ethics is available at no cost by
request to the Fund's Chief Financial Officer, 255 State Street, Boston, MA
02109 or by calling (800) 225-6265. If the Fund makes any substantive amendments
to the Code of Ethics or grants any waiver, including an implicit waiver, from a
provision of the Code of Ethics as applicable to the principal executive officer
or principal financial officer, the Fund will disclose the nature of such
amendment or waiver in a report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION.
- ---------------------------------
As noted in Item 10, the officers of the Fund receive no compensation from the
Fund. The Fund's manager, Eaton Vance, and its affiliates receive compensation
from the Fund for services provided to the Fund, which is described in Item 13
below.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. To the knowledge of the Fund,
no person beneficially owns more than five percent of the Shares of the Fund.
26
SECURITY OWNERSHIP OF MANAGEMENT. As of March 1, 2004, Eaton Vance, the manager
of the Fund, beneficially owned 101.735 Shares of the Fund and James B. Hawkes,
Chairman, President and Chief Executive Officer of Eaton Vance, owned 78,753.265
Shares of the Fund individually and 24,324.427 Shares of the Fund jointly with
his spouse. The Shares owned by Mr. Hawkes (individually and jointly) and Eaton
Vance represent less than 1% of the outstanding Shares of the Fund as of March
1, 2004. None of the other entities or individuals named in response to Item 10
above beneficially owned Shares of the Fund as of such date.
CHANGES IN CONTROL. Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
The table below sets forth the fees, paid or payable by, or allocable to, the
Fund and Belport Realty for the the years ended December 31, 2003 and 2002 in
connection with services rendered by Eaton Vance and its affiliates. Each fee is
described following the table.
Year ended Year ended
December 31, December 31,
2003 2002
- ---------------------------------------------------------------------------------------------------
Fund Advisory and Administrative Fees* $1,011,068 $1,032,117
- ---------------------------------------------------------------------------------------------------
Belport Realty Management Fees* $3,028,427 $2,965,540
- ---------------------------------------------------------------------------------------------------
Fund's Allocable Portion of the Portfolio's Advisory Fees** $6,277,917 $6,746,346
- ---------------------------------------------------------------------------------------------------
Fund Servicing Fees $1,322,277 $1,463,390
- ---------------------------------------------------------------------------------------------------
Fund's Allocable Portion of Belvedere Company's Servicing Fees $2,152,277 $2,319,921
- ---------------------------------------------------------------------------------------------------
Fund Distribution Fees* $1,390,860 $1,512,281
- ---------------------------------------------------------------------------------------------------
Redemption Fees paid by Redeeming Shareholders $ 449,806 $ 183,987
- ---------------------------------------------------------------------------------------------------
Aggregate Compensation Paid by the Fund to Eaton Vance and its
Affiliates $5,430,355 $5,509,938
- ---------------------------------------------------------------------------------------------------
* Boston Management has agreed to waive the portion of the investment
advisory and administrative fee payable by the Fund to the extent that such
fee, together with the distribution fee payable by the Fund and the Fund's
attributable share of the investment advisory and management fees payable
by the Portfolio and Belport Realty, respectively, exceeds 0.60% of the
average daily gross assets of the Fund. The amount shown reflects this
waiver by Boston Management.
** For the years ended December 31, 2003 and 2002, advisory fees paid or
payable by the Portfolio totaled $67,584,543 and $71,564,552, respectively.
For the year ended December 31, 2003, Belvedere Company's allocable portion
of that fee was $41,671,111, of which $6,277,917 was allocable to the Fund.
For the year ended December 31, 2002, Belvedere Company's allocable portion
of that fee was $41,180,780, of which $6,746,346 was allocable to the Fund.
THE FUND'S INVESTMENT ADVISORY AND ADMINISTRATIVE FEE. Under the terms of the
Fund's investment advisory and administrative agreement, Boston Management is
entitled to receive, subject to the fee waiver described in the next sentence, a
monthly advisory and administrative fee at the rate of 1/20 of 1% (equivalent to
0.60% annually) of the average daily gross assets of the Fund. Boston Management
has agreed to waive that portion of the monthly investment advisory and
administrative fee payable by the Fund to the extent that such fee, together
with the distribution fees payable by the Fund (see below) and the Fund's
attributable share of the monthly investment advisory and management fees for
such month payable by the Portfolio and Belport Realty, respectively, exceeds
1/20 of 1% of the average daily gross assets of the Fund. The term "gross assets
of the Fund" means the value of all Fund assets (including the Fund's interest
in Belvedere Company and the Fund's ratable share of the assets of its directly
and indirectly controlled subsidiaries), without reduction by any liabilities.
BELPORT REALTY'S MANAGEMENT FEE. Under the terms of Belport Realty's management
agreement with Boston Management, Boston Management receives a monthly
management fee at the rate of 1/20 of 1% (equivalent to 0.60% annually) of the
average daily gross assets of Belport Realty. The term "gross assets of Belport
Realty" means the current value of all assets of Belport Realty, including
Belport Realty's ratable share of the assets of its controlled subsidiaries,
27
without reduction by any liabilities. For this purpose, the assets and
liabilities of Belport Realty's controlled subsidiaries are reduced by the
proportionate interests therein of investors other than Belport Realty.
THE PORTFOLIO'S INVESTMENT ADVISORY FEE. Under the terms of the Portfolio's
investment advisory agreement with Boston Management, Boston Management receives
a monthly advisory fee as follows:
Annual Fee Rate
Average Daily Net Assets for the Month (for each level)
- ------------------------------------------------------------
Up to $500 million 0.6250%
$500 million but less than $1 billion 0.5625%
$1 billion but less than $1.5 billion 0.5000%
$1.5 billion but less than $7 billion 0.4375%
$7 billion but less than $10 billion 0.4250%
$10 billion but less than $15 billion 0.4125%
$15 billion and over 0.4000%
In accordance with the terms of the 1940 Act, the Portfolio's Board of Trustees
considers the continuation of the Portfolio's investment advisory agreement
annually.
SERVICING FEES PAID BY THE FUND. Pursuant to a servicing agreement between the
Fund and EV Distributors, the Fund pays a servicing fee to EV Distributors for
providing certain services and information to the Shareholders of the Fund. The
servicing fee is paid on a quarterly basis at an annual rate of 0.25% of the
Fund's average daily net assets. With respect to Shareholders who subscribed
through a subagent, EV Distributors has assigned servicing responsibilities and
fees to the applicable subagent, beginning twelve months after the issuance of
Shares of the Fund to such persons. The Fund's allocated share of the servicing
fee paid by Belvedere Company is credited toward the Fund's servicing fee
payment, thereby reducing the amount of the servicing fee payable by the Fund.
SERVICING FEES PAID BY BELVEDERE COMPANY. Pursuant to a servicing agreement
between Belvedere Company and EV Distributors, Belvedere Company pays a
servicing fee to EV Distributors for providing certain services and information
to direct and indirect investors in Belvedere Company. The servicing fee is paid
on a quarterly basis, at an annual rate of 0.15% of Belvedere Company's average
daily net assets. With respect to investors in Belvedere Company and
Shareholders of the Fund who subscribed through a subagent, EV Distributors has
assigned servicing responsibilities and fees to the applicable subagent,
beginning twelve months after the issuance of shares of Belvedere Company or
Shares of the Fund to such persons. The Fund assumes its allocated share of
Belvedere Company's servicing fee. The servicing fee payable in respect of the
Fund's investment in Belvedere Company is credited toward the Fund servicing fee
described above.
DISTRIBUTION FEES PAID TO EV DISTRIBUTORS. Under the terms of the Fund's
placement agreement with EV Distributors, EV Distributors receives a monthly
distribution fee at an annual rate of 0.10% of the average daily net assets of
the Fund as compensation for its services as placement agent. The distribution
fee accrued from the Fund's initial closing and will continue for a period of
ten years (subject to the annual approval of Eaton Vance, Inc.).
REDEMPTION FEES. Shares of the Fund redeemed within three years of issuance are
generally subject to a redemption fee equal to 1% of the net asset value of the
Fund Shares redeemed. The redemption fee is payable to EV Distributors in cash
by the Fund on behalf of the redeeming Shareholder. No redemption fee is imposed
on Shares of the Fund held for at least three years, Shares acquired through the
reinvestment of Fund distributions, Shares redeemed in connection with a tender
offer or other extraordinary corporate event involving securities contributed by
the redeeming Shareholder, or Shares redeemed following the death of all of the
initial owners of the Shares redeemed. In addition, no fee applies to
redemptions made pursuant to a systematic redemption plan established by a
Shareholder with the Fund.
CERTAIN REAL ESTATE INVESTMENT TRANSACTIONS. During the year ended December 31,
2003, Bel Holdings issued units to Belport Realty for approximately $18.5
million. As of December 31, 2003, each investor in Bel Holdings was a REIT
subsidiary of an investment fund managed by Eaton Vance and advised by Boston
28
Management. During the year ended December 31, 2003, Belport Realty also sold
Partnership Preference Units of two issuers to Belshire Realty Corporation
(Belshire), a REIT subsidiary of another investment fund managed by Eaton Vance
and advised by Boston Management, for approximately $28.2 million. In connection
with such sales, the Fund realized gains of approximately $4.7 million. During
the year ended December 31, 2003, Belport Realty also sold Bel Oakbrook to
Belshire, realizing a gain of $0.3 million on the transaction. The sale prices
for the real estate investments sold to Belshire were determined in good faith
by Boston Management after consideration of factors, data and information that
it considered relevant.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- -------------------------------------------------
The following table presents fees for the professional audit services rendered
by Deloitte & Touche LLP for the audit of the Fund's annual financial statements
for the years ended December 31, 2003 and 2002 and fees billed for other
services rendered by Deloitte & Touche LLP during those periods.
Year ended December 31, 2003 2002
- --------------------------------------------------------------------------------
Audit fees $ 24,781 $ 22,300
Audit related fees(1) 35,040 25,755
Tax fees(2) 84,874 198,320
All other fees(3) 12,200 4,200
-----------------------------------
Total $ 156,895 $ 250,575
-----------------------------------
(1) Audit related fees consist of assurance and related services that are
reasonably related to the performance of the audit of the Fund's
consolidated financial statements. The category includes fees related to
the performance of audits and attest services not required by statute or
regulation and accounting consultations regarding the application of
generally accepted accounting principles to proposed transactions.
(2) Tax fees consist of the aggregate fees billed for professional services
rendered by Deloitte & Touche LLP for tax compliance, tax advice and tax
planning.
(3) Other fees consist primarily of the aggregate fees billed for professional
services rendered by Deloitte & Touche LLP related to agreed upon
procedures for requirements by lenders.
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
- -----------------------------------------------------------------
(a) The following is a list of all financial statements incorporated by
reference into this report from the Fund's Form 10-K filed March 27,
2003:
(1) (i) Consolidated Portfolio of Investments as of December 31, 2002
Consolidated Statement of Assets and Liabilities as of December 31,
2002
Consolidated Statement of Operations for the year ended December 31,
2002
Consolidated Statements of Changes in Net Assets for the years ended
December 31, 2002 and December 31, 2001
Consolidated Statement of Cash Flows for the year ended December 31,
2002
Financial Highlights for the year ended December 31, 2002
Notes to Consolidated Financial Statements
Independent Auditors' Report dated February 28, 2003
Portfolio of Investments of Tax-Managed Growth Portfolio as of
December 31, 2002
Statement of Assets and Liabilities of Tax-Managed Growth Portfolio as
of December 31, 2002
Statement of Operations of Tax-Managed Growth Portfolio for the year
ended December 31, 2002
Statements of Changes in Net Assets of Tax-Managed Growth Portfolio
for the years ended December 31, 2002 and December 31, 2001
29
Supplementary Data of Tax-Managed Growth Portfolio for the years ended
December 31, 2002, December 31, 2001, December 31, 2000, December 31,
1999, the two month period ended December 31, 1998, and the year ended
October 31, 1998
Notes to Financial Statements
Independent Auditors' Report dated February 14, 2003
(ii) The following is a list of all financial statements filed as a part of
of this report:
Consolidated Portfolio of Investments as of December 31, 2003
Consolidated Statement of Assets and Liabilities as of December 31,
2003
Consolidated Statement of Operations for the year ended December 31,
2003
Consolidated Statements of Changes in Net Assets for the years ended
December 31, 2003 and December 31, 2002
Consolidated Statement of Cash Flows for the year ended December 31,
2003
Financial Highlights for the year ended December 31, 2003
Notes to Consolidated Financial Statements
Independent Auditors' Report dated March 5, 2004
Portfolio of Investments of Tax-Managed Growth Portfolio as of
December 31, 2003
Statement of Assets and Liabilities of Tax-Managed Growth Portfolio as
of December 31, 2003
Statement of Operations of Tax-Managed Growth Portfolio for the year
ended December 31, 2003
Statements of Changes in Net Assets of Tax-Managed Growth Portfolio
for the years ended December 31, 2003 and December 31, 2002
Supplementary Data of Tax-Managed Growth Portfolio for the years ended
December 31, 2003, December 31, 2002, December 31, 2001, December 31,
2000 and December 31, 1999
Notes to Financial Statements
Independent Auditors' Report dated February 20, 2004
(b) Reports on Form 8-K:
None.
(c) A list of the exhibits filed as a part of this Form 10-K is included
in the Exhibit Index appearing on page 66 hereof.
30
Appendix A
Set forth below is a chart depicting the various entities in which the Fund
invested as of December 31, 2003. Defined terms used below have the meaning
ascribed to them in Item 1.
[Chart depicting (1) the Fund investing in Belvedere Company and Belport Realty;
(2) Belvedere Company investing in the Portfolio; and (3) Belport Realty
investing in Bel Multifamily and Monadnock. The Fund is followed by footnote
(A); Belvedere Company is followed by footnote (B); the Portfolio is followed by
footnote (C); Belport Realty is followed by footnote (D); and Bel Multifamily
and Monadnock are each followed by footnote (E). The footnotes appear below.]
(A) Eaton Vance is the manager of the Fund; Boston Management is the Fund's
investment adviser.
(B) Boston Management is the manager and investment adviser of Belvedere
Company.
(C) Boston Management is the Portfolio's investment adviser.
(D) Boston Management is the manager of Belport Realty. Belport Realty also
holds investments in Partnership Preference Units.
(E) Belport Realty owns a majority interest in these Real Estate Joint
Ventures.
31
BELPORT CAPITAL FUND LLC as of December 31, 2003
CONSOLIDATED PORTFOLIO OF INVESTMENTS
INVESTMENT IN BELVEDERE CAPITAL
FUND COMPANY LLC -- 73.4%
SECURITY SHARES VALUE
- ---------------------------------------------------------------------------------------
Investment in Belvedere Capital Fund
Company LLC (Belvedere Capital) 10,292,977 $ 1,611,769,203
- ---------------------------------------------------------------------------------------
TOTAL INVESTMENT IN BELVEDERE CAPITAL
(IDENTIFIED COST, $1,680,824,754) $ 1,611,769,203
- ---------------------------------------------------------------------------------------
PARTNERSHIP PREFERENCE UNITS -- 4.3%
SECURITY UNITS VALUE
- ---------------------------------------------------------------------------------------
Bel Holdings, LLC+(1)(2) 184,327 $ 18,634,421
Essex Portfolio, L.P. (California Limited
Partnership affiliate of Essex Property Trust,
Inc.), 7.875% Series B Cumulative
Redeemable Preferred Units, Callable
from 2/6/03+(2)(3) 450,000 21,681,990
PSA Institutional Partners, L.P. (California
Limited Partnership affiliate of Public Storage,
Inc.), 9.50% Series N Cumulative Redeemable
Perpetual Preferred Units, Callable
from 3/17/05+(2) 1,300,000 33,800,000
Prentiss Properties Acquisition Partners, L.P.
(Delaware Limited Partnership affiliate of
Prentiss Properties Trust), 8.30% Series B
Cumulative Redeemable Perpetual Preferred Units,
Callable from 6/25/03+(2) 390,000 19,160,700
- ---------------------------------------------------------------------------------------
TOTAL PARTNERSHIP PREFERENCE UNITS
(IDENTIFIED COST, $87,333,414) $ 93,277,111
- ---------------------------------------------------------------------------------------
OTHER REAL ESTATE INVESTMENTS -- 22.1%
DESCRIPTION VALUE
- ---------------------------------------------------------------------------------------
Rental property(2)(4) $ 484,704,890
- ---------------------------------------------------------------------------------------
TOTAL OTHER REAL ESTATE INVESTMENTS
(IDENTIFIED COST, $530,790,333) $ 484,704,890
- ---------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 0.2%
PRINCIPAL
AMOUNT
(000'S
SECURITY OMITTED) VALUE
- ---------------------------------------------------------------------------------------
Investors Bank & Trust Company-
Time Deposit 1.01%, 1/2/04 $ 4,821 $ 4,821,135
- ---------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(AT AMORTIZED COST, $4,821,135) $ 4,821,135
- ---------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100.0%
(IDENTIFIED COST, $2,303,769,636) $ 2,194,572,339
- ---------------------------------------------------------------------------------------
+ Security exempt from registration under the Securities Act of 1933. At
December 31, 2003, the value of these securities totaled $93,277,111, or
5.9% of net assets.
