UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2004
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[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________ to _____________
Commission File No. 000-50258
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Belrose Capital Fund LLC
------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3613468
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(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
------------
None
----
(Former Name, Former Address and Former Fiscal Year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
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 [ ]
BELROSE CAPITAL FUND LLC
Index to Form 10-Q
PART I FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Statements of Assets and Liabilities
as of June 30, 2004 (Unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended June 30, 2004 and 2003 and for the
Six Months Ended June 30, 2004 and 2003 4
Condensed Consolidated Statements of Changes in Net Assets
for the Six Months Ended June 30, 2004 (Unaudited) and the
Year Ended December 31, 2003 6
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 2004 and 2003 7
Financial Highlights (Unaudited) for the Six Months Ended
June 30, 2004 9
Notes to Condensed Consolidated Financial Statements as of
June 30, 2004 (Unaudited) 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
EXHIBIT INDEX 28
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Assets and Liabilities
June 30, 2004 December 31,
(Unaudited) 2003
-------------- --------------
Assets:
Investment in Belvedere Capital Fund
Company LLC (Belvedere Company) $1,684,553,263 $1,640,828,100
Investment in Partnership Preference Units 69,354,420 56,717,736
Investment in other real estate 489,128,933 473,491,403
Short-term investments 2,334,000 7,614,214
-------------- --------------
Total investments $2,245,370,616 $2,178,651,453
Cash 6,340,643 6,535,905
Escrow deposits - restricted 2,457,140 2,436,133
Distributions and interest receivable 97 400,960
Other assets 5,741,675 3,660,997
Open interest rate swap agreements, at value 5,175,227 1,423,867
-------------- --------------
Total assets $2,265,085,398 $2,193,109,315
-------------- --------------
Liabilities:
Loan payable - Credit Facility $ 216,000,000 $ 183,300,000
Mortgages payable 344,219,483 344,219,483
Distributions payable to minority shareholders - 16,800
Security deposits 1,029,636 968,110
Swap interest payable 92,600 79,280
Accrued expenses:
Interest expense 2,347,965 2,319,122
Property taxes 2,525,736 1,959,252
Other expenses and liabilities 2,093,505 1,782,021
Minority interests in controlled subsidiaries 29,643,431 26,010,489
-------------- --------------
Total liabilities $ 597,952,356 $ 560,654,557
-------------- --------------
Net assets $1,667,133,042 $1,632,454,758
-------------- --------------
Shareholders' Capital $1,667,133,042 $1,632,454,758
-------------- --------------
Shares outstanding 16,934,881 17,032,796
-------------- --------------
Net asset value and redemption price per Share $ 98.44 $ 95.84
-------------- --------------
See notes to unaudited condensed consolidated financial statements
3
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Investment Income:
Dividends allocated from Belvedere Company
(net of foreign taxes of $138,823, $92,084,
$207,839, and $151,447, respectively) $ 6,377,891 $ 5,063,208 $ 12,145,956 $ 9,806,609
Interest allocated from Belvedere Company 19,225 158,393 47,208 246,968
Expenses allocated from Belvedere Company (2,477,944) (2,128,086) (4,978,269) (4,044,132)
------------- ------------- ------------- -------------
Net investment income allocated from
Belvedere Company $ 3,919,172 $ 3,093,515 $ 7,214,895 $ 6,009,445
Rental income 16,312,522 16,086,495 32,523,311 32,420,280
Distributions from Partnership Preference Units 1,177,774 1,198,457 3,952,184 2,195,038
Interest 62,990 26,591 122,177 46,376
------------- ------------- ------------- -------------
Total investment income $ 21,472,458 $ 20,405,058 $ 43,812,567 $ 40,671,139
------------- ------------- ------------- -------------
Expenses:
Investment advisory and administrative fees $ 1,428,580 $ 1,234,123 $ 2,836,163 $ 2,368,839
Property management fees 654,243 649,248 1,300,770 1,301,734
Distribution and servicing fees 807,645 684,681 1,629,405 1,296,752
Interest expense on mortgages 6,579,658 6,579,443 13,159,099 13,158,882
Interest expense on Credit Facility 790,827 748,300 1,531,057 1,480,592
Property and maintenance expenses 4,536,233 4,471,340 8,995,593 8,728,038
Property taxes and insurance 2,030,302 2,126,971 4,060,504 4,316,313
Miscellaneous 223,528 313,876 375,975 585,711
------------- ------------- ------------- -------------
Total expenses $ 17,051,016 $ 16,807,982 $ 33,888,566 $ 33,236,861
Deduct-
Reduction of investment advisory
and administrative fees 409,847 344,919 820,842 650,361
------------- ------------- ------------- -------------
Net expenses $ 16,641,169 $ 16,463,063 $ 33,067,724 $ 32,586,500
------------- ------------- ------------- -------------
Net investment income before
minority interests in net income of
controlled subsidiaries $ 4,831,289 $ 3,941,995 $ 10,744,843 $ 8,084,639
Minority interests in net income
of controlled subsidiaries (508,514) (458,996) (981,722) (973,697)
------------- ------------- ------------- -------------
Net investment income $ 4,322,775 $ 3,482,999 $ 9,763,121 $ 7,110,942
------------- ------------- ------------- -------------
See notes to unaudited condensed consolidated financial statements
4
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited) (Continued)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions and foreign
currency transactions allocated from
Belvedere Company (identified cost basis) $ 2,723,087 $ 2,425,286 $ 8,789,601 $ (2,920,634)
Investment transactions in Partnership
Preference Units (identified cost basis) (4,828,100) - (1,779,381) -
Interest rate swap agreements(1) (1,068,524) $ (1,131,355) (2,063,952) (2,182,638)
------------- ------------- ------------- -------------
Net realized (loss) gain $ (3,173,537) $ 1,293,931 $ 4,946,268 $ (5,103,272)
------------- ------------- ------------- -------------
Change in unrealized appreciation
(depreciation) -
Investments and foreign currency
allocated from Belvedere Company
(identified cost basis) $ 14,549,114 $ 166,965,607 $ 39,351,842 $109,175,976
Investments in Partnership Preference Units
(identified cost basis) 2,219,810 2,211,391 (1,616,796) 7,171,989
Investments in other real estate (net of
minority interests in unrealized gain (loss)
of controlled subsidiaries of $1,353,009,
$86,763, $333,924 and $(4,648,190),
respectively) 738,813 3,138,098 1,088,037 3,947,885
Interest rate swap agreements 8,115,687 (4,300,825) 3,751,360 (4,942,316)
------------- ------------- ------------- -------------
Net change in unrealized appreciation
(depreciation) $ 25,623,424 $ 168,014,271 $ 42,574,443 $115,353,534
------------- ------------- ------------- -------------
Net realized and unrealized gain $ 22,449,887 $ 169,308,202 $ 47,520,711 $110,250,262
------------- ------------- ------------- -------------
Net increase in net assets from operations $ 26,772,662 $ 172,791,201 $ 57,283,832 $117,361,204
============= ============= ============= =============
(1) Amounts represent periodic payments made in connection with interest rate
swap agreements. (Note 5)
See notes to unaudited condensed consolidated financial statements
5
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Changes in Net Assets
Six Months
Ended Year Ended
June 30, 2004 December 31,
(Unaudited) 2003
--------------- ---------------
Increase (Decrease) in Net Assets:
Net investment income $ 9,763,121 $ 15,279,642
Net realized gain from investment
transactions, foreign currency transactions
and interest rate swap agreements 4,946,268 2,449,130
Net change in unrealized appreciation
(depreciation) of investments, foreign
currency and interest rate swap agreements 42,574,443 311,836,713
--------------- ---------------
Net increase in net assets from operations $ 57,283,832 $ 329,565,485
--------------- ---------------
Transactions in Fund Shares -
Investment securities contributed $ - $ 95,047,136
Less - Selling commissions - (325,083)
--------------- ---------------
Net contributions $ - $ 94,722,053
Net asset value of Fund Shares issued to
Shareholders in payment of distributions
