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 September 30, 2004
[ ] 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. 000-32633
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Belmar Capital Fund LLC
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(Exact name of registrant as specified in its charter)
Delaware 04-3508106
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(State of organization) (I.R.S. Employer Identification No.)
The Eaton Vance Building
255 State Street
Boston, Massachusetts 02109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 617-482-8260
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None
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(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 [ ]
BELMAR 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 September 30, 2004 (Unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended September 30, 2004 and 2003 and for
the Nine Months Ended September 30, 2004 and 2003 4
Condensed Consolidated Statements of Changes in Net Assets
for the Nine Months Ended September 30, 2004 (Unaudited) and
the Year Ended December 31, 2003 6
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 2004 and 2003 7
Financial Highlights (Unaudited) for the Nine Months Ended
September 30, 2004 9
Notes to Condensed Consolidated Financial Statements as of
September 30, 2004 (Unaudited) 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 28
PART II OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 31
EXHIBIT INDEX 32
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
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BELMAR CAPITAL FUND LLC
Condensed Consolidated Statements of Assets and Liabilities
September 30, 2004 December 31,
(Unaudited) 2003
----------------------- -----------------------
Assets:
Investment in Belvedere Capital Fund Company LLC (Belvedere Company) $ 1,877,111,347 $ 1,966,911,184
Investment in Partnership Preference Units 170,269,728 424,780,443
Investment in other real estate 820,466,734 185,138,810
Short-term investments 3,662,000 16,973,476
----------------------- -----------------------
Total investments $ 2,871,509,809 $ 2,593,803,913
Cash 5,193,655 6,605,096
Escrow deposits - restricted 4,083,087 3,817,390
Open interest rate swap agreements, at value 1,251,222 2,090,845
Distributions and interest receivable 952,206 1,960,318
Other assets 14,499,790 3,661,857
----------------------- -----------------------
Total assets $ 2,897,489,769 $ 2,611,939,419
----------------------- -----------------------
Liabilities:
Loan payable - Credit Facility $ 597,000,000 $ 513,000,000
Mortgages payable 401,414,976 161,157,192
Payable for Fund Shares redeemed 1,100,000 1,361,403
Distributions payable to minority shareholders - 16,800
Swap interest payable 161,435 242,283
Security deposits 1,242,601 744,420
Notes payable to minority shareholder 565,972 565,972
Accrued expenses:
Interest expense 2,544,011 1,423,780
Property taxes 2,620,729 3,281,589
Other expenses and liabilities 7,394,822 1,586,790
Minority interests in controlled subsidiaries 77,251,671 7,947,333
----------------------- -----------------------
Total liabilities $ 1,091,296,217 $ 691,327,562
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Net assets $ 1,806,193,552 $ 1,920,611,857
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Shareholders' Capital $ 1,806,193,552 $ 1,920,611,857
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Shares outstanding 21,041,844 22,261,334
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Net asset value and redemption price per Share $ 85.84 $ 86.28
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See notes to unaudited condensed consolidated financial statements
3
BELMAR CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
----------------------------------------------------------------------------------
Investment Income:
Dividends allocated from Belvedere Company
(net of foreign taxes of $79,280, $54,283,
$324,083, and $239,038, respectively) $ 7,130,416 $ 6,434,594 $ 21,458,195 $ 18,541,161
Interest allocated from Belvedere Company 12,098 53,274 67,873 356,952
Expenses allocated from Belvedere Company (2,857,329) (2,751,074) (8,734,857) (7,759,274)
------------------- ------------------- ------------------- --------------------
Net investment income allocated from
Belvedere Company $ 4,285,185 $ 3,736,794 $ 12,791,211 $ 11,138,839
Distributions from Partnership Preference Units 2,656,063 10,698,840 12,865,212 35,334,250
Rental income 18,553,658 8,473,810 43,685,281 25,718,859
Interest 118,907 53,976 504,354 112,079
------------------- ------------------- ------------------- --------------------
Total investment income $ 25,613,813 $ 22,963,420 $ 69,846,058 $ 72,304,027
------------------- ------------------- ------------------- --------------------
Expenses:
Investment advisory and administrative fees $ 2,145,643 $ 1,789,557 $ 5,914,189 $ 5,327,406
Property management fees 438,736 338,613 1,102,334 1,012,188
Distribution and servicing fees 885,242 873,268 2,738,036 2,459,323
Interest expense on mortgages 7,325,098 3,605,783 20,924,661 10,765,966
Interest expense on Credit Facility 2,699,050 1,944,624 5,647,769 6,852,621
Property and maintenance expenses 3,329,290 2,954,163 9,153,931 8,842,473
Property taxes and insurance 1,884,234 1,239,332 4,226,575 3,612,851
Miscellaneous 802,831 342,831 1,488,451 987,615
------------------- ------------------- ------------------- --------------------
Total expenses $ 19,510,124 $ 13,088,171 $ 51,195,946 $ 39,860,443
Deduct-
Reduction of investment advisory
and administrative fees 455,190 446,705 1,404,063 1,246,404
------------------- ------------------- ------------------- --------------------
Net expenses $ 19,054,934 $ 12,641,466 $ 49,791,883 $ 38,614,039
------------------- ------------------- ------------------- --------------------
Net investment income before
minority interests in net income of
controlled subsidiaries $ 6,558,879 $ 10,321,954 $ 20,054,175 $ 33,689,988
Minority interests in net income
of controlled subsidiaries (854,163) (45,381) (855,891) (277,732)
------------------- ------------------- ------------------- --------------------
Net investment income $ 5,704,716 $ 10,276,573 $ 19,198,284 $ 33,412,256
------------------- ------------------- ------------------- --------------------
See notes to unaudited condensed consolidated financial statements
4
BELMAR CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited) (Continued)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
-----------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions and foreign currency
transactions allocated from Belvedere
Company (identified cost basis) $ 1,379 $ 1,277,688 $ 11,420,583 $ (3,041,249)
Investment transactions in Partnership
Preference Units (identified cost basis) 4,063,620 14,546,216 40,590,325 16,357,516
Interest rate swap agreements (1) (5,426,650) (6,972,899) (11,700,552) (26,215,668)
Investment transactions in other real estate 908,060 - 908,060 -
------------------- ------------------- ------------------- --------------------
Net realized gain (loss) $ (453,591) $ 8,851,005 $ 41,218,416 $ (12,899,401)
------------------- ------------------- ------------------- --------------------
Change in unrealized appreciation
(depreciation) -
Investments and foreign currency allocated
from Belvedere Company (identified cost basis) $ (46,048,567) $ 36,814,345 $ (552,457) $ 166,112,788
Investment in Partnership Preference Units
(identified cost basis) (4,242,068) (12,223,737) (42,589,557) 14,063,518
Investment in other real estate
(net of minority interest in unrealized loss of
controlled subsidiaries of $(372,466),
$(174,654), $(6,780,437) and $(1,896,900),
respectively) (1,654,928) (2,283,368) (1,384) (14,583,748)
Interest rate swap agreements (6,086,810) 7,776,056 (839,623) 20,988,204
------------------- ------------------- ------------------- --------------------
Net change in unrealized appreciation
(depreciation) $ (58,032,373) $ 30,083,296 $ (43,983,021) $ 186,580,762
------------------- ------------------- ------------------- --------------------
Net realized and unrealized gain (loss) $ (58,485,964) $ 38,934,301 $ (2,764,605) $ 173,681,361
------------------- ------------------- ------------------- --------------------
Net (decrease) increase in net assets
from operations $ (52,781,248) $ 49,210,874 $ 16,433,679 $ 207,093,617
=================== =================== =================== ====================
(1) Amounts include periodic payments made in connection with interest rate
swap agreements of $2,989,394, $6,972,899, $9,263,296 and $26,215,668,
respectively (Note 5).
