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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2004
Commission File No. 000-32633
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Belmar Capital Fund LLC (the Fund)
(Exact name of registrant as specified in its charter)
Securities registered pursuant to Section 12(g) of the Act:
Delaware 04-3508106
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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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Limited Liability Company Interests in the Fund (Shares)
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
YES [X] NO [ ]
Aggregate market value of the Shares held by non-affiliates of registrant, based
on the closing net asset value on June 30, 2004 was $1,903,992,715. Calculation
of holdings by non-affiliates is based upon the assumption, for these purposes
only, that the registrant's manager, its executive officers and directors and
persons holding 5% or more of the registrant's Shares are affiliates.
Incorporation by Reference:
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None.
The Exhibit Index is located on page _________.
Belmar Capital Fund LLC
Index to Form 10-K
Item Page
PART I
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1 Business........................................................... 1
Fund Overview................................................... 1
Structure of the Fund........................................ 1
Fund Management.............................................. 1
The Fund's Offering.......................................... 2
The Fund's Investment in Belvedere Capital Fund Company
LLC and Tax-Managed Growth Portfolio........................... 2
Belvedere Company............................................ 2
The Portfolio................................................ 3
The Portfolio's Investment Objective and Policies............ 3
The Portfolio's Tax-Sensitive Management Strategies.......... 3
The Fund's Real Estate Investments.............................. 4
Real Estate Joint Venture Investments........................ 4
Partnership Preference Units................................. 5
Net Leased Property.......................................... 6
Organization of the Fund's Controlled Subsidiaries........... 6
Fund Borrowings................................................. 6
Interest Rate Swap Agreements................................ 7
The Eaton Vance Organization.................................... 7
Conflicts of Interest........................................ 7
2 Properties......................................................... 7
3 Legal Proceedings.................................................. 8
4 Submission of Matters to a Vote of Security Holders................ 8
PART II
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5 Determining Net Asset Value, Market for Fund Shares, Related
Shareholder Matters and Issuer Purchases of Equity Securities..... 9
Market Information, Restrictions on Transfers and
Redemption of Shares.......................................... 9
Transfers of Fund Shares.................................... 9
Redemption of Fund Shares................................... 9
Determining Net Asset Value................................. 10
Historic Net Asset Values................................... 11
Record Holders of Shares of the Fund........................... 11
Distributions.................................................. 11
Income and Capital Gain Distributions....................... 11
Special Distributions....................................... 12
6 Selected Financial Data............................................ 12
Table of Selected Financial Data................................ 12
7 Management's Discussion and Analysis of Financial Condition
(MD&A) and Results of Operations.................................. 13
Results of Operations........................................... 13
MD&A and Results of Operations for the Year Ended December 31,
2004 Compared to the Year Ended December 31, 2003................. 14
Performance of the Fund......................................... 14
Performance of the Portfolio.................................... 14
Performance of Real Estate Investments.......................... 15
Performance of Interest Rate Swap Agreements.................... 17
MD&A and Results of Operations for the Year Ended December 31,
2003 Compared to the Year Ended December 31, 2002................. 17
Performance of the Fund......................................... 17
Performance of the Portfolio.................................... 17
Performance of Real Estate Investments.......................... 18
Performance of Interest Rate Swap Agreements.................... 19
Liquidity and Capital Resources.................................... 19
Outstanding Borrowings.......................................... 19
Liquidity....................................................... 19
Off-Balance Sheet Arrangements..................................... 19
The Fund's Contractual Obligations................................. 20
Critical Accounting Estimates...................................... 20
7A Quantitative and Qualitative Disclosures About Market Risk
Quantitative Information About Market Risk...................... 23
Interest Rate Risk............................................. 23
Qualitative Information About Market Risk........................ 23
Risks Associated with Equity Investing......................... 25
Risks of Investing in Foreign Securities....................... 25
Risks of Certain Investment Techniques......................... 25
Risks of Real Estate Investments............................... 26
Risks of Interest Rate Swap Agreements......................... 28
Risks of Leverage.............................................. 28
8 Financial Statements and Supplementary Data........................ 28
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.............................. 29
9A Controls and Procedures............................................ 29
9B Other Information.................................................. 29
PART III
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10 Directors and Executive Officers................................... 30
Management...................................................... 30
Compliance with Section 16(a) of the Securities Exchange
Act of 1934.................................................... 31
Code of Ethics.................................................. 31
11 Executive Compensation............................................. 31
12 Security Ownership of Certain Beneficial Owners and Management..... 31
Security Ownership of Certain Beneficial Owners................. 31
Security Ownership of Management................................ 31
Changes in Control.............................................. 31
13 Certain Relationships and Related Transactions..................... 31
The Fund's Investment Advisory and Administrative Fee........... 32
Belmar Realty's Management Fee.................................. 32
The Portfolio's Investment Advisory Fee......................... 32
Servicing Fees Paid by the Fund................................. 33
Servicing Fees Paid by Belvedere Company........................ 33
Distribution Fees Paid to EV Distributors....................... 33
Certain Real Estate Investment Transactions..................... 33
14 Principal Accountant Fees and Services............................. 34
PART IV
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15 Exhibits, Financial Statements and Reports on Form 8-K............. 34
APPENDIX A ............................................................... 35
FINANCIAL STATEMENTS....................................................... 36
SIGNATURES ............................................................... 80
EXHIBIT INDEX.............................................................. 81
PART I
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ITEM 1. BUSINESS.
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FUND OVERVIEW. Belmar Capital Fund LLC (the Fund) is a private investment
company organized by Eaton Vance Management (Eaton Vance) to provide
diversification and tax-sensitive investment management to investors holding
large and concentrated positions in equity securities of selected public
companies. The Fund's investment objective is to achieve long-term, after-tax
returns for persons who have invested in the Fund (Shareholders). The Fund, a
Delaware limited liability company, commenced its investment operations on March
17, 2000. Limited liability company interests of the Fund (Shares) were issued
to Shareholders at five closings during 2000. At each Fund closing, the Fund
accepted contributions of stock from investors in exchange for Shares of the
Fund. The Fund discontinued offering Shares on November 29, 2000 and, while the
Fund is not prohibited from doing so, no future offering is anticipated. As of
December 31, 2004, the Fund had net assets of approximately $1.9 billion.
STRUCTURE OF THE FUND. The Fund is structured to provide tax-free
diversification and tax-sensitive investment management to Shareholders. To meet
the objective of tax-free diversification, the Fund must satisfy specific
requirements of the Internal Revenue Code of 1986, as amended (the Code). In
order for the contributions of appreciated stock to the Fund by Shareholders to
be nontaxable, not more than 80% of the Fund's assets (calculated in the manner
prescribed) may consist of "stocks and securities" as defined in the Code. To
meet this requirement, the Fund invests at least 20% of its assets as so
determined in certain real estate investments (see "The Fund's Real Estate
Investments" below). The Fund invests up to 80% of its assets in a diversified
portfolio of common stocks (see "The Fund's Investment in Belvedere Capital Fund
Company LLC and Tax-Managed Growth Portfolio" below). The Fund acquired its real
estate investments with borrowed funds, as described below under "Fund
Borrowings". See Appendix A for a chart detailing the investment structure of
the Fund.
In its investment program, the Fund balances investment considerations and tax
considerations, and takes into account the taxes payable by Shareholders on
allocated investment income and realized capital gains. See "The Fund's
Investment in Belvedere Capital Fund Company LLC and Tax-Managed Growth
Portfolio" below.
There is no trading market for the Fund's Shares. As described further under
"Redemption of Fund Shares" in Item 5(a), Fund Shares may be redeemed on any
business day. The Fund satisfies redemption requests principally by distributing
securities, but may also distribute cash. The value of securities and cash
distributed to satisfy a redemption will equal the net asset value of the number
of Shares redeemed. Under most circumstances, a redemption from the Fund that is
met by distributing securities as described herein will not result in the
recognition of capital gains by the Fund or by the redeeming Shareholder. The
redeeming Shareholder would generally recognize capital gains upon the sale of
the securities received upon the redemption.
The Fund intends to distribute each year the amount of its net investment income
for such year, if any. The Fund also intends to make annual capital gain
distributions equal to approximately 18% of the amount of its net realized
capital gains, if any, other than certain precontribution gains. The Fund's
distributions generally are based on determinations of net investment income and
net realized capital gains for federal income tax purposes. Such amounts may
differ from net investment income (or loss) and net realized gain (or loss) as
set forth in the Fund's consolidated financial statements due to differences in
the treatment of various income, gain, loss, expense and other items for federal
income tax purposes and under generally accepted accounting principles. The
Fund's income distributions are not expected to be significant. The Fund intends
to pay any distributions on the last business day of each fiscal year of the
Fund (which concludes on December 31) or shortly thereafter. See "Distributions"
in Item 5(c).
FUND MANAGEMENT. The manager of the Fund is Eaton Vance, a Massachusetts
business trust registered as an investment adviser under the Investment Advisers
Act of 1940, as amended (the Advisers Act). Eaton Vance and its subsidiary,
Boston Management and Research (Boston Management), provide management and
advisory services to the Fund, its real estate subsidiary and the investment
portfolio in which the Fund invests. Boston Management is also registered as an
investment adviser under the Advisers Act. Eaton Vance and Boston Management
provide advisory, administration and/or management services to over 150
investment companies, as well as individual and institutional investors. As of
October 31, 2004, Eaton Vance and its affiliates managed more than $90 billion
on behalf of clients. The fees payable to the Eaton Vance organization, as well
as other fees payable by the Fund, are described in Item 13. The Eaton Vance
organization is subject to certain conflicts of interest in providing services
to the Fund, its subsidiaries and the investment portfolio in which the Fund
invests. See "The Eaton Vance Organization - Conflicts of Interest" below.