declared $ 5,415,563 $ 348,050
Net asset value of Fund Shares redeemed (14,905,858) (33,374,471)
--------------- ---------------
Net (decrease) increase in net assets from
Fund Share transactions $ (9,490,295) $ 61,695,632
--------------- ---------------
Distributions -
Distributions to Shareholders $ (13,115,253) $ (808,014)
--------------- ---------------
Total distributions $ (13,115,253) $ (808,014)
--------------- ---------------
Net increase in net assets $ 34,678,284 $ 390,453,103
Net assets:
At beginning of period $1,632,454,758 $1,242,001,655
--------------- ---------------
At end of period $1,667,133,042 $1,632,454,758
=============== ===============
See notes to unaudited condensed consolidated financial statements
6
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Six Months
Ended Ended
June 30, 2004 June 30, 2003
------------- --------------
Cash Flows From (For) Operating Activities -
Net increase in net assets from operations $ 57,283,832 $ 117,361,204
Adjustments to reconcile net increase in net assets from operations
to net cash flows for operating activities -
Net investment income allocated from Belvedere Company (7,214,895) (6,009,445)
(Increase) decrease in escrow deposits (21,007) 602,632
(Increase) decrease in other assets (1,972,719) 224,340
Decrease in distributions and interest receivable 400,863 39,096
Increase in interest payable for open swap agreements 13,320 27,791
Increase (decrease) in security deposits, accrued interest and
other expenses and liabilities 363,141 (480,625)
Increase in accrued property taxes 497,236 103,389
Purchases of Partnership Preference Units (57,172,890) (8,033,600)
Proceeds from sales of Partnership Preference Units 41,140,029 -
Payment for investment in other real estate (9,339,576) -
Improvements to rental property (2,541,096) (1,870,841)
Decrease (increase) in short-term investments 5,280,214 (1,402,053)
Net decrease in investment in Belvedere Company - 1,651,420
Net interest incurred on interest rate swap agreements (2,063,952) (2,182,638)
Minority interests in net income of controlled subsidiaries 981,722 973,697
Net realized (gain) loss from investment transactions (4,946,268) 5,103,272
Net change in unrealized (appreciation) depreciation of investments (42,574,443) (115,353,534)
------------- --------------
Net cash flows for operating activities $(21,886,489) $ (9,245,895)
------------- --------------
Cash Flows From (For) Financing Activities -
Proceeds from Credit Facility $ 32,700,000 $ 13,000,000
Payments on behalf of investors (selling commissions) - (325,083)
Payments for Fund Shares redeemed (3,274,683) (2,874,086)
Distributions paid to minority shareholders (34,400) -
Distributions paid to Shareholders (7,699,690) (459,964)
Capital contributed to controlled subsidiaries - 105,717
------------- --------------
Net cash flows from financing activities $ 21,691,227 $ 9,446,584
------------- --------------
Net (decrease) increase in cash $ (195,262) $ 200,689
Cash at beginning of period $ 6,535,905 $ 7,214,141
------------- --------------
Cash at end of period $ 6,340,643 $ 7,414,830
============= ==============
See notes to unaudited condensed consolidated financial statements
7
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
Six Months Six Months
Ended Ended
June 30, 2004 June 30, 2003
------------- --------------
Supplemental Disclosure and Non-cash Investing and
Financing Activities -
Securities contributed by Shareholders, invested in
Belvedere Company $ - $ 95,047,136
Interest paid on loan - Credit Facility $ 1,480,222 $ 1,389,862
Interest paid on mortgages $ 12,952,482 $ 12,952,265
Interest paid on swap agreements $ 2,050,632 $ 2,154,847
Market value of securities distributed in payment of
redemptions $ 11,631,175 $ 19,075,753
Market value of real property and other assets, net of
current liabilities, assumed in conjunction with the
acquisition of other real estate $ 11,674,470 $ -
See notes to unaudited condensed consolidated financial statements
8
BELROSE CAPITAL FUND LLC as of June 30, 2004
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FINANCIAL HIGHLIGHTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2004
- --------------------------------------------------------------------------------
Net asset value - Beginning of period $ 95.840
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
- --------------------------------------------------------------------------------
Net investment income(6) $ 0.573
Net realized and unrealized gain 2.797
- --------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS $ 3.370
- --------------------------------------------------------------------------------
DISTRIBUTIONS
- --------------------------------------------------------------------------------
Distributions to Shareholders $ (0.770)
- --------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS $ (0.770)
- --------------------------------------------------------------------------------
NET ASSET VALUE - END OF PERIOD $ 98.440
- --------------------------------------------------------------------------------
TOTAL RETURN(1) 3.54%
- --------------------------------------------------------------------------------
As a Percentage As a Percentage
of Average Net of Average Gross
RATIOS Assets(5) Assets(2)(5)
- --------------------------------------------------------------------------------
Expenses of Consolidated Real Property
Subsidiaries
Interest and other borrowing costs(7) 1.29%(9) 0.99%(9)
Operating expenses(7) 1.42%(9) 1.10%(9)
Belrose Capital Fund LLC Expenses
Interest and other borrowing costs(4)(8) 0.19%(9) 0.14%(9)
Investment advisory and administrative fees,
servicing fees and other Fund operating
expenses(3)(4) 1.08%(9) 0.83%(9)
----------------------------------
Total expenses 3.98% 3.06%
Net investment income 1.19%(9) 0.91%(9)
- --------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $1,667,133
Portfolio turnover of Tax-Managed Growth Portfolio (the Portfolio) 1.73%
- --------------------------------------------------------------------------------
(1) Returns are calculated by determining the percentage change in net asset
value with all distributions reinvested. Total return is not computed on an
annualized basis.
(2) Average Gross Assets is defined as the average daily amount of all assets
of Belrose Capital Fund LLC (Belrose Capital) (including Belrose Capital's
interest in Belvedere Capital Fund Company LLC (Belvedere Company) and
Belrose Capital's ratable share of the assets of its directly and
indirectly controlled subsidiaries), without reduction by any liabilities.
For this purpose, the assets of Belrose Realty Corporation's (Belrose
Realty) controlled subsidiaries are reduced by the proportionate interests
therein of investors other than Belrose Realty.
(3) Includes Belrose Capital's share of Belvedere Company's allocated expenses,
including those expenses allocated from the Portfolio.
(4) Includes the expenses of Belrose Capital and Belrose Realty. Does not
include expenses of the real estate subsidiaries majority-owned by Belrose
Realty.
(5) For the purpose of calculating ratios, the income and expenses of Belrose
Realty's controlled subsidiaries are reduced by the proportionate interest
therein of investors other than Belrose Realty.
(6) Calculated using average shares outstanding.
(7) Includes Belrose 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) Annualized.
See notes to unaudited condensed consolidated financial statements
9
BELROSE CAPITAL FUND LLC as of June 30, 2004 Notes to Condensed Consolidated
Financial Statements (Unaudited)
1 Organization and Basis of Presentation
The condensed consolidated interim financial statements of Belrose Capital Fund
LLC (Belrose Capital) and its subsidiaries (collectively, the Fund) have been
prepared, without audit, in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted as permitted by such rules and regulations. All adjustments, consisting
of normal recurring adjustments, have been included. Management believes that
the disclosures are adequate to present fairly the financial position, results
of operations, cash flows and financial highlights as of the dates and for the
periods presented. It is suggested that these interim financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Fund's latest annual report on Form 10-K. Results for interim periods are
not necessarily indicative of those to be expected for the full fiscal year.