See notes to unaudited condensed consolidated financial statements
5
BELMAR CAPITAL FUND LLC
Condensed Consolidated Statements of Changes in Net Assets
Nine Months
Ended Year Ended
September 30, 2004 December 31,
(Unaudited) 2003
------------------------ ----------------------
Increase (Decrease) in Net Assets:
Net investment income $ 19,198,284 $ 43,724,019
Net realized gain from investment transactions, foreign
currency transactions and interest rate swap agreements 41,218,416 5,911,089
Net change in unrealized appreciation (depreciation) of
investments, foreign currency and interest rate swap agreements (43,983,021) 362,154,142
------------------------ ----------------------
Net increase in net assets from operations $ 16,433,679 $ 411,789,250
------------------------ ----------------------
Transactions in Fund Shares -
Net asset value of Fund Shares issued to Shareholders in
payment of distributions declared $ 10,101,552 $ 18,603,373
Net asset value of Fund Shares redeemed (115,366,848) (90,690,145)
------------------------ ----------------------
Net decrease in net assets from Fund Share transactions $ (105,265,296) $ (72,086,772)
------------------------ ----------------------
Distributions -
Distributions to Shareholders $ (25,586,688) $ (39,320,426)
------------------------ ----------------------
Total distributions $ (25,586,688) $ (39,320,426)
------------------------ ----------------------
Net (decrease) increase in net assets $ (114,418,305) $ 300,382,052
Net assets:
At beginning of period $ 1,920,611,857 $ 1,620,229,805
------------------------ ----------------------
At end of period $ 1,806,193,552 $ 1,920,611,857
======================== ======================
See notes to unaudited condensed consolidated financial statements
6
BELMAR CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Nine Months
Ended Ended
September 30, 2004 September 30, 2003
------------------------ ----------------------
Cash Flows From (For) Operating Activities -
Net increase in net assets from operations $ 16,433,679 $ 207,093,617
Adjustments to reconcile net increase in net assets from operations
to net cash flows (for) from operating activities -
Net investment income allocated from Belvedere Company (12,791,211) (11,138,839)
Increase in escrow deposits (265,697) (184,609)
Decrease in receivable for securities sold - 29,285,540
(Increase) decrease in other assets (9,130,315) 661,379
Decrease in distributions and interest receivable 1,008,112 311,242
Decrease in interest payable for open swap agreements (80,848) (551,790)
Increase (decrease) in security deposits, accrued interest and
accrued other expenses and liabilities 5,873,730 (594,918)
Decrease in accrued property taxes (705,236) (741,160)
Purchases of Partnership Preference Units (88,924,869) -
Proceeds from sales of Partnership Preference Units 341,436,352 84,967,714
Payments for investments in other real estate (479,631,795) -
Proceeds from sale of investment in other real estate 159,062,857 -
Cash assumed in connection with acquisition
of other real estate investments 15,051 -
Decrease in cash due to sale of majority interest in controlled
subsidiary (395,135) -
Decrease (increase) in short-term investments 13,311,476 (20,783,681)
Improvements to rental property (1,004,811) (1,117,017)
Net increase in investment in Belvedere Company - (10,866,251)
Interest incurred on interest rate swap agreements (9,263,296) (26,215,668)
Payment for termination of interest rate swap agreements (2,437,256) -
Minority interests in net income of controlled subsidiaries 855,891 277,732
Net realized (gain) loss from investment transactions,
foreign currency transactions and interest rate swap agreements (41,218,416) 12,899,401
Net change in unrealized (appreciation) depreciation of investments,
foreign currency and interest rate swap agreements 43,983,021 (186,580,762)
------------------------ ----------------------
Net cash flows (for) from operating activities $ (63,868,716) $ 76,721,930
------------------------ ----------------------
Cash Flows From (For) Financing Activities -
Net proceeds from (repayment of) Credit Facility $ 84,000,000 $ (55,000,000)
Payments on mortgages (3,871,712) (959,319)
Payments for Fund Shares redeemed (2,169,077) (2,430,950)
Distributions paid to Shareholders (15,485,136) (20,717,053)
Distributions paid to minority shareholders (16,800) -
Capital contributed to controlled subsidiary - 79,926
------------------------ ----------------------
Net cash flows from (for) financing activities $ 62,457,275 $ (79,027,396)
------------------------ ----------------------
Net decrease in cash $ (1,411,441) $ (2,305,466)
Cash at beginning of period $ 6,605,096 $ 6,149,096
------------------------ ----------------------
Cash at end of period $ 5,193,655 $ 3,843,630
======================== ======================
See notes to unaudited condensed consolidated financial statements
7
BELMAR CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
Nine Months Nine Months
Ended Ended
September 30, 2004 September 30, 2003
----------------------- -------------------------
Supplemental Disclosure and Non-cash Investing and
Financing Activities -
Interest paid on loan - Credit Facility $ 5,534,316 $ 6,452,294
Interest paid on mortgages $ 19,749,183 $ 10,469,505
Interest paid on swap agreements $ 9,344,144 $ 26,767,458
Market value of securities distributed in payment of redemptions $ 113,459,174 $ 63,091,872
Market value of real property and other assets, net of current
liabilities, assumed in conjunction with the acquisitions of
other real estate $ 840,381,023 $ -
Market value of minority interests assumed in conjunction with the
acquisitions of other real estate $ 116,686,185 $ -
Mortgages assumed in conjunction with the acquisitions of other
real estate $ 244,129,496 $ -
Market value of real property and other assets, net of current
liabilities, disposed of in conjunction with the sale of other
real estate $ 197,178,423 $ -
Market value of minority interests disposed of in conjunction with
the sale of other real estate $ 40,158,768 $ -
See notes to unaudited condensed consolidated financial statements
8
BELMAR CAPITAL FUND LLC as of September 30, 2004
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial Highlights (Unaudited)
For the Nine Months Ended September 30, 2004
- -------------------------------------------------------------------------------
Net asset value - Beginning of period $ 86.280
- -------------------------------------------------------------------------------
Income (loss) from operations
- -------------------------------------------------------------------------------
Net investment income (6) $ 0.883
Net realized and unrealized loss (0.173)
- -------------------------------------------------------------------------------
Total income from operations $ 0.710
- -------------------------------------------------------------------------------
Distributions
- -------------------------------------------------------------------------------
Distributions to Shareholders $ (1.150)
- -------------------------------------------------------------------------------
Total distributions $ (1.150)
- -------------------------------------------------------------------------------
Net asset value - End of period $ 85.840
- -------------------------------------------------------------------------------
Total Return (1) 0.83%
- -------------------------------------------------------------------------------
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) 1.49%(9) 1.03%(9)
Operating expenses(7) 1.03%(9) 0.71%(9)
Belmar Capital Fund LLC Expenses
Interest and other borrowing costs(4)(8) 0.40%(9) 0.28%(9)
Investment advisory and administrative fees,
servicing fees and other Fund operating
expenses(3)(4) 1.23%(9) 0.85%(9)
---------------------------------
Total expenses 4.15%(9) 2.87%(9)
Net investment income 1.37%(9) 0.95%(9)
- -------------------------------------------------------------------------------
Supplemental Data
- -------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 1,806,194
Portfolio turnover of Tax-Managed Growth
Portfolio (the Portfolio) 2.41%
- -------------------------------------------------------------------------------
(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 Belmar Capital Fund LLC (Belmar Capital) (including Belmar Capital's
interest in Belvedere Capital Fund Company LLC (Belvedere Company) and
Belmar 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 Belmar Realty Corporation's (Belmar Realty)
controlled subsidiaries are reduced by the proportionate interests therein
of investors other than Belmar Realty.
(3) Includes Belmar Capital's share of Belvedere Company's allocated expenses,
including those expenses allocated from the Portfolio.
(4) Includes the expenses of Belmar Capital and Belmar Realty. Does not include
expenses of the real estate subsidiaries majority-owned by Belmar Realty.
(5) For the purpose of calculating ratios, the income and expenses of Belmar
Realty's controlled subsidiaries are reduced by the proportionate interests
therein of investors other than Belmar Realty.
(6) Calculated using average shares outstanding.
(7) Includes Belmar 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
BELMAR CAPITAL FUND LLC as of September 30, 2004
Notes To Condensed Consolidated Financial Statements (Unaudited)
1. Organization and Basis of Presentation
The condensed consolidated interim financial statements of Belmar Capital Fund
LLC (Belmar 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 nine months ended September 30, 2004, Belmar Realty Corporation
(Belmar Realty) made indirect investments in real property through two newly
established controlled subsidiaries, Brazos Property Trust (Brazos) and Cimmaron
Property Trust (Cimmaron), as described below. On September 29, 2004, Belmar
sold its investment in Cimmaron. The consolidated financial statements include
the accounts of Brazos and Cimmaron (for the period from June 30, 2004 until
September 29, 2004) and all material intercompany accounts and transactions have
been eliminated.
Subsidiaries-
Brazos- On May 3, 2004, Belmar Realty entered into an agreement to establish and
acquire a majority interest in a controlled subsidiary, Brazos. On June 30,
2004, Brazos acquired a majority interest in four industrial distribution
properties located in two states (Tennessee and North Carolina). On August 4,
2004, Brazos acquired an additional nineteen industrial distribution properties
located in six states (Florida, Indiana, New Jersey, Ohio, Pennsylvania and
South Carolina). Belmar Realty owns 100% of the Class A Units of Brazos,
representing 60% of the voting interests in Brazos and a minority shareholder
(the Brazos Minority Shareholder) owns 100% of the Class B units, representing
40% of the voting interests in Brazos. 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. Belmar Realty has priority in distributions and has
greater voting rights than the holder of the Class B units. From and after
August 4, 2014, either Belmar Realty or the Brazos Minority Shareholder may
cause a liquidation of Brazos and if Belmar Realty makes that election, the
Brazos Minority Shareholder has the right either to purchase the shares of
Brazos owned by Belmar Realty or to acquire the assets of Brazos, in either case
at a price determined through an appraisal of the assets of Brazos.
10
Cimmaron- On May 3, 2004, Belmar Realty entered into an agreement to establish
and acquire a majority interest in a controlled subsidiary, Cimmaron. On June
30, 2004, Cimmaron acquired a majority interest in four industrial distribution
properties located in four states (Tennessee, Georgia, Texas and Ohio). On
August 4, 2004, Cimmaron acquired an additional twenty industrial distribution
properties located in five states (Florida, New Jersey, Ohio, Pennsylvania and
South Carolina). On September 29, 2004, Belmar Realty sold its interest in
Cimmaron to another fund advised by Boston Management and Research (Boston
Management). Belmar Realty owned 100% of the Class A Units of Cimmaron,
representing 60% of the voting interests in Cimmaron and a minority shareholder
(the Cimmaron Minority Shareholder) owned 100% of the Class B units,
representing 40% of the voting interests in Cimmaron. The primary distinctions
between the two classes of shares are the distribution priority and voting
rights. Belmar Realty had priority in distributions and had greater voting
rights than the holder of the Class B units. Belmar Realty does not own an
interest in Cimmaron at September 30, 2004.