(1) The sole investment of Bel Holdings, LLC is as follows: Vornado Realty,
L.P. (Delaware Limited Partnership affiliate of Vornado Realty Trust), 7%
Series D-10 Cumulative Redeemable Preferred Units, Callable from
11/17/08. See Note 1B.
(2) Investment valued at fair value using methods determined in good faith by
or at the direction of the Manager of Belport Realty Corporation.
(3) On January 8, 2004, the call date was changed to 12/31/09.
(4) Rental property represents twenty-three multi-family residential
properties located in ten states. None of the individual properties
represent more than 5% of net assets.
See notes to consolidated financial statements
32
BELPORT CAPITAL FUND LLC as of December 31, 2003
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF ASSETS
AND LIABILITIES
AS OF DECEMBER 31, 2003
ASSETS
Investments, at value (identified cost, $2,303,769,636) $ 2,194,572,339
Cash 6,522,994
Escrow deposits -- restricted 2,764,808
Open interest rate swap agreements, at value 1,763,670
Distributions and interest receivable 404,628
Other assets 2,358,005
- -------------------------------------------------------------------------------
TOTAL ASSETS $ 2,208,386,444
- -------------------------------------------------------------------------------
LIABILITIES
Loan payable -- New Credit Facility $ 230,500,000
Mortgages payable 361,107,500
Distributions payable to minority shareholders 16,800
Special Distributions payable 17
Security deposits 863,503
Swap interest payable 118,147
Accrued expenses:
Interest expense 2,141,722
Property taxes 2,212,615
Other expenses and liabilities 2,224,975
Minority interests in controlled subsidiaries 24,347,753
- -------------------------------------------------------------------------------
TOTAL LIABILITIES $ 623,533,032
- -------------------------------------------------------------------------------
NET ASSETS FOR 16,697,292 FUND SHARES OUTSTANDING $ 1,584,853,412
- -------------------------------------------------------------------------------
SHAREHOLDERS' CAPITAL $ 1,584,853,412
- -------------------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE (NOTE 4)
($1,584,853,412 DIVIDED BY 16,697,292 FUND SHARES OUTSTANDING) $ 94.92
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31, 2003
INVESTMENT INCOME
Dividends allocated from Belvedere Capital
(net of foreign taxes, $248,032) $ 21,301,557
Interest allocated from Belvedere Capital 337,201
Expenses allocated from Belvedere Capital (8,705,495)
- -------------------------------------------------------------------------------
Net investment income allocated from Belvedere Capital $ 12,933,263
Rental income 65,576,738
Distributions from Partnership Preference Units 8,230,953
Interest 182,017
- -------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME $ 86,922,971
- -------------------------------------------------------------------------------
EXPENSES
Investment advisory and administrative fees $ 5,430,355
Property management fees 2,613,099
Distribution and servicing fees 2,713,137
Interest expense on mortgages 25,392,737
Interest expense on credit facilities 3,557,425
Property and maintenance expenses 17,374,486
Property taxes and insurance 8,038,500
Miscellaneous 1,102,266
- -------------------------------------------------------------------------------
TOTAL EXPENSES $ 66,222,005
- -------------------------------------------------------------------------------
Deduct --
Reduction of investment advisory and administrative fees $ 1,390,860
- -------------------------------------------------------------------------------
NET EXPENSES $ 64,831,145
- -------------------------------------------------------------------------------
Net investment income before minority interests in net
income of controlled subsidiaries $ 22,091,826
Minority interests in net income of controlled subsidiaries (2,442,982)
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 19,648,844
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) --
Investment transactions from Belvedere Capital
(identified cost basis) $ 18,686,724
Investment transactions (identified cost basis) (22,088)
Investment transactions in other real estate 323,384
Investment transactions in Partnership Preference Units
(identified cost basis) 4,667,180
Interest rate swap agreements (33,677,750)
- -------------------------------------------------------------------------------
NET REALIZED LOSS $ (10,022,550)
- -------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investment in Belvedere Capital (identified cost basis) $ 285,637,095
Investments in Partnership Preference Units (identified
cost basis) 1,854,494
Investment in other real estate (net of minority
interests in unrealized loss of controlled
subsidiaries of $7,471,486) (6,553,960)
Interest rate swap agreements 28,149,185
- -------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) $ 309,086,814
- -------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN $ 299,064,264
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 318,713,108
- -------------------------------------------------------------------------------
See notes to consolidated financial statements
33
CONSOLIDATED STATEMENTS OF CHANGES
IN NET ASSETS
INCREASE (DECREASE) YEAR ENDED YEAR ENDED
IN NET ASSETS DECEMBER 31, 2003 DECEMBER 31, 2002
- -------------------------------------------------------------------------------------------
Net investment income $ 19,648,844 $ 18,908,498
Net realized loss from investment transactions (10,022,550) (18,022,339)
Net change in unrealized appreciation
(depreciation) of investments 309,086,814 (379,891,616)
- -------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS $ 318,713,108 $ (379,005,457)
- -------------------------------------------------------------------------------------------
Transactions in Fund Shares --
Net asset value of Fund Shares issued
to Shareholders in payment of
distributions declared $ 6,479,733 $ --
Net asset value of Fund
Shares redeemed (52,613,896) (45,510,343)
- -------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS FROM FUND
SHARE TRANSACTIONS $ (46,134,163) $ (45,510,343)
- -------------------------------------------------------------------------------------------
Distributions --
Distributions to Shareholders $ (12,367,580) $ --
Special Distributions to Shareholders (17) --
- -------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS $ (12,367,597) $ --
- -------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS $ 260,211,348 $ (424,515,800)
- -------------------------------------------------------------------------------------------
NET ASSETS
At beginning of year $ 1,324,642,064 $ 1,749,157,864
- -------------------------------------------------------------------------------------------
AT END OF YEAR $ 1,584,853,412 $ 1,324,642,064
- -------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED
INCREASE (DECREASE) IN CASH DECEMBER 31, 2003
- -------------------------------------------------------------------------------------------
Cash Flows From (For) Operating Activities --
Net increase in net assets from operations $ 318,713,108
Adjustments to reconcile net increase in net assets from operations
to net cash flows from operating activities --
Net investment income allocated from Belvedere Capital (12,933,263)
Increase in escrow deposits (492,597)
Decrease in receivable for investments sold 50,221,589
Decrease in other assets 322,417
Decrease in distributions and interest receivable 166,076
Decrease in interest payable for open swap agreements (71,307)
Decrease in security deposits, accrued interest and accrued
other expenses and liabilities (852,534)
Increase in accrued property taxes 161,212
Purchases of Partnership Preference Units (18,533,268)
Proceeds from sales of Partnership Preference Units 28,280,856
Payments for investment in other real estate (5,026,960)
Proceeds from sale of investment in other real estate 5,356,755
Proceeds from sale of common stock 20,248,362
Improvements to rental property (4,779,830)
Net increase in investment in Belvedere Capital (41,000,000)
Payment for termination of interest swap agreements (25,390,804)
Net interest incurred on interest rate swap agreements (8,286,946)
Increase in short-term investments (4,198,157)
Minority interests in net income of controlled subsidiaries 2,442,982
Net realized loss from investment transactions 10,022,550
Net change in unrealized (appreciation) depreciation
of investments (309,086,814)
- -------------------------------------------------------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 5,283,427
- -------------------------------------------------------------------------------------------
Cash Flows From (For) Financing Activities --
Proceeds from Credit Facility $ 4,500,000
Repayments of mortgage (6,411)
Payments for Fund Shares redeemed (4,270,256)
Distributions paid to Shareholders (5,887,847)
Distributions paid to minority shareholders (548,215)
- -------------------------------------------------------------------------------------------
NET CASH FLOWS FOR FINANCING ACTIVITIES $ (6,212,729)
- -------------------------------------------------------------------------------------------
NET DECREASE IN CASH $ (929,302)
- -------------------------------------------------------------------------------------------
CASH AT BEGINNING OF YEAR $ 7,452,296
- -------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 6,522,994
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE AND NON-CASH
INVESTING AND FINANCING ACTIVITIES
Interest paid on loan -- credit facilities $ 3,323,625
Interest paid on mortgages $ 25,123,105
Interest paid on swap agreements $ 8,358,253
Market value of securities distributed in payment of redemptions $ 48,343,640
Market value of common stock received from Belvedere Capital $ 20,270,450
Market value of real property and other assets, net
of current liabilities, assumed in conjunction with
acquisition of other real estate $ 64,628,785
Mortgage assumed in conjunction with acquisition of other real estate $ 59,601,825
Market value of real property and other assets, net of current
liabilities, disposed of in conjunction with sale of other
real estate $ 64,713,609
Mortgage disposed of in conjunction with sale of other real estate $ 59,595,414
- -------------------------------------------------------------------------------------------
See notes to consolidated financial statements
34
FINANCIAL HIGHLIGHTS
FOR THE YEAR ENDED DECEMBER 31, 2003
Net asset value - Beginning of year $ 76.750
- ------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
Net investment income(6) $ 1.157
Net realized and unrealized gain 17.733
- ------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS $ 18.890
- ------------------------------------------------------------------------------
DISTRIBUTIONS
Distributions to Shareholders $ (0.720)
Special Distributions to Shareholders(9) (0.000)
- ------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS $ (0.720)
- ------------------------------------------------------------------------------
NET ASSET VALUE -- END OF YEAR $ 94.920
- ------------------------------------------------------------------------------
TOTAL RETURN(1) 24.81%
- ------------------------------------------------------------------------------
AS A PERCENTAGE OF AS A PERCENTAGE OF
RATIOS AVERAGE NET ASSETS(5) AVERAGE GROSS ASSETS(2)(5)
- ----------------------------------------------------------------------------------------------------------------------
Expenses of Consolidated Real Property Subsidiaries
Interest and other borrowing costs(7) 1.49% 1.06%
Operating expenses(7) 1.64% 1.17%
Belport Capital Fund LLC Expenses
Interest and other borrowing costs(4)(8) 0.26% 0.18%
Investment advisory and administrative fees, servicing fees and
other Fund operating expenses(3)(4) 1.18% 0.84%
-------------------------------------------------
Total expenses 4.57% 3.25%
Net investment income 1.41% 1.01%
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $ 1,584,853
Portfolio turnover of Tax-Managed Growth Portfolio (the Portfolio) 15%
- ----------------------------------------------------------------------------------------------------------------------
(1) Returns are calculated by determining the percentage change in net asset
value with all distributions reinvested.
(2) Average Gross Assets is defined as the average daily amount of all assets
of Belport Capital Fund LLC (Belport Capital) (including Belport
Capital's interest in Belvedere Capital Fund Company LLC (Belvedere
Capital) and Belport Capital's ratable share of the assets of its
directly and indirectly controlled subsidiaries (Note 1)), without
reduction by any liabilities. For this purpose, the assets of Belport
Realty Corporation's (Belport Realty) controlled subsidiaries are reduced
by the proportionate interests therein of investors other than Belport
Realty.
(3) Includes Belport Capital's share of Belvedere Capital's allocated
expenses, including those expenses allocated from the Portfolio.
(4) Includes the expenses of Belport Capital and Belport Realty. Does not
include expenses of the real estate subsidiaries majority-owned by
Belport Realty.
(5) For the purpose of calculating ratios, the income and expenses of Belport
Realty's controlled subsidiaries are reduced by the proportionate
interest therein of investors other than Belport Realty.
(6) Calculated using average shares outstanding.
(7) Includes Belport Realty's proportional share of expenses incurred by its
majority-owned subsidiaries.
(8) Ratios do not include interest incurred in connection with the interest
rate swap agreements. Had such amounts been included, ratios would be
higher.
(9) Special distributions amount to less than $0.001 per share.
See notes to consolidated financial statements
35
BELPORT CAPITAL FUND LLC as of December 31, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 ORGANIZATION
A INVESTMENT OBJECTIVE -- Belport Capital Fund LLC (Belport Capital) is a
Delaware limited liability company established to offer diversification
and tax-sensitive investment management to investors holding large and
concentrated positions in equity securities of selected publicly-traded
companies. The investment objective of Belport Capital is to achieve
long-term, after-tax returns for Belport Capital shareholders
(Shareholders). Belport Capital pursues this objective primarily by
investing indirectly in Tax-Managed Growth Portfolio (the Portfolio), a
diversified, open-end management investment company registered under the
Investment Company Act of 1940, as amended. The Portfolio is organized as
a trust under the laws of the State of New York. Belport Capital maintains
its investment in the Portfolio by investing in Belvedere Capital Fund
Company LLC (Belvedere Capital), a separate Massachusetts limited
liability company that invests exclusively in the Portfolio. The
performance of Belport Capital and Belvedere Capital is directly and
substantially affected by the performance of the Portfolio. Separate from
its investment in the Portfolio through Belvedere Capital, Belport Capital
invests in real estate assets through a controlled subsidiary, Belport
Realty Corporation (Belport Realty). Such investments include
income-producing preferred equity interests in real estate operating
partnerships (Partnership Preference Units) affiliated with
publicly-traded real estate investment trusts (REITs) and interests in
real properties held through joint ventures that are controlled
subsidiaries of Belport Realty.
B SUBSIDIARIES -- Belport Capital invests in real estate through its
subsidiary Belport Realty. At December 31, 2003, Belport Realty invested
directly and indirectly in Partnership Preference Units and indirectly in
real property through controlled subsidiaries, Bel Multifamily Property
Trust (Bel Multifamily) and Monadnock Property Trust, LLC (Monadnock).
During the year ended December 31, 2003, Belport Realty also invested
indirectly in real property through a controlled subsidiary, Bel Oakbrook
LLC (Bel Oakbrook). Belport Realty's investments in Partnership Preference
Units are held directly except for its indirect investment in Partnership
Preference Units of Vornado Realty, L.P. (a Delaware Limited Partnership)
which is held through its 23.1% investment in Bel Holdings, LLC at
December 31, 2003. Vornado Realty, L.P. is the sole investment of Bel
Holdings, LLC.
Belport Realty -- At December 31, 2003, Belport Capital owned 100% of the
common stock issued by Belport Realty and intends to hold all of Belport
Realty's common stock at all times. Additionally, 2,100 shares of
preferred stock of Belport Realty are outstanding at December 31, 2003.
The preferred stock has a par value of $0.01 per share and is redeemable
by Belport Realty at a redemption price of $100 per share after the
occurrence of certain tax events or after December 31, 2005. Dividends on
the preferred stock are cumulative and payable annually equal to $8 per
share. The interest in preferred stock is recorded as minority interest on
the Consolidated Statement of Assets and Liabilities.
Bel Multifamily -- Bel Multifamily, a majority-owned subsidiary of Belport
Realty, owns eleven multi-family residential properties consisting of
3,011 units (collectively, the Bel Multifamily Properties) located in
seven states (Washington, Missouri, North Carolina, Arizona, Florida,
Georgia and Texas). The average occupancy rate was approximately 91% at
December 31, 2003. Belport Realty owns 100% of the Class A units of Bel
Multifamily, representing 75% of the voting interests in Bel Multifamily,
and a minority shareholder (the Bel Multifamily Minority Shareholder) owns
100% of the Class B units, representing 25% of the voting interests in Bel
Multifamily. The Class B equity interest is recorded as minority interest
on the Consolidated Statement of Assets and Liabilities. The primary
distinctions between the two classes of shares are the distribution
priority and voting rights. Belport Realty has priority in distributions
and has greater voting rights than the holders of the Class B units.
Pursuant to a buy/sell agreement entered into at the time Bel Multifamily
was established, either Belport Realty or the Bel Multifamily Minority
Shareholder can give notice after February 22, 2010 either to buy the
other's equity interest in Bel Multifamily or to sell its own equity
interest in Bel Multifamily.
Monadnock -- Monadnock, a majority-owned subsidiary of Belport Realty,
owns twelve multi-family residential properties consisting of 4,614 units
(collectively, the Monadnock Properties) located in eight states (Texas,
Arizona, Georgia, North Carolina, Oregon, Utah, Tennessee and Florida).
The average occupancy rate was approximately 96% at December 31, 2003.
Belport Realty owns 100% of the Class A units of Monadnock and a minority
shareholder (the Monadnock Minority Shareholder) owns 100% of the Class B
units. The units of Monadnock entitled to board of managers'
representation are currently owned 75% by Belport Realty and 25% by the
Monadnock Minority Shareholder. The Class B equity interest is recorded as
minority interest on the Consolidated Statement of Assets and Liabilities.
The primary distinctions between the two classes of shares are the
distribution priority and voting rights. Belport Realty has priority in
distributions and has greater voting rights than the holder of the Class B
units. Pursuant to a buy/sell agreement entered into at the time Monadnock
was established, either
36
Belport Realty or the Monadnock Minority Shareholder can give notice after
September 13, 2010 either to buy the other's equity interest in Monadnock
or to sell its own equity interest in Monadnock.