1
THE FUND'S OFFERING. Shares of the Fund were privately offered and sold only to
"accredited investors" as defined in Rule 501(a) under the Securities Act of
1933, as amended (the Securities Act), who were "qualified purchasers" (as
defined in Section 2(a)(51)(A) of the Investment Company Act of 1940, as amended
(the 1940 Act)). The offering was conducted by Eaton Vance Distributors, Inc.
(EV Distributors), a wholly-owned subsidiary of Eaton Vance, as placement agent
and by certain subagents appointed by EV Distributors. The Shares were offered
and sold in reliance upon an exemption from registration provided by Rule 506
under the Securities Act. The Fund issued Shares to Shareholders at closings
taking place on March 17, 2000, May 16, 2000, July 19, 2000, September 27, 2000
and November 29, 2000. At the five closings, an aggregate of 25,888,893 Shares
were issued in exchange for Shareholder contributions totaling approximately
$2.6 billion.
The Fund is registered under the Securities Exchange Act of 1934, as amended
(the 1934 Act), and files periodic reports (such as reports on Form 10-Q and
Form 10-K) thereunder. Copies of the reports filed by the Fund are available: at
the public reference room of the Securities and Exchange Commission (SEC) in
Washington, DC (call 1-202-942-8090 for information on the operation of the
public reference room); on the EDGAR Database on the SEC's Internet site
(http:// www.sec.gov); or, upon payment of copying fees, by writing to the SEC's
public reference section, Washington, DC 20549-0102, or by electronic mail at
publicinfo@sec.gov. The Fund does not have a website. The Fund intends to
provide Shareholders with an annual and semiannual report containing the Fund's
consolidated financial statements, audited by the Fund's independent registered
public accounting firm in the case of the annual report.
THE FUND'S INVESTMENT IN BELVEDERE CAPITAL FUND COMPANY LLC AND TAX-MANAGED
GROWTH PORTFOLIO. At each Fund closing, all of the securities accepted for
contribution to the Fund were contributed by the Fund to Belvedere Capital Fund
Company LLC (Belvedere Company), a Massachusetts limited liability company, in
exchange for shares of Belvedere Company. Belvedere Company, in turn,
immediately thereafter contributed the securities received from the Fund to
Tax-Managed Growth Portfolio (the Portfolio) in exchange for an interest in the
Portfolio. The Portfolio is a diversified, open-end management investment
company registered under the 1940 Act with net assets of approximately $19.1
billion as of December 31, 2004. As of December 31, 2004, the Fund's investment
in the Portfolio through Belvedere Company had a value of approximately $2.0
billion (equal to approximately 75.4% of the Fund's total assets on a
consolidated basis).
BELVEDERE COMPANY. Belvedere Company was organized in 1997 by Eaton Vance to
offer tax-free diversification and tax-sensitive investment management to
certain qualified investors who contributed diversified portfolios of equity
securities. As of December 31, 2004, the investment assets of Belvedere Company
consisted exclusively of an interest in the Portfolio with a value of
approximately $12.8 billion. As of such date, the Fund owned approximately 15.7%
of Belvedere Company's outstanding shares. As of December 31, 2004, the other
investors in Belvedere Company included seven other investment funds sponsored
by the Eaton Vance organization (investment fund investors), as well as
qualified individual investors who acquired shares of Belvedere Company in
exchange for portfolios of acceptable securities (non-investment fund
investors).
Belvedere Company considers for acceptance equity securities that (i) are listed
on the New York Stock Exchange, the American Stock Exchange, the NASDAQ National
Market or a major foreign exchange, (ii) have a trading price of at least $10.00
per share and (iii) are issued by issuers having an equity market capitalization
of at least $500 million. Because Belvedere Company only accepts contributions
of diversified baskets of securities (as described below), it is not subject to
the requirement that not more than 80% of its assets consist of "stocks and
securities" as defined in the Code. For investors that own a diversified basket
of securities, investing in Belvedere Company (rather than in the Fund) avoids
the costs and risks of investing in real estate and the associated financial
leverage to which the Fund is subject. See "Risks of Investing in Real Estate"
and "Risks of Leverage" in Item 7A(b).
Belvedere Company provides a vehicle through which investment fund and
non-investment fund investors contributing a "diversified basket of securities"
can acquire an indirect interest in the Portfolio. A "diversified basket of
securities" means a group of securities that is diversified such that not more
than 25% of the value of the securities are investments in the securities of any
one issuer and not more than 50% of the value of the securities are investments
in the securities of five or fewer issuers. The securities contributed to
Belvedere Company at each Fund closing constituted a diversified basket of
securities. Because the Fund is required to hold a percentage of its investments
in non-Portfolio assets in order to meet certain tax requirements (see
"Structure of the Fund" above and "The Fund's Real Estate Investments" below),
it does not satisfy the conditions of the 1940 Act for investing directly in the
Portfolio.
2
THE PORTFOLIO. The Portfolio was organized in 1995 by Eaton Vance as the
successor to the investment operations of Eaton Vance Tax-Managed Growth Fund
1.0 (Tax-Managed Growth 1.0), a mutual fund established in 1966 by Eaton Vance
and managed from inception for long-term, after-tax returns. As of December 31,
2004, investors in the Portfolio included six investors in addition to Belvedere
Company and Tax-Managed Growth 1.0, each of which acquired or is acquiring on a
continuous basis interests in the Portfolio with cash. All investors in the
Portfolio are sponsored by or affiliated with Eaton Vance. As of December 31,
2004, Belvedere Company owned approximately 66.9% of the Portfolio.
The Fund invests in the Portfolio (on an indirect basis through Belvedere
Company) because it is a well-established investment portfolio that has an
investment objective and policies that are compatible to those of the Fund.
Investing in the Portfolio enables the Fund to participate in a substantially
larger and more diversified investment portfolio than it could achieve by
managing the contributed securities directly. The audited financial statements
of the Portfolio for the year ended December 31, 2004 are included as pages 36
to 79 of this Annual Report on Form 10-K. The Portfolio's audited financial
statements include information about the assets and liabilities of the
Portfolio, including Portfolio expenses. For a discussion of the Portfolio's
performance for the year ended December 31, 2004, see "Performance of the
Portfolio" in Item 7. For a description of the investment advisory fee payable
by the Portfolio, see "The Portfolio's Investment Advisory Fee" in Item 13.
THE PORTFOLIO'S INVESTMENT OBJECTIVE AND POLICIES. The investment objective of
the Portfolio is to achieve long-term, after-tax returns for its investors by
investing in a diversified portfolio of equity securities. The Portfolio invests
primarily in common stocks of domestic and foreign growth companies that are
considered by its investment adviser to be high in quality and attractive in
their long-term investment prospects. The Portfolio seeks to invest in a broadly
diversified portfolio of stocks and to invest primarily in established companies
with characteristics of above-average growth, predictability and stability that
are acquired with the expectation of being held for a period of years. Under
normal market conditions, the Portfolio invests primarily in common stocks. The
Portfolio has acquired securities through contributions from Belvedere Company
and Tax-Managed Growth 1.0, and through purchases of securities with cash
invested in the Portfolio by other investors.
Although the Portfolio may, in addition to investing in common stocks, invest in
investment-grade preferred stocks and debt securities, purchases of such
securities are normally limited to securities convertible into common stocks and
temporary investments in short-term notes and government obligations. During
periods in which the investment adviser to the Portfolio believes that returns
on common stock investments may be unfavorable, the Portfolio may invest a
portion of its assets in U.S. government obligations and high quality short-term
notes. The Portfolio's holdings represent a number of different industries. Not
more than 25% of the Portfolio's assets may be invested in the securities of
issuers having their principal business activity in the same industry,
determined as of the time of acquisition of any such securities.
THE PORTFOLIO'S TAX-SENSITIVE MANAGEMENT STRATEGIES. In its operations, the
Portfolio seeks to achieve long-term, after-tax returns in part by minimizing
the taxes incurred by investors in the Portfolio in connection with the
Portfolio's investment income and realized capital gains. Taxes on investment
income are minimized by investing primarily in lower-yielding securities and
stocks that pay dividends that qualify for favorable federal tax treatment.
Taxes on realized capital gains are minimized by avoiding or minimizing the sale
of securities holdings with large accumulated capital gains. The Portfolio
generally seeks to avoid net realized short-term capital gains.
When the Portfolio decides to sell a particular appreciated security, the
Portfolio will select for sale the share lots resulting in the most favorable
tax treatment, generally those with holding periods sufficient to qualify for
long-term capital gain treatment that have the highest cost basis. The Portfolio
may, when deemed prudent by its investment adviser, sell securities to realize
capital losses that can be used to offset realized gains. While the Portfolio
generally retains the securities contributed to the Portfolio by Belvedere
Company, the Portfolio has the flexibility to sell contributed securities.
Securities acquired by the Portfolio with cash may be sold in accordance with
the tax-management strategies described above. In lieu of selling a security,
the Portfolio may hedge its exposure to that security by using the techniques
described below. The Portfolio also disposes of contributed securities through
its practice of settling redemptions by investors in the Portfolio that
contributed securities primarily by distributing securities as described in Item
5(a) under "Redemption of Fund Shares." As described in Item 5(a), settling
redemptions with securities can result in certain tax benefits to the Portfolio,
Belvedere Company, the Fund and the redeeming Shareholder.
To reduce its exposure to adverse price movements in individual securities or
groups of securities holdings with large accumulated gains, the Portfolio may
use various investment techniques, including, but not limited to, the purchase
of put options on securities held, equity collars (combining the purchase of a
put option and the sale of a call option), equity swaps, short sales of
individual securities held, short sales of index or basket securities whose
3
constituents are held in whole or in part, forward sales of stocks held, and the
purchase and sale of futures contracts on stocks and stock indexes and options
thereon. By using these techniques rather than selling such securities, the
Portfolio can, within certain limits, reduce its exposure to price declines in
the securities without realizing substantial capital gains under current tax
law.