2. Estate Freeze
Shareholders in Belmar 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 Shares, plus any returns
thereon in excess of the fixed annual priority of the Preferred Shares. At
September 30, 2004 and December 31, 2003, the Preferred Shares were valued at
$85.84 and $86.28, respectively, and the Common Shares had no value. The
existence of restructured Fund Shares does not adversely affect Shareholders who
do not make an 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.
3. Investment Transactions
The following table summarizes the Fund's investment transactions for the nine
months ended September 30, 2004 and September 30, 2003:
Nine Months Ended Nine Months Ended
Investment Transaction September 30, 2004 September 30, 2003
- -----------------------------------------------------------------------------------------
Increases in investment in Belvedere Company $ - $ 10,000,000
Decreases in investment in Belvedere Company $113,459,174 $ 62,225,621
Acquisition of other real property(1)(2) $479,631,795 $ -
Sales of other real property(2) $159,062,857 $ -
Purchases of Partnership Preference Units(3) $ 88,924,869 $ -
Sales of Partnership Preference Units(4) $341,436,352 $ 84,967,714
- -----------------------------------------------------------------------------------------
(1) In January 2004, Belmar Realty purchased an indirect investment in real
property through a controlled subsidiary, Bel Stamford Investors, LLC (Bel
Stamford) for $16,058,060. At the date of the transaction, the value of the
real property was $242,750,000. The real property is financed through a
mortgage loan assumed at acquisition. The mortgage loan balance assumed at
the date of the transaction was $229,674,914 and accrues interest at a
fixed rate of 6% through the stated maturity date, October 11, 2016.
(2) On June 30, 2004 and August 4, 2004, Belmar Realty purchased an indirect
investment in real property through two controlled subsidiaries, Brazos and
Cimmaron, for $7,791,240 and $298,565,255 and $16,407,819 and $140,809,421,
respectively (Note 1). On September 29, 2004, Belmar sold its interest in
Cimmaron to another fund advised by Boston Management for which a gain of
$908,060 was recognized on the transaction.
11
(3) Purchases of Partnership Preference Units during the nine months ended
September 30, 2004 represent Partnership Preference Units purchased from
other investment funds advised by Boston Management. There were no
purchases for the nine months ended September 30, 2003.
(4) Sales of Partnership Preference Units for the nine months ended September
30, 2004 and 2003 include Partnership Preference Units sold to other
investment funds advised by Boston Management for which a gain of
$32,432,139 and $4,268,591 was recognized, respectively.
On May 3, 2004, Belmar Realty entered into an agreement to establish and acquire
a majority interest in two controlled subsidiaries, Brazos and Cimmaron. During
the nine months ended September 30, 2004, Brazos and Cimmaron acquired a
majority interest in twenty-three and twenty-four industrial distribution
properties, respectively. The seller retained a minority interest in the
properties and an affiliate of the Brazos Minority Shareholder and the Cimmaron
Minority Shareholder manages the properties. On September 29, 2004 Belmar Realty
sold its interest in Cimmaron to another fund advised by Boston Management. A
portion of the Fund's indirect investment in Brazos represents a partial
interest in certain property management contracts. Other interested parties to
the property management contracts include an affiliate of the Brazos Minority
Shareholder. This partial interest provides for Brazos to receive cash flows
from management fees and certain other fees over the life of the contracts in
amounts that exceed certain preferred payments to other interested parties. The
estimated value of Brazo's interest in the management contracts is approximately
$3,000,000. Such value was estimated based upon discounting expected cash flows
over the terms of the agreements. The value of such interests will be reviewed
at least annually and may be adjusted if there has been a significant change in
economic circumstances since the most recent valuation.
When Brazos and Cimmaron acquired the real estate investments, 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 September 30, 2004, $258,815 of the real estate investment balance
represents the estimated fair value of net favorable in-place leases for Brazos.
The properties are leased under fixed-term operating leases on a long-term
basis. At September 30, 2004, the minimum lease payments expected to be received
by Brazos on leases with lease periods greater than one year are as follows:
Twelve Months Ending September 30, Amount
------------------------------------------------------
2005 $ 20,842,825
2006 14,566,845
2007 12,237,319
2008 10,791,260
2009 8,378,888
Thereafter 27,539,566
In May 2004, Bel Alliance Apartments, LLC (Bel Apartments), a controlled
subsidiary of Belmar Realty, agreed to sell all of its multifamily residential
properties to an affiliate of the Bel Apartments Minority Shareholder. In
October 2004, the sale transaction was completed and Bel Apartments received
proceeds of $23,494,175 as consideration for all of its interest in the
multifamily properties and did not retain any contingent liabilities associated
with the mortgage debt secured by the properties or other liabilities.
Concurrent with this sale, Belmar Realty acquired the outstanding minority
interest in Bel Apartments for a nominal amount. The Fund had an increase in net
unrealized appreciation of $5,298,371 for the nine months ended September 30,
2004 as a result of the terms of the agreement. In October 2004, the Fund
recognized a loss of approximately $21,000,000 on the sale.
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 nine months ended September 30, 2004 and September 30, 2003,
including allocations of income, expenses and net realized and unrealized gains
(losses) for the respective periods then ended:
12
Nine Months Nine Months
Ended Ended
September 30, September 30,
2004 2003
- -------------------------------------------------------------------------------------------------------------------
Belvedere Company's interest in the Portfolio (1) $11,744,785,646 $ 9,775,572,306
The Fund's investment in Belvedere Company (2) $ 1,877,111,347 $ 1,767,246,710
Income allocated to Belvedere Company from the Portfolio $ 127,279,355 $ 102,346,416
Income allocated to the Fund from Belvedere Company $ 21,526,068 $ 18,898,113
Expenses allocated to Belvedere Company from the Portfolio $ 38,377,075 $ 31,352,609
Expenses allocated to the Fund from Belvedere Company $ 8,734,857 $ 7,759,274
Net realized gain (loss) from investment transactions and foreign currency
transactions allocated to Belvedere Company from the Portfolio $ 72,613,080 $ (10,803,952)
Net realized gain (loss) from investment transactions and foreign currency
transactions allocated to the Fund from Belvedere Company $ 11,420,583 $ (3,041,249)
Net change in unrealized appreciation (depreciation) of investments and
foreign currency allocated to Belvedere Company from the Portfolio $ (18,939,820) $ 898,392,188
Net change in unrealized appreciation (depreciation) of investments and
foreign currency allocated to the Fund from Belvedere Company $ (552,457) $ 166,112,788
- -------------------------------------------------------------------------------------------------------------------
(1) As of September 30, 2004 and 2003, the value of Belvedere Company's
interest in the Portfolio represents 65.9% and 62.1% of the Portfolio's net
assets, respectively.
(2) As of September 30, 2004 and 2003, the Fund's investment in Belvedere
Company represents 16.0% and 18.1% of Belvedere Company's net assets,
respectively.
A summary of the Portfolio's Statement of Assets and Liabilities at September
30, 2004, December 31, 2003 and September 30, 2003 and its operations for the
nine months ended September 30, 2004, for the year ended December 31, 2003 and
for the nine months ended September 30, 2003 follows:
September 30, December 31, September 30,
2004 2003 2003
----------------------------------------------------
Investments, at value $17,792,133,580 $17,584,390,762 $15,720,495,292
Other assets 38,445,443 25,462,745 22,166,551
- --------------------------------------------------------------------------------
Total assets $17,830,579,023 $17,609,853,507 $15,742,661,843
Loan payable -
Line of Credit 15,200,000 - -
Other liabilities 218,380 264,502 241,245
- --------------------------------------------------------------------------------
Total liabilities 15,418,380 264,502 241,245
- --------------------------------------------------------------------------------
Net assets $17,815,160,643 $17,609,589,005 $15,742,420,598
================================================================================
Dividends and interest $ 197,869,361 $ 232,925,912 $ 166,725,898
- --------------------------------------------------------------------------------
Investment adviser fee $ 57,812,972 $ 67,584,543 $ 49,370,631
Other expenses 1,911,200 2,295,653 1,730,334
- --------------------------------------------------------------------------------
Total expenses $ 59,724,172 $ 69,880,196 $ 51,100,965
- --------------------------------------------------------------------------------
Net investment income $ 138,145,189 $ 163,045,716 $ 115,624,933
Net realized gain (loss) from
investment transactions and
foreign currency transactions 118,172,446 70,909,770 (17,942,587)
Net change in unrealized
appreciation (depreciation)
of investments and foreign
currency (29,473,230) 3,174,709,110 1,449,036,078
- --------------------------------------------------------------------------------
Net increase in net assets
from operations $ 226,844,405 $ 3,408,664,596 $ 1,546,718,424
- --------------------------------------------------------------------------------
5. Interest Rate Swap Agreements
Belmar 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, Belmar 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 September 30, 2004 and December 31, 2003 are listed
below.