Bel Oakbrook -- Bel Oakbrook, which was a wholly-owned subsidiary of Belport
Realty during the year ended December 31, 2003, owns 100% indirect interest
in an office building located in Illinois. The property is leased to a
single tenant on a triple net lease basis pursuant to a non-cancelable,
fixed-term operating lease expiring in June 2017 with options to extend the
lease or to purchase the property. Belport Realty does not own an interest
in Bel Oakbrook at December 31, 2003 (Note 5).
The audited financial statements of the Portfolio, including the Portfolio
of Investments, are included elsewhere in this report and should be read
in conjunction with these financial statements.
2 SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed in the preparation of the consolidated financial statements. The
policies are in conformity with accounting principles generally accepted
in the United States of America.
A PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Belport Capital and its majority owned
subsidiaries. Belport Capital and Belport Realty consolidate all
investments in affiliates in which its ownership exceeds 50 percent. The
accompanying consolidated financial statements include the accounts of
Belport Capital, Belport Realty, Bel Multifamily, Monadnock, Bel Oakbrook
(for the period during which Belport Realty maintained an interest in Bel
Oakbrook) (collectively, the Fund). All material intercompany accounts and
transactions have been eliminated.
B BASIS OF PRESENTATION -- Belport Capital is an investment company and,
as such, presents its assets at fair value. Fixed liabilities are
generally stated at their principal value.
C INVESTMENT COSTS -- The Fund's investment assets were principally
acquired through contributions of common stock by Shareholders in exchange
for Shares of the Fund, through purchases of Partnership Preference Units
and other real estate investments, and through contributions of real
estate investments in exchange for cash and a minority interest in
controlled subsidiaries. Upon receipt of common stock from Shareholders,
Belport Capital immediately exchanged the contributed securities into
Belvedere Capital for shares thereof, and Belvedere Capital, in turn,
immediately thereafter exchanged the contributed securities into the
Portfolio for an interest in the Portfolio. The initial cost at which the
Fund's investments of contributed securities is carried in the
consolidated financial statements is the value of the contributed
securities as of the close of business on the day prior to their
contribution to the Fund. The initial tax basis of the Fund's investment
in the Portfolio through Belvedere Capital is the same as the contributing
Shareholders' basis in securities contributed to the Fund. The initial tax
and financial reporting basis of the Fund's investment in Partnership
Preference Units and other real estate purchased by the Fund is the
purchase cost. The initial cost at which the Fund's investments in real
estate contributed to the Fund is carried in the consolidated financial
statements is the market value on contribution date. The initial tax basis
of real estate investments contributed to the Fund is the contributor's
tax basis at the time of contribution or value at the time of
contribution, depending on the taxability of the contribution.
D INVESTMENT AND OTHER VALUATIONS -- The Fund's investments may consist of
shares of Belvedere Capital, real property investments, Partnership
Preference Units and short-term debt securities. Belvedere Capital's only
investment is an interest in the Portfolio, the value of which is derived
from a proportional interest therein. Additionally, the Fund has entered
into interest rate swap agreements (Note 7). The valuation policy followed
by the Fund, Belvedere Capital and the Portfolio is as follows:
Securities listed on a U.S. securities exchange generally are valued at
the last sale price on the day of valuation or, if no sales took place on
such date, at the mean between the closing bid and asked prices therefore
on the exchange where such securities are principally traded. Equity
securities listed on the NASDAQ National Market System generally are
valued at the official NASDAQ closing price. Unlisted or listed securities
for which closing sales prices or closing quotations are not available are
valued at the mean between the latest available bid and asked prices.
Exchange-traded options are valued at the last sale price for the day of
valuation as quoted on the principal exchange or board of trade on which
the options are traded or, in the absence of sales on such date, at the
mean between the latest bid and asked prices therefore. Futures positions
on securities and currencies generally are valued at closing settlement
prices. Short-term debt securities with a remaining maturity of 60 days or
less are valued at amortized cost. If short-term debt securities were
acquired with a remaining maturity of more than 60 days, their amortized
cost value will be based
37
on their value on the sixty-first day prior to maturity. Other fixed income
and debt securities, including listed securities and securities for which
price quotations are available, will normally be valued on the basis of
valuations furnished by a pricing service. The daily valuation of foreign
securities generally is determined as of the close of trading on the
principal exchange on which such securities trade. Events occurring after
the close of trading on foreign exchanges may result in adjustments to the
valuation of foreign securities to more accurately reflect their fair value
as of the close of regular trading on the New York Stock Exchange. The
Portfolio may rely on an independent fair valuation service in adjusting the
valuations of foreign securities. Foreign securities and currencies are
valued in U.S. dollars, based on foreign currency exchange rate quotations
supplied by an independent quotation service. Investments held by the
Portfolio for which valuations or market quotations are unavailable are
valued at fair value using methods determined in good faith by or at the
direction of the Trustees of the Portfolio considering relevant factors,
data and information including the market value of freely tradeable
securities of the same class in the principal market on which such
securities are normally traded. Interest rate swap agreements are valued by
Boston Management and Research (Boston Management), as Investment Adviser of
Belport Capital, based upon dealer and counterparty quotes and pricing
models which take into consideration the market trading prices of interest
rate swap agreements that have similar terms to the interest rate swap
agreements the Fund has entered.
Market prices for the Fund's real estate investments (including
Partnership Preference Units and joint ventures) are not readily available
and therefore they are stated in the Fund's consolidated financial
statements at estimated fair value. The estimated fair value of an
investment represents the amount at which Boston Management (as manager of
Belport Realty) believes the investment could be sold in a current
transaction between willing parties in an orderly disposition, that is,
other than in a forced or liquidation sale. In valuing these investments,
Boston Management considers relevant factors, data and information. With
respect to investments in Partnership Preference Units, Boston Management
considers information from dealers and similar firms with knowledge of
such issues and the prices of comparable preferred equity securities and
other fixed or adjustable rate instruments having similar investment
characteristics. Real estate investments, other than Partnership
Preference Units, are valued based upon independent valuations, that
represent the amount at which the investments could be sold in a current
transaction between willing parties and assume an orderly disposition,
that is, other than in a forced or liquidation sale. Detailed real
property valuations are performed at least annually and reviewed
periodically. The value of real estate investments in joint ventures is
estimated using a financial model that considers the (i) terms of the
joint venture agreements relating to allocation of distributable cash
flow, (ii) the duration of the joint venture; and (iii) the projected
property values and cash flows from the properties based on estimates used
in the independent valuations. Interim valuations reflect results of
operations and distributions, and may be adjusted if there has been a
significant change in economic circumstances since the most recent
independent valuation. The valuation of real estate investments includes
many assumptions, including, but not limited to, a current transaction
between willing parties and an orderly disposition of assets. If the
assumptions used to value a real estate investment change, it may
materially impact the estimated fair value of that investment.
A mortgage note payable may be adjusted to the estimated amount at which
the mortgage note could be settled in a current transaction. If the rental
property securing such mortgage note payable has a value lower than the
outstanding principal balance, is operating at a deficit and financial
resources are not expected to be provided to fund such deficit, then
the mortgage note payable may be adjusted to the estimated fair value of
the property securing the mortgage note.
Changes in the fair value of the Fund's investments are recorded as
unrealized appreciation or depreciation in the Consolidated Statement of
Operations.
E INTEREST RATE SWAPS -- Belport Capital has entered into interest rate
swap agreements with respect to its borrowings and real estate
investments. Pursuant to these agreements, Belport Capital makes periodic
payments to the counterparty at predetermined fixed rates in exchange for
floating-rate payments from the counterparty that fluctuate with one-month
LIBOR. Net interest paid and accrued or received and earned is recorded as
realized gains or losses and changes in the underlying values of the swaps
are recorded as unrealized appreciation (depreciation), each in the
Consolidated Statement of Operations. Belport Capital is exposed to credit
loss in the event of non-performance by the swap counterparty. Risks may
arise from the unanticipated movements in the value of interest rates.
F RENTAL OPERATIONS -- The apartment units held by Bel Multifamily and
Monadnock are leased to residents generally for a term of one year
renewable upon consent of both parties on a year-to-year or month-to-month
basis.
The mortgage escrow accounts consist of deposits for real estate taxes,
insurance, reserve for replacements and capital repairs as required under
the mortgage agreements. The
38
mortgage escrow accounts are held by the respective financial institutions
and controlled by mortgage lenders (Note 8).
Costs incurred in connection with acquisitions of properties have been
capitalized. Significant betterments and improvements are capitalized as
part of real property.
G INCOME -- Dividend income and distributions from Partnership Preference
Units are recorded on the ex-dividend date and interest income is recorded
on the accrual basis. Rental income is recorded on the accrual basis based
upon the terms of the lease agreements.
Belvedere Capital's net investment income or loss consists of Belvedere
Capital's pro rata share of the net investment income or loss of the
Portfolio, less all actual or accrued expenses of Belvedere Capital,
determined in accordance with accounting principles generally accepted in
the United States of America. The Fund's net investment income or loss
consists of the Fund's pro rata share of the net investment income or loss
of Belvedere Capital, plus all income earned on the Fund's direct and
indirect investments (including Partnership Preference Units and real
property), less all actual and accrued expenses of the Fund determined in
accordance with accounting principles generally accepted in the United
States of America.
H DEFERRED COSTS -- Mortgage origination expenses incurred in connection
with the financing of Bel Multifamily and Monadnock are capitalized and
amortized over the terms of the respective loans. Deferred loan costs are
included in other assets and amortization expense is included in mortgage
interest expense in the accompanying consolidated financial statements.
I INCOME TAXES -- Belport Capital, Belvedere Capital and the Portfolio are
treated as partnerships for federal income tax purposes. As a result,
Belport Capital, Belvedere Capital and the Portfolio do not incur federal
income tax liability, and the shareholders and partners thereof are
individually responsible for taxes on items of partnership income, gain,
loss and deduction. The policy of Belport Realty, Bel Multifamily and
Monadnock is to comply with the Internal Revenue Code of 1986, as amended,
applicable to REITs. Belport Realty, Bel Multifamily and Monadnock will
generally not be subject to federal income tax to the extent that they
distribute their earnings to their stockholders each year and maintain
their qualification as REITs. Bel Oakbrook is a single member limited
liability company treated as a pass-through entity for federal tax
purposes for the period that Belport Realty owned an interest in Bel
Oakbrook.
Net investment income and capital gains determined in accordance with
income tax regulations may differ from such amounts determined in
accordance with generally accepted accounting principles. Such differences
could be significant and are primarily due to differences in the cost
basis of securities contributed, depreciation on real estate assets,
periodic payments made in connection with interest rate swap agreements
and the character of distributions received from REITs and Partnership
Preference Units.
J OTHER -- Investment transactions are accounted for on a trade date
basis.
K USE OF 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
that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of income and expense
during the reporting period. Actual results could differ from those
estimates.
L RECLASSIFICATIONS -- Certain amounts in the prior year's consolidated
financial statements have been reclassified to conform with the current
year presentation.
M INDEMNIFICATIONS -- Under Belport Capital's Limited Liability Company
Agreement, Belport Capital's officers, its manager, investment adviser,
and any affiliate, associate, officer, employee or trustee thereof, and
any manager, director, officer or employee of Belport Realty or any other
controlled subsidiary may be indemnified against certain liabilities and
expenses arising out of their duties to the Fund. Shareholders also may be
indemnified against personal liability for the liabilities of Belport
Capital. Additionally, in the normal course of business, the Fund enters
into agreements with service providers that may contain indemnification
clauses. The Fund's maximum exposure under these arrangements is unknown
as this would involve future claims that may be made against the Fund that
have not yet occurred.
3 DISTRIBUTIONS TO SHAREHOLDERS
Belport Capital intends to distribute at the end of each year, or shortly
thereafter, the amount of its net investment income for the year, if any,
and 18% of the amount of its net realized capital gains for such year
(reduced from 22% to reflect the reduction in federal long-term capital
gains tax rates), if any, other than precontribution gains allocated to a
Shareholder in connection with a tender offer or other extraordinary event
with respect to a security contributed by that Shareholder or such
Shareholder's predecessor in
39
interest. In addition, whenever a distribution in respect of a
precontribution gain is made, Belport Capital intends to make a
supplemental distribution to compensate Shareholders receiving such
distributions for taxes that may be due on income specially allocated in
connection with the precontribution gain and supplemental distributions.
Capital gain distributions that are made with respect to realized
precontribution gains and the associated supplemental distributions
(collectively, Special Distributions) will be made solely to the
Shareholders to whom such realized precontribution gain is allocated.
There were $17 in Special Distributions paid or accrued during the year
ended December 31, 2003.
The Fund's distributions generally are based on determinations of net
investment income and net realized capital gains for federal income tax
purposes. Such amounts may differ from net investment income (or loss) and
net realized gain (or loss) as set forth in the Fund's financial
statements due to differences in the treatment of various income, gain,
loss, expense and other items for federal income tax purposes and under
generally accepted accounting principles.
In addition, Belport Realty, Bel Multifamily and Monadnock intend to
distribute substantially all of their taxable income earned by the
respective entities during the year.
4 SHAREHOLDER TRANSACTIONS
Belport Capital may issue an unlimited number of full and fractional Fund
Shares. Transactions in Fund Shares were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
--------------------------------------------------------------------------------
Issued to Shareholders electing to
receive payment of distributions
in Fund Shares 83,010 --
Redemptions (643,812) (524,147)
--------------------------------------------------------------------------------
NET DECREASE (560,802) (524,147)
--------------------------------------------------------------------------------
Redemptions of Fund Shares held less than three years are generally
subject to a redemption fee of 1% of the net asset value of Fund Shares
redeemed. The redemption fee is paid to Eaton Vance Distributors, Inc. (EV
Distributors) by Belport Capital on behalf of the redeeming Shareholder.
No charge is levied on redemptions of Fund Shares acquired through the
reinvestment of distributions, Fund Shares redeemed in connection with a
tender offer or other extraordinary corporate event or Fund Shares
redeemed following the death of all of the initial holders of the Fund
Shares redeemed. In addition, no fee applies to redemptions made pursuant
to a Systematic Redemption Plan, whereby a Shareholder can redeem up to 2%
of Fund Shares held on a quarterly basis. For the year ended December 31,
2003, EV Distributors received $449,806 in redemption fees.
Shareholders in Belport Capital are entitled to restructure their Fund
Share interests under what is termed an Estate Freeze Election. Under this
election, Fund Shares are divided into Preferred Shares and Common Shares.
Preferred Shares have a preferential right over the corresponding Common
Shares equal to (i) 95% of the original capital contribution made in
respect of the undivided Shares from which the Preferred Shares and Common
Shares were derived, plus (ii) an annuity priority return equal to 8.5% of
the Preferred Shares' preferential interest in the original capital
contribution of the undivided Fund Shares. The associated Common Shares
are entitled to the remaining 5% of the original capital contribution in
respect of the undivided Fund Shares, plus any returns thereon in excess
of the fixed annual priority of the Preferred Shares. The existence of
restructured Fund Shares does not adversely affect Shareholders who do not
participate in the election nor do the restructured Fund Shares have
preferential rights to Fund Shares that have not been restructured.
Shareholders who subdivide Fund Shares under this election sacrifice
certain rights and privileges that they would otherwise have with respect
to the Fund Shares so divided, including redemption rights and voting and
consent rights. Upon the twentieth anniversary of the issuance of the
associated undivided Fund Shares to the original holders thereof,
Preferred and Common Shares will automatically convert into full and
fractional undivided Fund Shares.
The allocation of Belport Capital's net asset value per Share of $94.92 as
of December 31, 2003, between Preferred and Common Shares that have been
restructured is as follows:
PER SHARE VALUE AT
DECEMBER 31, 2003
-------------------------------------
PREFERRED COMMON
DATE OF CONTRIBUTION SHARES SHARES
--------------------------------------------------------------------------------
May 22, 2001 $ 94.92 $ --
July 25, 2001 $ 94.71 $ 0.21
December 17, 2001 $ 91.87 $ 3.05
--------------------------------------------------------------------------------
40
5 INVESTMENT TRANSACTIONS
The following table summarizes the Fund's investment transactions for the
year ended December 31, 2003:
YEAR ENDED
INVESTMENT TRANSACTION DECEMBER 31, 2003
---------------------------------------------------------------------
Increases in investment in Belvedere Capital $ 41,000,000
Decreases in investment in Belvedere Capital(1) $ 48,343,640
Acquisitions of other real estate(2) $ 5,026,960
Sale of other real estate(2) $ 5,356,755
Sale of common stock(1) $ 20,248,362
Purchase of Partnership Preference Units(3) $ 18,533,268
Sales of Partnership Preference Units(4) $ 28,280,856
(1) Included in decreases in investment in Belvedere Capital is the
receipt of common stock through a redemption in-kind of $20,270,450.
Belport Capital subsequently sold the common stock recognizing a loss
of $22,088 on the transaction.
(2) In March 2003, Bel Oakbrook, a wholly-owned subsidiary of Belport
Realty, acquired a 100% ownership interest in an office building. In
May 2003, Belport Realty sold its interest in Bel Oakbrook to another
fund sponsored by Eaton Vance Management (Eaton Vance). A gain of
$323,384 was recognized on the transaction.