The Portfolio's ability to utilize covered short sales, certain equity swaps,
forward sales, futures contracts and certain equity collar strategies as a
tax-efficient management technique with respect to holdings of appreciated
securities is limited to circumstances in which the hedging transaction is
closed out within 30 days after the end of the Portfolio's taxable year in which
the hedging transaction was initiated and the underlying appreciated securities
position is held unhedged for at least the next 60 days after such hedging
transaction is closed. In addition, dividends received on stock for which the
Portfolio is obligated to make related payments (pursuant to a short sale or
otherwise) with respect to positions in substantially similar or related
property are subject to federal income tax at ordinary rates and do not qualify
for favorable tax treatment. Also, the holding periods required to receive
tax-advantaged treatment of qualified dividends on a stock are suspended
whenever the Portfolio has an option (other than a qualified covered call option
not in the money when written) or contractual obligation to sell or an open
short sale of substantially identical stock, is the grantor of an option (other
than a qualified covered call option not in the money when written) to buy
substantially identical stock or has diminished risk of loss in such stock by
holding positions with respect to substantially similar or related property. The
use of these investment techniques may require the Portfolio to commit or make
available cash and, therefore, may not be available at such times as the
Portfolio has limited holdings of cash. At December 31, 2004, the Portfolio held
a short position on a security with a value equal to approximately 1.0% of the
Portfolio's net assets. The Portfolio paid commissions totaling approximately
$90,000 in connection with entering into this short position in 2004. The
Portfolio did not otherwise employ any of the techniques described above on
securities holdings during the year ended December 31, 2004. See "Risks of
Certain Investment Techniques" in Item 7A(b).
THE FUND'S REAL ESTATE INVESTMENTS. Separate from its investment in the
Portfolio through Belvedere Company, the Fund invests in certain real estate
investments through Belmar Realty Corporation (Belmar Realty). The ownership
structure of Belmar Realty is described below under "Organization of the Fund's
Controlled Subsidiaries". As referred to above under "Fund Overview - Structure
of the Fund", the Fund invests in real estate investments to satisfy certain
requirements of the Code for contributions of appreciated stocks to the Fund by
Shareholders to be nontaxable. As of December 31, 2004, the consolidated real
estate investments of Belmar Realty totaled approximately $643.2 million and
represented 24.1% of the Fund's assets on a consolidated basis. The Fund
acquired its real estate investments with borrowed funds, as described below
under "Fund Borrowings". The Fund seeks a return on its real estate investments
over the long term that exceeds the cost of the borrowings incurred to acquire
such investments. For a description of real estate investment transactions
during the year ended December 31, 2004, see "Performance of Real Estate
Investments" in Item 7.
At December 31, 2004, Belmar Realty held investments in a real estate joint
venture (Real Estate Joint Venture) that is controlled by Belmar Realty, in a
portfolio of income-producing preferred equity interests in real estate
operating partnerships that generally are affiliated with and controlled by real
estate investment trusts (REITs) that are publicly traded (Partnership
Preference Units), in property subject to a long-term triple net lease (Net
Leased Property) and in certain other real estate investments. As of December
31, 2004, approximately 46.4% of the consolidated real estate investments of
Belmar Realty consisted of its investment in the Real Estate Joint Venture,
approximately 9.9% was investments in Partnership Preference Units,
approximately 43.2% was investments in Net Leased Property and approximately
0.5% was investments in other real estate investments.
In the future, Belmar Realty may invest in other types of real estate
investments. Belmar Realty may purchase real estate investments from, and sell
them to, real estate subsidiaries of other investment funds advised by Boston
Management. See "Certain Real Estate Investment Transactions" in Item 13.
Boston Management serves as manager of Belmar Realty. In that capacity, Boston
Management manages the investment and reinvestment of Belmar Realty's assets and
administers its affairs. See "Belmar Realty's Management Fee" in Item 13 for a
description of the management fee payable by Belmar Realty to Boston Management.
REAL ESTATE JOINT VENTURE INVESTMENTS. At December 31, 2004, Belmar Realty owned
a controlling interest in a Real Estate Joint Venture, Brazos Property Trust
(Brazos). Brazos owns real property through its interest in ProLogis Six Rivers
Limited Partnership and the ProLogis Brazos Fund L.P. With respect to the Real
Estate Joint Venture, Belmar Realty owns a majority economic interest therein
and controls a majority of its board. Belmar Realty's approval is required for
all major decisions affecting the Real Estate Joint Venture.
4
The day-to-day operating management of the real properties owned by the Real
Estate Joint Venture is provided by the real estate operating company (the
Operating Partner) that is the principal minority investor in the Real Estate
Joint Venture or an affiliated company thereof. The Operating Partner (or its
affiliate) receives certain fees from the Real Estate Joint Venture (including
property management fees and fees for administration, construction management,
leasing, acquisitions, dispositions, debt placement, tax preparation, legal and
other services). For the year ended December 31, 2004, such fees totaled
approximately $1.4 million.
At December 31, 2004, the assets of the Real Estate Joint Venture consisted of
23 industrial distribution properties acquired from or in conjunction with the
Operating Partner thereof. See Item 2. Distributable cash flows from the Real
Estate Joint Venture are allocated in a manner that provides Belmar Realty: 1) a
priority position versus the Operating Partner with respect to a fixed annual
preferred return; and 2) participation on a pro rata or reduced basis in
distributable cash flows in excess of the annual preferred return of Belmar
Realty and the subordinated preferred return of the Operating Partner. A portion
of Belmar Realty's investment in Brazos represents a partial interest in certain
management contracts pursuant to which Brazos may receive cash flows from
management fees and certain other fees over the life of the contracts.
Financing for the Real Estate Joint Venture consists primarily of fixed-rate
secured mortgage debt obligations of the Real Estate Joint Venture that are
without recourse to Belmar Realty and the Fund, as described in "Risks of Real
Estate Investments" in Item 7A(b). Both Belmar Realty and the Operating Partner
invested equity in the Real Estate Joint Venture. Belmar Realty's equity in the
Real Estate Joint Venture was acquired using the proceeds of Fund borrowings.
A board of trustees controlled by Belmar Realty oversees the performance of the
Operating Partner and controls the major decisions of the Real Estate Joint
Venture. Belmar Realty controls three of the five seats on Brazos' board of
trustees. The persons serving as trustees on behalf of Belmar Realty are
employees of Boston Management. See "Directors and Executive Officers" in Item
10(a). No director of Belmar Realty or trustee of the Real Estate Joint Venture
is a Shareholder of the Fund. The Operating Partner of Belmar Realty's Real
Estate Joint Venture also serves as an operating partner of other Real Estate
Joint Ventures that are majority owned by real estate subsidiaries of other
investment funds advised by Boston Management. Eaton Vance and its affiliates do
not have a material financial interest in the Real Estate Joint Venture.
The Operating Partner of Brazos is ProLogis. ProLogis, a publicly owned REIT
with its headquarters in Aurora, Colorado, operates a global network of
industrial distribution properties. As of December 31, 2004, ProLogis owned or
had ownership interests in 1,994 distribution facilities aggregating 297.9
million square feet in 72 markets in North America, Europe and Asia. Common
shares of ProLogis are traded on the New York Stock Exchange under the symbol
"PLD". ProLogis owns 20% of the issued and outstanding shares of Brazos that are
entitled to representation on the board of trustees. Belmar Realty owns the
balance of such shares. Pursuant to an agreement with ProLogis, from and after
August 4, 2014 either Belmar Realty or ProLogis may cause a liquidation of
Brazos. If Belmar Realty elects to liquidate Brazos, ProLogis will have 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
independent appraisal of the assets of Brazos. The Brazos operating documents
prohibit the transfer of any shares that would adversely affect Brazos'
qualification as a REIT.
The liquidation agreement applicable to Brazos continues indefinitely, but could
be terminated upon the receipt of the requisite approval of the owners of the
voting interests in Brazos. If Belmar Realty were to dispose of its interest in
Brazos pursuant to the liquidation agreement or otherwise, it may acquire an
interest in a different real estate investment to replace the investment sold.
PARTNERSHIP PREFERENCE UNITS. Belmar Realty's investments in Partnership
Preference Units represent preferred equity interests in real estate operating
partnerships. The assets of the partnerships that issued the Partnership
Preference Units owned by Belmar Realty on December 31, 2004 consisted of direct
or indirect ownership interests in real properties, including manufactured home
communities and self-storage facilities. The Partnership Preference Units owned
by Belmar Realty as of December 31, 2004 are listed in Item 7A(a) and in the
consolidated portfolio of investments included in the Fund's consolidated
financial statements, which are included as pages 36 to 79 of this Annual Report
on Form 10-K. Eaton Vance is not, and has not been, involved in the management
or operation of the real estate operating partnerships that issued the
Partnership Preference Units owned by Belmar Realty.
The Partnership Preference Units held by Belmar Realty were issued by
partnerships that are not publicly-traded partnerships within the meaning of
Code Section 7704(b). The Partnership Preference Units are perpetual life
instruments (subject to call provisions) and are not, by their terms, readily
convertible or exchangeable into cash or securities of the affiliated public
5
company. Partnership Preference Units are not rated by a nationally-recognized
rating agency, and such interests may not be as high in quality as issues that
are rated investment grade.
Each issue of Partnership Preference Units held by Belmar Realty pays regular
quarterly distributions at fixed rates from the net profits of the issuing
partnership, with preferential rights over common and other subordinated units.
None of the Partnership Preference Units are or will be registered under the
Securities Act and each issue is thus subject to restrictions on transfer.