13
Notional Initial
Amount Optional Final Unrealized Unrealized
Effective (000's Fixed Floating Termination Termination Appreciation at Appreciation at
Date omitted) Rate Rate Date Date September 30, 2004 December 31, 2003
- ------------------------------------------------------------------------------------------------------------------
06/04 $279,760 4.875% LIBOR + 0.00% - 6/12 $ -* $ -
02/04 58,363 4.90% LIBOR + 0.20% 8/04 6/10 31,315 -
10/03 58,363 4.95% LIBOR + 0.20% 2/04 6/10 -** 133,207
10/03 55,831 4.875% LIBOR + 0.20% 4/04 6/10 25,323 154,214
10/03 43,010 4.755% LIBOR + 0.20% 7/04 6/10 108,265 163,545
10/03 56,978 4.695% LIBOR + 0.20% 9/04 6/10 208,573 232,978
10/03 64,418 4.565% LIBOR + 0.20% 3/05 6/10 372,302 316,702
10/03 110,068 3.9725% LIBOR + 0.20% - 6/10 505,444 1,090,199
- ------------------------------------------------------------------------------------------------------------------
$1,251,222 $2,090,845
- ------------------------------------------------------------------------------------------------------------------
* On May 3, 2004, Belmar Capital entered into a forward interest rate swap
agreement with Merrill Lynch Capital Services, Inc. in anticipation of its
future investment in controlled subsidiaries Brazos and Cimmaron for the
purpose of hedging Belmar Realty's proportionate share of the interest rate
of substantially all of the expected fixed-rate mortgage financing of the
real property over the expected 8-year term. Such agreement was terminated
in July 2004 and the Fund realized a loss of $2,437,256 upon termination.
** Agreement was terminated on the Initial Optional Termination Date.
6. Debt
Credit Facility - In August 2004, Belmar Capital made borrowings under its
credit arrangement with Merrill Lynch Mortgage Capital, Inc. (Merrill Lynch) in
the amount of $118,500,000. At that time, Belmar Capital also increased the
amount available with Merrill Lynch under a temporary arrangement (the Temporary
Arrangement) by $213,500,000 and borrowed that amount. Belmar Capital used the
proceeds from these borrowings to finance the Fund's investment in Brazos and
Cimmaron (Note 3). 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 Belmar Capital, excluding the assets of Bel Apartments,
Bel Stamford, Brazos and Cimmaron (for the period during which Belmar Capital
maintained an indirect interest in Cimmaron), secure all borrowings under the
credit arrangement with Merrill Lynch.
Mortgages - In connection with the acquisition of real properties on June 30,
2004, Brazos assumed an existing mortgage note with a principal balance of
$14,454,582. The mortgage note, which bears interest at a fixed rate of 6.29%
per annum, is secured by the properties and is generally without recourse to the
other assets of Belmar Capital and Belmar Realty. The value of the rental
property securing the mortgage is $21,545,602. Principal and interest payments
are due monthly with a balloon payment of $12,421,558 due on January 1, 2013.
Principal payments due under the mortgage note for the years subsequent to
September 30, 2004 are as follows:
2005 $ 189,802
2006 202,091
2007 215,175
2008 229,107
2009 243,941
Thereafter 13,328,847
------------
$ 14,408,963
============
The estimated market value of the mortgage note payable is approximately
$15,400,000 at September 30, 2004. The mortgage note payable cannot be prepaid
or otherwise disposed of without incurring a substantial prepayment penalty or
without the sale of the rental properties financed by the mortgage note payable.
Management generally has no current plans to prepay or otherwise dispose of the
mortgage note payable or sell the related rental property prior to the maturity
date. The market value of the mortgage 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
14
use of different assumptions or estimation methodologies may have a material
effect on the estimated market value.
Rental property held by Belmar Realty's controlled subsidiaries, Bel Apartments
and Bel Stamford, is financed through mortgages issued to the controlled
subsidiaries. The mortgages are secured by a rental property or properties. The
mortgages are generally without recourse to Belmar Capital and Belmar Realty.
The mortgage debt obligation of Bel Stamford is generally without recourse to
Belmar Capital, Belmar Realty and Shareholders.
The mortgage agreements relating to the rental properties held by Bel Apartments
require certain covenants be met, including a covenant that trade payables and
accrued expenses incurred in the ordinary course of business in the aggregate
will not exceed 1% of the outstanding principal balance of the loan. At
September 30, 2004, this covenant was not met for certain mortgage agreements,
of which the aggregate principal balance at September 30, 2004 totals
$20,826,857, or 5% of the total mortgages outstanding. The mortgage agreements
provide for a cure period of 30 days after written notification from the
lenders, with a further extension of up to 60 additional days. As of September
30, 2004 the lenders had not provided such notice. Upon the sale of Bel
Apartment's interest in the Bel Apartments Properties in October 2004, Bel
Apartments did not retain any contingent liabilities associated with the
mortgage debt secured by the properties.
On October 21, 2004, Brazos obtained first mortgage financing for its investment
in real properties in the amount of $215,000,000. The mortgage note, which bears
interest at a fixed rate of 5.40% per annum, is secured by all of the Brazos
properties and is without recourse to Belmar Realty, Belmar Capital and its
Shareholders. Pursuant to an agreement between Belmar Realty and the Brazos
Minority Shareholder, Belmar Realty may (but is not obligated to) make loans to
Brazos to fund certain items, such as debt service, insurance or property taxes.
Interest payments are due monthly starting November 1, 2004, with the unpaid
principal due on November 1, 2012. The proceeds from this financing were
subsequently distributed to Belmar Realty and the Brazos Minority Shareholder in
accordance with their equity interests. The proceeds from this transaction along
with other funds available were used to repay Belmar Capital's borrowings under
the Temporary Arrangement as well as a portion of other borrowings under the
Credit Facility. Pursuant to its terms, the Temporary Arrangement expired on
October 29, 2004. As of November 9, 2004, outstanding borrowings under the
credit arrangement with DrKW and Merrill Lynch totaled $335,000,000 and
$84,000,000, respectively.
Notes Payable - The Bel Apartments minority shareholder loaned $600,000 and
$100,000 to Bel Apartments in November and December 2001, respectively. Interest
on the notes is payable at a rate of 10% per annum. The remaining principal
balance of the notes plus accrued interest thereon was due in August 2004 and
December 2004. At September 30, 2004, the aggregate principal amount outstanding
under the notes was $565,972. At September 30, 2004, total interest payable to
the Bel Apartments minority shareholder was $144,480.
Belmar Realty loaned $900,000 and $150,000 to Bel Apartments in August and
December 2001, respectively. Interest on the notes is payable at a rate of 10%
per annum. The remaining principal balance of the notes plus accrued interest
thereon was due in August 2004 and December 2004. At September 30, 2004, the
aggregate principal amount outstanding under the notes was $866,708. At
September 30, 2004, total interest payable to Belmar Realty was $221,251. All
balances and transactions related to the notes made by Belmar Realty have been
eliminated through consolidation of the financial statements.
In October 2004, the liability of Bel Apartments for such notes payable was
relieved upon the sale of Bel Apartments interest in the multifamily properties
(Note 3).
7. Segment Information
Belmar 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
15
investment in Belvedere Company, Belmar Capital invests in real estate assets
through its subsidiary, Belmar Realty. Belmar Realty invests directly and
indirectly in Partnership Preference Units and indirectly in real property
through controlled subsidiaries, Bel Apartments, Bel Stamford (for the period
January 14, 2004 to September 30, 2004), Brazos (for the period June 30, 2004 to
September 30, 2004) and Cimmaron (for the period June 30, 2004 to September 29,
2004).