(3) Purchases of Partnership Preference Units represent the purchase of an
investment in Bel Holdings, LLC (Note 1B).
(4) Sales of Partnership Preference Units for the year ended December 31,
2003 represent Partnership Preference Units sold to other funds
sponsored by Eaton Vance for which a gain of $4,667,180 was
recognized.
6 INDIRECT INVESTMENT IN PORTFOLIO
The following table summarizes the Fund's investment in the Portfolio
through Belvedere Capital, for the year ended December 31, 2003, including
allocations of income, expenses and net realized and unrealized gains
(losses) for the year then ended:
YEAR ENDED
DECEMBER 31, 2003
---------------------------------------------------------------------
Belvedere Capital's interest in the Portfolio(1) $ 11,100,012,615
The Fund's investment in Belvedere Capital(2) $ 1,611,769,203
Income allocated to Belvedere Capital from the
Portfolio $ 143,671,130
Income allocated to the Fund from Belvedere
Capital $ 21,638,758
Expenses allocated to Belvedere Capital from
the Portfolio $ 43,085,940
Expenses allocated to the Fund from Belvedere
Capital(3) $ 8,705,495
Net realized gain allocated to Belvedere
Capital from the Portfolio $ 128,352,887
Net realized gain allocated to the Fund from
Belvedere Capital $ 18,686,724
Change in unrealized appreciation(depreciation)
allocated to Belvedere Capital from the
Portfolio $ 1,892,271,872
Change in unrealized appreciation(depreciation)
allocated to the Fund from Belvedere Capital $ 285,637,095
(1) As of December 31, 2003, the value of Belvedere Capital's interest in
the Portfolio represents 63.0% of the Portfolio's net assets.
(2) As of December 31, 2003, the Fund's investment in Belvedere Capital
represents 14.5% of Belvedere Capital's net assets.
(3) Allocated expenses include $6,491,194 of expenses from the Portfolio,
$62,024 of operating expenses and $2,152,277 of service fees (Note 9).
7 INTEREST RATE SWAP AGREEMENTS
Belport Capital has entered into interest rate swap agreements with
Merrill Lynch Capital Services, Inc. in connection with its real estate
investments and the associated borrowings. Under such agreements, Belport
Capital has agreed to make periodic payments at fixed rates in exchange
for payments at floating rates. The notional or contractual amounts of
these instruments may not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these
investments is meaningful only when considered in conjunction with all
related assets, liabilities and agreements. Interest rate swap agreements
open at December 31, 2003 are listed below.
41
NOTIONAL INITIAL UNREALIZED
AMOUNT OPTIONAL FINAL APPRECIATION AT
(000'S FIXED FLOATING TERMINATION TERMINATION DECEMBER 31,
OMITTED) RATE RATE DATE DATE 2003
----------------------------------------------------------------------------
$ 34,905 4.565% LIBOR + 0.20% 3/05 6/10 $ 170,784
46,160 4.045% LIBOR + 0.20% 2/10 6/10 326,668
109,822 3.945% LIBOR + 0.20% -- 6/10 1,266,218
----------------------------------------------------------------------------
TOTAL $ 1,763,670
----------------------------------------------------------------------------
On October 1, 2003, new interest rate swap agreements were entered into to
fix a portion of the cost of Belport Capital's borrowings under the New
Credit Facility (Note 8B) established on June 30, 2003. Concurrently, all
interest rate swap agreements outstanding on September 30, 2003 were
terminated, resulting in realized losses of $25,390,804.
8 DEBT
A MORTGAGES -- Rental property held by Belport Realty's controlled
subsidiaries is financed through mortgages issued to the controlled
subsidiaries. The mortgages are secured by the rental property. The
mortgages are generally without recourse to Belport Realty and Belport
Capital, except, in the case of Bel Multifamily, for certain liabilities
associated with fraud, misrepresentation, misappropriation of funds, or
breach of material covenants, and liabilities arising from environmental
conditions involving or affecting the rental property subject to the
mortgages. Belport Capital and Belport Realty have received
indemnification from the Bel Multifamily Minority Shareholder (Note 1B)
for certain of such potential liabilities. The estimated fair value of the
rental property securing the loans was $484,704,890 at December 31, 2003.
Amounts outstanding at December 31, 2003, are as follows:
ANNUAL MONTHLY BALANCE AT
MATURITY INTEREST INTEREST DECEMBER 31,
DATE RATE PAYMENT* 2003
--------------------------------------------------------
April 1, 2009 7.89% $ 100,647 $ 15,307,500
March 1, 2011 6.95% 832,842 143,800,000
April 1, 2011 6.57% 1,105,952 202,000,000
--------------------------------------------------------
$ 2,039,441 $ 361,107,500
--------------------------------------------------------
* Mortgages provide for monthly payments of interest only through the
respective maturity date, with the entire principal balance due on the
respective maturity date.
The estimated market value of the mortgage notes payable is approximately
$394,000,000 at December 31, 2003. The mortgage notes payable cannot be
prepaid or otherwise disposed of without incurring a substantial
prepayment penalty or without the sale of the rental property financed by
the mortgage notes payable. Management generally has no current plans to
prepay or otherwise dispose of the mortgage notes payable or sell the
related rental property prior to the maturity date. The market value of
the mortgages is based on estimates using discounted cash flow analysis
and currently prevailing rates. Considerable judgment is necessary in
interpreting market data to develop estimates of market value. The use of
different assumptions or estimation methodologies may have a material
effect on the estimated market value.
B CREDIT FACILITY -- On June 30, 2003, Belport Capital refinanced its
credit facility with Citicorp North America, Inc. with two new credit
arrangements (collectively, the New Credit Facility). The New Credit
Facility has a seven-year maturity and will expire on June 25, 2010.
Belport Capital's obligations under the New Credit Facility are secured by
a pledge of its assets, excluding the assets of Bel Multifamily and
Monadnock.
At the date the agreement was entered into, Belport Capital borrowed
$221,000,000 with DrKW Holdings, Inc., which increased to $230,500,000 as
of September 29, 2003. Borrowings under this credit arrangement accrue
interest at a rate of one-month LIBOR plus 0.20% per annum. As of December
31, 2003, outstanding borrowings under this credit arrangement totaled
$230,500,000.
The $54,000,000 credit arrangement with Merrill Lynch Mortgage Capital,
Inc. includes the ability to issue letters of credit up to $10,000,000.
This credit arrangement accrues interest at a rate of one-month LIBOR plus
0.38% per annum. A commitment fee of 0.10% per annum is paid on the unused
commitment amount. Belport Capital pays all fees associated with issuing
the letters of credit. As of December 31, 2003, there were no outstanding
borrowings under this credit arrangement. There was $1,584,000 outstanding
under a letter of credit as of December 31, 2003. The letter of credit was
issued as a substitute for funding certain mortgage escrow accounts
required by the lender of Bel Multifamily. The letter of credit expires on
June 30, 2004 and automatically extends for one-year periods not to extend
beyond June 15, 2010.
Borrowings under the New Credit Facility have been used to purchase the
Fund's interests in real estate investments, to pay selling commissions
and organizational expenses, and to provide for the short-term liquidity
needs of the Fund. Additional borrowings under the New Credit Facility may
be made in the future for these purposes.
42
9 MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Belport Capital and the Portfolio have engaged Boston Management as
Investment Adviser. Under the terms of the advisory agreement with the
Portfolio, Boston Management receives a monthly advisory fee of 5/96 of 1%
(0.625% annually) of the average daily net assets of the Portfolio up to
$500,000,000 and at reduced rates as daily net assets exceed that level.
For the year ended December 31, 2003, the advisory fee applicable to the
Portfolio was 0.44% of average daily net assets. Belvedere Capital's
allocated portion of the advisory fee totaled $41,671,111 of which
$6,277,917 was allocated to Belport Capital for the year ended December
31, 2003.
In addition, Boston Management is, subject to the fee cap described below,
entitled to receive a monthly advisory and administrative fee of 1/20 of
1% (0.60% annually) of the average daily gross assets of Belport Capital.
The term "gross assets" with respect to Belport Capital is defined to
include the current value of all of Belport Capital's assets (including
Belport Capital's interest in Belvedere Capital and Belport Capital's
ratable share of the assets of its directly and indirectly controlled
subsidiaries), without reduction by any liabilities. Belport Realty pays
Boston Management a monthly management fee at a rate of 1/20 of 1%
(equivalent to 0.60% annually) of the average daily gross assets of
Belport Realty. The term "gross assets" with respect to Belport Realty is
defined to include the current value of all assets of Belport Realty,
including Belport Realty's ratable share of the assets of its controlled
subsidiaries, without reduction by any liabilities. For this purpose, the
assets of Belport Realty's controlled subsidiaries are reduced by the
proportionate interest therein of investors other than Belport Realty. For
the year ended December 31, 2003, the advisory and administrative fee paid
or accrued to Boston Management by Belport Capital, plus the management
fee paid or accrued to Boston Management by Belport Realty, totaled
$5,430,355.
Eaton Vance and Boston Management do not receive separate compensation for
serving as Manager of Belport Capital and Manager of Belvedere Capital,
respectively.
As compensation for its services as Placement Agent, Belport Capital pays
EV Distributors a monthly distribution fee at a rate of 1/120 of 1%
(equivalent to 0.10% annually) of Belport Capital's average daily net
assets. For the year ended December 31, 2003, Belport Capital's
distribution fees paid or accrued to EV Distributors totaled $1,390,860.
Payments to the Eaton Vance organization for investment advisory,
management, administration and distribution services made by or in respect
of Belport Capital on a direct or indirect basis are subject to a monthly
fee cap at a rate of 1/20th of 1% (equivalent to 0.60% annually) of the
average daily gross assets of Belport Capital (as defined above). Payments
subject to the monthly fee cap are the distribution fee paid to EV
Distributors, Belport Capital's attributable share of the advisory and
management fees paid by the Portfolio and Belport Realty, and Belport
Capital's advisory and administrative fee. Boston Management has agreed to
waive a portion of the monthly advisory and administrative fee otherwise
payable by Belport Capital as necessary to comply with the monthly fee
cap. For the year ended December 31, 2003, Boston Management has waived
$1,390,860 of the advisory and administrative fees of Belport Capital.
Pursuant to a servicing agreement between Belvedere Capital and EV
Distributors, Belvedere Capital pays a servicing fee to EV Distributors
for providing certain services and information to Shareholders. The
servicing fee is paid on a quarterly basis at an annual rate of 0.15% of
Belvedere Capital's average daily net assets and totaled $14,288,579 for
the year ended December 31, 2003, of which $2,152,277 was allocated to
Belport Capital. Pursuant to a servicing agreement between Belport Capital
and EV Distributors, Belport Capital pays a servicing fee to EV
Distributors on a quarterly basis at an annual rate of 0.25% of Belport
Capital's average daily net assets, less Belport Capital's allocated share
of the servicing fee payable by Belvedere Capital. For the year ended
December 31, 2003, the servicing fee paid directly by Belport Capital
totaled $1,322,277. Of the servicing fee amounts allocated to and incurred
by Belport Capital for the year ended December 31, 2003, $3,444,493 was
paid or accrued to subagents.
Management services for the real property held by Bel Multifamily and
Monadnock are provided by an affiliate of each respective entity's
Minority Shareholder (Note 1B). Each management agreement provides for a
management fee and allows for reimbursement of payroll expenses incurred
by the managers in conjunction with managing each respective entity's
properties (Note 1B). For the year ended December 31, 2003, Belport
Realty's controlled subsidiaries paid or accrued property management fees
of $2,613,099.
43
10 SEGMENT INFORMATION
Belport Capital pursues its investment objective primarily by investing
indirectly in the Portfolio through Belvedere Capital. The Portfolio is a
diversified investment company that emphasizes investments in common
stocks of domestic and foreign growth companies that are considered to be
high in quality and attractive in their long-term investment prospects.
Separate from its investment in Belvedere Capital, Belport Capital invests
in real estate assets through its subsidiary Belport Realty. Belport
Realty invests directly and indirectly in Partnership Preference Units and
indirectly in real property through controlled subsidiaries, Bel
Multifamily, Monadnock and Bel Oakbrook (for the period from March 19,
2003, to May 13, 2003) (Note 1).
Belport Capital evaluates performance of the reportable segments based on
the net increase (decrease) in net assets from operations of the
respective segment, which includes net investment income (loss), realized
gain (loss) and unrealized appreciation (depreciation). The accounting
policies of the reportable segments are the same as those for Belport
Capital on a consolidated basis (Note 2). No reportable segments have been
aggregated. Reportable information by segment is as follows:
TAX-
MANAGED
FOR THE YEAR ENDED GROWTH REAL
DECEMBER 31, 2003 PORTFOLIO* ESTATE TOTAL
-------------------------------------------------------------------------------
Revenue $ 12,933,263 $ 73,882,093 $ 86,815,356
Interest expense
on mortgages -- (25,392,737) (25,392,737)
Interest expense
on credit facilities -- (3,272,831) (3,272,831)
Operating expenses (1,011,068) (31,818,763) (32,829,831)
Minority interest in
net income of
controlled subsidiaries -- (2,442,982) (2,442,982)
-------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 11,922,195 $ 10,954,780 $ 22,876,975
Net realized gain (loss) 18,664,636 (28,687,186) (10,022,550)
Change in unrealized
appreciation
(depreciation) 285,637,095 23,449,719 309,086,814
-------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS OF
REPORTABLE SEGMENTS $ 316,223,926 $ 5,717,313 $ 321,941,239
-------------------------------------------------------------------------------
Segment assets $ 1,611,769,203 $ 589,657,910 $ 2,201,427,113
Segment liabilities 16,596,400 598,192,300 614,788,700
-------------------------------------------------------------------------------
NET ASSETS OF
REPORTABLE SEGMENTS $ 1,595,172,803 $ (8,534,390) $ 1,586,638,413
-------------------------------------------------------------------------------
* Belport Capital invests indirectly in Tax-Managed Growth Portfolio
through Belvedere Capital.
The following tables reconcile the reported segment information to the
consolidated financial statements for the year ended December 31, 2003:
Revenue:
Revenue from reportable segments $ 86,815,356
Unallocated amounts:
Interest earned on cash not invested in the
Portfolio or in subsidiaries 107,615
--------------------------------------------------------------------------------------
TOTAL REVENUE $ 86,922,971
--------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations:
Net increase in net assets from operations of
reportable segments $ 321,941,239
Unallocated amounts:
Interest earned on cash not invested
in the Portfolio or in subsidiaries 107,615
Unallocated amounts(1):
Distribution and servicing fees (2,713,137)
Interest expense on credit facilities (284,594)
Audit, tax and legal fees (215,470)
Other operating expenses (122,545)
--------------------------------------------------------------------------------------
TOTAL NET INCREASE IN NET ASSETS FROM OPERATIONS $ 318,713,108
--------------------------------------------------------------------------------------
Net assets:
Net assets of reportable segments $ 1,586,638,413
Unallocated cash(2) 2,138,196
Short-term investments(2) 4,821,135
Loan payable -- New Credit Facility(3) (8,568,222)
Other liabilities (176,110)
--------------------------------------------------------------------------------------
TOTAL NET ASSETS $ 1,584,853,412
--------------------------------------------------------------------------------------
(1) Unallocated amounts represent expenses incurred that pertain to the
overall operation of Belport Capital, and do not pertain to either
operating segment.
(2) Unallocated cash and short-term investments represent cash and cash
equivalents not invested in the Portfolio or real estate assets.
(3) Unallocated amount of loan payable -- New Credit Facility represents
borrowings not specifically used to fund real estate investments. Such
borrowings are generally used to pay selling commissions, organization
expenses and other liquidity needs of the Fund.
11 SUBSEQUENT EVENT (UNAUDITED)
On January 14, 2004, the Fund made a distribution of $0.76 per Share to
Shareholders of record on January 13, 2004.