The balance sheet at December 31, 2003 and the statement of changes in net
assets for the year then ended have been derived from the December 31, 2003
audited financial statements but do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements as permitted by the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Certain amounts in the prior periods' condensed consolidated financial
statements have been reclassified to conform with the current period
presentation.
During the quarter ended June 30, 2004, Belrose Realty Corporation (Belrose
Realty) made an indirect investment in real property through a newly established
controlled subsidiary, Deerfield Property Trust (Deerfield), as described below.
The consolidated financial statements include the accounts of Deerfield and all
material intercompany accounts and transactions have been eliminated.
SUBSIDIARY -
Deerfield - On May 3, 2004, Belrose Realty entered into an agreement to
establish and acquire a majority interest in a controlled subsidiary, Deerfield.
On June 30, 2004, Deerfield acquired a majority interest in three industrial
properties located in two states (Georgia and Ohio). On August 4, 2004,
Deerfield acquired an additional fifteen industrial properties located in five
states (Florida, New Jersey, Ohio, Pennsylvania and South Carolina). Belrose
Realty owns 100% of the Class A Units of Deerfield, representing 60% of the
voting interests in Deerfield and a minority shareholder (the Deerfield Minority
Shareholder) owns 100% of the Class B units, representing 40% of the voting
interests in Deerfield. The Class B equity interest is recorded as a minority
interest on the Consolidated Statements of Assets and Liabilities. The primary
distinctions between the two classes of shares are the distribution priority and
voting rights. Belrose Realty has priority in distributions and has greater
voting rights than the holder of the Class B units. From and after August 4,
2013, either Belrose Realty or the Deerfield Minority Shareholder may cause a
liquidation of Deerfield and, if Belrose Realty makes that election, the
Deerfield Minority Shareholder has the right either to purchase either the
shares of Deerfield owned by Belrose Realty or to acquire the assets of
Deerfield, in either case at a price determined through an appraisal of the
assets of Deerfield.
10
2 Estate Freeze
Shareholders in Belrose 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 7.75% 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 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
Belrose Capital's net asset value per Share at June 30, 2004 and December 31,
2003, between Preferred and Common shares that have been restructured is as
follows:
Per Share Value At Per Share Value At
June 30, 2004 December 31, 2003
--------------------------------------------------------
Preferred Common Preferred Common
Date of Contribution Shares Shares Shares Shares
- --------------------------------------------------------------------------------
February 19, 2003 $ 76.74 $ 21.70 $ 74.80 $ 21.04
3 Investment Transactions
The following table summarizes the Fund's investment transactions for the six
months ended June 30, 2004 and June 30, 2003:
Six Months Ended Six Months Ended
Investment Transaction June 30, 2004 June 30, 2003
- --------------------------------------------------------------------------------
Increases in investment in Belvedere Company $ - $ 95,047,136
Decreases in investment in Belvedere Company $ 11,631,175 $ 20,727,173
Acquisition of other real property(1) $ 9,339,576 $ -
Purchases of Partnership Preference Units(2) $ 57,172,890 $ 8,033,600
Sales of Partnership Preference Units(3) $ 41,140,029 $ -
(1) On June 30, 2004, Belrose Realty purchased an indirect investment in real
property through a controlled subsidiary, Deerfield, as described below. At
the date of the transaction, the value of Belrose Realty's interest in its
real property investment in Deerfield was $9,341,847.
(2) Purchases of Partnership Preference Units during the six months ended June
30, 2004 and June 30, 2003, represent Partnership Preference Units
purchased from other investment funds advised by Boston Management and
Research (Boston Management).
(3) Sales of Partnership Preference Units for the six months ended June 30,
2004 include Partnership Preference Units sold to another investment fund
advised by Boston Management for which a loss of $4,828,100 was recognized.
There were no sales for the six months ended June 30, 2003.
On May 3, 2004, Belrose Realty entered into an agreement to establish and
acquire a majority interest in a controlled subsidiary, Deerfield. On June 30,
2004, Deerfield acquired a majority interest in three separate industrial
properties. The seller retained a minority interest in the properties and an
affiliate of the Deerfield Minority Shareholder manages the properties. When
11
Deerfield acquired the real estate investment, a portion of the real estate's
purchase price was allocated to the estimated fair value of in-place leases in
accordance with Statement of Financial Accounting Standards 141. At June 30,
2004, the real estate investment balance includes the estimated fair value of
net unfavorable in-place leases totaling $21,073 at acquisition. The properties
are leased under fixed-term operating leases on a long-term basis. At June 30,
2004, the minimum lease payments expected to be received by Deerfield on leases
with lease periods greater than one year are as follows:
Twelve Months Ending June 30, Amount
--------------------------------------------------
2005 $ 982,522
2006 941,345
2007 981,016
2008 956,592
2009 785,979
Thereafter 3,581,264
----------
$8,228,718
==========
On August 4, 2004, the Fund made an additional investment in Deerfield of
$153,542,090. Deerfield concurrently acquired a majority interest in an
additional fifteen industrial properties. An affiliate of the Deerfield Minority
Shareholder manages the properties. All of the Deerfield properties are leased
under fixed-term operating leases on a long-term basis.
4 Indirect Investment in the Portfolio
The following table summarizes the Fund's investment in Tax-Managed Growth
Portfolio (the Portfolio) through Belvedere Capital Fund Company LLC (Belvedere
Company), for the six months ended June 30, 2004 and June 30, 2003, including
allocations of income, expenses and net realized and unrealized gains (losses)
for the respective periods then ended:
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
------------------------------------------------------------------------------------------------------------------
Belvedere Company's interest in the Portfolio(1) $ 11,762,239,521 $ 9,599,217,401
The Fund's investment in Belvedere Company(2) $ 1,684,553,263 $ 1,450,899,286
Income allocated to Belvedere Company from the Portfolio $ 83,686,364 $ 66,798,353
Income allocated to the Fund from Belvedere Company $ 12,193,164 $ 10,053,577
Expenses allocated to Belvedere Company from the Portfolio $ 25,387,360 $ 20,113,419
Expenses allocated to the Fund from Belvedere Company $ 4,978,269 $ 4,044,132
Net realized gain (loss) from investment transactions and foreign currency
transactions allocated to Belvedere Company from the Portfolio $ 72,573,659 $ (17,889,099)
Net realized gain (loss) from investment transactions and foreign currency
transactions allocated to the Fund from Belvedere Company $ 8,789,601 $ (2,920,634)
Net change in unrealized appreciation (depreciation) of investments and
foreign currency allocated to Belvedere Company from the Portfolio $ 255,505,090 $ 698,962,649
Net change in unrealized appreciation (depreciation) of investments and
foreign currency allocated to the Fund from Belvedere Company $ 39,351,842 $ 109,175,976
------------------------------------------------------------------------------------------------------------------
(1) As of June 30, 2004 and 2003, the value of Belvedere Company's interest in
the Portfolio represents 64.7% and 61.7% of the Portfolio's net assets,
respectively.
(2) As of June 30, 2004 and 2003, the Fund's investment in Belvedere Company
represents 14.3% and 15.1% of Belvedere Company's net assets, respectively.