NET LEASED PROPERTY. At December 31, 2004, Belmar Realty owned Net Leased
Property consisting of an office building and attached facilities leased to a
single tenant under a triple net lease. Belmar Realty owns this property through
its majority owned subsidiary, Bel Stamford Investors LLC (Bel Stamford). Bel
Stamford's property is financed by fixed-rate secured mortgage debt obligations
of Bel Stamford that generally are without recourse to Belmar Realty and the
Fund, except as described in "Risks of Real Estate Investments" in Item 7A(b).
Belmar Realty's equity in Bel Stamford was acquired using the proceeds of Fund
borrowings.
The Net Leased Property held by Belmar Realty is leased on a long-term basis to
one tenant that is obligated to pay rent sufficient to service the associated
mortgage debt and to pay all costs and expenses associated with operation and
maintenance of the property, including real estate taxes, repairs and insurance.
The tenant has also generally indemnified Bel Stamford against certain
liabilities in connection with the property. Because all or substantially all of
the rental payments are dedicated to debt service, realized returns on Belmar
Realty's investment in the Net Leased Property generally will be deferred until
the property is sold or re-leased following the initial lease term.
ORGANIZATION OF THE FUND'S CONTROLLED SUBSIDIARIES. Belmar Realty and the Real
Estate Joint Venture operate in such a manner as to qualify for taxation as
REITs under the Code. As REITs, Belmar Realty and the Real Estate Joint Venture
generally are not subject to federal income tax on that portion of their
ordinary income or taxable gain that is distributed to stockholders each year.
The Fund owns 100% of the common stock issued by Belmar Realty, and intends to
hold all of the common stock at all times. Belmar Realty and the Operating
Partner own all of the common shares of the Real Estate Joint Venture.
Belmar Realty and the Real Estate Joint Venture also have issued preferred
shares to satisfy certain provisions of the Code, which require (among other
things) that a REIT be beneficially owned in the aggregate by 100 or more
persons. The preferred shares of each such entity are owned by not less than 100
charitable organizations that received the preferred shares as gifts. Each
charitable organization that received a preferred share was an "accredited
investor" (as defined in the Securities Act) with total assets in excess of $5
million at the time the organization received the preferred shares. Eaton Vance
selected the charitable organizations from the charities for which it has
matched employee contributions and/or based on suggestions from its employees or
the Operating Partner. As of December 31, 2004, the total value of the preferred
shares outstanding of Belmar Realty was $210,000. Dividends on preferred shares
are cumulative and payable annually at a dividend rate of 8% per year for Belmar
Realty and 6% per year for Brazos. The dividends paid on preferred shares have
priority over payments on common shares. For the year ended December 31, 2004,
Belmar Realty paid or accrued distributions to preferred shareholders of
$16,800. Brazos issued preferred shares on January 28, 2005 and is expected to
make its first distribution on or about December 31, 2005.
FUND BORROWINGS. To finance its real estate investments, the Fund has entered
into credit arrangements with DrKW Holdings, Inc. (the DrKW Credit Facility) and
Merrill Lynch Mortgage Capital, Inc. (the MLMC Credit Facility) (collectively,
the Credit Facility). The Credit Facility is secured by a pledge of the Fund's
assets, excluding the assets of Brazos and Bel Stamford, and expires in June
2010. At December 31, 2004, the total principal amount outstanding under the
Credit Facility was $290.0 million. The Credit Facility is also used to provide
for selling commissions, organizational expenses and any liquidity needs of the
Fund. Under certain circumstances, the Fund may increase the size of the Credit
Facility (subject to lender consent) and the amount of outstanding borrowings
thereunder.
The DrKW Credit Facility is a term credit agreement. Borrowings under the DrKW
Credit Facility accrue interest at a rate of one-month LIBOR plus 0.20% per
annum. As of December 31, 2004, outstanding borrowings under the DrKW Credit
Facility totaled $290.0 million.
The MLMC Credit Facility is a revolving credit agreement. The Fund may borrow up
to $118.5 million under the MLMC Credit Facility, of which up to $10.0 million
may be letters of credit. Borrowings under the MLMC Credit Facility accrue
interest at a rate of one-month LIBOR plus 0.38% per annum. As of December 31,
2004, there were no outstanding borrowings under the MLMC Credit Facility. There
were no letters of credit issued as of December 31, 2004. The unused loan
6
commitment amount totaled $118.5 million. A commitment fee of 0.10% per annum is
paid on the unused commitment amount. The Fund pays all fees associated with
issuing letters of credit.
Obligations under the Credit Facility are without recourse to Fund Shareholders.
As described above, financing for the Real Estate Joint Venture and Net Leased
Property consists primarily of fixed-rate secured mortgage debt obligations of
the Real Estate Joint Venture and Net Leased Property that are without recourse
to Fund Shareholders, and generally are without recourse to Belmar Realty and
the Fund, as described under "Risks of Real Estate Investments" in Item 7A(b).
INTEREST RATE SWAP AGREEMENTS. The Fund has entered into interest rate swap
agreements with Merrill Lynch Capital Services, Inc. (MLCS) to fix the cost of
borrowings under the Credit Facility used to acquire equity in real estate
investments. Pursuant to the interest rate swap agreements, the Fund makes cash
payments to MLCS at fixed rates in exchange for floating rate payments from MLCS
that fluctuate with one-month LIBOR. The interest rate swap agreements entered
into with respect to Belmar Realty's real estate investments extend until June
25, 2010, subject to the Fund's earlier termination rights in the case of
certain swaps, and provide for the Fund to make payments to MLCS at fixed rates
averaging 4.53%. See Note 7 to the Fund's consolidated financial statements
included as pages to of this Annual Report on Form 10-K.
THE EATON VANCE ORGANIZATION. The Eaton Vance organization sponsors the Fund.
Eaton Vance serves as the Fund's manager. Boston Management serves as the Fund's
investment adviser and as manager of Belmar Realty. EV Distributors served as
the Fund's placement agent. The Fund's business affairs are conducted by Eaton
Vance (as its manager) and its investment operations are conducted by Boston
Management (as its investment adviser). The Fund's officers are employees of
Eaton Vance. Eaton Vance, Boston Management and EV Distributors are wholly-owned
subsidiaries of Eaton Vance Corp., a publicly-traded holding company that,
through its affiliates and subsidiaries, engages primarily in investment
management, administration and marketing activities.
As described above, the Fund pursues its objective primarily by investing in
Belvedere Company. Belvedere Company invests exclusively in the Portfolio.
Boston Management acts as investment adviser of the Portfolio and manager of
Belvedere Company. EV Distributors acts as placement agent for Belvedere Company
and the Portfolio. As of December 31, 2004, the assets of the Fund represented
approximately 2.7% of assets under management by Eaton Vance and its affiliates.
The offices of the Fund, Eaton Vance, Boston Management and EV Distributors are
located at 255 State Street, Boston, Massachusetts 02109.
CONFLICTS OF INTEREST. Boston Management and other Eaton Vance affiliates are
subject to certain conflicts of interests in their dealings with the Fund,
Belmar Realty, Belvedere Company and the Portfolio, as well as with other
investment companies advised by Boston Management that invest in the Portfolio.
Eaton Vance and Boston Management have determined and will determine which of
their sponsored investment companies invest in the Portfolio, the securities
each of them contributes to the Portfolio when making an investment therein and,
subject to the rights of redeeming investors in the Portfolio, the securities
and/or cash received in redemptions from the Portfolio. Such determinations are
inherently subject to potential conflicts of interest. In addition, Portfolio
management activities with respect to securities contributed to the Portfolio
may have different tax consequences for the contributing investor in the
Portfolio than for other investors in the Portfolio. Boston Management manages
the Portfolio in pursuit of long-term, after-tax returns for all investors in
the Portfolio and, with respect to contributed securities, takes into account
the tax position of the contributing investor in the Portfolio. Whenever
conflicts of interest arise, Eaton Vance, Boston Management and other Eaton
Vance affiliates will endeavor to exercise their discretion in a manner that
they believe is equitable to all interested persons.
Belmar Realty may purchase real estate investments from real estate subsidiaries
of other investment funds advised by Boston Management. Belmar Realty may also
co-invest with such entities in real estate investments and sell real estate
investments to such entities. In any such transaction, the assets purchased and
sold will be valued in good faith by Boston Management, after consideration of
factors, data and information that Boston Management considers relevant.
Transaction prices generally will include an allocation of the original costs
incurred in creating and acquiring the transferred real estate investments. Real
estate investments are often difficult to value and others could in good faith
arrive at valuations different from those of Boston Management. See "Critical
Accounting Estimates" in Item 7(e).
ITEM 2. PROPERTIES.
- -------------------
The Fund does not own any physical properties, other than indirectly through
Belmar Realty's investments. At December 31, 2004, Belmar Realty held
investments in Partnership Preference Units of three issuers, owned majority
interests in Brazos and Bel Stamford, whose assets are reflected in the
consolidated financial statements of the Fund. At December 31, 2004, Brazos
7
owned 23 industrial distribution properties located in Florida, Indiana, North
Carolina, New Jersey, Ohio, Pennsylvania, South Carolina and Tennessee. At
December 31, 2004, Bel Stamford owned an office building and attached facilities
in Connecticut.
ITEM 3. LEGAL PROCEEDINGS.
- --------------------------
Although in the ordinary course of business, the Fund and its directly and
indirectly controlled subsidiaries may become involved in legal proceedings, the
Fund is not aware of any material pending legal proceedings to which any of them
is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the quarter ended
December 31, 2004.
8
PART II
-------
ITEM 5. DETERMINING NET ASSET VALUE, MARKET FOR FUND SHARES, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
- --------------------------------------------------------------------------------
This Item and other Items in this report contain summaries of certain provisions
contained in the Limited Liability Company Agreement of the Fund, as amended
(the LLC Agreement), which was filed as an exhibit to the Fund's registration
statement on Form 10. All such summaries are qualified in their entirety by the
actual provisions of the LLC Agreement, which are incorporated by reference
herein.