44
BELPORT CAPITAL FUND LLC as of December 31, 2003
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS
OF BELPORT CAPITAL FUND LLC AND SUBSIDIARIES:
We have audited the accompanying consolidated statement of assets and
liabilities, including the consolidated portfolio of investments, of Belport
Capital Fund LLC and subsidiaries (collectively, the Fund) as of December 31,
2003, and the related consolidated statements of operations and cash flows for
the year then ended, the consolidated statements of changes in net assets for
each of the two years in the period then ended, and financial highlights for
the year then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the 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. Our procedures included confirmation of securities
owned as of December 31, 2003 by correspondence with the custodian and
brokers. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Fund
as of December 31, 2003, the results of its operations, its cash flows, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with accounting principles generally accepted in
the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 5, 2004
45
TAX-MANAGED GROWTH PORTFOLIO as of December 31, 2003
PORTFOLIO OF INVESTMENTS
COMMON STOCKS -- 99.2%
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
AEROSPACE AND DEFENSE -- 2.5%
Boeing Company (The) 797,051 $ 33,587,729
General Dynamics 735,000 66,436,650
Honeywell International, Inc. 275,998 9,226,613
Northrop Grumman Corp. 1,684,522 161,040,303
Raytheon Company 313,599 9,420,514
Rockwell Collins, Inc. 203,032 6,097,051
Teledyne Technologies Incorporated(1) 6,117 115,305
United Technologies Corp. 1,582,098 149,935,427
- ------------------------------------------------------------------------------------------------------
$ 435,859,592
- ------------------------------------------------------------------------------------------------------
AIR FREIGHT AND LOGISTICS -- 2.6%
FedEx Corporation 2,106,578 $ 142,194,015
Robinson (C.H.) Worldwide, Inc. 1,186,638 44,985,447
United Parcel Service, Inc. Class B 3,549,425 264,609,634
- ------------------------------------------------------------------------------------------------------
$ 451,789,096
- ------------------------------------------------------------------------------------------------------
AIRLINES -- 0.0%
Southwest Airlines, Inc. 126,393 $ 2,039,983
- ------------------------------------------------------------------------------------------------------
$ 2,039,983
- ------------------------------------------------------------------------------------------------------
AUTO COMPONENTS -- 0.2%
ArvinMeritor, Inc. 33,635 $ 811,276
Borg-Warner Automotive, Inc. 203,981 17,352,664
Dana Corp. 25,000 458,750
Delphi Automotive Systems Corp. 6,338 64,711
Johnson Controls, Inc. 114,364 13,279,948
Visteon Corp. 10,226 106,453
- ------------------------------------------------------------------------------------------------------
$ 32,073,802
- ------------------------------------------------------------------------------------------------------
AUTOMOBILES -- 0.1%
DaimlerChrysler AG 7,000 $ 323,540
Ford Motor Co. 145,884 2,334,144
General Motors Corp. 13,896 742,046
Harley-Davidson, Inc. 137,700 6,544,881
Honda Motor Co. Ltd. ADR 20,000 450,000
- ------------------------------------------------------------------------------------------------------
$ 10,394,611
- ------------------------------------------------------------------------------------------------------
BEVERAGES -- 3.9%
Anheuser-Busch Companies, Inc. 3,381,243 $ 178,123,881
Coca-Cola Company (The) 3,177,651 161,265,788
Coca-Cola Enterprises, Inc. 1,729,424 $ 37,822,503
PepsiCo., Inc. 6,531,299 304,489,159
- ------------------------------------------------------------------------------------------------------
$ 681,701,331
- ------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY -- 1.7%
Amgen, Inc.(1) 3,861,137 $ 238,618,267
Applera Corp. - Celera Genomics Group(1) 26,000 361,660
Genzyme Corp. - General Division(1) 464,926 22,939,449
Gilead Sciences, Inc.(1) 39,362 2,288,507
Incyte Pharmaceuticals, Inc.(1) 14,294 97,771
Invitrogen Corp.(1) 467,551 32,728,570
Vertex Pharmaceuticals, Inc.(1) 13,000 132,990
- ------------------------------------------------------------------------------------------------------
$ 297,167,214
- ------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS -- 0.9%
American Standard Companies, Inc.(1) 331,609 $ 33,393,026
CRH plc 329,450 6,752,716
Masco Corporation 4,145,436 113,626,401
Water Pik Technologies(1) 2,141 26,270
- ------------------------------------------------------------------------------------------------------
$ 153,798,413
- ------------------------------------------------------------------------------------------------------
CAPITAL MARKETS -- 3.8%
Affiliated Managers Group(1) 13,680 $ 951,991
Bank of New York Co., Inc. (The) 441,413 14,619,599
Bear Stearns Companies, Inc. 83,352 6,663,992
Credit Suisse Group 155,136 5,676,090
Federated Investors, Inc. 1,634,947 48,002,044
Franklin Resources, Inc. 1,508,429 78,528,814
Goldman Sachs Group, Inc. 9,627 950,474
Investors Financial Services Corp. 475,402 18,260,191
Knight Trading Group, Inc.(1) 1,750,000 25,620,000
Legg Mason, Inc. 17,641 1,361,532
Lehman Brothers Holdings, Inc. 57,486 4,439,069
Mellon Financial Corporation 221,912 7,125,594
Merrill Lynch & Co., Inc. 1,761,959 103,338,895
Morgan (J.P.) Chase & Co. 394,005 14,471,804
Morgan Stanley Dean Witter & Co. 4,770,551 276,071,786
Northern Trust Corp. 261,505 12,139,062
Nuveen Investments Class A 150,000 3,999,000
Price (T. Rowe) Group, Inc. 171,434 8,127,686
Raymond James Financial, Inc. 98,225 3,703,082
Schwab (Charles) & Co. 946,055 11,201,291
See notes to financial statements.
46
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
CAPITAL MARKETS (CONTINUED)
State Street Corp. 328,000 $ 17,082,240
UBS AG 49,812 3,386,718
Waddell & Reed Financial, Inc., Class A 271,320 6,365,167
- ------------------------------------------------------------------------------------------------------
$ 672,086,121
- ------------------------------------------------------------------------------------------------------
CHEMICALS -- 1.0%
Airgas, Inc. 389,753 $ 8,371,894
Arch Chemicals, Inc. 4,950 127,017
Bayer AG ADR 40,000 1,176,400
Dow Chemical Co. (The) 267,064 11,101,850
DuPont (E.I.) de Nemours & Co. 1,302,039 59,750,570
Ecolab, Inc. 318,168 8,708,258
MacDermid, Inc. 61,937 2,120,723
Monsanto Company 28,797 828,778
Olin Corp. 9,900 198,594
PPG Industries, Inc. 23,542 1,507,159
Rohm and Haas, Co. 2,601 111,089
RPM, Inc. 88,338 1,454,043
Sigma-Aldrich Corp. 630,897 36,074,690
Solutia Inc.(1) 20,293 7,407
Valspar Corp. 818,316 40,441,177
- ------------------------------------------------------------------------------------------------------
$ 171,979,649
- ------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS -- 8.3%
AmSouth Bancorporation 812,145 $ 19,897,552
Associated Banc-Corp. 749,148 31,951,162
Bank of America Corporation 2,257,529 181,573,057
Bank of Hawaii Corp. 49,425 2,085,735
Bank of Montreal 269,166 11,116,556
Bank One Corp. 1,786,768 81,458,753
Banknorth Group, Inc. 50,125 1,630,566
BB&T Corp. 1,276,393 49,319,826
Charter One Financial, Inc. 251,993 8,706,358
City National Corp. 273,260 16,974,911
Colonial Bancgroup, Inc. (The) 253,936 4,398,172
Comerica, Inc. 241,725 13,551,103
Commerce Bancshares, Inc. 147,766 7,243,489
Community First Bancshares, Inc. 360,184 10,423,725
Compass Bancshares, Inc. 358,352 14,086,817
Fifth Third Bancorp 1,209,520 71,482,632
First Citizens BancShares, Inc. 43,651 5,304,906
First Financial Bancorp. 47,933 764,531
First Midwest Bancorp, Inc. 815,329 $ 26,424,813
First Tennessee National Corporation 157,089 6,927,625
FleetBoston Financial Corporation 715,716 31,241,003
Hibernia Corp. Class A 187,345 4,404,481
HSBC Holdings PLC ADR 608,017 47,923,900
Huntington Bancshares, Inc. 578,423 13,014,517
Keycorp 625,951 18,352,883
M&T Bank Corp. 37,734 3,709,252
Marshall & Ilsley Corp. 683,798 26,155,273
National City Corp. 1,598,288 54,245,895
National Commerce Financial Corp. 1,113,055 30,364,140
North Fork Bancorporation, Inc. 53,534 2,166,521
PNC Bank Corp. 156,003 8,538,044
Popular, Inc. 716 32,177
Regions Financial Corp. 1,624,786 60,442,039
Royal Bank of Scotland Group PLC 50,837 1,497,956
S&T Bancorp, Inc. 100,000 2,990,000
SouthTrust Corp. 506,253 16,569,661
Southwest Bancorporation of Texas, Inc.(1) 815,601 31,686,099
SunTrust Banks, Inc. 425,640 30,433,260
Synovus Financial Corp. 1,345,581 38,914,203
TCF Financial Corporation 28,000 1,437,800
U.S. Bancorp 4,150,861 123,612,641
Union Planters Corp. 703,729 22,160,426
Valley National Bancorp 202,293 5,906,956
Wachovia Corp. 1,901,325 88,582,732
Wells Fargo & Company 3,129,623 184,303,498
Westamerica Bancorporation 268,474 13,343,158
Whitney Holding Corp. 353,200 14,477,668
Zions Bancorporation 252,271 15,471,780
- ------------------------------------------------------------------------------------------------------
$ 1,457,300,252
- ------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES AND SUPPLIES -- 2.4%
Allied Waste Industries, Inc.(1) 1,674,390 $ 23,240,533
Apollo Group, Inc. Class A(1) 7,599 516,732
Arbitron, Inc.(1) 30,885 1,288,522
Avery Dennison Corp. 1,350,977 75,681,732
Banta Corp. 42,341 1,714,810
Block (H&R), Inc. 732,354 40,550,441
Bowne & Company 172,640 2,340,998
Cendant Corp.(1) 549,359 12,234,225
Century Business Services, Inc.(1) 370,000 1,653,900
Cintas Corp. 1,326,202 66,482,506
See notes to financial statements.
47
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES AND SUPPLIES (CONTINUED)
Consolidated Graphics, Inc.(1) 70,215 $ 2,217,390
Deluxe Corporation 32,000 1,322,560
Donnelley (R.R.) & Sons Co. 200,521 6,045,708
Equifax, Inc. 85,724 2,100,238
Gevity HR, Inc. 78,125 1,737,500
Harland (John H.) Co. 51,540 1,407,042
HON Industries, Inc. 1,552,470 67,253,000
Hudson Highland Group, Inc.(1) 11,581 276,207
Imagistics International Inc.(1) 2,482 93,075
Manpower, Inc. 112,000 5,272,960
Miller (Herman) Inc. 541,800 13,149,486
Monster Worldwide Inc.(1) 154,426 3,391,195
Navigant Consulting, Inc.(1) 463,017 8,732,501
Pitney Bowes, Inc. 89,799 3,647,635
ServiceMaster Co. 1,318,302 15,358,218
Steelcase Inc. 123,000 1,766,280
Sylvan Learning Systems, Inc.(1) 538,458 15,502,206
United Rentals, Inc.(1) 401,179 7,726,708
Waste Management, Inc. 1,255,659 37,167,506
- ------------------------------------------------------------------------------------------------------
$ 419,871,814
- ------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT -- 1.3%
3Com Corp.(1) 873,949 $ 7,140,163
ADC Telecommunications, Inc.(1) 370,286 1,099,749
Advanced Fibre Communication, Inc.(1) 15,000 302,250
Alcatel S.A. ADR(1) 43,728 561,905
Avaya, Inc.(1) 56,960 737,062
Ciena Corp.(1) 380,378 2,525,710
Cisco Systems, Inc.(1) 3,441,441 83,592,602
Comverse Technology, Inc.(1) 386,378 6,796,389
Corning, Inc.(1) 651,520 6,795,354
Enterasys Networks, Inc.(1) 55,945 209,794
JDS Uniphase Corp.(1) 52,451 191,446
Lucent Technologies, Inc.(1) 555,464 1,577,518
McData Corp., Class A(1) 18,562 176,896
Motorola, Inc. 741,114 10,427,474
Nokia Corp., Class A, ADR 4,870,478 82,798,126
Nortel Networks Corp.(1) 1,306,729 5,527,464
Qualcomm, Inc. 344,112 18,557,960
Riverstone Networks, Inc.(1) 28,706 31,864
Tellabs, Inc.(1) 118,404 998,146
- ------------------------------------------------------------------------------------------------------
$ 230,047,872
- ------------------------------------------------------------------------------------------------------
COMPUTERS AND PERIPHERALS -- 3.1%
Dell, Inc.(1) 4,305,989 $ 146,231,386
EMC Corp.(1) 1,104,455 14,269,559
Gateway, Inc.(1) 99,407 457,272
Hewlett-Packard Co. 1,197,265 27,501,177
International Business Machines Corp. 2,286,121 211,877,694
Lexmark International Group, Inc.(1) 1,704,885 134,072,156
Network Appliance, Inc.(1) 488,000 10,018,640
Palmone, Inc.(1) 65,230 766,453
Sun Microsystems, Inc.(1) 370,670 1,664,308
- ------------------------------------------------------------------------------------------------------
$ 546,858,645
- ------------------------------------------------------------------------------------------------------
CONSTRUCTION AND ENGINEERING -- 0.1%
Dycom Industries, Inc.(1) 151,725 $ 4,069,264
Jacobs Engineering Group, Inc.(1) 354,741 17,031,115
- ------------------------------------------------------------------------------------------------------
$ 21,100,379
- ------------------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS -- 0.0%
Vulcan Materials Company 184,512 $ 8,777,236
- ------------------------------------------------------------------------------------------------------
$ 8,777,236
- ------------------------------------------------------------------------------------------------------
CONSUMER FINANCE -- 0.9%
American Express Co. 521,715 $ 25,162,314
Capital One Financial Corp. 1,245,321 76,325,724
MBNA Corporation 456,002 11,331,650
Providian Financial Corp.(1) 457,296 5,322,925
SLM Corp. 905,499 34,119,202
- ------------------------------------------------------------------------------------------------------
$ 152,261,815
- ------------------------------------------------------------------------------------------------------
CONTAINERS AND PACKAGING -- 0.1%
Bemis Co. 207,593 $ 10,379,650
Caraustar Industries, Inc.(1) 192,532 2,656,942
Sealed Air Corp.(1) 37,014 2,003,938
Sonoco Products Co. 160,690 3,956,188
Temple-Inland, Inc. 57,962 3,632,479
- ------------------------------------------------------------------------------------------------------
$ 22,629,197
- ------------------------------------------------------------------------------------------------------
DEPARTMENT STORES -- 0.0%
Neiman Marcus Group, Inc. (The)(1) 27,117 $ 1,355,850
- ------------------------------------------------------------------------------------------------------
$ 1,355,850
- ------------------------------------------------------------------------------------------------------
See notes to financial statements.
48
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
DISTILLERS AND VINTNERS -- 0.1%
Brown-Forman Corp. Class A 154,012 $ 14,931,463
- ------------------------------------------------------------------------------------------------------
$ 14,931,463
- ------------------------------------------------------------------------------------------------------
DISTRIBUTORS -- 0.0%
Genuine Parts Company 188,609 $ 6,261,819
- ------------------------------------------------------------------------------------------------------
$ 6,261,819
- ------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES -- 1.6%
Citigroup Inc. 4,030,512 $ 195,641,052
Finova Group, Inc.(1) 175,587 114,132
ING groep, N.V. ADR 216,111 5,059,159
Moody's Corp. 47,543 2,878,729
Royal Bank of Canada 321,353 15,322,111
Societe Generale 809,647 71,487,377
- ------------------------------------------------------------------------------------------------------
$ 290,502,560
- ------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES -- 2.3%
Alltel Corp. 1,488,598 $ 69,338,895
AT&T Corp. 473,645 9,614,993
BCE, Inc. 4,500,000 100,620,000
BellSouth Corp. 457,572 12,949,288
Cincinnati Bell Inc.(1) 169,013 853,516
Citizens Communications Co.(1) 14,252 177,010
Deutsche Telekom AG(1) 1,956,790 35,476,603
PTEK Holdings, Inc.(1) 28,000 246,680
Qwest Communications International, Inc.(1) 59,924 258,872
RSL Communications Ltd.(1) 247,161 2,472
SBC Communications, Inc. 1,493,660 38,939,716
Sprint Corp. - FON Group 167,078 2,743,421
Talk America Holdings, Inc.(1) 42,372 488,125
Telefonos de Mexico ADR 3,000,000 99,090,000
Verizon Communications 954,938 33,499,225
WorldCom, Inc.(1) 98,634 1,302
WorldCom, Inc. - MCI Group(1) 42,805 2,097
- ------------------------------------------------------------------------------------------------------
$ 404,302,215
- ------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 0.2%
Ameren Corp. 5,000 $ 230,000
American Electric Power, Inc. 960 29,290
Dominion Resources, Inc. 10,464 667,917
Exelon Corp. 500,000 33,180,000
PG&E Corp.(1) 47,705 1,324,768
TECO Energy, Inc. 35,511 $ 511,714
TXU Corp. 250,196 5,934,649
Wisconsin Energy Corp. 9,576 320,317
- ------------------------------------------------------------------------------------------------------
$ 42,198,655
- ------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 0.6%
American Power Conversion Corp. 36,671 $ 896,606
Baldor Electric Co. 149,060 3,406,021
Emerson Electric Co. 1,309,555 84,793,686
Rockwell International Corp. 179,520 6,390,912
Thomas & Betts Corp. 114,600 2,623,194
- ------------------------------------------------------------------------------------------------------
$ 98,110,419
- ------------------------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT AND INSTRUMENTS -- 0.9%
Agilent Technologies, Inc.(1) 599,247 $ 17,521,982
Arrow Electronics, Inc.(1) 8,750 202,475
Flextronics International Ltd.(1) 282,653 4,194,571
Jabil Circuit, Inc.(1) 2,127,971 60,221,579
Molex, Inc., Class A 112,582 3,305,408
National Instruments Corp. 490,458 22,301,125
PerkinElmer, Inc. 300,081 5,122,383
Plexus Corp.(1) 209,946 3,604,773
Roper Industries, Inc. 23,122 1,138,990
Sanmina Corp.(1) 1,164,972 14,690,297
Solectron Corporation(1) 1,818,848 10,749,392
Waters Corp.(1) 165,841 5,499,288
X-Rite Incorporated 361,707 4,094,523
- ------------------------------------------------------------------------------------------------------
$ 152,646,786
- ------------------------------------------------------------------------------------------------------
ENERGY EQUIPMENT AND SERVICES -- 0.5%
Baker Hughes, Inc. 520,182 $ 16,729,053
Core Laboratories N.V.(1) 109,787 1,832,345
Grant Prideco, Inc.(1) 124,234 1,617,527
Halliburton Company 481,502 12,519,052
National-Oilwell, Inc.(1) 686,929 15,359,732
Schlumberger Ltd. 484,178 26,494,220
Smith International, Inc.(1) 140,000 5,812,800
Transocean Sedco Forex, Inc.(1) 6,315 151,623
- ------------------------------------------------------------------------------------------------------
$ 80,516,352
- ------------------------------------------------------------------------------------------------------
FOOD AND STAPLES RETAILING -- 2.3%
Albertson's, Inc. 1,172,238 $ 26,551,191
See notes to financial statements.