Belmar 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 Belmar Capital 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
September 30, 2004 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 4,285,185 $ 21,211,013 $ 25,496,198
Interest expense on mortgages - (7,325,098) (7,325,098)
Interest expense on Credit Facility (483,332) (1,572,939) (2,056,271)
Operating expenses (377,078) (7,692,094) (8,069,172)
Minority interest in net income of controlled
subsidiaries - (854,163) (854,163)
- ----------------------------------------------------------------------------------------------------------------
Net investment income $ 3,424,775 $ 3,766,719 $ 7,191,494
Net realized gain (loss) 1,379 (454,970) (453,591)
Net change in unrealized appreciation (depreciation) (46,048,567) (11,983,806) (58,032,373)
- ----------------------------------------------------------------------------------------------------------------
Net decrease in net assets from operations of
reportable segments $(42,622,413) $ (8,672,057) $(51,294,470)
- ----------------------------------------------------------------------------------------------------------------
Tax-Managed
For the Three Months Ended Growth Real
September 30, 2003 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 3,736,794 $ 19,173,640 $ 22,910,434
Interest expense on mortgages - (3,605,783) (3,605,783)
Interest expense on Credit Facility (331,515) (1,554,771) (1,886,286)
Operating expenses (320,336) (5,820,059) (6,140,395)
Minority interest in net income of controlled
subsidiary - (45,381) (45,381)
- ----------------------------------------------------------------------------------------------------------------
Net investment income $ 3,084,943 $ 8,147,646 $ 11,232,589
Net realized gain 1,277,688 7,573,317 8,851,005
Net change in unrealized appreciation (depreciation) 36,814,345 (6,731,049) 30,083,296
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations of
reportable segments $ 41,176,976 $ 8,989,914 $ 50,166,890
- ----------------------------------------------------------------------------------------------------------------
Tax-Managed
For the Nine Months Ended Growth Real
September 30, 2004 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 12,791,211 $ 56,555,069 $ 69,346,280
Interest expense on mortgages - (20,924,661) (20,924,661)
Interest expense on Credit Facility (1,073,076) (3,106,273) (4,179,349)
Operating expenses (1,307,732) (18,932,525) (20,240,257)
Minority interest in net income of controlled
subsidiaries - (855,891) (855,891)
- ----------------------------------------------------------------------------------------------------------------
Net investment income $ 10,410,403 $ 12,735,719 $ 23,146,122
Net realized gain 11,420,583 29,797,833 41,218,416
Net change in unrealized appreciation (depreciation) (552,457) (43,430,564) (43,983,021)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations
of reportable segments $ 21,278,529 $ (897,012) $ 20,381,517
- ----------------------------------------------------------------------------------------------------------------
16
Tax-Managed
For the Nine Months Ended Growth Real
September 30, 2003 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 11,138,839 $ 61,055,484 $ 72,194,323
Interest expense on mortgages - (10,765,966) (10,765,966)
Interest expense on Credit Facility (822,315) (5,824,728) (6,647,043)
Operating expenses (876,924) (17,371,387) (18,248,311)
Minority interest in net income of controlled subsidiary - (277,732) (277,732)
- ----------------------------------------------------------------------------------------------------------------
Net investment income $ 9,439,600 $ 26,815,671 $ 36,255,271
Net realized loss (3,041,249) (9,858,152) (12,899,401)
Net change in unrealized appreciation (depreciation) 166,112,788 20,467,974 186,580,762
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations of
reportable segments $172,511,139 $ 37,425,493 $209,936,632
- ----------------------------------------------------------------------------------------------------------------
Tax-Managed
Growth Real
At September 30, 2004 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------
Segment assets $1,877,111,347 $1,015,502,123 $2,892,613,470
Segment liabilities 87,132,145 934,023,787 1,021,155,932
- ----------------------------------------------------------------------------------------------------------------
Net assets of reportable segments $1,789,979,202 $ 81,478,336 $1,871,457,538
- ----------------------------------------------------------------------------------------------------------------
At December 31, 2003
- ----------------------------------------------------------------------------------------------------------------
Segment assets $1,966,911,184 $ 623,035,741 $2,589,946,925
Segment liabilities 87,378,722 549,380,252 636,758,974
- ----------------------------------------------------------------------------------------------------------------
Net assets of reportable segments $1,879,532,462 $ 73,655,489 $1,953,187,951
- ----------------------------------------------------------------------------------------------------------------
* Belmar 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 Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
----------------------------------------------------------------------------------
Revenue:
Revenue from reportable segments $ 25,496,198 $ 22,910,434 $ 69,346,280 $ 72,194,323
Unallocated amounts:
Interest earned on cash not invested in
the Portfolio or in subsidiaries 117,615 52,986 499,778 109,704
----------------------------------------------------------------------------------
Total revenue $ 25,613,813 $ 22,963,420 $ 69,846,058 $ 72,304,027
----------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations:
Net (decrease) increase in net assets from
operations of reportable segments $(51,294,470) $ 50,166,890 $ 20,381,517 $209,936,632
Unallocated investment income:
Interest earned on cash not invested
in the Portfolio or in subsidiaries 117,615 52,986 499,778 109,704
Unallocated expenses(1):
Distribution and servicing fees (885,242) (873,268) (2,738,036) (2,459,323)
Interest expense on Credit Facility (642,779) (58,338) (1,468,420) (205,578)
Audit, tax, and legal fees (55,401) (56,401) (168,251) (205,689)
Other operating expenses (20,971) (20,995) (72,909) (82,129)
----------------------------------------------------------------------------------
Total net (decrease) increase in net assets
from operations $(52,781,248) $ 49,210,874 $ 16,433,679 $207,093,617
----------------------------------------------------------------------------------
17
September 30, 2004 December 31, 2003
------------------ -----------------
Net assets:
Net assets of reportable segments $1,871,457,538 $1,953,187,951
Unallocated amounts:
Cash(2) 1,214,299 5,019,018
Short-term investments(2) 3,662,000 16,973,476
Loan payable - Credit Facility(3) (69,890,509) (54,357,683)
Other liabilities (249,776) (210,905)
------------------ -----------------
Total net assets $1,806,193,552 $1,920,611,857
------------------ -----------------
(1) Unallocated expenses represent costs incurred that pertain to the overall
operation of Belmar Capital, and do not pertain to either operating
segment.
(2) Unallocated cash and short-term investments represent cash and cash
equivalents not currently invested in the Portfolio or real estate assets.
(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.
18
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 Belmar 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 SEPTEMBER 30, 2004 COMPARED TO THE
QUARTER ENDED SEPTEMBER 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 Belmar Realty Corporation (Belmar 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 Belmar Realty's controlled subsidiaries, partnership income
allocated to the income-producing preferred equity interests in real estate
operating partnerships (Partnership Preference Units) owned by Belmar 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 Belmar Realty's controlled subsidiaries,
interest expense on the Fund's Credit Facility (described in Item 2(b) below),
property management fees, property taxes, insurance, maintenance and other
expenses relating to the properties owned by Belmar 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 Belmar 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 S&P 500 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
- --------------------------
(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.
19
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 Belmar Realty, 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 borrowings under the
Credit Facility used to acquire Belmar 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 -2.75% for the quarter ended September 30, 2004.
This return reflects a decrease in the Fund's net asset value per share from
$88.27 to $85.84 during the period. The total return of the S&P 500 was -1.87%
over the same period. The performance of the Fund trailed that of the Portfolio
by approximately 0.71% during the period. Last year, the Fund had a total return
performance of 2.81% for the quarter ended September 30, 2003. This return
reflected an increase in the Fund's net asset value per share from $75.04 to
$77.15 during the period. The S&P 500 had a total return of 2.65% over the same
period. The performance of the Fund exceeded that of the Portfolio by
approximately 0.46% during that period.
PERFORMANCE OF THE PORTFOLIO. For the quarter ended September 30, 2004, the
Portfolio's total return was -2.04%, slightly lower than the S&P 500 Index,
which posted a -1.87% return during the quarter. The third quarter of 2004 was
disappointing for equity returns, as pre-election jitters and moderating
earnings growth expectations in the face of rising oil prices and higher
short-term interest rates weighed on the markets.
During the third quarter of 2004, value stocks generally outperformed growth
stocks. The Portfolio's modest underperformance during this period was
attributable in part to a relative underweight of the market's strongest
performing industries, specifically electric utilities, diversified telecom and
metals. Investor anxiety over higher short-term interest rates and the
unrelenting surge in oil prices pressured economically sensitive sectors,
particularly consumer discretionary and information technology stocks. The
Portfolio benefited from a decreased exposure to media, specialty retail and
semiconductor industries during the quarter ended September 30, 2004. The
Portfolio's ongoing emphasis of the energy sector was also beneficial, as energy
stocks advanced on record high oil prices. Within the financials sector,
recognizing increased interest rate risk, the Portfolio redeployed assets in
less interest-sensitive industries. The Portfolio's de-emphasis of
pharmaceuticals was also helpful, given political and company specific headwinds
faced by health care stocks in the third quarter of 2004.
For the quarter ended September 30, 2003, the Portfolio's total return was 2.35%
compared to the 2.65% total return achieved by the S&P 500. Favorable fiscal and
monetary policies, resilient consumer spending and positive earnings momentum
contributed to the market's strength during the third quarter of 2003. The
Portfolio's stock selection and underweighting of the telecommunication and
health care sectors were beneficial during the quarter ended September 30, 2003,
but not sufficient to offset the impact of the Portfolio's underweighting during
that quarter of the information technnology sector (the best performing sector
during the quarter).
PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate investments are
held through Belmar Realty. As of September 30, 2004, real estate investments
included two real estate joint ventures (Real Estate Joint Ventures), an office
property subject to a long-term triple net lease (Net Leased Property) and a
portfolio of Partnership Preference Units issued by partnerships affiliated with
publicly traded real estate investment trusts (REITs). The Real Estate Joint
Ventures operate multifamily or industrial distribution properties. As of
September 30, 2004, the estimated fair value of the Fund's real estate
investments represented 34.2% of the Fund's total assets on a consolidated
basis. After adjusting for minority interests in the Real Estate Joint Ventures,
the Fund's real estate investments represented 50.5% of the Fund's net assets as
of September 30, 2004.
On August 4, 2004, a Real Estate Joint Venture, Brazos Property Trust (Brazos),
through its interest in ProLogis Six Rivers Limited Partnership (Six Rivers),
participated in the merger of Six Rivers with Keystone Property Trust
(Keystone), a publicly-held REIT. As part of the Keystone transaction, Brazos
increased its ownership interest in the properties acquired during the quarter
ended June 30, 2004 to 100% and acquired a partnership interest in Six Rivers.