(a) MARKET INFORMATION, RESTRICTIONS ON TRANSFERS AND REDEMPTION OF SHARES.
- ----------------------------------------------------------------------------
TRANSFERS OF FUND SHARES. There is no established public trading market for the
Shares of the Fund. Other than transfers to the Fund in a redemption, transfers
of Shares are expressly prohibited by the LLC Agreement of the Fund without the
consent of Eaton Vance. Eaton Vance's consent to a transfer may be withheld in
its sole discretion for any reason or for no reason.
The Shares have not been and will not be registered under the Securities Act,
and may not be resold unless an exemption from such registration is available.
Shareholders have no right to require registration of the Shares and the Fund
does not intend to register the Shares under the Securities Act or take any
action to cause an exemption (whether pursuant to Rule 144 of the Securities Act
or otherwise) to be available.
The Fund is not and will not be registered under the 1940 Act, and no transfer
of Shares may be made if, as determined by Eaton Vance or counsel to the Fund,
such transfer would result in the Fund being required to be registered under the
1940 Act. In addition, no transfer of Shares may be made unless, in the opinion
of counsel to the Fund, such transfer would not result in termination of the
Fund for purposes of Section 708 of the Code or result in the classification of
the Fund as an association or a publicly traded partnership taxable as a
corporation under the Code.
In no event shall all or any part of a Shareholder's Shares be assigned to a
minor or an incompetent, unless in trust for the benefit of such person. Shares
may be sold, transferred, assigned or otherwise disposed of by a Shareholder
only if it is determined by Eaton Vance or counsel to the Fund that such
transfer, assignment or disposition would not violate federal securities or
state securities or "blue sky" laws (including investor qualification
standards).
There are no outstanding options or warrants to purchase, or securities
convertible into, Shares of the Fund. Shares of the Fund cannot be sold pursuant
to Rule 144 under the Securities Act, and the Fund does not propose to publicly
offer any of its Shares at any time.
REDEMPTION OF FUND SHARES. Shares of the Fund may be redeemed on any business
day. The redemption price of Shares that are redeemed is based on the Fund's net
asset value next computed after receipt of the redemption request. During each
month in the quarter ended December 31, 2004, the total number of Shares
redeemed and the average price paid per Share were as follows:
Total No. of Shares Average Price Paid Per
Month Ended Redeemed(1) Share
- --------------------------------------------------------------------------------
October 83,904.47 $85.58
- --------------------------------------------------------------------------------
November 21,058.23 $90.06
- --------------------------------------------------------------------------------
December 56,470.46 $91.57
- --------------------------------------------------------------------------------
Total 161,433.16 $90.66
- --------------------------------------------------------------------------------
(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.
The Fund satisfies redemption requests principally by distributing securities
drawn from the Portfolio, but may also distribute cash. If requested by a
redeeming Shareholder, the Fund will satisfy a redemption request by
distributing securities that were contributed by the redeeming Shareholder,
provided that such securities are held in the Portfolio at the time of
redemption. The securities contributed by a Shareholder will not be distributed
9
to any other Shareholder in the Fund (or to any other investor in Belvedere
Company or the Portfolio) during the first seven years following their
contribution unless the contributing Shareholder has withdrawn from the Fund.
Under most circumstances, a redemption from the Fund that is settled with
securities as described herein will not result in the recognition of capital
gains by the Fund or by the redeeming Shareholder. The redeeming Shareholder
would generally recognize capital gains upon the sale of the securities received
through redemption. If a redeeming Shareholder receives cash in addition to
securities to settle a redemption, the amount of cash received will be taxable
to the Shareholder to the extent it exceeds such Shareholder's tax basis in Fund
Shares. Shareholders should consult their tax advisors about the tax
consequences of redeeming Fund Shares.
A Shareholder redemption request within seven years of a contribution of
securities by such Shareholder is ordinarily satisfied by distributing
securities that were contributed by such Shareholder, prior to distributing to
such Shareholder any other securities held in the Portfolio. Securities
contributed by a Shareholder may be distributed to other Shareholders in the
Fund (or to other investors in Belvedere Company or the Portfolio) after a
holding period of at least seven years and, if so distributed, would not be
available to meet subsequent redemption requests made by the contributing
Shareholder.
If requested by a redeeming Shareholder making a redemption of at least $1
million occurring more than seven years after such Shareholder's final
contribution of securities to the Fund, the Fund will generally distribute to
the redeeming Shareholder a diversified basket of securities representing a
range of industry groups that is drawn from the Portfolio, but the selection of
individual securities would be made by Boston Management in its sole discretion.
No interests in the Real Estate Joint Venture, Partnership Preference Units or
other real estate investments will be distributed to meet a redemption request,
and "restricted securities" will be distributed only to the Shareholder who
contributed such securities or such Shareholder's successor in interest.
Other than as set forth above, the allocation of each redemption between
securities and cash and the selection of securities to be distributed will be at
the sole discretion of Boston Management. Distributed securities may include
securities contributed by Shareholders as well as other readily marketable
securities held in the Portfolio. The value of securities and cash distributed
to meet a redemption will equal the net asset value of the number of Shares
being redeemed. The Fund's Credit Facility prohibits the Fund from honoring
redemption requests while there is an event of default outstanding under the
Credit Facility.
The Fund may compulsorily redeem all or a portion of the Shares of a Shareholder
if the Fund has determined that such redemption is necessary or appropriate to
avoid registration of the Fund or Belvedere Company under the 1940 Act, or to
avoid adverse tax or other consequences to the Portfolio, Belvedere Company, the
Fund or Shareholders, including those arising as the result of applicable
anti-money laundering requirements.
The right of a Shareholder to redeem can be suspended and the payment of the
redemption price may be deferred while there is outstanding an event of default
under the Credit Facility, when the NYSE is closed, during periods when trading
on the NYSE is restricted or during any emergency as determined by the SEC, at
any time when it is impracticable for the Portfolio or the Fund to dispose of or
value its assets, or during any other period permitted by order of the SEC for
the protection of investors.
A capital account for each Shareholder is maintained on the books of the Fund.
The account reflects the value of such Shareholder's interest in the Fund, which
is adjusted for profits, liabilities and distributions allocable to such account
in accordance with Article 6 of the Fund's LLC Agreement.
Subject to the consent of the manager of the Fund, a Shareholder may make an
estate freeze election pursuant to which all or a portion of such Shareholder's
Shares will be divided into Preferred Shares and Common Shares (Estate Freeze
Shares). Such division will be made in accordance with the terms of the LLC
Agreement. Estate Freeze Shares are not transferable without the consent of the
Fund's manager and have no redemption rights or voting or consent rights.
DETERMINING NET ASSET VALUE. Boston Management, as investment adviser, is
responsible for determining the value of the Fund's assets. The Fund's
custodian, Investors Bank & Trust Company, calculates the value of the assets of
the Fund, Belvedere Company and the Portfolio each day that the New York Stock
Exchange (NYSE) is open for trading, as of the close of regular trading on the
NYSE. The Fund's net asset value per Share is calculated by dividing the value
of the Fund's total assets, less its liabilities, by the number of Shares
outstanding.
The Fund's net assets are valued in accordance with the Fund's valuation
procedures and reflect the value of its directly-held assets and liabilities, as
well as the net asset value of the Fund's investment in the Portfolio held
through Belvedere Company and in real estate investments held through Belmar
Realty. The trustees of the Portfolio have established procedures for the
valuation of the Portfolio's assets under normal market conditions. Pursuant to
these procedures, marketable securities listed on U.S. securities exchanges
generally are valued at the last sale price on the day of the valuation or, if
there were no sales, at the mean between the closing bid and asked prices
therefor on the exchange where such securities are principally traded.
Marketable securities listed on the NASDAQ National Market generally are valued
10
at the NASDAQ official closing price. Unlisted or listed securities for which
closing sale prices are not available are valued at the mean between the last
available bid and asked prices or by an independent pricing service.
Exchange-traded options are valued at the last sale price for the day of
valuation as quoted on the principal exchange or board of trade on which the
options are traded, or in the absence of a sale on such day, at the mean between
the latest bid and asked prices therefor. Futures positions on securities or
currencies are generally valued at closing settlement prices. Short-term debt
securities with a remaining maturity of 60 days or less are valued at amortized
cost. If short-term debt securities were acquired with a remaining maturity of
more than 60 days, their amortized cost value will be based on their value on
the sixty-first day prior to maturity. Other fixed income and debt securities,
including listed securities and securities for which price quotations are
available, will normally be valued on the basis of valuations furnished by a
pricing service.
Foreign securities and currencies held by the Portfolio are valued in U.S.
dollars, as calculated by the Portfolio's custodian based on foreign currency
exchange rate quotations supplied by an independent quotation service. The daily
valuation of foreign securities generally is determined as of the close of
trading on the principal exchange on which such securities trade. Events
occuring after the close of trading on foreign exchanges may result in
adjustments to the valuations of foreign securities to more accurately reflect
their fair value as of the close of regular trading on the NYSE. When valuing
foreign equity securities that meet certain criteria, the Portfolio uses a fair
value service that values such securities to reflect market trading that occurs
after the close of the applicable foreign markets of comparable securities or
other instruments that have a strong correlation to the securities held by the
Portfolio. All other securities are valued at fair value as determined in good
faith by or at the direction of the Portfolio's trustees considering relevant
factors, data and information including the market value of freely tradable
securities of the same class in the principal market on which such securities
are normally traded.