49
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
FOOD AND STAPLES RETAILING (CONTINUED)
Casey's General Stores, Inc. 91,201 $ 1,610,610
Costco Wholesale Corp.(1) 1,220,435 45,375,773
CVS Corp. 177,839 6,423,545
Kroger Co. (The)(1) 1,201,784 22,245,022
Safeway, Inc.(1) 1,270,912 27,845,682
Sysco Corp. 1,601,774 59,634,046
Sysco Corp.(2)(3) 32,036 1,190,911
Walgreen Co. 665,292 24,203,323
Wal-Mart Stores, Inc. 3,674,877 194,952,225
Winn-Dixie Stores, Inc. 225,735 2,246,063
- ------------------------------------------------------------------------------------------------------
$ 412,278,391
- ------------------------------------------------------------------------------------------------------
FOOD PRODUCTS -- 2.3%
Archer-Daniels-Midland Co. 316,652 $ 4,819,443
Campbell Soup Co. 1,243,047 33,313,660
Conagra Inc. 1,638,964 43,252,260
Dean Foods Co.(1) 504,216 16,573,580
Del Monte Foods, Co.(1) 103,109 1,072,334
General Mills, Inc. 286,539 12,980,217
Heinz (H.J.) Co. 298,859 10,887,433
Hershey Foods Corp. 244,744 18,842,841
JM Smucker Co. 19,265 872,512
Kellogg Co. 69,795 2,657,794
Kraft Foods, Inc. 165 5,316
McCormick & Co., Inc. 219,798 6,615,920
Nestle SA 200,000 49,969,679
Riviana Foods, Inc. 250,000 6,847,500
Sara Lee Corp. 2,601,502 56,478,608
Smithfield Foods, Inc.(1) 4,207,530 87,095,871
Tyson Foods, Inc. 315,272 4,174,201
Wrigley (Wm.) Jr. Company Class A 933,873 52,493,001
- ------------------------------------------------------------------------------------------------------
$ 408,952,170
- ------------------------------------------------------------------------------------------------------
GAS UTILITIES -- 0.6%
Kinder Morgan, Inc. 1,781,672 $ 105,296,815
- ------------------------------------------------------------------------------------------------------
$ 105,296,815
- ------------------------------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT AND SUPPLIES -- 1.4%
Advanced Medical Optics(1) 3,744 $ 73,570
Bausch & Lomb, Inc. 29,250 1,518,075
Baxter International, Inc. 201,413 6,147,125
Becton & Dickinson and Co. 64,173 $ 2,640,077
Biomet, Inc. 411,340 14,976,889
Boston Scientific Corporation(1) 1,083,970 39,846,737
Dentsply International, Inc. 11,325 511,550
Edwards Lifesciences Corp.(1) 15,420 463,834
Guidant Corp. 54,692 3,292,458
Hillenbrand Industries, Inc. 638,072 39,598,748
Lumenis Ltd.(1) 100,000 135,000
Medtronic, Inc. 2,259,696 109,843,823
Millipore Corporation(1) 70,000 3,013,500
St. Jude Medical, Inc.(1) 10,014 614,359
Steris Corp.(1) 19,538 441,559
VISX, Inc.(1) 50,000 1,157,500
Zimmer Holdings, Inc.(1) 251,155 17,681,312
- ------------------------------------------------------------------------------------------------------
$ 241,956,116
- ------------------------------------------------------------------------------------------------------
HEALTH CARE PROVIDERS AND SERVICES -- 2.0%
AmerisourceBergen Corp. 104,493 $ 5,867,282
Andrx Group(1) 393,772 9,466,279
Beverly Enterprises, Inc.(1) 357,143 3,067,858
Cardinal Health, Inc. 1,837,836 112,402,050
Cigna Corp. 11,836 680,570
Express Scripts, Inc.(1) 14,002 930,153
HCA Inc. 253,450 10,888,212
Health Management Associates, Inc., Class A 1,036,833 24,883,992
IDX Systems Corp.(1) 60,000 1,609,200
IMS Health, Inc. 280,530 6,973,976
McKesson HBOC, Inc. 101,169 3,253,595
Medco Health Solutions, Inc.(1) 131,480 4,469,005
Parexel International Corp.(1) 35,000 569,100
Quest Diagnostics, Inc. 8,750 639,712
Renal Care Group, Inc.(1) 371,007 15,285,488
Schein (Henry), Corp.(1) 1,272,548 85,998,794
Service Corp. International(1) 142,389 767,477
Stewart Enterprises, Inc.(1) 114,000 647,520
Sunrise Assisted Living, Inc.(1) 144,000 5,578,560
Tenet Healthcare Corp.(1) 3,961 63,574
UnitedHealth Group, Inc. 184,976 10,761,904
Ventiv Health, Inc.(1) 160,833 1,471,622
Wellpoint Health Networks(1) 404,000 39,183,960
- ------------------------------------------------------------------------------------------------------
$ 345,459,883
- ------------------------------------------------------------------------------------------------------
See notes to financial statements.
50
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS AND LEISURE -- 1.6%
Brinker International, Inc.(1) 459,469 $ 15,235,992
Carnival Corporation 559,353 22,223,095
CBRL Group, Inc. 62,047 2,373,918
Darden Restaurants Inc. 184,714 3,886,383
Evans (Bob) Farms, Inc. 51,662 1,676,949
Gaylord Entertainment Co.(1) 428,482 12,790,188
International Game Technology 400,000 14,280,000
International Speedway Corporation 118,344 5,285,243
Jack in the Box, Inc.(1) 500,000 10,680,000
Lone Star Steakhouse & Saloon, Inc. 145,981 3,383,840
Marriott International, Inc. 332,298 15,352,168
McDonald's Corp. 1,176,299 29,207,504
MGM Grand, Inc.(1) 94,445 3,552,076
Navigant International, Inc.(1) 44,278 613,250
Outback Steakhouse, Inc. 1,641,207 72,557,761
Papa John's International, Inc.(1) 199,488 6,658,909
Royal Caribbean Cruises Ltd. 500,000 17,395,000
Sonic Corp.(1) 106,510 3,261,336
Starbucks Corp.(1) 1,255,994 41,523,162
Yum! Brands, Inc.(1) 241,659 8,313,070
- ------------------------------------------------------------------------------------------------------
$ 290,249,844
- ------------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES -- 0.5%
Blyth Industries, Inc. 742,373 $ 23,919,258
Department 56, Inc.(1) 255,162 3,342,622
Fortune Brands Inc. 142,143 10,161,803
Helen of Troy Ltd.(1) 20,000 463,000
Interface, Inc. Class A(1) 75,467 417,333
Leggett & Platt, Inc. 1,581,019 34,197,441
Maytag Corp. 27,073 753,983
Newell Rubbermaid, Inc. 438,432 9,983,097
Snap-On, Inc. 51,429 1,658,071
- ------------------------------------------------------------------------------------------------------
$ 84,896,608
- ------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS -- 1.8%
Clorox Co. (The) 53,688 $ 2,607,089
Colgate-Palmolive Co. 676,711 33,869,386
Energizer Holdings(1) 168,981 6,346,926
Kimberly-Clark Corp. 1,535,512 90,733,404
Procter & Gamble Co. 1,877,616 187,536,286
- ------------------------------------------------------------------------------------------------------
$ 321,093,091
- ------------------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES -- 1.9%
3M Co. 564,132 $ 47,968,144
General Electric Co. 8,283,871 256,634,324
Teleflex, Inc. 47,559 2,298,526
Tyco International Ltd. 1,176,566 31,178,999
- ------------------------------------------------------------------------------------------------------
$ 338,079,993
- ------------------------------------------------------------------------------------------------------
INSURANCE -- 6.3%
21st Century Insurance Group 70,700 $ 972,125
Aegon N.V. ADR 5,311,829 78,615,069
AFLAC Corp. 2,092,063 75,690,839
Allstate Corp. (The) 188,362 8,103,333
American International Group, Inc. 5,434,795 360,218,213
AON Corp. 826,887 19,795,675
Berkshire Hathaway, Inc., Class A(1) 393 33,110,250
Berkshire Hathaway, Inc., Class B(1) 40,126 112,954,690
Chubb Corporation 3,901 265,658
Commerce Group, Inc. 120,000 4,740,000
Delphi Financial Group Inc. 9,672 348,192
Gallagher (Arthur J.) and Co. 991,627 32,217,961
Hartford Financial Services Group, Inc. 11,800 696,554
Jefferson-Pilot Corp. 211,013 10,687,808
Kansas City Life Insurance Co. 70,800 3,270,960
Lincoln National Corp. 52,903 2,135,694
Manulife Financial Corp. 74,958 2,421,143
Marsh & McLennan Cos., Inc. 1,830,750 87,674,617
MetLife, Inc. 1,969,700 66,319,799
Old Republic International Corp. 195,360 4,954,330
Progressive Corp. 1,855,100 155,067,809
Safeco Corp. 177,122 6,895,359
St. Paul Companies, Inc. (The) 325,275 12,897,154
Torchmark Corp. 440,119 20,043,019
Travelers Property Casualty - Class A 196,364 3,294,988
Travelers Property Casualty - Class B 403,442 6,846,411
UICI(1) 43,597 578,968
UnumProvident Corp. 53,710 847,007
XL Capital Ltd., Class A 79,232 6,144,442
- ------------------------------------------------------------------------------------------------------
$ 1,117,808,067
- ------------------------------------------------------------------------------------------------------
INTEGRATED TELECOMMUNICATION SERVICES -- 0.0%
McLeodUSA(1) 35,538 $ 52,596
- ------------------------------------------------------------------------------------------------------
$ 52,596
- ------------------------------------------------------------------------------------------------------
See notes to financial statements.
51
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
INTERNET AND CATALOG RETAIL -- 0.4%
eBay, Inc(1)(2)(3) 200,000 $ 12,909,926
eBay, Inc.(1) 89,632 5,789,331
eBay, Inc.(1)(2)(3) 318,000 20,534,485
InterActiveCorp.(1) 806,192 27,354,095
School Specialty Corp.(1) 49,197 1,673,190
- ------------------------------------------------------------------------------------------------------
$ 68,261,027
- ------------------------------------------------------------------------------------------------------
INTERNET SOFTWARE AND SERVICES -- 0.0%
Retek, Inc.(1) 150,348 $ 1,395,229
- ------------------------------------------------------------------------------------------------------
$ 1,395,229
- ------------------------------------------------------------------------------------------------------
IT SERVICES -- 3.1%
Accenture Ltd.(1) 3,638,000 $ 95,752,160
Acxiom Corp.(1) 647,804 12,029,720
Affiliated Computer Services(1) 200,654 10,927,617
Automatic Data Processing, Inc. 2,223,695 88,080,559
BISYS Group, Inc. (The)(1) 280,492 4,173,721
Ceridian Corp.(1) 166,750 3,491,745
Certegy, Inc. 42,862 1,405,874
Computer Sciences Corp.(1) 388,302 17,174,597
Concord EFS, Inc.(1) 267,810 3,974,300
CSG Systems International, Inc.(1) 41,116 513,539
DST Systems, Inc.(1) 391,034 16,329,580
eFunds Corp.(1) 17,645 306,141
Electronic Data Systems Corp. 157,712 3,870,252
First Data Corp. 4,920,602 202,187,536
Gartner Group, Inc., Class A(1) 4,811 54,412
Gartner Group, Inc., Class B(1) 92,416 1,005,486
Keane, Inc.(1) 52,404 767,195
Paychex, Inc. 1,379,399 51,313,643
Perot Systems Corp.(1) 726,775 9,796,927
Safeguard Scientifics, Inc.(1) 26,579 107,379
SunGard Data Systems, Inc.(1) 822,160 22,782,054
- ------------------------------------------------------------------------------------------------------
$ 546,044,437
- ------------------------------------------------------------------------------------------------------
LEISURE EQUIPMENT AND PRODUCTS -- 0.0%
Eastman Kodak Co. 150,547 $ 3,864,541
Mattel, Inc. 9,739 187,671
- ------------------------------------------------------------------------------------------------------
$ 4,052,212
- ------------------------------------------------------------------------------------------------------
MACHINERY -- 3.0%
Caterpillar, Inc. 27,255 $ 2,262,710
Danaher Corporation 2,015,985 $ 184,966,624
Deere & Co. 3,450,000 224,422,500
Dionex Corp.(1) 139,750 6,431,295
Donaldson Company, Inc. 40,220 2,379,415
Dover Corp. 375,527 14,927,198
Federal Signal Corp. 283,471 4,966,412
Illinois Tool Works, Inc. 756,502 63,478,083
ITT Industries, Inc. 4,214 312,721
Nordson Corporation 163,978 5,662,160
Parker-Hannifin Corporation 33,842 2,013,599
Tecumseh Products Co., Class A 156,420 7,575,421
Wabtec 232,061 3,954,319
- ------------------------------------------------------------------------------------------------------
$ 523,352,457
- ------------------------------------------------------------------------------------------------------
MEDIA -- 7.0%
ADVO, Inc. 794,552 $ 25,234,972
Belo (A.H.) Corp. 542,924 15,386,466
Cablevision Systems Corp.(1) 207,410 4,851,320
Catalina Marketing Corp.(1) 89,203 1,798,332
Clear Channel Communications, Inc. 424,444 19,876,713
Comcast Corp. Class A(1) 4,466,124 146,801,496
Comcast Corp. Class A Special(1) 2,280,622 71,337,856
Cox Communications, Inc., Class A(1) 1,265,627 43,600,850
Disney (Walt) Company 6,250,933 145,834,267
EchoStar Communications, Class A(1) 35,150 1,195,100
Entercom Communications Corp.(1) 220,000 11,651,200
Gannett Co., Inc. 1,447,727 129,079,339
Havas Advertising, S.A. ADR 3,142,938 18,417,617
Hughes Electronics Corp.(1) 24 397
Interpublic Group of Companies., Inc.(1) 1,520,905 23,726,118
KnightRidder, Inc. 18,123 1,402,177
Lamar Advertising Co.(1) 243,271 9,078,874
Liberty Media Corp. Class A(1) 965,499 11,479,783
Liberty Media Corp. Class B(1) 32,876 453,689
MacClatchy Co. (The) 48,066 3,306,941
McGraw-Hill Companies, Inc. (The) 246,964 17,267,723
Meredith Corp. 190,000 9,273,900
New York Times Co. (The), Class A 282,204 13,486,529
News Corporation Ltd. 93,967 2,842,502
Omnicom Group, Inc. 2,334,382 203,861,580
Proquest Company(1) 115,000 3,386,750
Publicis Groupe SA 367,533 11,914,205
Reuters Holdings plc ADR 1,431 36,319
See notes to financial statements.