Through its interest in Six Rivers, Brazos acquired 100% of the economic
interest in certain industrial distribution properties for approximately $373.2
million. Belmar Realty owns a majority interest in Brazos, ProLogis owns a
minority interest in Brazos and ProLogis or an affiliate thereof manages the
properties. Brazos obtained first mortgage financing on October 21, 2004, which
is secured by the properties it owns and is without recourse to Belmar Realty,
the Fund or its Shareholders. Pursuant to an agreement between Belmar Realty and
ProLogis, Belmar Realty may (but is not obligated to) make loans to Brazos to
fund certain items, such as debt service, insurance or property taxes.
20
On September 29, 2004, Belmar Realty sold its interest in a Real Estate Joint
Venture, Cimmaron Property Trust (Cimmaron), for approximately $159.1 million to
another fund advised by Boston Management. Belmar Realty recognized a gain of
approximately $0.9 million on the sale. Belmar Realty acquired its interest in
Cimmaron in May 2004 and Cimmaron acquired industrial distribution properties on
June 30, 2004 and August 4, 2004.
In May 2004, Bel Alliance Apartments LLC (Bel Apartments) agreed to sell all of
its multifamily properties to an affiliate of the minority interest holder in
Bel Apartments. On October 29, 2004, Bel Apartments received net proceeds of
approximately $23.5 million as consideration for all of its interest in the
multifamily properties and did not retain any contingent liabilities associated
with the mortgage debt secured by the properties or other liabilities. Belmar
Realty recognized a loss of approximately $21.0 million on the sale. Concurrent
with this sale, Belmar Realty acquired the outstanding minority interest in Bel
Apartments for a nominal amount.
During the quarter ended September 30, 2004, rental income from real estate
operations was approximately $18.6 million compared to approximately $8.5
million for the quarter ended September 30, 2003, an increase of $10.1 million
or 119%. This increase was due to income from the industrial distribution
properties acquired on June 30 and August 4, 2004 and income from the Net Leased
Property offset in part by a modest decline in income from multifamily
properties. Multifamily income decreased primarily due to lower rental revenues
as the result of reduced apartment rental rates, increased rent concessions and
lower occupancy levels during the quarter. For the quarter ended September 30,
2003, rental income decreased primarily due to increased rent concessions or
reduced apartment rental rates and lower occupancy levels at multifamily
properties during the quarter.
During the quarter ended September 30, 2004, property operating expenses were
approximately $5.7 million compared to approximately $4.5 million for the
quarter ended September 30, 2003, an increase of 27% (property operating
expenses are before certain operating expenses of Belmar Realty of approximately
$2.0 million for the quarter ended September 30, 2004 and $1.3 million for the
quarter ended September 30, 2003). The net increase in property operating
expenses was primarily due to the expenses of the industrial distribution
properties acquired on June 30 and August 4, 2004. During the quarter ended
September 30, 2003, property operating expenses increased principally due to a
1% decrease in property and maintenance expenses offset by a 17% increase in
property taxes and insurance expense during the quarter.
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. Boston Management expects
that multifamily real estate operating results for the remainder of 2004 will
continue to be similar to 2003. In 2004, many industrial markets in the United
States began to experience increased demand for space after several years of
occupancy and rental rate declines. For many industrial distribution properties,
reduced rent levels are likely to continue over the near term as above-market
leases mature and space is released at current market rates. Boston Management
expects that improvements in multifamily and industrial distribution property
operating performance will occur over the longer term.
At September 30, 2004, the estimated fair value of the real properties
indirectly held through Belmar Realty (including the interest in property
management contracts described in Note 3 to the Fund's unaudited condensed
consolidated financial statements in Item 1 above) was approximately $820.5
million compared to approximately $188.6 million at September 30, 2003, a net
increase of $631.9 million or 335%. The net increase in estimated real property
values at September 30, 2004 as compared to September 30, 2003 was principally
due to the January 2004 acquisition of the Net Leased Property, the properties
acquired by Brazos and Bel Apartments' agreement to sell certain properties
(described below). The decrease in estimated property values at September 30,
2003 as compared to September 30, 2002 was due to declines in near term earnings
expectations, partially offset by decreases in capitalization rates during the
quarter. 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 September 30, 2004, the Fund saw unrealized
depreciation of the estimated fair value of its other real estate investments
(which includes the Real Estate Joint Ventures and the Net Leased Property) of
approximately $1.7 million compared to unrealized depreciation of approximately
$2.3 million during the quarter ended September 30, 2003. Unrealized
depreciation during the quarter ended September 30, 2004 included approximately
$1.5 million of unrealized depreciation due to certain legal and transaction
costs associated with Brazos' property acquisitions. Unrealized depreciation
during the quarter ended September 30, 2003 was due to modest decreases in
estimated property values during the quarter.
During the quarter ended September 30, 2004, Belmar Realty sold (or experienced
scheduled redemptions of) certain of its Partnership Preference Units totaling
approximately $88.3 million (including sales to other investment funds advised
21
by Boston Management), recognizing gains of approximately $4.1 million on the
transactions. During the quarter ended September 30, 2004, Belmar Realty also
acquired interests in additional Partnership Preference Units (including
acquisitions from other investment funds advised by Boston Management) totaling
approximately $88.9 million. At September 30, 2004, the estimated fair value of
Belmar Realty's Partnership Preference Units totaled approximately $170.3
million compared to approximately $495.8 million at September 30, 2003, a net
decrease of $325.5 million or 66%. While the net decrease in value was
principally due to fewer Partnership Preference Units at September 30, 2004, the
net decrease also reflects lower per unit values of the Partnership Preference
Units held at September 30, 2004 due principally to their lower average coupon
rates. In the current low interest rate environment, many issuers have been
redeeming Partnership Preference Units as call protections expire or
restructuring the terms of outstanding Partnership Preference Units in advance
of their call dates. As a result, many of the higher-yielding Partnership
Preference Units held by Belmar Realty during the quarter ended September 30,
2003 were no longer held at September 30, 2004. Boston Management expects this
trend to continue through 2004. At September 30, 2003, the estimated fair value
of Partnership Preference Units had decreased principally due to fewer units
held as compared to September 30, 2002. The per unit value of the remaining
Partnership Preference Units also declined slightly during the quarter.
During the quarter ended September 30, 2004, the Fund saw unrealized
depreciation of the estimated fair value of its Partnership Preference Units of
approximately $4.2 million compared to unrealized depreciation of approximately
$12.2 million during the quarter ended September 30, 2003. The net unrealized
depreciation of approximately $4.2 million during the third quarter of 2004
consisted of approximately $1.2 million of unrealized depreciation resulting
from modest decreases in per unit values of the Partnership Preference Units
held by Belmar Realty at September 30, 2004, and approximately $3.0 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 quarter ended September 30, 2004.
Distributions from Partnership Preference Units for the quarter ended September
30, 2004 totaled approximately $2.7 million compared to approximately $10.7
million for the quarter ended September 30, 2003, a decrease of $8.0 million or
75%. The decrease was principally due to fewer Partnership Preference Units held
on average, as well as lower average distribution rates on Partnership
Preference Units held during the quarter ended September 30, 2004. During the
quarter ended September 30, 2003, distributions from Partnership Preference
Units decreased due to fewer Partnership Preference Units held as compared to
the same quarter in 2002.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the quarter ended September
30, 2004, net realized and unrealized losses on the Fund's interest rate swap
agreements totaled approximately $11.5 million, compared to net realized and
unrealized gains of approximately $0.8 million for the quarter ended September
30, 2003. Net realized and unrealized losses on swap agreements for the quarter
ended September 30, 2004 consisted of $6.1 million of unrealized depreciation
due to changes in swap agreement valuations, $3.0 million of periodic payments
made pursuant to outstanding swap agreements (and classified as net realized
losses on interest rate swap agreements) and $2.4 million of realized losses on
swap terminations. For the quarter ended September 30, 2003, unrealized
appreciation of $7.8 million on swap agreement valuation changes was offset by
$7.0 million of swap agreement periodic payments. The negative impact on Fund
performance for the quarter ended September 30, 2004 from changes in swap
agreement valuations was attributable to a decline in swap rates during the
period. The positive contribution for the quarter ended September 30, 2003 from
changes in swap valuations was due to a number of swap agreements approaching
their initial optional termination dates and an increase in swap rates during
the period.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2003
PERFORMANCE OF THE FUND. The Fund's total return was 0.83% for the nine months
ended September 30, 2004. This return reflects a decrease in the Fund's net
asset value per share from $86.28 to $85.84 and a distribution of $1.15 per
share during the period. The S&P 500 had a total return of 1.51% over the same
period. The performance of the Fund trailed that of the Portfolio by
approximately 0.50% during the period. Last year, the Fund had a total return
performance of 13.09% for the nine months ended September 30, 2003. This return
reflected an increase in the Fund's net asset value per share from $69.87 to
$77.15 and a distribution of $1.70 per share. The S&P 500 had a total return of
14.71% over the same period. The performance of the Fund exceeded that of the
Portfolio by 2.35% during that period.