The Fund's real estate investments are valued each day as determined in good
faith by Boston Management after consideration of relevant factors, data and
information. The procedures for valuing real estate investments are described
under "Critical Accounting Estimates" in Item 7(e). Boston Management values the
Fund's interest rate swap agreements based upon dealer and counterparty quotes
and pricing models that take into consideration the market trading prices of
interest rate swap agreements that have similar terms to the Fund's interest
rate swap agreements. Fixed liabilities of the Fund generally are stated at
principal value.
HISTORIC NET ASSET VALUES. Set forth below are the high and low net asset values
per Share (NAVs) of the Fund for each full quarter during the two years ended
December 31, 2004 and 2003, the closing NAV on the last business day of each
full quarter, and the percentage change in NAV during each such quarter.
NAV at Quarterly %
Quarter Ended High NAV Low NAV Quarter End Change in NAV(1)
- ------------- -------- ------- ----------- ----------------
12/31/04 $93.34 $84.00 $91.50 6.59%
9/30/04 $87.42 $81.49 $85.84 -2.75%
6/30/04 $88.82 $83.79 $88.27 1.85%
3/31/04 $88.81 $84.07 $86.67 0.45%
12/31/03 $86.36 $78.90 $86.28 11.83%
9/30/03 $79.91 $74.75 $77.15 2.81%
6/30/03 $78.19 $66.42 $75.04 14.08%
3/31/03 $73.04 $61.58 $65.78 -5.85%
(1) Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that Shares, when redeemed, may be worth
more or less than their original cost. Changes in NAV are historical.
Performance is for the stated time period only; due to market volatility,
the Fund's current performance may be lower or higher. For more information
about the performance of the Fund, see "Management's Discussion and
Analysis of Financial Condition (MD&A) and Results of Operations" in Item
7(a).
(b) RECORD HOLDERS OF SHARES OF THE FUND.
- -----------------------------------------
As of March 1, 2005, there were 715 record holders of Shares of the Fund.
(c) DISTRIBUTIONS.
- ------------------
INCOME AND CAPITAL GAIN DISTRIBUTIONS. The Fund intends to distribute each year
the amount of its net investment income for such year, if any. The Fund also
intends to make annual capital gain distributions equal to approximately 18% of
the amount of its net realized capital gains, if any, other than precontribution
gains allocated to a Shareholder in connection with a taxable tender offer or
other taxable corporate event for a security contributed to the Fund by that
Shareholder or that Shareholder's predecessor in interest. The Fund's net
investment income and net realized gains include the Fund's allocated share of
the net investment income and net realized gains of Belmar Realty, Belvedere
11
Company and, indirectly, the Portfolio, as well as income and capital gains, if
any, distributed by Belmar Realty. The Fund's distributions generally are based
on determinations of net investment income and net realized capital gains for
federal income tax purposes. Such amounts may differ from net investment income
(or loss) and net realized gain (or loss) as set forth in the Fund's
consolidated financial statements due to differences in the treatment of various
income, gain, loss, expense and other items for federal income tax purposes and
under generally accepted accounting principles. Because the Portfolio invests
primarily in lower yielding securities, seeks to avoid net realized short-term
capital gains and bears certain ongoing expenses, it is not expected that income
distributions will be significant. The Fund intends to pay distributions (if
any) on the last business day of each fiscal year of the Fund (which concludes
on December 31) or shortly thereafter. The Fund's distribution rates with
respect to realized gains may be adjusted in the future to reflect changes in
the effective maximum marginal individual federal tax rate applicable to
long-term capital gains.
Shareholder distributions with respect to net investment income and realized
post-contribution gains are made pro rata in proportion to the number of Shares
held as of the record date of the distribution. All income and capital gain
distributions (including Special Distributions described below) are paid by the
Fund in cash. Distributions are generally not taxable to the recipient
Shareholder unless the distributions exceed the recipient Shareholder's tax
basis in Fund Shares. The Fund's Credit Facility prohibits the Fund from making
any distribution to Shareholders while there is an event of default outstanding
under the Credit Facility.
On January 27, 2005, the Fund made a distribution of $1.12 per Share to
Shareholders of record on January 26, 2005. On January 14, 2004, the Fund made a
distribution of $1.15 per Share to Shareholders of record on January 13, 2004.
On January 17, 2003, the Fund made a distribution of $1.70 per Share to
Shareholders of record on January 16, 2003.
SPECIAL DISTRIBUTIONS. In addition to the pro rata income and capital gain
distributions described above, the Fund also makes distributions to Shareholders
allocated precontribution gain (other than precontribution gains allocated to a
Shareholder in connection with a tender offer or other extraordinary corporate
event involving a security contributed by such Shareholder) (a Special
Distribution). Special Distributions generally equal approximately 18% of the
amount of realized precontribution gains plus approximately 4% of the allocated
precontribution gain or such other percentage as deemed appropriate to
compensate Shareholders receiving such distributions for taxes that may be due
in connection with the precontribution gain and Special Distributions. Special
Distributions are made solely to the Shareholders to whom the precontribution
gain is allocated. The Fund does not intend to make Special Distributions to a
Shareholder in respect of realized precontribution gain allocated to a
Shareholder in connection with a tender offer or other extraordinary corporate
event involving a security contributed by such Shareholder. During the years
ended December 31, 2004 and 2003, the Fund made no Special Distributions.
ITEM 6. SELECTED FINANCIAL DATA.
- --------------------------------
TABLE OF SELECTED FINANCIAL DATA. The consolidated data referred to below
reflects the Fund's historical results for the years ended December 31, 2004,
2003, 2002, 2001 and for the period from March 17, 2000 through December 31,
2000. The following information should be read in conjunction with all of the
consolidated financial statements and related notes appearing on pages 36 to 79
of this Annual Report on Form 10-K. The other consolidated data referred to
below is as of each period end.
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002(2) December 31, 2001(2) December 31, 2000(1)(2)
----------------- ----------------- -------------------- -------------------- --------------------
Total investment income $ 92,676,501 $ 94,906,482 $ 99,814,835 $ 103,489,725 $ 53,330,719
Interest expense $ 36,451,042 $ 22,974,061 $ 28,506,573 $ 45,447,387 $ 25,969,680
Net expenses (including
interest expense) $ 66,204,475 $ 50,746,633 $ 56,644,137 $ 76,754,182 $ 39,649,034
Net investment income $ 25,224,494 $ 43,724,019 $ 42,746,644 $ 26,515,171 $ 13,353,048
Minority interests in net
income of controlled
subsidiaries $ (1,247,532) $ (435,830) $ (424,054) $ (220,372) $ (328,637)
Net realized gain (loss) $ 57,671,882 $ 5,911,089 $ (41,522,684) $ (35,955,721) $ 8,272,294
Net change in unrealized
appreciation
(depreciation) $ 52,072,410 $ 362,154,142 $ (417,581,832) $ (230,675,625) $ (74,236,068)
12
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002(2) December 31, 2001(2) December 31, 2000(1)(2)
----------------- ----------------- -------------------- -------------------- --------------------
Net increase (decrease) in
net assets from operations $ 134,968,786 $ 411,789,250 $ (416,357,872) $ (240,116,175) $ (52,610,726)
Total assets $2,677,042,933 $2,611,939,419 $2,445,639,296 $2,967,430,657 $3,325,479,191
Loan payable $ 290,000,000 $ 513,000,000 $ 596,500,000 $ 613,500,000 $ 613,500,000
Mortgages payable $ 455,098,913 $ 161,157,192 $ 162,461,900 $ 175,470,843 $ 176,647,796
Net assets $1,910,487,498 $1,920,611,857 $1,620,229,805 $2,108,684,133 $2,457,715,428
Shares outstanding 20,880,411 22,261,334 23,190,678 24,134,504 25,122,311
Net asset value and
redemption price per Share $ 91.50 $ 86.28 $ 69.87 $ 87.37 $ 97.83
Net increase (decrease) in
net assets from operations
per Share $ 6.37 $ 18.11 $ (17.50) $ (9.67) $ (1.87)
Distribution paid per
Share(3) $ 1.15(6) $ 1.70(5) $ 0.00(4) $ 0.79 $ 0.30
(1) The Fund commenced operations on March 17, 2000.
(2) Certain amounts have been reclassified to conform with the current year
presentation.
(3) The Fund also makes Special Distributions, which are not made on a pro rata
basis. See Item 5(c). Special Distributions of $0.073 and $0.03 per Share
were paid for the periods ended December 31, 2001 and 2000, respectively.
Special Distributions, to the extent made in 2004, 2003 and 2002, amounted
to less than $0.001 per Share in each year.
(4) On January 17, 2003, the Fund made a distribution of $1.70 per Share to
Shareholders of record on January 16, 2003.
(5) On January 14, 2004, the Fund made a distribution of $1.15 per Share to
Shareholders of record on January 13, 2004.
(6) On January 27, 2005, the Fund made a distribution of $1.12 per Share to
Shareholders of record on January 26, 2005.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (MD&A) AND
RESULTS OF OPERATIONS.
- --------------------------------------------------------------------------------
The information in this report contains forward-looking statements within the
meaning of the federal securities laws. Forward-looking statements typically are
identified by use of terms such as "may," "will," "should," "might," "expect,"
"anticipate," "estimate," and similar words, although some forward-looking
statements are expressed differently. The actual results of the Fund could
differ materially from those contained in the forward-looking statements due to
a number of factors. The Fund undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events, or otherwise, except as required by applicable law. Factors that could
affect the Fund's performance include a decline in the U.S. stock markets or in
general economic conditions, adverse developments affecting the real estate
industry, or fluctuations in interest rates. See "Qualitative Information About
Market Risk" in Item 7A(b) below.
The following discussion should be read in conjunction with the Fund's
consolidated financial statements and related notes appearing on pages 36 to 79
of this Annual Report on Form 10-K.
(a) RESULTS OF OPERATIONS.