52
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
MEDIA (CONTINUED)
Scripps (The E.W) Company 25,533 $ 2,403,677
Time Warner Inc.(1) 3,754,241 67,538,796
Tribune Co. 1,501,683 77,486,843
Univision Communications, Inc.(1) 917,233 36,404,978
Viacom, Inc., Class A 29,774 1,318,095
Viacom, Inc., Class B 1,383,821 61,413,976
Vivendi Universal S.A. ADR(1) 490,725 11,914,803
Washington Post Co. (The) 14,970 11,847,258
Westwood One, Inc.(1) 122,400 4,187,304
WPP Group plc 139,450 1,369,256
WPP Group plc ADR 209,454 10,294,664
- ------------------------------------------------------------------------------------------------------
$ 1,232,762,665
- ------------------------------------------------------------------------------------------------------
METALS AND MINING -- 0.2%
Alcoa, Inc. 558,287 $ 21,214,906
Allegheny Technologies, Inc. 21,408 283,014
Nucor Corp. 221,462 12,401,872
Phelps Dodge Corp.(1) 14,862 1,130,850
Steel Dynamics, Inc.(1) 311,800 7,324,182
Worthington Industries, Inc. 147,466 2,658,812
- ------------------------------------------------------------------------------------------------------
$ 45,013,636
- ------------------------------------------------------------------------------------------------------
MULTILINE RETAIL -- 1.8%
99 Cents Only Stores(1) 1,142,232 $ 31,102,977
Dollar General Corp. 101,456 2,129,561
Dollar Tree Stores, Inc.(1) 813,306 24,447,978
Family Dollar Stores, Inc. 2,618,411 93,948,587
Kohls Corp.(1) 55 2,472
May Department Stores Co. (The) 632,760 18,394,333
Nordstrom, Inc. 65,692 2,253,236
Penney (J.C.) Company, Inc. 529,169 13,906,561
Sears, Roebuck & Co. 16,950 771,055
Target Corp. 3,576,019 137,319,130
- ------------------------------------------------------------------------------------------------------
$ 324,275,890
- ------------------------------------------------------------------------------------------------------
MULTI-UTILITIES AND UNREGULATED POWER -- 0.1%
AES Corporation(1) 49,542 $ 467,676
Duke Energy Corp. 419,154 8,571,699
Dynegy, Inc.(1) 63,525 271,887
El Paso Corp. 175,909 1,440,695
National Fuel Gas Co. 4,000 97,760
Williams Companies. Inc. (The) 222,833 $ 2,188,220
- ------------------------------------------------------------------------------------------------------
$ 13,037,937
- ------------------------------------------------------------------------------------------------------
OFFICE ELECTRONICS -- 0.0%
Ikon Office Solutions, Inc. 83,040 $ 984,854
Xerox Corp.(1) 20,000 276,000
Zebra Technologies Corp., Class A(1) 9,000 597,330
- ------------------------------------------------------------------------------------------------------
$ 1,858,184
- ------------------------------------------------------------------------------------------------------
OIL AND GAS -- 5.9%
Amerada Hess Corp. 18,947 $ 1,007,412
Anadarko Petroleum Corp. 2,557,003 130,432,723
Apache Corporation 1,035,690 83,994,459
Ashland, Inc. 85,716 3,776,647
BP plc ADR 5,056,838 249,554,955
Burlington Resources, Inc. 2,130,802 118,003,815
ChevronTexaco Corporation 123,875 10,701,561
ConocoPhillips 1,790,067 117,374,693
Devon Energy Corp. 507,678 29,069,642
Exxon Mobil Corp. 5,811,941 238,289,581
Kerr - McGee Corp. 267,327 12,428,032
Marathon Oil Corp. 1,450 47,980
Murphy Oil Corporation 13,200 862,092
Newfield Exploration Company(1) 60,000 2,672,400
Royal Dutch Petroleum Co. 96,661 5,064,070
Total Fina Elf SA ADR 400,000 37,004,000
Valero Energy Corp. 51,510 2,386,973
- ------------------------------------------------------------------------------------------------------
$ 1,042,671,035
- ------------------------------------------------------------------------------------------------------
PAPER AND FOREST PRODUCTS -- 0.2%
Georgia-Pacific Corp. 647,002 $ 19,843,551
International Paper Co. 232,175 10,009,064
Louisiana-Pacific Corp.(1) 70,750 1,265,010
MeadWestvaco Corp. 84,358 2,509,651
Weyerhaeuser Co. 119,608 7,654,912
- ------------------------------------------------------------------------------------------------------
$ 41,282,188
- ------------------------------------------------------------------------------------------------------
PERSONAL PRODUCTS -- 1.4%
Avon Products, Inc. 186,700 $ 12,600,383
Gillette Company 3,929,412 144,327,303
Lauder (Estee) Companies, Inc. 2,092,312 82,144,169
- ------------------------------------------------------------------------------------------------------
$ 239,071,855
- ------------------------------------------------------------------------------------------------------
See notes to financial statements.
53
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
PHARMACEUTICALS -- 7.0%
Abbott Laboratories 2,482,012 $ 115,661,759
Allergan, Inc. 38,840 2,983,300
Bristol-Myers Squibb Company 3,201,708 91,568,849
Elan Corp., PLC ADR(1) 31,838 219,364
Forest Laboratories, Inc.(1) 656,800 40,590,240
GlaxoSmithKline plc 433,759 20,221,845
Johnson & Johnson 2,917,570 150,721,666
King Pharmaceuticals, Inc.(1) 1,481,117 22,601,845
Lilly (Eli) & Co. 3,173,638 223,201,961
Merck & Co., Inc. 1,611,471 74,449,960
Mylan Laboratories, Inc. 27,992 707,078
Novo Nordisk ADR 292,277 11,971,666
Pfizer, Inc. 7,799,066 275,541,002
Schering AG ADR 25,000 1,277,500
Schering-Plough Corp. 2,478,438 43,100,037
Sepracor, Inc.(1) 4,000 95,720
Teva Pharmaceutical Industries Ltd. ADR 1,200,000 68,052,000
Watson Pharmaceuticals, Inc.(1) 951,175 43,754,050
Wyeth Corp. 974,196 41,354,620
- ------------------------------------------------------------------------------------------------------
$ 1,228,074,462
- ------------------------------------------------------------------------------------------------------
REAL ESTATE -- 0.2%
AvalonBay Communities, Inc. 55,000 $ 2,629,000
Catellus Development Corp. 441,282 10,643,722
Jones Lang Lasalle, Inc.(1) 154,567 3,204,174
Plum Creek Timber Co., Inc. 198,791 6,053,186
Trammell Crow Co.(1) 804,200 10,655,650
- ------------------------------------------------------------------------------------------------------
$ 33,185,732
- ------------------------------------------------------------------------------------------------------
ROAD AND RAIL -- 0.2%
ANC Rental Corporation(1) 459,525 $ 46
Burlington Northern Santa Fe Corp. 203,594 6,586,266
CSX Corporation 38,134 1,370,536
Florida East Coast Industries, Inc. 121,978 4,037,472
Heartland Express, Inc. 435,436 10,533,197
Kansas City Southern Industries, Inc.(1) 15,215 217,879
Norfolk Southern Corp. 3,990 94,364
Union Pacific Corp. 92,772 6,445,799
- ------------------------------------------------------------------------------------------------------
$ 29,285,559
- ------------------------------------------------------------------------------------------------------
SEMICONDUCTORS AND SEMICONDUCTOR
EQUIPMENT -- 2.6%
Agere Systems, Inc.(1) 6,495 $ 19,810
Agere Systems, Inc., Class B(1) 159,398 462,254
Altera Corp.(1) 66,116 1,500,833
Analog Devices, Inc.(1) 555,525 25,359,716
Applied Materials, Inc.(1) 418,392 9,392,900
Applied Materials, Inc.(1)(2)(3) 543,250 12,183,767
Broadcom Corp.(1) 234,000 7,977,060
Conexant Systems, Inc.(1) 134,174 666,845
Cypress Semiconductor Corporation(1) 152,742 3,262,569
Intel Corp. 9,103,378 293,128,772
KLA-Tencor Corp.(1) 108,382 6,358,772
KLA-Tencor Corp.(1)(2)(3) 50,000 2,929,100
Linear Technologies Corp. 87,760 3,692,063
LSI Logic Corporation(1) 132,810 1,178,025
Maxim Integrated Products Co. 274,351 13,662,680
Mindspeed Technologies Inc.(1) 44,724 306,359
Skyworks Solutions, Inc.(1) 98,685 858,560
Taiwan Semiconductor ADR(1) 1,000,000 10,240,000
Teradyne, Inc.(1) 27,996 712,498
Texas Instruments, Inc. 1,970,330 57,888,295
Xilinx, Inc.(1) 68,518 2,654,387
- ------------------------------------------------------------------------------------------------------
$ 454,435,265
- ------------------------------------------------------------------------------------------------------
SOFTWARE -- 2.5%
Adobe Systems, Inc. 261,994 $ 10,296,364
BMC Software, Inc.(1) 27,000 503,550
Cadence Design Systems, Inc.(1) 900,000 16,182,000
Cognos, Inc.(1) 77,000 2,357,740
Computer Associates International, Inc. 33,070 904,134
Compuware Corp.(1) 150,944 911,702
Fair, Isaac and Co., Inc. 707,571 34,784,190
Henry (Jack) & Associates 201,006 4,136,703
I2 Technologies, Inc.(1) 233,752 388,028
Intuit, Inc.(1) 1,108,389 58,644,862
Microsoft Corp. 9,489,802 261,349,147
Oracle Corp.(1) 737,178 9,730,750
PalmSource, Inc.(1) 20,208 440,332
Parametric Technology Corp.(1) 94,600 372,724
PeopleSoft, Inc.(1) 300,680 6,855,504
Reynolds & Reynolds, Co. 451,043 13,102,799
Siebel Systems, Inc.(1) 816,061 11,318,766
Symantec Corporation(1) 30,450 1,055,093
See notes to financial statements.
54
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
SOFTWARE (CONTINUED)
VERITAS Software Corp.(1) 43,942 $ 1,632,885
Wind River Systems, Inc.(1) 91,910 805,132
- ------------------------------------------------------------------------------------------------------
$ 435,772,405
- ------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL -- 2.2%
Abercrombie & Fitch Co.(1) 14,915 $ 368,550
AutoNation, Inc.(1) 3,744,851 68,792,913
Best Buy Co., Inc. 313,610 16,382,986
Boise Cascade Corporation 2,192 72,029
Burlington Coat Factory Warehouse Corp. 609,010 12,886,652
Carmax, Inc.(1) 67,797 2,096,961
Circuit City Stores, Inc. 216,000 2,188,080
Gap, Inc. (The) 541,012 12,556,889
Home Depot, Inc. (The) 3,469,933 123,147,922
Limited Brands, Inc. 813,017 14,658,697
Lowe's Companies 963,356 53,360,289
Office Depot, Inc.(1) 238,664 3,988,075
Payless Shoesource, Inc.(1) 23,100 309,540
Pep Boys - Manny, Moe & Jack (The) 83,415 1,907,701
Pier 1 Imports, Inc. 44,982 983,307
RadioShack Corp. 677,904 20,798,095
Sherwin-Williams Co. (The) 80,569 2,798,967
Staples, Inc.(1) 92,500 2,525,250
Tiffany & Co. 88,000 3,977,600
TJX Companies, Inc. (The) 2,016,834 44,471,190
Too, Inc.(1) 38,284 646,234
- ------------------------------------------------------------------------------------------------------
$ 388,917,927
- ------------------------------------------------------------------------------------------------------
TEXTILES, APPAREL AND LUXURY GOODS -- 0.5%
Coach, Inc.(1) 365,720 $ 13,805,930
Nike Inc., Class B 1,079,222 73,883,538
Unifi, Inc.(1) 42,921 276,840
- ------------------------------------------------------------------------------------------------------
$ 87,966,308
- ------------------------------------------------------------------------------------------------------
THRIFTS AND MORTGAGE FINANCE -- 0.8%
Countrywide Financial Corp. 133,333 $ 10,113,308
Fannie Mae 406,147 30,485,394
Freddie Mac 135,586 7,907,376
Golden West Financial Corporation 21,845 2,254,186
GreenPoint Financial Corp. 1,081,474 38,197,662
MGIC Investment Corp. 85,000 4,839,900
Radian Group, Inc. 30,800 1,501,500
Sovereign Bancorporation, Inc. 23,766 $ 564,443
Washington Mutual, Inc. 1,204,074 48,307,449
- ------------------------------------------------------------------------------------------------------
$ 144,171,218
- ------------------------------------------------------------------------------------------------------
TOBACCO -- 0.2%
Altria Group Inc. 593,732 $ 32,310,895
UST, Inc. 439 15,668
- ------------------------------------------------------------------------------------------------------
$ 32,326,563
- ------------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES -- 0.1%
AT&T Wireless Services, Inc.(1) 1,321,244 $ 10,556,740
Nextel Communications, Inc., Class A(1) 73,122 2,051,803
Sprint Corp. - PCS Group(1) 19,754 111,017
Telephone and Data Systems, Inc. 70,844 4,431,292
Vodafone Group plc ADR 116,617 2,920,090
- ------------------------------------------------------------------------------------------------------
$ 20,070,942
- ------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $14,558,336,419) $ 17,461,971,848
- ------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS -- 0.0%
MULTI-UTILITIES AND UNREGULATED POWER -- 0.0%
Enron Corp.(1)(2) 11,050 $ 8,448
- ------------------------------------------------------------------------------------------------------
$ 8,448
- ------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(IDENTIFIED COST $4,500,777) $ 8,448
- ------------------------------------------------------------------------------------------------------
PREFERRED STOCKS -- 0.0%
COMMERCIAL BANKS -- 0.0%
Wachovia Corp. (Dividend Equalization Preferred Shares)(1) 166,518 $ 832
- ------------------------------------------------------------------------------------------------------
$ 832
- ------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(IDENTIFIED COST $39,407) $ 832
- ------------------------------------------------------------------------------------------------------
RIGHTS -- 0.0%
BANKS -- 0.0%
Bank United Corp. (Litigation Contingent Payment Rights)(1) 102,072 $ 12,249
- ------------------------------------------------------------------------------------------------------
$ 12,249
- ------------------------------------------------------------------------------------------------------
See notes to financial statements.
55
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
COMPUTERS AND BUSINESS EQUIPMENT -- 0.0%
Seagate Technology, Inc. (Tax Refund Rights)(1)(2) 197,392 $ 0
- ------------------------------------------------------------------------------------------------------
$ 0
- ------------------------------------------------------------------------------------------------------
INTEGRATED TELECOMMUNICATION SERVICES -- 0.0%
McLeodUSA (Escrow Rights)(1)(2) 1,592,200 $ 0
- ------------------------------------------------------------------------------------------------------
$ 0
- ------------------------------------------------------------------------------------------------------
TOTAL RIGHTS
(IDENTIFIED COST $50,596) $ 12,249
- ------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 0.3%
PRINCIPAL
AMOUNT
SECURITY (000'S OMITTED) VALUE
- ------------------------------------------------------------------------------------------------------
Investors Bank & Trust Company -
Time Deposit, 1.01%, 1/2/04 $ 47,415 $ 47,415,330
- ------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(AT AMORTIZED COST, $47,415,330) $ 47,415,330
- ------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER -- 0.4%
PRINCIPAL
AMOUNT
SECURITY (000'S OMITTED) VALUE
- ------------------------------------------------------------------------------------------------------
Old Line Funding Corp., 1.09%, 1/9/04 $ 25,000 $ 24,993,944
Transamerica Finance Corp., 1.07%, 1/9/04 50,000 49,988,111
- ------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(AT AMORTIZED COST, $74,982,055) $ 74,982,055
- ------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 99.9%
(IDENTIFIED COST $14,685,324,584) $ 17,584,390,762
- ------------------------------------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES -- 0.1% $ 25,198,243
- ------------------------------------------------------------------------------------------------------
NET ASSETS -- 100.0% $ 17,609,589,005
- ------------------------------------------------------------------------------------------------------
ADR - American Depositary Receipt
(1) Non-income producing security.
(2) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees.
(3) Security restricted from resale for a period not exceeding two years. At
December 31, 2003, the value of these securities totaled $49,748,189 or
0.3% of net assets.
See notes to financial statements.
56
TAX-MANAGED GROWTH PORTFOLIO as of December 31, 2003
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 2003
ASSETS
Investments, at value
(identified cost, $14,685,324,584) $ 17,584,390,762
Cash 5,669
Receivable for investments sold 2,552,453
Dividends and interest receivable 22,326,200
Tax reclaim receivable 578,423
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 17,609,853,507
- ------------------------------------------------------------------------------
LIABILITIES
Payable to affiliate for Trustees' fees $ 8,252
Accrued expenses 256,250
- ------------------------------------------------------------------------------
TOTAL LIABILITIES $ 264,502
- ------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO INVESTORS' INTEREST IN PORTFOLIO $ 17,609,589,005
- ------------------------------------------------------------------------------
SOURCES OF NET ASSETS
Net proceeds from capital contributions and withdrawals $ 14,710,453,882
Net unrealized appreciation (computed on the basis of
identified cost) 2,899,135,123
- ------------------------------------------------------------------------------
TOTAL $ 17,609,589,005
- ------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
INVESTMENT INCOME
Dividends (net of foreign taxes, $2,599,762) $ 229,304,460
Interest 3,621,452
- ------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME $ 232,925,912
- ------------------------------------------------------------------------------
EXPENSES
Investment adviser fee $ 67,584,543
Trustees' fees and expenses 30,403
Custodian fee 1,909,174
Legal and accounting services 85,806
Miscellaneous 270,270
- ------------------------------------------------------------------------------
TOTAL EXPENSES $ 69,880,196
- ------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 163,045,716
- ------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) --
Investment transactions (identified cost basis) $ 73,809,988
Securities sold short (2,985,249)
Foreign currency transactions 85,031
- ------------------------------------------------------------------------------
NET REALIZED GAIN $ 70,909,770
- ------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investments (identified cost basis) $ 3,174,871,573
Securities sold short (203,701)
Foreign currency 41,238
- ------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) $ 3,174,709,110
- ------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN $ 3,245,618,880
- ------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 3,408,664,596
- ------------------------------------------------------------------------------
See notes to financial statements.