A summary of the Portfolio's Statement of Assets and Liabilities at June 30,
2004, December 31, 2003 and June 30, 2003 and its operations for the six months
ended June 30, 2004, for the year ended December 31, 2003 and for the six months
ended June 30, 2003 follows:
12
June 30, December 31, June 30,
2004 2003 2003
----------------------------------------------------------
Investments, at value $18,156,546,589 $17,584,390,762 $15,616,951,272
Other assets 30,174,170 25,462,745 26,660,614
- ---------------------------------------------------------------------------------------------
Total assets $18,186,720,759 $17,609,853,507 $15,643,611,886
Total liabilities 138,607 264,502 93,843,137
- ---------------------------------------------------------------------------------------------
Net assets $18,186,582,152 $17,609,589,005 $15,549,768,749
=============================================================================================
Dividends and interest $ 131,109,908 $ 232,925,912 $ 109,393,140
- ---------------------------------------------------------------------------------------------
Investment adviser fee $ 38,780,667 $ 67,584,543 $ 31,979,032
Other expenses 1,025,267 2,295,653 985,298
- ---------------------------------------------------------------------------------------------
Total expenses $ 39,805,934 $ 69,880,196 $ 32,964,330
- ---------------------------------------------------------------------------------------------
Net investment income $ 91,303,974 $ 163,045,716 $ 76,428,810
Net realized gain (loss) from
investment transactions and
foreign currency transactions 118,166,339 70,909,770 (29,306,399)
Net change in unrealized
appreciation (depreciation) of
investments and foreign currency 397,547,485 3,174,709,110 1,126,151,279
- ---------------------------------------------------------------------------------------------
Net increase in net assets from
operations $ 607,017,798 $ 3,408,664,596 $ 1,173,273,690
- ---------------------------------------------------------------------------------------------
5 Interest Rate Swap Agreements
Belrose 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, Belrose 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 June 30, 2004 and December 31, 2003 are
listed below.
Notional Initial
Amount Optional Final Unrealized Unrealized
Effective (000's Fixed Floating Termination Termination Appreciation at Appreciation at
Date omitted) Rate Rate Date Date June 30, 2004 December 31, 2003
- ----------------------------------------------------------------------------------------------------------------------
10/03 $ 31,588 4.180% LIBOR + 0.30% 7/09 6/10 $ 953,203 $ 210,531
10/03 37,943 4.160% LIBOR + 0.30% 11/09 6/10 1,162,378 252,843
10/03 83,307 4.045% LIBOR + 0.30% - 6/10 2,982,460 960,493
06/04 108,168 4.875% LIBOR + 0.00% - 6/12 77,186* -
- ----------------------------------------------------------------------------------------------------------------------
Total $5,175,227 $1,423,867
- ----------------------------------------------------------------------------------------------------------------------
* On May 3, 2004, Belrose Capital entered into a forward interest rate swap
agreement with Merrill Lynch Capital Services, Inc. in anticipation of its
future investment in a controlled subsidiary Deerfield for the purpose of
hedging the interest rate of substantially all of the expected fixed-rate
mortgage financing of the real property over the expected 8-year term. A portion
of this agreement was terminated in July 2004 and the Fund realized a gain of
$60,454 upon the partial termination.
6 Credit Facility
In August 2004, additional borrowings under the Credit Facility in the amount of
$57,000,000 were used to purchase an additional interest in the real estate
investment Deerfield, a real estate subsidiary of Belrose Realty. This borrowing
accrues interest at a rate of one-month LIBOR plus 0.38% per annum.
13
On August 4, 2004, Deerfield acquired a majority interest in fifteen industrial
properties (see Note 3). To finance the Fund's investment in the properties
acquired by Deerfield, Belrose Capital increased the amount available under its
credit arrangement with Merrill Lynch Mortgage Capital, Inc. (Merrill Lynch) by
$66,000,000 under a temporary arrangement (the Temporary Arrangement) and
borrowed that amount. The borrowing under the Temporary Arrangement accrues
interest at a rate of one-month LIBOR plus 0.90% and is for a term of sixty
days, subject to a thirty-day extension. Any unused amount of the increase
pertaining to the Temporary Arrangement is subject to a commitment fee of 0.10%
per annum. The assets of Belrose Capital, excluding the assets of Bel Apartment
Properties Trust (Bel Apartment), Katahdin Property Trust LLC (Katahdin), Bel
Communities Property Trust (Bel Communities) and Deerfield, secure all
borrowings under the credit arrangement with Merrill Lynch.
Deerfield expects to obtain first mortgage financing for its investment in real
properties in the third and fourth quarters of 2004. The proceeds from such
first mortgage financing will be used to repay Belrose Capital, and accordingly,
Belrose Capital will repay its borrowings under the Temporary Arrangement and a
portion of other borrowings under the Credit Facility.
7 Segment Information
Belrose Capital pursues its investment objective primarily by investing
indirectly in the Portfolio through Belvedere Company. 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 Company, Belrose Capital invests in real estate assets
through its subsidiary Belrose Realty. Belrose Realty invests directly in
Partnership Preference Units and indirectly in real property through controlled
subsidiaries Bel Apartment, Katahdin, Bel Communities and Deerfield (Note 1).
Belrose 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), net realized gain (loss) and
unrealized appreciation (depreciation). The accounting policies of the
reportable segments are the same as those for the Fund on a consolidated basis.
No reportable segments have been aggregated. Reportable information by segment
is as follows:
Tax-Managed
For the Three Months Ended Growth Real
June 30, 2004 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------
Revenue $ 3,919,172 $ 17,513,176 $ 21,432,348
Interest expense on mortgages - (6,579,658) (6,579,658)
Interest expense on Credit Facility - (641,076) (641,076)
Operating expenses (317,097) (8,073,638) (8,390,735)
Minority interest in net income of controlled
subsidiaries - (508,514) (508,514)
- ----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 3,602,075 $ 1,710,290 $ 5,312,365
Net realized gain (loss) 2,723,087 (5,896,624) (3,173,537)
Net change in unrealized appreciation (depreciation) 14,549,114 11,074,310 25,623,424
- ----------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS OF
REPORTABLE SEGMENTS $ 20,874,276 $ 6,887,976 $ 27,762,252
- ----------------------------------------------------------------------------------------------------------
14
Tax-Managed
For the Three Months Ended Growth Real
June 30, 2003 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------
Revenue $ 3,093,515 $ 17,306,971 $ 20,400,486
Interest expense on mortgages - (6,579,443) (6,579,443)
Interest expense on Credit Facility - (710,885) (710,885)
Operating expenses (223,639) (8,070,975) (8,294,614)
Minority interest in net income of controlled
subsidiaries - (458,996) (458,996)
- ----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 2,869,876 $ 1,486,672 $ 4,356,548
Net realized gain (loss) 2,425,286 (1,131,355) 1,293,931
Net change in unrealized appreciation (depreciation) 166,965,607 1,048,664 168,014,271
- ----------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS OF
REPORTABLE SEGMENTS $172,260,769 $ 1,403,981 $173,664,750
- ----------------------------------------------------------------------------------------------------------
Tax-Managed
For the Six Months Ended Growth Real
June 30, 2004 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------
Revenue $ 7,214,895 $ 36,534,481 $ 43,749,376
Interest expense on mortgages - (13,159,099) (13,159,099)
Interest expense on Credit Facility - (1,255,467) (1,255,467)
Operating expenses (618,904) (15,999,501) (16,618,405)
Minority interest in net income of controlled
subsidiaries - (981,722) (981,722)
- ----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 6,595,991 $ 5,138,692 $ 11,734,683
Net realized gain (loss) 8,789,601 (3,843,333) 4,946,268
Net change in unrealized appreciation (depreciation) 39,351,842 3,222,601 42,574,443
- ----------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS OF
REPORTABLE SEGMENTS $ 54,737,434 $ 4,517,960 $ 59,255,394
- ----------------------------------------------------------------------------------------------------------
Tax-Managed
For the Six Months Ended Growth Real
June 30, 2003 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------
Revenue $ 6,009,445 $ 34,653,882 $ 40,663,327
Interest expense on mortgages - (13,158,882) (13,158,882)
Interest expense on Credit Facility - (1,406,562) (1,406,562)
Operating expenses (419,053) (15,964,270) (16,383,323)
Minority interest in net income of controlled
subsidiaries - (973,697) (973,697)
- ----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 5,590,392 $ 3,150,471 $ 8,740,863
Net realized loss (2,920,634) (2,182,638) (5,103,272)
Net change in unrealized appreciation (depreciation) 109,175,976 6,177,558 115,353,534
- ----------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS OF
REPORTABLE SEGMENTS $111,845,734 $ 7,145,391 $118,991,125
- ----------------------------------------------------------------------------------------------------------
15
Tax-Managed Growth Real
At June 30, 2004 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------
Segment assets $1,684,553,263 $578,189,649 $2,262,742,912
Segment liabilities - 563,450,625 563,450,625
- ----------------------------------------------------------------------------------------------
Net assets of reportable segments $1,684,553,263 $ 14,739,024 $1,699,292,287
- ----------------------------------------------------------------------------------------------
At December 31, 2003
- ----------------------------------------------------------------------------------------------
Segment assets $1,640,828,100 $544,254,775 $2,185,082,875
Segment liabilities - 533,483,765 533,483,765
- ----------------------------------------------------------------------------------------------
Net assets of reportable segments $1,640,828,100 $ 10,771,010 $1,651,599,110
- ----------------------------------------------------------------------------------------------
* Belrose Capital invests indirectly in Tax-Managed Growth Portfolio through
Belvedere Company.