PERFORMANCE OF THE PORTFOLIO. For the nine months ended September 30, 2004, the
Portfolio's total return was 1.33%, slightly lower than the S&P 500 Index, which
returned 1.51% for the period. U.S. equity markets remained range-bound during
the period, restrained by investor anxiety over higher short-term interest
22
rates, rising energy prices and moderating consumer spending. Geopolitical and
economic concerns were offset by low inflation levels, continued earnings
strength and attractive valuations. Investors returned to quality,
dividend-paying stocks avoiding last year's high volatility, low quality
investments. During the first nine months of 2004, mid-cap stocks outperformed
large-caps and small-caps, and value stocks trounced growth investments.
The Portfolio's modest underperformance during this period was attributable in
part to adverse stock selection within the market's lagging sectors. Investments
within media, retail and health care service industries detracted from returns.
The Portfolio maintained an overweight of industrials stocks and benefited from
advances in airfreight, defense and machinery holdings. While the information
technology and consumer staples sectors lagged the market during the first nine
months of 2004, the Portfolio's allocation and investment selections within
computer peripherals and food products were beneficial. The Portfolio's ongoing
emphasis of the commodity-related investments in the energy and materials
sectors was also positive, as stocks advanced on higher commodity prices. During
the nine months ended September 30, 2004, the Portfolio continued to underweight
the utilities and telecom sectors.
For the nine months ended September 30, 2003, the Portfolio's total return was
10.74% compared to the 14.71% total return achieved by the S&P 500. In March of
2003, equity markets began a sharp rally coincident with U.S. military success
in Iraq and the development of stronger economic conditions domestically. 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. During the nine months ended September
30, 2004, Belmar Realty purchased and sold certain real estate investments. As
described below, in January 2004 Belmar Realty acquired the Net Leased Property.
In May 2004, Bel Apartments agreed to sell all of its real estate assets to an
affiliate of the minority interest holder in Bel Apartments. Reflecting the
anticipated sale, an increase of approximately $5.3 million of unrealized
appreciation is reported on the Fund's unaudited consolidated financial
statements for the nine months ended September 30, 2004 included in Item 1
above. The Bel Apartments sale was consummated in October 2004.
In January 2004, Belmar Realty acquired the Net Leased Property for an equity
investment of $16.1 million. The Net Leased Property is a commercial office
building and attached facilities in Stamford, Connecticut with 682,000 square
feet of rentable space that is leased to a single investment grade-quality
tenant on a triple net basis pursuant to a non-cancelable, fixed term operating
lease expiring in December 2017, subject to renewal options extending
thereafter. At the date of the transaction, the value of the real property was
$242.8 million. The real property is financed through a mortgage loan assumed at
acquisition. The mortgage loan balance assumed at the date of the transaction
was $229.7 million. The estimated fair value of the property held through the
Net Leased Property on September 30, 2004 was $242.8 million.
On June 30, 2004, Brazos and Cimmaron acquired majority interests in certain
industrial distribution properties from ProLogis for approximately $7.8 million
and $16.4 million, respectively. ProLogis retained minority interests in the
properties. In May 2004, Belmar Realty entered into agreements with ProLogis to
form Six Rivers (in association with subsidiaries of other investment funds
advised by Boston Management) and to merge Six Rivers with Keystone. The
transactions contemplated by these agreements were consummated on August 4,
2004. As a result of the transactions, Brazos and Cimmaron acquired partnership
interests in Six Rivers. In addition, ProLogis acquired minority interests in
Brazos and Cimmaron. Through their interests in Six Rivers, Brazos and Cimmaron
each own 100% of the economic interests in certain industrial distribution
properties acquired through the merger of Six Rivers and Keystone for
approximately $373.2 million and $176.0 million, respectively. As part of the
transaction on June 30, 2004, Brazos assumed first mortgage debt of
approximately $14.5 million secured by certain properties. As described above in
Results of Operations for the quarter ended September 30, 2004, Belmar Realty
sold its interest in Cimmaron in September 2004. On October 21, 2004, Brazos
obtained first mortgage financing secured by its properties. At the time of
acquisition, the Fund provided interim financing for Brazos and Cimmaron.
During the nine months ended September 30, 2004, rental income from real estate
operations was approximately $43.7 million compared to approximately $25.7
million for the nine months ended September 30, 2003, an increase of $18.0
million or 70%. This increase was due to income from the industrial distribution
properties acquired on June 30 and August 4, 2004 and net leased property income
offset in part by a decline in income from multifamily properties. Multifamily
income decreased primarily due to lower rental revenues as the result of reduced
apartment rental rates, increased rent concessions and lower occupancy levels
during the period. During the nine months ended September 30, 2003, rental
income decreased primarily due to weak multifamily market fundamentals in most
regions with lower occupancy levels and increased rent concessions or reduced
apartment rents during the period.
23
During the nine months ended September 30, 2004, property operating expenses
were approximately $14.5 million compared to approximately $13.5 million for the
nine months ended September 30, 2003, a net increase of 7% (property operating
expenses are before certain operating expenses of Belmar Realty of approximately
$4.4 million for the nine months ended September 30, 2004 and $3.9 million for
the nine months ended September 30, 2003). The increase in property operating
expenses during the nine months ended September 30, 2004 was principally due to
the expenses of the industrial distribution properties acquired on June 30 and
August 4, 2004. During the nine months ended September 30, 2003, property
operating expenses increased due to a 4% increase in property and maintenance
expenses and a 2% increase in property taxes and insurance expense. The near
term outlook for multifamily property operations continues to be weak. As
discussed above, 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. Additionally,
while conditions in many industrial markets began to improve in 2004, reduced
rental rates are likely to continue over the near term.
At September 30, 2004, the estimated fair value of the real properties
indirectly held through Belmar Realty was approximately $820.5 million compared
to approximately $188.6 million at September 30, 2003, a net increase of $631.9
million or 335%. The net increase in estimated real property values at September
30, 2004 as compared to September 30, 2003 was principally due to the January
2004 acquisition of the Net Leased Property, the properties acquired by Brazos
and the agreement to sell certain properties. The decrease in estimated property
values at September 30, 2003 as compared to September 30, 2002 resulted from
declines in near term earnings expectations and the economic downturn. Declines
in estimated property values were generally modest as decreases in
capitalization rates partially offset declining income level expectations.
During the nine months ended September 30, 2004 the Fund saw unrealized
depreciation of approximately $4.5 million due to certain legal and transaction
costs associated with Brazos' acquisitions and the acquisition of the Net Leased
Property offset by unrealized appreciation of approximately $4.5 million due to
the agreement to sell certain properties. Unrealized depreciation of
approximately $14.6 million during the nine months ended September 30, 2003
resulted from decreases in estimated property values during the period.
During the nine months ended September 30, 2004, Belmar Realty sold (or
experienced scheduled redemptions of) certain of its Partnership Preference
Units totaling approximately $341.4 million (including sales to other investment
funds advised by Boston Management), recognizing gains of approximately $40.6
million on the transactions. During the nine months ended September 30, 2004,
Belmar Realty also acquired interests in additional Partnership Preference Units
from other investment funds advised by Boston Management totaling approximately
$88.9 million. At September 30, 2004, the estimated fair value of Belmar
Realty's Partnership Preference Units totaled approximately $170.3 million
compared to approximately $495.8 million at September 30, 2003, a net decrease
of $325.5 million or 66%. The decrease was principally due to fewer Partnership
Preference Units held on average, as well as lower average distribution rates on
Partnership Preference Units held during the nine months ended September 30,
2004. During the nine months ended September 30, 2004, Partnership Preference
Units 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. At September 30, 2003, the decrease in the estimated fair value of
Partnership Preference Units was principally due to fewer Partnership Preference
Units held at September 30, 2003, as compared to September 30, 2002, offset in
part by increases in the per unit value of the remaining Partnership Preference
Units held by Belmar Realty. This appreciation in per unit value resulted from
declines in interest rates and tighter spreads on the real estate securities
during the nine months ended September 30, 2003.
The Fund saw net unrealized depreciation of the estimated fair value in its
Partnership Preference Units of approximately $42.6 million during the nine
months ended September 30, 2004 compared to unrealized appreciation of
approximately $14.1 million for the nine months ended September 30, 2003. The
net unrealized depreciation of approximately $42.6 million in the first nine
months of 2004 consisted of approximately $6.0 million of unrealized
depreciation resulting from decreases in per unit values of the Partnership
Preference Units held by Belmar Realty during the period and approximately $36.6
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 nine months ended September 30, 2004.
Unrealized appreciation during the nine months ended September 30, 2003 resulted
from increases in per unit values of Partnership Preference Units during the
period.