- --------------------------
Increases and decreases in the Fund's net asset value per share are based on
increases and decreases in 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 net investment income (or loss) attributable to
the minority interest in Belmar Realty's controlled subsidiaries. The Fund's
investment income includes the net investment income allocated to the Fund from
Belvedere Company, rental income from the properties owned by Belmar Realty's
controlled subsidiaries, partnership income allocated to the 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 and interest allocated to Belvedere
Company by the Portfolio less the expenses of Belvedere Company allocated to the
Fund. The Fund's total expenses include the Fund's investment advisory and
administrative fees, 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, 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
13
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 by its investment adviser 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.
MD&A AND RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004 COMPARED TO
THE YEAR ENDED DECEMBER 31, 2003.
- --------------------------------------------------------------------------------
PERFORMANCE OF THE FUND.(1) The Fund's investment objective is to achieve
long-term, after-tax returns for Shareholders. Eaton Vance, as the Fund's
manager, measures the Fund's success in achieving its objective based on the
investment returns of the Fund, using the S&P 500 Index as the Fund's primary
performance benchmark. The S&P 500 Index is a broad-based unmanaged index of
common stocks commonly used as a measure of U.S. stock market performance. Eaton
Vance's primary focus in pursuing total return is on the Fund's common stock
portfolio, which consists of its indirect interest in the Portfolio. In
measuring the performance of the Fund's real estate investments, Eaton Vance
considers whether, through current returns and changes in valuation, the real
estate investments achieve returns that over the long-term exceed the cost of
the borrowing incurred to acquire such investments and thereby add to Fund
returns. The Fund has entered into interest rate swap agreements to fix the cost
of its borrowings under the Credit Facility used to acquire equity in real
estate investments and to mitigate in part the impact of interest rate changes
on the Fund's net asset value.
The Fund's total return for the year ended December 31, 2004 was 7.48%. This
return reflects an increase in the Fund's net asset value per Share from $86.28
to $91.50 and a distribution of $1.15 per Share during the period. For
comparison, the S&P 500 Index had a total return of 10.87% over the same period.
The combined impact on performance of the Fund's investment activities outside
of the Portfolio was negative for the year ended December 31, 2004. The
performance of the Fund trailed that of the Portfolio by approximately 2.19% for
the year.
The Fund had a total return of 26.48% for the year ended December 31, 2003. This
return reflected an increase in the Fund's net asset value per Share from $69.87
to $86.28 and a distribution of $1.70 per Share during the period. For
comparison, the S&P 500 Index had a total return of 28.67% over the same period.
For the year ended December 31, 2003, the performance of the Fund exceeded that
of the Portfolio by approximately 2.60%.
PERFORMANCE OF THE PORTFOLIO. Economic pressures lingered for much of 2004, but
the lifting of some political uncertainty ignited a late-year market rally,
helping U.S. equities lock in a second consecutive year of gains. Strength in
the broader market toward year-end was a function of several economic and
fundamental factors: historically low interest rates, decisive election results,
retreating oil prices and solid earnings growth. A wave of merger and
acquisition activity provided additional support for equities, as companies
across technology, telecommunications and healthcare sectors announced
multi-billion dollar combinations. The Federal Reserve raised its key
interest-rate target five times in 2004, increasing the federal funds target
rate to 2.25%. The Portfolio's performance for the year ended December 31, 2004
was 9.67%, trailing the S&P 500 Index, which had a total return of 10.87% for
the year. The total return of the Portfolio for the year ended December 31, 2003
was 23.88%.
In 2004, value stocks outperformed growth stocks and small-caps and mid-caps
outperformed large-caps. The best performing market sectors were energy,
utilities, telecom services and industrials. Lagging the overall market were the
healthcare, technology, and consumer staples sectors.
During the year, the Portfolio's sector allocation shifted slightly from 2003,
as it increased positions in energy and industrial stocks and reduced exposure
to the technology, healthcare and consumer discretionary sectors. The
- --------------------------------
(1) Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that Shares, when redeemed, may be worth
more or less than their original cost. Returns are calculated by
determining the percentage change in net asset value with all distributions
invested. Performance is for the stated time period only; due to market
volatility, the Fund's current performance may be lower or higher. The
performance of the Fund and the Portfolio is compared to that of their
benchmark, the S&P 500 Index. It is not possible to invest directly in an
Index.
14
Portfolio's performance versus the S&P 500 Index benefited from relative
overweightings in the strong performing energy and industrial sectors and
favorable stock selection among consumer staples. The Portfolio's relative
performance versus the S&P 500 Index was hampered by underweightings in the
utilities and telecom services sectors and adverse selection among technology,
healthcare and consumer discretionary stocks. Among industry groups, the
Portfolio benefited from overweightings of air freight & logistics, oil & gas,
and building products and underweightings of semiconductors and pharmaceuticals.
Industry groups adversely affecting the Portfolio's relative performance
included the overweighted insurance and media groups and the underweighted
health services and internet groups.
Looking forward, Boston Management believes that corporate earnings and the
economy will remain on track as we enter 2005. The longer-term success of the
Portfolio will be determined by the performance of the U.S. equity markets and
the execution of the Portfolio's investment strategy. The Portfolio maintains a
broadly diversified portfolio of stocks, emphasizing investments in established
growth companies that are considered by Boston Management to be high in quality
and attractive in their long-term investment prospects. The Portfolio seeks to
minimize trading costs and defer the recognition of taxable gains by holding
most successful investments for the long-term. Stock selection and asset
allocation are based on Boston Management's detailed fundamental analysis.
PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate investments are
held through Belmar Realty. As of December 31, 2004, real estate investments
included a majority interest in a Real Estate Joint Venture (Brazos), a Net
Leased Property (Bel Stamford) and a portfolio of Partnership Preference Units.
Brazos operates industrial distribution properties.
In January, 2004, Belmar Realty acquired Bel Stamford for approximately $16.1
million (including transaction costs). During the year ended December 31, 2004,
Belmar Realty acquired a majority interest in Brazos. In transactions occurring
in June and August 2004, Brazos acquired 100% of the economic interest in 23
industrial distribution properties located in eight states. Brazos acquired the
properties for approximately $382.9 million. ProLogis owns a minority interest
in Brazos and ProLogis or an affiliate thereof manages the properties. Brazos
obtained first mortgage financing in October 2004, which is secured by the
properties it owns and without recourse to Belmar Realty, the Fund or
Shareholders.
In September 2004, Belmar Realty sold its interest in a Real Estate Joint
Venture, Cimmaron Property Trust (Cimmaron), for approximately $159.1 million to
the real estate subsidiary of 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 October 2004, Bel Alliance Apartments LLC (Bel Apartments) sold all of its
multifamily properties to an affiliate of the former Operating Partner of Bel
Apartments, receiving net proceeds of approximately $23.5 million. Bel
Apartments 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 $19.4 million on the sale. Concurrent with
this sale, Belmar Realty acquired the outstanding minority interest in Bel
Apartments for a nominal amount. On December 15, 2004, Belmar Realty sold Bel
Apartments, which then held a portfolio of Partnership Preference Units, to the
real estate subsidiary of another fund advised by Boston Management. Belmar
Realty recognized a gain of approximately $0.5 million on the sale.
During the year ended December 31, 2004, rental income from real estate
operations was approximately $57.2 million compared to approximately $34.0
million for the year ended December 31, 2003, an increase of $23.2 million or
68%. This increase in rental income was due to income from the industrial
distribution properties acquired in 2004 and from the Net Leased Property
acquired in January 2004, offset in part by a decline in income from multifamily
properties. Multifamily income decreased primarily due to the sale of Bel
Apartments' properties in October 2004. Prior to the sale of its properties, Bel
Apartments experienced lower rental revenues as the result of reduced apartment
rental rates, increased rent concessions and lower occupancy levels during 2004.
For the year ended December 31, 2003, rental income decreased principally due to
increased rent concessions or reduced apartment rental rates and lower occupancy
levels at multifamily properties during 2003.
During the year ended December 31, 2004, property operating expenses were
approximately $17.7 million compared to approximately $17.9 million for the year
ended December 31, 2003, a decrease of $0.2 million or 1.1% (property operating
expenses are before certain operating expenses of Belmar Realty of approximately
$6.2 million for the year ended December 31, 2004 and $4.8 million for the year
ended December 31, 2003). During 2004, the decrease in property operating
expenses was principally due to the sale of Bel Apartments' properties in
October 2004 and was offset by the expenses of the industrial distribution
properties acquired in 2004. During the year ended December 31, 2003, property
operating expenses increased principally due to 17% increase in property taxes
15
and insurance expenses for Bel Apartments during the year, offset in part by a
1% decrease in property and maintenance expenses. Belmar Realty does not record
operating expenses for the Net Leased Property because expenses are assumed by
the tenant under the terms of the lease agreement.
In 2004, certain 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
industrial distribution property operating performance will occur over the
longer term.
At December 31, 2004, the estimated fair value of the real properties indirectly
held through Belmar Realty was approximately $579.5 million compared to
approximately $185.1 million at December 31, 2003, a net increase of $394.4
million, or 213%. The net increase in estimated real property values at December
31, 2004 as compared to December 31, 2003 was principally due to the January
2004 acquisition of Net Leased Property and the properties acquired by Brazos in
June and August 2004, offset in part by the sale of Bel Apartments' properties
in October 2004. The decrease in estimated property values at December 31, 2003
as compared to December 31, 2002 was due to declines in near-term earnings
expectations for the multifamily properties held, partially offset by decreases
in capitalization rates. 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 year ended December 31, 2004, the Fund saw unrealized depreciation of
the estimated fair value of its other real estate investments (which includes
Brazos and Bel Stamford) of approximately $15.8 million compared to unrealized
depreciation of approximately $18.5 million during the year ended December 31,
2003. Net unrealized depreciation of approximately $15.8 million during the year
ended December 31, 2004 included unrealized depreciation resulting from a net
decrease in estimated industrial distribution property values, offset in part by
unrealized appreciation resulting from net increases in estimated Net Leased
Property values and the recharacterization of previously recorded unrealized
depreciation to realized losses due to the October 2004 sale of properties of
Bel Apartments. The net decrease in industrial distribution property values
reflects the results of initial independent appraisals of newly acquired
properties and adjustments in the value of unappraised industrial distribution
properties to reflect appraisal results for similar properties, in accordance
with the Fund's valuation procedures (described in "The Real Estate Joint
Venture" under "Critical Accounting Estimates" in Item 7(e) below). Initial
appraised values of newly acquired properties differed from transaction values
due primarily to differences in discount and capitalization rates applied in
valuing the properties. Unrealized depreciation during the year ended December
31, 2003 was due to modest decreases in estimated multifamily property values
during the year.