The following tables reconcile the reported segment information to the condensed
consolidated financial statements for the periods indicated:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
-----------------------------------------------------------------------
Revenue:
Revenue from reportable segments $ 21,432,348 $ 20,400,486 $ 43,749,376 $ 40,663,327
Unallocated amounts:
Interest earned on cash not invested
in the Portfolio or in subsidiaries 40,110 4,572 63,191 7,812
-----------------------------------------------------------------------
Total revenue $ 21,472,458 $ 20,405,058 $ 43,812,567 $ 40,671,139
-----------------------------------------------------------------------
Net increase (decrease) in net assets
from operations:
Net increase in net assets from
operations of reportable segments $ 27,762,252 $173,664,750 $ 59,255,394 $118,991,125
Unallocated amounts:
Interest earned on cash not invested
in the Portfolio or in subsidiaries 40,110 4,572 63,191 7,812
Unallocated amounts (1):
Distribution and servicing fees (807,645) (684,681) (1,629,405) (1,296,752)
Audit, tax and legal fees (39,115) (118,413) (75,888) (203,661)
Interest expense on Credit Facility (149,751) (37,415) (275,590) (74,030)
Other operating expenses (33,189) (37,612) (53,870) (63,290)
-----------------------------------------------------------------------
Total net increase in net assets from
operations $ 26,772,662 $172,791,201 $ 57,283,832 $117,361,204
--------------------------------------------------------------------
June 30, 2004 December 31, 2003
--------------------------------------
Net assets:
Net assets of reportable segments $1,699,292,287 $1,651,599,110
Unallocated cash(2) 8,486 412,226
Short-term investments(2) 2,334,000 7,614,214
Loan payable - Credit Facility(3) (34,353,989) (27,026,426)
Other liabilities (147,742) (144,366)
--------------------------------------
Total net assets $1,667,133,042 $1,632,454,758
--------------------------------------
(1) Unallocated amounts represent expenses incurred that pertain to the overall
operation of Belrose 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.
16
(3) Unallocated amount of loan payable-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.
17
ITEM 2. 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 BELROSE CAPITAL FUND
LLC (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.
The following discussion should be read in conjunction with the Fund's unaudited
condensed consolidated financial statements and related notes in Item 1 above.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2004 COMPARED TO THE
QUARTER ENDED JUNE 30, 2003
- --------------------------------------------------------------------------------
(a) RESULTS OF OPERATIONS.
- --------------------------
Increases and decreases from operations 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 (or loss) of the
controlled subsidiaries of Belrose Realty Corporation (Belrose Realty). The
Fund's investment income includes the net investment income allocated to the
Fund from Belvedere Capital Fund Company LLC (Belvedere Company), rental income
from the properties owned by Belrose Realty's controlled subsidiaries,
partnership income allocated to the income-producing preferred equity interests
in real estate operating partnerships (Partnership Preference Units) owned by
Belrose 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, interest and expenses allocated to Belvedere Company by
Tax-Managed Growth Portfolio (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, distribution and servicing fees,
interest expense from mortgages on properties owned by Belrose Realty's
controlled subsidiaries, interest expense on the Fund's Credit Facility (as
described in Item 2(b) below), property management fees, property taxes,
insurance, maintenance and other expenses relating to the properties owned by
Belrose 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 Belrose 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.
Realized and unrealized gains and losses on investments 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 Management (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 widely
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 held through Belrose Realty, Eaton Vance
considers whether, through current returns and changes in valuation, the real
- ------------------------
(1) Total returns are historical and are calculated by determining the
percentage change in net asset value with all distributions reinvested.
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. The Portfolio's total return for the
period reflects the total return of another fund that invests in the
Portfolio, adjusted for certain fund expenses. Performance is for the
stated time period only and is not annualized; 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.
18
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 borrowings under the Credit Facility used to acquire Belrose 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 was 1.62% for the quarter ended June 30, 2004. This
return reflects an increase in the Fund's net asset value per share from $96.87
to $98.44 during the period. For comparison, the S&P 500 had a total return of
1.72% over the same period. The performance of the Fund exceeded that of the
Portfolio by approximately 0.31% during the period. Last year, the Fund had a
total return performance of 13.63% for the quarter ended June 30, 2003. This
return reflected an increase in the Fund's net asset value per share from $73.42
to $83.43 during the period. For comparison, the S&P 500 had a total return of
15.39% over the same period. The performance of the Fund exceeded that of the
Portfolio by approximately 0.09% during that period.
PERFORMANCE OF THE PORTFOLIO. For the quarter ended June 30, 2004, the
Portfolio's total return was 1.31%. This compares to a total return of 1.72% for
the S&P 500. In the second quarter, U.S. equity returns were supported by
strengthening employment trends, robust manufacturing activity and rising
corporate profits. At the same time, uncertainty over the situation in Iraq and
the prospect of rising interest rates and inflation weighed on investors and
held back returns. During the quarter, growth stocks outperformed value stocks,
and small-caps performed better than large-caps and mid-caps.
The Portfolio's modest underperformance during the quarter was attributable in
part to a relative overweighting of certain weaker performing industry groups,
specifically specialty retail and media. In addition, the Portfolio was
underweight internet software and communications equipment stocks, which rallied
during the period. Concerns about future trends in consumer spending caused the
Portfolio to trim its relative overweighting of the discretionary and staples
sectors during the quarter. The Portfolio also reduced healthcare and technology
investments during the quarter, mainly in the lagging biotech and semi-conductor
groups. During the quarter, the Portfolio continued to overweight airfreight and
machinery holdings, which contributed positively to the Portfolio's performance.
The Portfolio benefited from the strong performance of stocks in the food,
staples retailing and commercial bank industries during the quarter, as well as
from increased exposure to energy stocks. Material stocks were also solid
performers during the quarter and, despite the Portfolio's underweight of the
sector versus the S&P 500, the performance of the Portfolio's holdings in the
metals and mining group was noteworthy. Valuation and regulatory concern
prompted a continued de-emphasis of multi-line utilities and diversified telecom
companies.
For the quarter ended June 30, 2003, the Portfolio's total return was 13.54%
compared to the 15.39% total return for the S&P 500. During the quarter, the S&P
500 posted its best quarterly return in five years, with favorable fiscal and
monetary policy developments, progress in Iraq and signs of an improving economy
contributing to a stronger market. The Portfolio's relative underperformance was
attributable primarily to its lower exposure to higher-volatility, lower-quality
stocks that were the strongest performers in the sharp market rally.
PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate investments are
held through Belrose Realty. As of June 30, 2004, real estate investments
included three real estate joint ventures that operate multifamily properties
(the Multifamily Joint Ventures), a portfolio of Partnership Preference Units
issued by partnerships affiliated with publicly traded real estate investment
trusts (REITs) and a real estate joint venture that operates industrial
properties, Deerfield Property Trust (Deerfield). The Multifamily Joint Ventures
and Deerfield are referred to as the Real Estate Joint Ventures. As of June 30,
2004, the estimated fair value of the Fund's real estate investments represented
24.7% of the Fund's total assets on a consolidated basis. After adjusting for
minority interests in the Multifamily Joint Ventures and Deerfield, the Fund's
real estate investments represented 27.8% of the Fund's net assets as of June
30, 2004. The Multifamily Joint Ventures and Deerfield are collectively referred
to herein as the Real Estate Joint Ventures.
On June 30, 2004, Belrose Realty's newly formed subsidiary Deerfield acquired a
majority interest in certain industrial properties from ProLogis, a
publicly-traded REIT, for approximately $9.3 million. ProLogis retained a
minority interest in the properties. In May 2004, Belrose Realty entered into
agreements with ProLogis to form ProLogis Six Rivers Limited Partnership (Six
Rivers) (in association with subsidiaries of other investment funds advised by
Boston Management) and to merge Six Rivers with Keystone Property Trust, a
publicly-traded REIT (Keystone). The transactions contemplated by these
agreements were consummated on August 4, 2004. As a result of the transactions,
Deerfield acquired a partnership interest in Six Rivers. In addition, ProLogis
acquired a minority interest in Deerfield. Through its interest in Six Rivers,
Deerfield owns 100% of the economic interest in certain industrial properties
acquired through the merger of Six Rivers and Keystone for approximately $191.9
million. It is anticipated that in the third and fourth quarters of 2004
Deerfield will obtain first mortgage financing secured by the properties equal
to approximately 60-65% of the property value. The Fund has provided interim
financing for Deerfield, as described below in "Liquidity and Capital
Resources."
19
Rental income from real estate operations of the Multifamily Joint Ventures
increased to approximately $16.3 million for the quarter ended June 30, 2004
compared to approximately $16.1 million for the quarter ended June 30, 2003, an
increase of $0.2 million or 1%. This increase in rental income was due to modest
increases in apartment rental rates net of concessions. Property operating
expenses for Belrose Realty's Multifamily Joint Ventures were approximately $7.2
million for the quarters ended June 30, 2004 and 2003 (property operating
expenses are before certain operating expenses of Belrose Realty of
approximately $0.9 million for each of the quarters ended June 30, 2004 and June
30, 2003). The near-term outlook for multifamily property operations continues
to be weak. While the recent pick-up in economic and employment growth is
expected to lead to improved supply-demand balance in the apartment industry,
oversupply conditions continue to exist in most major markets. As a result,
Boston Management expects that multifamily real estate operating results in 2004
will continue to be similar to 2003.
Because Deerfield held no investments in property until June 30, 2004, it had no
significant impact on real estate operations during the quarter then ended. As
of August 4, 2004, Deerfield owns an interest in 18 industrial properties, which
consist of industrial distribution properties located in six states. ProLogis,
the largest REIT specializing in industrial distribution properties, provides
day-to-day operating management of these properties. The terms of the Deerfield
joint venture are similar to those of the Multifamily Joint Ventures. Belrose
Realty's investment in Deerfield will be valued in substantially the same manner
as its investment in the Multifamily Joint Ventures and it is subject to
substantially similar risks, as well as risks specifically associated with
industrial distribution properties (such as changing transportation and
logistics patterns and tenant credit). The mortgage financing to be obtained by
Deerfield will be secured by the properties it owns and is expected to be
without recourse to Belrose Realty, the Fund or its Shareholders. Pursuant to an
agreement between Belrose Realty and ProLogis, Belrose Realty is obligated to
make capital contributions to Deerfield if required to fund certain items such
as debt service, insurance or property taxes. In 2004, industrial properties in
the United States have experienced increased demand for space in most markets
after three years of occupancy and rental rate declines. However, reduced rent
levels may continue over the near term as above-market leases mature and space
is released at current market rates. As a result, Boston Management expects that
improvements in industrial property operating performance will occur gradually
over the longer term.
At June 30, 2004, the estimated fair value of the real properties indirectly
held through Belrose Realty was approximately $489.1 million compared to
approximately $471.8 million at June 30, 2003, a net increase of $17.3 million
or 4%. The modest net increase in estimated real property values at June 30,
2004 resulted principally from the acquisition of properties by Deerfield on
June 30, 2004.
Belrose Realty saw unrealized appreciation in the estimated fair value of its
other real estate investments (which includes the Real Estate Joint Ventures) of
approximately $1.0 million during the quarter ended June 30, 2004 compared to
approximately $3.1 million in unrealized appreciation during the quarter ended
June 30, 2003. Changes in estimated asset values for multifamily properties have
generally been modest as decreases in capitalization rates have largely offset
declining earnings expectations. The capitalization rate, a term commonly used
in the real estate industry, is the rate of return percentage applied to actual
or projected income levels to estimate the value of a real estate investment.
During the quarter ended June 30, 2004, Belrose Realty sold certain of its
Partnership Preference Units totaling approximately $21.6 million (representing
sales to another investment fund advised by Boston Management), recognizing a
loss of $4.8 million on the transactions. During the quarter ended June 30,
2004, Belrose Realty also acquired interests in additional Partnership
Preference Units (including acquisitions from other investment funds advised by
Boston Management) totaling approximately $12.6 million. At June 30, 2004, the
estimated fair value of the Partnership Preference Units held by Belrose Realty
totaled $69.4 million compared to $57.1 million at June 30, 2003, a net increase
of $12.3 million or 22%. The net increase in value was principally due to the
increase in the number of Partnership Preference Units held at June 30, 2004.
The Fund saw unrealized appreciation in the estimated fair value of its
Partnership Preference Units of approximately $2.2 million during each of the
quarters ended June 30, 2004 and June 30, 2003. For the quarter ended June 30,
2004, net unrealized appreciation of $2.2 million consisted of approximately
$1.0 million of unrealized depreciation as a result of decreases in per unit
values of the Partnership Preference Units held by Belrose Realty at June 30,
2004, and approximately $3.2 million of unrealized appreciation resulting from
the recharacterization of previously recorded unrealized depreciation to
realized losses due to sales of Partnership Preference Units during the quarter
ended June 30, 2004. During the quarter ended June 30, 2004, Partnership
Preference Unit values were negatively affected by the rising trend in U.S.
interest rates, partly offset by tighter spreads for credit-sensitive income
securities, including real estate-related securities. In a rising interest rate
20
environment, values of outstanding Partnership Preference Units generally can be
expected to decline. During the quarter ended June 30, 2003, Belrose Realty's
investments in Partnership Preference Units generally benefited from declining
interest rates and tightening spreads in credit-sensitive income securities,
particularly in real estate-related securities.