24
Distributions from Partnership Preference Units for the nine months ended
September 30, 2004 totaled approximately $12.9 million compared to approximately
$35.3 million for the nine months ended September 30, 2003, a decrease of $22.4
million or 64%. The decrease was principally due to fewer Partnership Preference
Units held on average and to lower average distribution rates on Partnership
Preference Units held during the nine months ended September 30, 2004, partially
offset by a one-time special distribution from one issuer made in connection
with a restructuring of its Partnership Preference Units. During the nine months
ended September 30, 2003, distributions from Partnership Preference Units
decreased due to fewer Partnership Preference Units held during the same period
in 2002.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the nine months ended
September 30, 2004, net realized and unrealized losses on the Fund's interest
rate swap agreements totaled approximately $12.5 million, compared to net
realized and unrealized losses of approximately $5.2 million for the nine months
ended September 30, 2003. Net realized and unrealized losses on swap agreements
for the nine months ended September 30, 2004 consisted of $0.8 million of
unrealized depreciation due to changes in swap agreement valuations, $9.3
million of periodic payments made pursuant to outstanding swap agreements (and
classified as net realized losses on interest rate swap agreements) and $2.4
million of realized losses on termination of swap agreements. For the nine
months ended September 30, 2003, unrealized appreciation of $21.0 million on
swap agreement valuation changes was offset by $26.2 million of swap agreement
periodic payments. The negative impact on Fund performance for the nine months
ended September 30, 2004 from changes in swap agreement valuations was
attributable to a decline in swap rates during the period. The positive
contribution to Fund performance for the nine months ended September 30, 2003
from changes in swap valuations was primarily due to the exercise of early
termination options on a number of swap agreements and the remaining swap
agreements approaching their initial optional termination dates. Swap rates did
not change significantly during the nine months ended September 30, 2003.
(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 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 September 30, 2004, the Fund had outstanding
borrowings of $597.0 million and unused loan commitments of $70.0 million under
the Credit Facility.
In August 2004, the Fund made borrowings under its credit arrangement with
Merrill Lynch Mortgage Capital, Inc. (Merrill Lynch) in the amount of $118.5
million. At that time, the Fund also temporarily increased the amount available
under its credit arrangement with Merrill Lynch by $213.5 million and borrowed
that amount. The additional $213.5 million of borrowings was at a rate of LIBOR
plus 0.90% and was for a period of up to sixty-days (subject to a 30-day
extension, if needed). The Fund used the total proceeds from these borrowings to
finance the acquisitions by Brazos and Cimmaron of interests in certain
industrial distribution properties. On September 29, 2004, the Fund's indirect
interest in Cimmaron was sold and on October 21, 2004, Brazos obtained first
mortgage financing for its properties. The proceeds from these transactions were
used to reduce the Merrill Lynch borrowings. As of November 9, 2004, outstanding
borrowings under the Merrill Lynch credit arrangement were $84.0 million.
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 that fluctuate with 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 September 30, 2004, the unrealized appreciation related
to the interest rate swap agreements was approximately $1.3 million. As of
September 30, 2003, the unrealized depreciation related to the interest rate
swap agreements was approximately $26.1 million.
(c) CRITICAL ACCOUNTING ESTIMATES.
The Fund's critical accounting estimates are described in Item 7(e) of its
Annual Report on Form 10-K for the year ended December 31, 2003. The Fund's
critical accounting estimates as they relate to Real Estate Joint Ventures have
been updated to reflect the valuation of Belmar Realty's interest in Brazos (and
formerly Cimmaron). The following discussion replaces the discussion of such
estimates included in the Fund's Annual Report. The discussion of the Fund's
critical accounting estimates included in the Annual Report is otherwise
unchanged.
25
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 properties owned by such Real Estate Joint Venture
(provided such appraisals are available) 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 Real Estate Joint Ventures were to change, it may
materially impact the estimated fair value of the Real Estate Joint Ventures.
When a property owned by a Real Estate Joint Venture has not been appraised
(such as when the Real Estate Joint Venture recently acquired the property),
Boston Management determines the estimated fair value of the property based on
the transaction value of the property, which equals the total acquisition cost
of the property exclusive of certain legal and transaction costs. Once an
appraisal of that property has been conducted, Boston Management will base the
estimated fair value of the property on the estimated value as determined by the
appraiser. Appraisals of newly acquired properties are conducted throughout the
year following the acquisition. If the appraised value of the property differs
significantly from the transaction value of the property, it may materially
impact the estimated fair value of the Real Estate Joint Venture.
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. This
allocation is calculated by a third party specialist, provided appraisals have
been conducted of all of the properties owned by the Real Estate Joint Venture.
The specialist 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 each Real Estate Joint Venture is prepared quarterly and reviewed by
Boston Management. When the properties owned by a Real Estate Joint Venture have
not been appraised (such as when the Real Estate Joint Venture recently acquired
the properties), Boston Management allocates equity interests in the Real Estate
Joint Venture based on the contractual ownership interests of Belmar Realty and
the Operating Partner. Once appraisals have been conducted of all of the
properties owned by the Real Estate Joint Venture, the estimated fair value of
the Fund's equity interest in the Real Estate Joint Venture will be determined
by the third party specialist using the financial model described above. 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 Real
Estate Joint Ventures. As of September 30, 2004, all of the properties owned by
26
the Real Estate Joint Ventures have been appraised, except for those owned by
Brazos. The properties owned by Brazos were acquired on June 30, 2004 and August
4, 2004.
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 and Net Leased
Property. 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 a substantial portion of
its borrowings under the Credit Facility used to acquire Belmar 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 Note 5 and Note 6
to the Fund's unaudited condensed consolidated financial statements in Item 1
above.
Interest Rate Sensitivity
Cost, Principal (Notional) Amount
by Contractual Maturity and Callable Date
for the Twelve Months Ended September 30,*
Estimated Fair
Value as of
2005 2006-2008 2009 Thereafter Total September 30, 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
- ---------------------------
Long-term debt:
- ---------------------------
Fixed-rate mortgages $401,414,976 $401,414,976 $424,400,000
Average interest rate 7.01% 7.01%
- ---------------------------
Variable-rate Credit
Facility $597,000,000 $597,000,000 $597,000,000
Average interest rate 2.24% 2.24%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative
financial instruments:
- ---------------------------
Pay fixed/receive variable
interest rate swap agreements $388,668,000 $388,668,000 $ 1,251,222
Average pay rate 4.53% 4.53%
Average receive rate 2.04% 2.04%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive investments:
- ---------------------------
Fixed-rate Partnership
Preference Units:
- ---------------------------
27
Estimated Fair
Value as of
2005 2006-2008 2009 Thereafter Total September 30, 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Cabot Industrial Properties, L.P.,
8.625% Series B Cumulative
Redeemable Preferred Units,
Callable 4/29/04, Current Yield:
8.37% $20,147,160 $20,147,160 $ 24,729,600
Camden Operating, L.P., 7% Series
B Cumulative Redeemable Perpetual
Preferred Units, Callable 12/2/08,
Current Yield: 7.16% $16,107,520 $16,107,520 $ 15,648,000
Colonial Realty Limited
Partnership, 7.25% Series B
Cumulative Redeemable Perpetual
Preferred Units, Callable 2/24/09,
Current Yield: 7.42% $15,579,515 $15,579,515 $ 15,137,300
Essex Portfolio, L.P., 7.875%
Series D Cumulative Redeemable
Preferred Units, Callable
7/28/10, Current Yield: 7.82% $ 15,910,902 $ 15,910,902 $ 15,867,243
Kilroy Realty, L.P., 7.45%
Series A Cumulative Redeemable
Preferred Units, Callable
9/30/09, Current Yield: 7.91% $ 9,938,334 $ 9,938,334 $ 9,885,876
MHC Operating Limited
Partnership, 9% Series D
Cumulative Redeemable Perpetual
Preference Units, Callable
9/29/04, Current Yield: 9.06% $20,544,240 $ 20,544,240 $ 19,864,000
PSA Institutional Partners, L.P.,
6.40% Series NN Cumulative
Redeemable Perpetual
Preferred Units, Callable
3/17/10, Current Yield:
6.82% $ 27,926,640 $ 27,926,640 $ 27,084,750
Sun Communities Operating L.P.,
8.875% Series A Cumulative
Redeemable Perpetual
Preferred Units, Callable
9/29/04, Current Yield: 8.85% $26,227,200 $ 26,227,200 $ 30,096,000
Vornado Realty, L.P., 7% Series
D-10 Cumulative Redeemable
Preferred Units, Callable
11/17/08, Current Yield:
7.02%(1) $12,091,558 $ 12,091,558 $ 11,956,959
* The amounts listed reflect the Fund's positions as of September 30, 2004.
The Fund's current positions may differ.
(1) Belmar Realty's interest in these Partnership Preference Units is held
through Bel Holdings LLC.
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. During the quarter the Fund adopted additional internal control
procedures as a result of the Brazos and Cimmaron acquisitions. There were no
other changes in the Fund's internal control over financial reporting that
occurred during the quarter ended September 30, 2004 that have materially
affected, or are reasonably likely to materially affect, the Fund's internal
control over financial reporting.
28
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, Belmar Realty and Belmar
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. 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 Annual Report on Form 10-K for the fiscal
year ending December 31, 2003). During each month in the quarter ended September
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
- --------------------------------------------------------------------------------
July 31, 2004 127,557.995 $86.20
- --------------------------------------------------------------------------------
August 31, 2004 104,618.031 $83.24
- --------------------------------------------------------------------------------
September 30, 2004 297,136.698 $86.15
- --------------------------------------------------------------------------------
Total 529,312.720 $85.76
- --------------------------------------------------------------------------------
(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 September 30, 2004.
ITEM 5. OTHER INFORMATION.
None.
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(a) Amendment No. 1 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
29
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.
30
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 November 9, 2004.
BELMAR CAPITAL FUND LLC
/s/ Michelle A. Green
---------------------
Michelle A. Green
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
31
EXHIBIT INDEX
-------------
4.2(a) Amendment No. 1 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
32