57
STATEMENTS OF CHANGES IN NET ASSETS
INCREASE (DECREASE) YEAR ENDED YEAR ENDED
IN NET ASSETS DECEMBER 31, 2003 DECEMBER 31, 2002
- ------------------------------------------------------------------------------
From operations --
Net investment income $ 163,045,716 $ 139,150,041
Net realized gain (loss) 70,909,770 (459,996,840)
Net change in unrealized
appreciation (depreciation) 3,174,709,110 (3,312,547,564)
- ------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
NET ASSETS FROM OPERATIONS $ 3,408,664,596 $ (3,633,394,363)
- ------------------------------------------------------------------------------
Capital transactions --
Contributions $ 1,351,483,956 $ 2,786,165,872
Withdrawals (1,722,081,135) (2,917,114,901)
- ------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
FROM CAPITAL TRANSACTIONS $ (370,597,179) $ (130,949,029)
- ------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS $ 3,038,067,417 $ (3,764,343,392)
- ------------------------------------------------------------------------------
NET ASSETS
At beginning of year $ 14,571,521,588 $ 18,335,864,980
- ------------------------------------------------------------------------------
AT END OF YEAR $ 17,609,589,005 $ 14,571,521,588
- ------------------------------------------------------------------------------
See notes to financial statements.
58
SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Ratios (As a percentage of average
daily net assets):
Expenses 0.45% 0.45% 0.45% 0.45% 0.46%
Net investment income 1.05% 0.85% 0.64% 0.67% 0.72%
Portfolio Turnover 15% 23% 18% 13% 11%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(1) 23.88% (19.52)% (9.67)% -- --
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S OMITTED) $ 17,609,589 $ 14,571,522 $ 18,335,865 $ 18,385,069 $ 15,114,649
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Total return is required to be disclosed for fiscal years beginning after
December 15, 2000.
See notes to financial statements.
59
TAX-MANAGED GROWTH PORTFOLIO as of December 31, 2003
NOTES TO FINANCIAL STATEMENTS
1 SIGNIFICANT ACCOUNTING POLICIES
Tax-Managed Growth Portfolio (the Portfolio) is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Portfolio, which was organized as a
trust under the laws of the State of New York on December 1, 1995, seeks
to provide long-term after-tax returns by investing in a diversified
portfolio of equity securities. The Declaration of Trust permits the
Trustees to issue interests in the Portfolio. The following is a summary
of significant accounting policies consistently followed by the Portfolio
in the preparation of its financial statements. The policies are in
conformity with accounting principles generally accepted in the United
States of America.
A INVESTMENT VALUATIONS -- Marketable securities, including options, that
are listed on foreign or U.S. securities exchanges are valued at closing
sale prices on the exchange where such securities are principally traded.
Marketable securities listed in the NASDAQ National Market System are
valued at the NASDAQ official closing price. Unlisted or listed securities
for which closing sale prices are not available are generally valued at
the mean between the latest bid and asked prices. Futures positions on
securities or currencies are generally valued at closing settlement
prices. Short-term debt securities with a remaining maturity of 60 days or
less are valued at amortized cost, which approximates fair value. Other
fixed income and debt securities, including listed securities and
securities for which price quotations are available, will normally be
valued on the basis of valuations furnished by a pricing service.
Over-the-counter options are normally valued at the mean between the
latest bid and asked price. Investments for which valuations or market
quotations are unavailable are valued at fair value using methods
determined in good faith by or at the direction of the Trustees.
B INCOME TAXES -- The Portfolio is treated as a partnership for federal
tax purposes. No provision is made by the Portfolio for federal or state
taxes on any taxable income of the Portfolio because each investor in the
Portfolio is ultimately responsible for the payment of any taxes on its
share of such taxable income. Since some of the Portfolio's investors are
regulated investment companies that invest all or substantially all of
their assets in the Portfolio, the Portfolio normally must satisfy the
applicable source of income and diversification requirements (under the
Internal Revenue Code) in order for its investors to satisfy them. The
Portfolio will allocate, at least annually among its investors, each
investor's distributive share of the Portfolio's net investment income,
net realized capital gains or losses, and any other items of income, gain,
loss, deduction or credit.
C FUTURES CONTRACTS -- Upon the entering of a financial futures contract,
the Portfolio is required to deposit either in cash or securities an
amount (initial margin) equal to a certain percentage of the purchase
price indicated in the financial futures contract. Subsequent payments are
made or received by the Portfolio (margin maintenance) each day, dependent
on daily fluctuations in the value of the underlying security, and are
recorded for book purposes as unrealized gains or losses by the Portfolio.
The Portfolio's investment in financial futures contracts is designed to
hedge against anticipated future changes in the price of current or
anticipated portfolio positions. Should prices move unexpectedly, the
Portfolio may not achieve the anticipated benefits of the financial
futures contracts and may realize a loss.
D PUT OPTIONS -- Upon the purchase of a put option by the Portfolio, the
premium paid is recorded as an asset in the Statement of Assets and
Liabilities, the value of which is marked-to-market daily. When a
purchased option expires, the Portfolio will realize a loss in the amount
of the premium paid. When the Portfolio enters into a closing sale
transaction, the Portfolio will realize a gain or loss depending on
whether the sales proceeds from the closing sale transaction are greater
or less than the premium paid. When the Portfolio exercises a put option,
settlement is made in cash. The risk associated with purchasing options is
limited to the premium originally paid.
E SECURITIES SOLD SHORT -- The Portfolio may sell a security short if it
owns at least an equal amount of the security sold short or another
security exchangeable for an equal amount of the security sold short in
anticipation of a decline in the market price of the securities or in
order to hedge portfolio positions. The Portfolio will generally borrow
the security sold in order to make delivery to the buyer. Upon executing
the transaction, the Portfolio records the proceeds as deposits with
brokers in the Statement of Assets and Liabilities and establishes an
offsetting payable for securities sold short for the securities due on
settlement. The proceeds are retained by the broker as collateral for the
short position. The liability is marked-to-market and the Portfolio is
required to pay the lending broker any dividend or interest income earned
while the short position is open. A gain or loss is recorded when the
security is delivered to
60
the broker. The Portfolio may recognize a loss on the transaction if the
market value of the securities sold increases before the securities are
delivered.
F FOREIGN CURRENCY TRANSLATION -- Investment valuations, other assets and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates.
Purchases and sales of foreign investment securities and income and
expenses are converted into U.S. dollars based upon currency exchange
rates prevailing on the respective dates of such transactions. Recognized
gains or losses on investment transactions attributable to foreign
currency exchange rates are recorded for financial statement purposes as
net realized gains and losses on investments. That portion of unrealized
gains and losses on investments that results from fluctuations in foreign
currency exchange rates is not separately disclosed.
G INDEMNIFICATIONS -- Under the Portfolio's organizational documents, its
officers and Trustees may be indemnified against certain liabilities and
expenses arising out of the performance of their duties to the Portfolio.
Interestholders in the Portfolio are jointly and severally liable for the
liabilities and obligations of the Portfolio in the event that the
Portfolio fails to satisfy such liabilities and obligations; provided,
however, that, to the extent assets are available in the Portfolio, the
Portfolio may, under certain circumstances, indemnify interestholders from
and against any claim or liability to which such holder may become subject
by reason of being or having been an interestholder in the Portfolio.
Additionally, in the normal course of business, the Fund enters into
agreements with service providers that may contain indemnification
clauses. The Portfolio's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the
Portfolio that have not yet occurred.
H OTHER -- Investment transactions are accounted for on a trade-date
basis. Dividend income is recorded on the ex-dividend date. However, if
the ex-dividend date has passed, certain dividends from foreign securities
are recorded as the Portfolio is informed of the ex-dividend date.
Interest income is recorded on the accrual basis.
I USE OF ESTIMATES -- The preparation of the financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of income and expense
during the reporting period. Actual results could differ from those
estimates.
2 INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The investment adviser fee is earned by Boston Management and Research
(BMR), a wholly-owned subsidiary of Eaton Vance Management (EVM), as
compensation for management and investment advisory services rendered to
the Portfolio. Under the advisory agreement, BMR receives a monthly
advisory fee in the amount of 0.625% annually of average daily net assets
of the Portfolio up to $500,000,000 and at reduced rates as daily net
assets exceed that level. For the year ended December 31, 2003, the
advisory fee was 0.44% of the Portfolio's average daily net assets. Except
for Trustees of the Portfolio who are not members of EVM's or BMR's
organization, officers and Trustees receive remuneration for their
services to the Portfolio out of such investment adviser fee. Trustees of
the Portfolio who are not affiliated with the Investment Adviser may elect
to defer receipt of all or a percentage of their annual fees in accordance
with the terms of the Trustees' Deferred Compensation Plan. For the year
ended December 31, 2003, no significant amounts have been deferred.
Certain officers and Trustees of the Portfolio are officers of the above
organizations.
3 INVESTMENT TRANSACTIONS
For the year ended December 31, 2003, purchases and sales of investments,
other than short-term obligations, aggregated $2,315,531,044 and
$2,601,576,258, respectively. In addition, investments having an aggregate
market value of $701,210,532 at dates of withdrawal were distributed in
payment for capital withdrawals. During the year ended December 31, 2003,
investors contributed securities with a value of $789,740,742.
4 FEDERAL INCOME TAX BASIS OF UNREALIZED APPRECIATION (DEPRECIATION)
The cost and unrealized appreciation (depreciation) in value of the
investments owned at December 31, 2003 as computed on a federal income tax
basis, were as follows:
AGGREGATE COST $ 5,191,822,303
-------------------------------------------------------------------------
Gross unrealized appreciation $ 12,396,006,523
Gross unrealized depreciation (3,438,064)
-------------------------------------------------------------------------
NET UNREALIZED APPRECIATION $ 12,392,568,459
-------------------------------------------------------------------------
61
5 FINANCIAL INSTRUMENTS
The Portfolio may trade in financial instruments with off-balance sheet
risk in the normal course of its investing activities to assist in
managing exposure to various market risks. These financial instruments
include written options, forward foreign currency exchange contracts and
financial futures contracts and may involve, to a varying degree, elements
of risk in excess of the amounts recognized for financial statement
purposes.
The notional or contractual amounts of these instruments represent the
investment the Portfolio has in particular classes of financial
instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting
transactions are considered. The Portfolio did not have any open
obligations under these financial instruments at December 31, 2003.
6 LINE OF CREDIT
The Portfolio participates with other portfolios and funds managed by BMR
and EVM and its affiliates in a $150 million unsecured line of credit
agreement with a group of banks. Borrowings will be made by the Portfolio
solely to facilitate the handling of unusual and/or unanticipated
short-term cash requirements. Interest is charged to each participating
portfolio or fund based on its borrowings at an amount above either the
Eurodollar rate or Federal Funds rate. In addition, a fee computed at an
annual rate of 0.10% on the daily unused portion of the line of credit is
allocated among the participating portfolios and funds at the end of each
quarter. The Portfolio did not have any significant borrowings or
allocated fees during the year ended December 31, 2003.
7 RESTRICTED SECURITIES
At December 31, 2003, the Portfolio owned the following securities
(representing 0.3% of net assets) which were restricted as to public
resale and not registered under the Securities Act of 1933. The securities
are valued at fair value using methods determined in good faith by or at
the direction of the Trustees.
DATE OF
DESCRIPTION ACQUISITION SHARES COST FAIR VALUE
------------------------------------------------------------------------------------
Applied Materials, Inc. 12/17/03 543,250 $ 11,575,935 $ 12,183,767
eBay, Inc 5/13/03 200,000 9,466,769 12,909,926
eBay, Inc. 2/19/03 318,000 12,143,667 20,534,485
KLA-Tencor Corp. 12/17/03 50,000 2,744,377 2,929,100
Sysco Corp. 12/17/03 32,036 1,157,644 1,190,911
------------------------------------------------------------------------------------
$ 37,088,392 $ 49,748,189
------------------------------------------------------------------------------------
62
TAX-MANAGED GROWTH PORTFOLIO as of December 31, 2003
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND INVESTORS
OF TAX-MANAGED GROWTH PORTFOLIO:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Tax-Managed Growth Portfolio (the
Portfolio) as of December 31, 2003, and the related statement of operations
for the year then ended, the statements of changes in net assets for the two
years in the period then ended and the supplementary data for each of the five
years ended in the period then ended. These financial statements and
supplementary data are the responsibility of the Portfolio's management. Our
responsibility is to express an opinion on these financial statements and
supplementary data based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements and supplementary data are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 2003 by correspondence
with the custodian. 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 and supplementary data present
fairly, in all material respects, the financial position of Tax-Managed Growth
Portfolio at December 31, 2003, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and its supplementary data for each of the five years in the
period then ended in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 20, 2004
63
BELPORT CAPITAL FUND LLC as of December 31, 2003
INVESTMENT ADVISER OF
TAX-MANAGED GROWTH PORTFOLIO
AND BELPORT CAPITAL FUND LLC
Boston Management and Research
The Eaton Vance Building
255 State Street
Boston, MA 02109
MANAGER OF BELPORT REALTY CORPORATION
Boston Management and Research
The Eaton Vance Building
255 State Street
Boston, MA 02109
MANAGER OF BELPORT CAPITAL FUND LLC
Eaton Vance Management
The Eaton Vance Building
255 State Street
Boston, MA 02109
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116
INDEPENDENT AUDITORS
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116
64
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 15, 2004.
BELPORT CAPITAL FUND LLC
(Registrant)
By: /s/ Michelle A. Alexander
-------------------------
Michelle A. Alexander
Duly Authorized Officer and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Thomas E. Faust Jr.
-----------------------
Thomas E. Faust Jr.
Chief Executive Officer
Date: March 15, 2004
By: /s/ Michelle A. Alexander
-------------------------
Michelle A. Alexander
Chief Financial Officer
Date: March 15, 2004
65
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3 Copy of Limited Liability Company Agreement of the Fund dated
December 5, 2000 filed as Exhibit 3 to the Fund's Initial
Registration Statement on Form 10 and incorporated herein by
reference. (Note: the LLC Agreement also defines the rights of
the holders of Shares of the Fund)
3(a) Copy of Amendment No. 1 to the Fund's Limited Liability Company
Agreement dated December 30, 2003 filed herewith.
4.1 Copy of Loan and Security Agreement between the Fund and DrKW
Holdings, Inc. dated as of June 30, 2003 filed as Exhibit 4.1 to
the Fund's Report on Form 10-Q filed for the period ended June
30, 2003 and incorporated herein by reference.
4.1(a) Amendment dated September 29, 2003 to Loan and Security Agreement
between the Fund and DrKW Holdings, Inc. filed as Exhibit 4.1(a)
to the Fund's Report on Form 10-Q filed for the period ended
September 30, 2003 and incorporated herein by reference.
4.2 Copy of Loan and Security Agreement among the Fund, Merrill Lynch
Mortgage Capital, Inc., the lenders referred to therein and
Merrill Lynch Capital Services, Inc., dated June 30, 2003 filed
as Exhibit 4.2 to the Fund's Report on Form 10-Q for the period
ended June 30, 2003 and incorporated herein by reference.
4.2(a) Amendment dated September 29, 2003 to Loan and Security Agreement
among Belport Capital Fund, Merrill Lynch Mortgage Capital, Inc.,
as Agent, the Lenders referred to therein and Merrill Lynch
Capital Services, Inc. filed as Exhibit 4.2(a) to the Fund's
Report on Form 10-Q for the period ended September 30, 2003
and incorporated herein by reference.
9 Not applicable and not filed.
10(1) Copy of Investment Advisory and Administration Agreement between
the Fund and Boston Management and Research dated March 7, 2001
filed as Exhibit 10(1) to the Fund's Initial Registration
Statement on Form 10 and incorporated herein by reference.
10(2) Copy of Management Agreement between Belport Realty Corporation
and Boston Management and Research dated March 14, 2001 filed as
Exhibit 10(2) to the Fund's Initial Registration Statement on
Form 10 and incorporated herein by reference.
10(3) Copy of Investor Servicing Agreement between the Fund and Eaton
Vance Distributors, Inc. dated December 5, 2000 filed as Exhibit
10(3) to the Fund's Initial Registration Statement on Form 10 and
incorporated herein by reference.
10(4) Copy of Custody and Transfer Agency Agreement between the Fund
and Investors Bank & Trust Company dated December 5, 2000 filed
as Exhibit 10(4) to the Fund's Initial Registration Statement on
Form 10 and incorporated herein by reference.
11 Not applicable and not filed.
12 Not applicable and not filed.
21 List of Subsidiaries of the Fund.
24 Not applicable and not filed.
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.3 Form N-CSR of Eaton Vance Tax-Managed Growth Portfolio (File No.
811-7409) for its year ended December 31, 2003 filed
electronically with the Securities and Exchange Commission under
the Investment Company Act of 1940 on March 8, 2004 (incorporated
herein by reference pursuant to Rule 12b-32).
66