Distributions from Partnership Preference Units were approximately $1.2 million
for each of the quarters ended June 30, 2004 and 2003.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the quarter ended June 30,
2004, net realized and unrealized gains on the Fund's interest rate swap
agreements totaled approximately $7.0 million, compared to net realized and
unrealized losses of approximately $5.4 million for the quarter ended June 30,
2003. Net realized and unrealized gains on swap agreements for the quarter ended
June 30, 2004 consisted of $8.1 million of unrealized appreciation due to
changes in swap agreement valuations offset in part by $1.1 million of periodic
payments made pursuant to outstanding swap agreements (and classified as
realized net losses on interest rate swap agreements). For the quarter ended
June 30, 2003, net realized and unrealized losses on swap agreements consisted
of unrealized depreciation of $4.3 million on swap agreement valuation changes
and $1.1 million of swap agreement periodic payments. The positive contribution
to Fund performance for the quarter ended June 30, 2004 from changes in swap
agreement valuations was attributable to an increase in swap rates during the
quarter. The negative impact on Fund performance for the quarter ended June 30,
2003 was attributable to a decline in swap rates during the quarter.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 2003
- --------------------------------------------------------------------------------
PERFORMANCE OF THE FUND. The Fund's total return was 3.54% for the six months
ended June 30, 2004. This return reflects an increase in the Fund's net asset
value per share from $95.84 to $98.44 and a distribution of $0.77 per share
during the period. For comparison, the S&P 500 had a total return of 3.44% over
the same period. The performance of the Fund exceeded that of the Portfolio by
approximately 0.09% during the period. Last year, the Fund had a total return
performance of 8.62% for the six months ended June 30, 2003. This return
reflected an increase in the Fund's net asset value per share from $76.86 to
$83.43 and a distribution of $0.05 per share. For comparison, the S&P 500 had a
total return of 11.75% over the same period. The performance of the Fund
exceeded that of the Portfolio by 0.43% during that period.
PERFORMANCE OF THE PORTFOLIO. For the six months ended June 30, 2004, the
Portfolio's total return was 3.45%, in line with the 3.44% total return of the
S&P 500. In the period, U.S. equity returns were supported by a strengthening
economy and rising corporate profits. Geopolitical concerns, higher interest
rates and rising inflation were negative factors that held back returns. In the
period, small-cap stocks sharply outperformed large-caps and mid-caps, and value
stocks performed modestly better than growth stocks.
The Portfolio's performance during the first six months of 2004 was driven
primarily by its diversified industry exposure and positive stock selection.
Concerns about future trends in consumer spending caused the Portfolio to trim
its relative overweighting of the discretionary and staples sectors during the
period. The Portfolio also decreased positions in healthcare and technology
stocks during the period. The underweighting of semiconductor equipment and
software industries added to performance. The Portfolio maintained an
overweighting of industrials stocks, and benefited from advances in airfreight,
machinery and building stocks. While the consumer staples and financials sectors
generally did not perform well during the period, the Portfolio's holdings in
those sectors were positive contributors to performance. Another positive
contributor was the Portfolio's growing exposure to the energy sector. The
Portfolio's oil exploration and gas investments benefited from the current
supply-demand imbalances and associated energy price increases. The strong
performance of the Portfolio's holdings in the cyclical metals and mining
industries during the period was also noteworthy. The Portfolio continued to
underweight the utilities and telecom sectors.
For the six months ended June 30, 2003, the Portfolio's total return was 8.19%
compared to an 11.75% total return for the S&P 500. Market performance during
the first six months of 2003 was volatile, with war angst, a questionable
economic recovery and the SARS outbreak among the concerns weighing on investors
toward the beginning of the year. From mid-March through the end of the period,
the U.S. market rallied sharply, with favorable fiscal and monetary policy
developments, progress in Iraq and signs of an improving economy contributing to
the strength. The Portfolio's relative underperformance during the period was
attributable primarily to its lower exposure to higher-volatility, lower-quality
stocks that were the strongest performers in the market rally.
PERFORMANCE OF REAL ESTATE INVESTMENTS. Rental income from real estate
operations of Belrose Realty's Multifamily Joint Ventures increased to
approximately $32.5 million for the six months ended June 30, 2004 compared to
approximately $32.4 million for the six months ended June 30, 2003, an increase
of $0.1 million or 0.3%. This increase in rental income was due to modest
21
increases in apartment rental rates net of concessions during the period.
Property operating expenses for the Multifamily Joint Ventures were
approximately $14.4 for the each of the six months ended June 30, 2004 and the
six months ended June 30, 2003 (property operating expenses are before certain
operating expenses of Belrose Realty of approximately $1.6 million for each of
the six months ended June 30, 2004 and June 30, 2003). As discussed above, the
near-term outlook for multifamily property operations continues to be weak.
While the recent pick-up in economic and employment growth is expected to lead
to improved supply-demand balance in the apartment industry, oversupply
conditions continue to exist in most major markets. As a result, Boston
Management expects that multifamily real estate operating results in 2004 will
continue to be similar to 2003.
As noted above, in a series of transactions on and after June 30, 2004, Belrose
Realty acquired an interest in Deerfield, which owns certain industrial
properties. The properties owned by Deerfield had no significant impact on real
estate operations during the six months ended June 30, 2004.
At June 30, 2004, the estimated fair value of the real properties indirectly
held through Belrose Realty was approximately $489.1 million compared to
approximately $471.8 million at June 30, 2003, a net increase of $17.3 million
or 4%. The modest net increase in estimated real property values at June 30,
2004 resulted principally from the properties acquired by Deerfield on June 30,
2004.
Belrose Realty saw unrealized appreciation in the estimated fair value of its
other real estate investments (which includes Real Estate Joint Ventures) of
approximately $1.1 million during the six months ended June 30, 2004 compared to
approximately $3.9 million in unrealized appreciation during the six months
ended June 30, 2003. Changes in estimated asset values for multifamily
properties have generally been modest as decreases in capitalization rates have
largely offset declining earnings expectations.
During the six months ended June 30, 2004, Belrose Realty sold (or experienced
scheduled redemptions of) certain of its Partnership Preference Units totaling
approximately $41.1 million (including sales to another investment fund advised
by Boston Management), recognizing a loss of $1.8 million on the transactions.
During the six months ended June 30, 2004, Belrose Realty also acquired
interests in additional Partnership Preference Units (including acquisitions
from other investment funds advised by Boston Management) totaling approximately
$57.2 million. At June 30, 2004, the estimated fair value of the Partnership
Preference Units totaled $69.4 million compared to $57.1 million at June 30,
2003, an increase of $12.3 million or 22%. The increase in value was due to the
increase in the number of Partnership Preference Units held.
The Fund saw unrealized depreciation in the estimated fair value of its
Partnership Preference Units of approximately $1.6 million during the six months
ended June 30, 2004 compared to unrealized appreciation of approximately $7.2
million for the six months ended June 30, 2003. For the six months ended June
30, 2004, net unrealized depreciation of $1.6 million consisted of approximately
$0.9 million of unrealized appreciation as a result of increases in per unit
values of the Partnership Preference Units held by Belrose Realty at June 30,
2004, and approximately $2.5 million of unrealized depreciation resulting from
the recharacterization of previously recorded unrealized appreciation to
realized gains due to sales of Partnership Preference Units during the six
months ended June 30, 2004. During the six months ended June 30, 2004,
Partnership Preference Unit values were negatively affected by the rising trend
in U.S. interest rates, partly offset by tighter spreads for credit-sensitive
income securities, including real estate-related securities. In a rising
interest rate environment, values of outstanding Partnership Preference Units
generally can be expected to decline. During the six months ended June 30, 2003,
Belrose Realty's investments in Partnership Preference Units generally benefited
from declining interest rates and tightening spreads in credit-sensitive income
securities, particularly in real estate-related securities.
Distributions from Partnership Preference Units for the six months ended June
30, 2004 totaled $4.0 million compared to $2.2 million for the six months ended
June 30, 2003, an increase of $1.8 million or 82%. The increase was due to the
larger number of Partnership Preference Units held during the six months ended
June 30, 2004 and to a one-time special distribution from one issuer made in
connection with a restructuring of its Partnership Preference Units.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the six months ended June 30,
2004, net realized and unrealized gains on the Fund's interest rate swap
agreements totaled approximately $1.7 million, compared to net realized and
unrealized losses of approximately $7.1 million for the six months ended June
30, 2003. Net realized and unrealized gains on swap agreements for the six
months ended June 30, 2004 consisted of $3.8 million of unrealized appreciation
due to changes in swap agreement valuations offset in part by $2.1 million of
periodic payments made pursuant to outstanding swap agreements (and classified
as net realized losses on interest rate swap agreements). For the six months
ended June 30, 2003, net realized and unrealized losses on swap agreements
consisted of unrealized depreciation of $4.9 million on swap agreement valuation
22
changes and $2.2 million of swap agreement periodic payments. The positive
contribution to Fund performance for the six months ended June 30, 2004 from
changes in swap agreement valuations was attributable to an increase in swap
rates during the period. The negative impact on Fund performance for the six
months ended June 30, 2003 from changes in swap valuations was attributable to a
decline in swap rates during the period.
(b) LIQUIDITY AND CAPITAL RESOURCES.
- ------------------------------------
OUTSTANDING BORROWINGS. The Fund has entered into credit arrangements with DrKW
Holdings, Inc. and Merrill Lynch Mortgage Capital, Inc. (collectively, the
Credit Facility) primarily to finance the Fund's equity in its real estate
investments and will continue to use the Credit Facility for such purpose in the
future. The Credit Facility may also be used for other purposes, including 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. As of June 30, 2004, the Fund had outstanding
borrowings of $216.0 million and unused loan commitments of $54.9 million under
the Credit Facility.
In August 2004, the Fund made borrowings under its credit arrangement with
Merrill Lynch Mortgage Capital, Inc. (MLMC) in the amount of $57.0 million. At
that time, the Fund also temporarily increased the amount available under its
credit arrangement with MLMC by $66 million and borrowed that amount. The Fund
used the total proceeds from these borrowings to finance the acquisitions by
Deerfield of interests in certain industrial properties. The additional $66.0
million of borrowings is at a rate of LIBOR plus 0.90% and is for a period of up
to sixty-days (subject to a 30-day extension, if needed). Deerfield expects to
obtain first mortgage financing for its properties in the third and fourth
quarters of 2004, the proceeds from which will be used to repay borrowings
obtained by the Fund in August 2004 to facilitate the Deerfield acquisitions.
The Fund has entered into interest rate swap agreements with respect to its real
estate investments and associated borrowings. Pursuant to these agreements, the
Fund makes periodic payments to the counterparty at predetermined fixed rates,
in exchange for floating-rate payments at a predetermined spread plus one-month
LIBOR. During the terms of the outstanding interest rate swap agreements,
changes in the underlying values of the agreements are recorded as unrealized
appreciation or depreciation. As of June 30, 2004, the unrealized appreciation
related to the interest rate swap agreements was approximately $5.2 million. As
of June 30, 2003, the unrealized depreciation related to the interest rate swap
agreements was approximately $16.5 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 decrease
when interest rates rise and increase 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 Belrose 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 and
three 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 Note 5 and Note 6
to the Fund's unaudited condensed consolidated financial statements in Item 1
above.
23
Interest Rate Sensitivity
Cost, Principal (Notional) Amount
by Contractual Maturity and Callable Date
for the Twelve Months Ended June 30,*
Estimated
Fair Value as of
June 30,
2005 2006-2009 Thereafter Total 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive
liabilities:
- ------------------------
Long-term debt:
- ------------------------
Fixed-rate mortgages $344,219,483 $344,219,483 $386,500,000
Average interest rate 7.53% 7.53%
- ------------------------
Variable-rate Credit Facility $216,000,000 $216,000,000 $216,000,000
Average interest rate 1.67% 1.67%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative financial instruments:
- ------------------------
Pay fixed/receive variable interest rate
swap agreements(**) $261,006,000 $261,006,000 $ 5,175,227
Average pay rate(**) 4.42% 4.42%
Average receive rate(**) 1.64% 1.64%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive investments:
- ------------------------
Fixed-rate Partnership Preference Units:
- ------------------------
Essex Portfolio, L.P., 7.875% Series B
Cumulative Redeemable Preferred Units,
Callable 12/31/09, Current Yield: 7.82% $ 16,616,170 $ 16,616,170 $ 20,132,880
Essex Portfolio, L.P., 9.3% Series D
Cumulative Redeemable Preferred Units,
Callable 7/28/10, Current Yield: 9.16%(1) $ 12,642,150 $ 12,642,150 $ 12,690,300
Kilroy Realty, L.P., 7.45% Series A
Cumulative Redeemable Preferred Units,
Callable 9/30/09, Current Yield: 7.88% $ 15,898,220 $ 15,898,220 $ 18,898,240
Liberty Property L.P., 9.25% Series B
Cumulative Redeemable Preferred Units,
Callable 7/28/04, Current Yield: 9.18% $18,130,840 $ 18,130,840 $ 17,633,000
* The amounts listed reflect the Fund's positions as of June 30, 2004. The
Fund's current positions may differ.
** The terms disclosed are those of the interest rate swap agreements that are
in effect as of June 30, 2004. As discussed in Note 5 to the Fund's
unaudited condensed consolidated financial statements in Item 1 above,
during July 2004 a portion of a certain interest rate swap agreement was
terminated, resulting in a change of the average pay rate and average
receive rate to 4.26% and 1.66%, respectively.
1 On July 28, 2004, the coupon rate reset to 7.875%.
24
ITEM 4. 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 June 30, 2004 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 II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- --------------------------
Although in the ordinary course of business, the Fund, Belrose Realty and
Belrose 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 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
- --------------------------------------------------------------------------------
As described in the Fund's Annual Report on Form 10-K for the year ended
December 31, 2003, shares of the Fund may be redeemed by Fund shareholders on
any business day. Redemptions are met at the net asset value per share of the
Fund (less any applicable redemption fee). The right to redeem is available to
all shareholders and all outstanding Fund shares are eligible (except for shares
subject to an estate freeze election as described in Item 5 of the Fund's Report
on Form 10-K for the fiscal year ending December 31, 2003). During each month in
the quarter ended June 30, 2004, the total number of shares redeemed and the
average price paid per share were as follows:
- --------------------------------------------------------------------------------
Total No. of Shares Average Price Paid
Month Ended Redeemed(1) Per Share
- --------------------------------------------------------------------------------
April 30, 2004 13,348.84 $98.76
- --------------------------------------------------------------------------------
May 31, 2004 62,236.88 $96.83
- --------------------------------------------------------------------------------
June 30, 2004 19,008.88 $98.07
- --------------------------------------------------------------------------------
Total 94,594.60 $97.82
- --------------------------------------------------------------------------------
(1) All shares redeemed during the periods were redeemed at the option of
shareholders pursuant to the Fund's redemption policy. The Fund has not
announced any plans or programs to repurchase shares other than at the
option of shareholders.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- ----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the three months
ended June 30, 2004.
ITEM 5. OTHER INFORMATION.
- --------------------------
None.
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
- -----------------------------------------
(a) The following is a list of all exhibits filed as part of this Form 10-Q:
4.2(b) Form of Amendment No. 2 dated August 3, 2004 to Loan and Security
Agreement among the Fund, Merrill Lynch Mortgage Capital, Inc., as
Agent, the Lenders referred to therein and Merrill Lynch Capital
Services, Inc.
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
(b) Reports on Form 8-K:
None.
26
SIGNATURES
Pursuant to the requirements 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 duly authorized officer on August 9, 2004.
BELROSE CAPITAL FUND LLC
/s/ Michelle A. Alexander
-------------------------
Michelle A. Alexander
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
27
EXHIBIT INDEX
-------------
4.2(b) Form of Amendment No. 2 dated August 3, 2004 to Loan and Security
Agreement among the Fund, Merrill Lynch Mortgage Capital, Inc., as
Agent, the Lenders referred to therein and Merrill Lynch Capital
Services, Inc.
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
28