During the year ended December 31, 2004, Belmar Realty sold (or experienced
scheduled redemptions of) certain of its Partnership Preference Units totaling
approximately $470.4 million (including sales to real estate subsidiaries of
other investment funds advised by Boston Management), recognizing a net gain of
approximately $45.8 million on the transactions. During the year ended December
31, 2004, Belmar Realty also acquired interests in additional Partnership
Preference Units (representing acquisitions from real estate subsidiaries of
other investment funds advised by Boston Management) for a total of
approximately $108.4 million.
At December 31, 2004, the estimated fair value of Belmar Realty's Partnership
Preference Units totaled approximately $63.7 million compared to approximately
$424.8 million at December 31, 2003, a net decrease of $361.1 million or 85%.
The net decrease in the value of Partnership Preference Units at December 31,
2004 was principally due to fewer Partnership Preference Units held as compared
to December 31, 2003. 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. Boston Management expects this trend to continue in 2005.
At December 31, 2003, the estimated fair value of Partnership Preference Units
decreased principally due to fewer units held as compared to December 31, 2002.
The per unit value of the remaining Partnership Preference Units also declined
slightly during 2003.
During the year ended December 31, 2004, the Fund saw net unrealized
depreciation of the estimated fair value of its Partnership Preference Units of
approximately $44.9 million compared to unrealized depreciation of approximately
$12.3 million during the year ended December 31, 2003. The net unrealized
depreciation of approximately $44.9 million during 2004 consisted of
approximately $5.3 million of unrealized depreciation resulting from decreases
in per unit values of the Partnership Preference Units held by Belmar Realty at
December 31, 2004, and approximately $39.6 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 year ended December 31, 2004. The decrease in per unit values was
16
principally due to restructurings of certain Partnership Preference Units, which
resulted in a special cash distribution and renegotiated lower subsequent
distribution rates. The decrease was also due to modest decreases in values for
certain other Partnership Preference Units held at December 31, 2004 as these
issues approach their call protection expiration dates. During 2003, the Fund
reported net unrealized depreciation consisting of approximately $8.6 million of
unrealized appreciation as a result of increases in the per unit value of
Partnership Preference Units held by Belmar Realty, offset by reclassifications
of previously unrealized appreciation as realized gains due to sales of
Partnership Preference Units in the amount of approximately $20.9 million.
Distributions from Partnership Preference Units for the year ended December 31,
2004 totaled approximately $14.7 million compared to approximately $45.0 million
for the year ended December 31, 2003, a decrease of $30.3 million or 67%. 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 year ended December 31, 2004. During the year ended
December 31, 2003, distributions from Partnership Preference Units decreased due
to fewer Partnership Preference Units held than during 2002.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the year ended December 31,
2004, net realized and unrealized losses on the Fund's interest rate swap
agreements totaled approximately $13.4 million, compared to approximately $7.2
million of net realized and unrealized losses for the year ended December 31,
2003. Net realized and unrealized losses on swap agreements in 2004 consisted of
$1.8 million of net realized and unrealized losses due to changes in swap
agreement valuations and $11.6 million of periodic payments made pursuant to
outstanding swap agreements (and classified as net realized losses on interest
rate swap agreements). In 2003, the Fund had net realized and unrealized gains
of $22.4 million due to swap agreement valuation changes, offset by $29.6
million of swap agreement periodic payments. The negative contribution to Fund
performance from changes in swap agreement valuations in 2004 was due to the
timing of terminating certain outstanding swap agreements, offset in part by
swaps held throughout the year increasing modestly in value as a result of
increases in swap rates on swap agreements with maturities comparable to those
of the Fund's swap agreements. The positive contribution to 2003 Fund
performance from changes in swap agreement valuations was attributable to a rise
in swap rates during the year and swap agreements entered into by the Fund
approaching their optional termination dates.
During the year ended December 31, 2004, the Fund terminated certain outstanding
swap agreements and realized a loss of approximately $2.4 million.
MD&A AND RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003 COMPARED TO
THE YEAR ENDED DECEMBER 31, 2002.
- --------------------------------------------------------------------------------
PERFORMANCE OF THE FUND. The Fund had a total return of 26.48% for the year
ended December 31, 2003. This return reflected an increase in the Fund's net
asset value per Share from $69.87 to $86.28 and a distribution of $1.70 per
Share during the period. For comparison, the S&P 500 Index had a total return of
28.67% over the same period. For the year ended December 31, 2003, the
performance of the Fund exceeded that of the Portfolio by approximately 2.60%.
The Fund had a total return of -20.03% for the year ended December 31, 2002.
This return reflected a decrease in the Fund's net asset value per Share from
$87.37 to $69.87. For comparison, the S&P 500 Index had a total return of
- -22.09% over the same period. For the year ended December 31, 2002, the
performance of the Fund trailed that of the Portfolio by approximately 0.51%.
PERFORMANCE OF THE PORTFOLIO. U.S. equities experienced a successful 2003, with
most major indices posting their first annual gains since 1999. Strength in the
broader market was a function of a favorable economic environment: historically
low inflation and interest rates, coupled with robust earnings growth and
continued consumer strength. While the Portfolio's performance for the year
ended December 31, 2003 of 23.88% was strong, the Portfolio trailed the S&P 500
Index, which had a total return of 28.67% for the year. The total return of the
Portfolio for the year ended December 31, 2002 was -19.52%.
The Portfolio's sector allocation in 2003 was substantially unaltered from 2002
in that the Portfolio continued to maintain overweighted positions in the
industrial, consumer discretionary and financials sectors. Although these
sectors generally performed well during 2003, the sub-par performance of the
Portfolio's holdings across the constituent industries, and multi-line retail
and aerospace/defense names in particular, hindered its performance. The
Portfolio's continued underweight of the best performing sector of the year,
information technology, was another factor contributing to the Portfolio's
relative underperformance versus the S&P 500 Index. As in 2002, lack of earnings
visibility and unattractive valuations caused Boston Management to remain
cautious on the technology sector. A similar rationale prompted a de-emphasis of
17
the telecommunications sector, the underweighting of which had a positive impact
on the Portfolio's return in 2003.
During the year, Boston Management increased the Portfolio's allocation to more
economically sensitive sectors, such as consumer discretionary and energy, from
2002 levels. This shift, particularly with respect to investments in
pro-cyclical industries, such as consumer electronics, energy services, and oil
and gas, was particularly beneficial. Financial and health care investments also
contributed to relative performance in 2003, with strong performance by consumer
finance, pharmaceuticals and biotechnology investments. While the Portfolio
remained underweighted in the materials and the utilities sectors during 2003,
stock selections in the electric and gas utilities groups positively impacted
returns for the year.
Unlike in 2002, the market favored lower quality and higher volatility
securities in 2003, something that is not unusual when coming out of an economic
slowdown or bear market. The Portfolio's policy of investing primarily in higher
quality securities and its valuation discipline contributed to its
underperformance versus its benchmark and the Portfolio's more aggressive peers
during 2003.
PERFORMANCE OF REAL ESTATE INVESTMENTS. At December 31, 2003, the Fund's real
estate investments included a majority interest in a Real Estate Joint Venture
(Bel Apartments) and Partnership Preference Units. During the year ended
December 31, 2003, the Fund's real estate operations continued to be impacted by
weak multifamily market fundamentals. Rental income from real estate operations
decreased to $34.0 million for the year ended December 31, 2003 compared to
$34.8 million for the year ended December 31, 2002, a decrease of $0.8 million
or 2%.
Property operating expenses totaled $17.9 million for each of the years ended
December 31, 2003 and December 31, 2002. Operating expenses for 2002 decreased
4% from $18.6 million in 2001. Property operating expenses are before certain
operating expenses of Belmar Realty of approximately $4.8 million for the year
ended December 31, 2003 and approximately $5.0 million for the year ended
December 31, 2002. Multifamily market fundamentals began to deteriorate in late
2001 in most regions with falling occupancy levels and rising rent concessions.
This trend continued through 2002. While the U.S. economy showed signs of
strength during the year ended December 31, 2003, significant employment growth
did not occur in most markets and low interest rates contributed to continued
apartment move-outs (due to new home purchases) and ongoing development of new
properties.
At December 31, 2003, the estimated fair value of the real properties held
through Belmar Realty was $185.1 million compared to $203.9 million at December
31, 2002, a decrease of $18.8 million or 9%. The decrease in estimated real
property value was due to declines in near-term earnings expectations offset in
part by decreases in capitalization rates. 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. The Fund saw unrealized depreciation in the estimated fair
value of its other real estate investments (which included Belmar Realty's
interest in the Real Estate Joint Venture) of approximately $18.5 million during
the year ended December 31, 2003 compared to approximately $8.5 million of
unrealized depreciation during the year ended December 31, 2002.
During the years ended December 31, 2003 and December 31, 2002, Belmar Realty
sold (or experienced scheduled redemptions of) certain Partnership Preference
Units, recognizing gains of $40.0 million and $5.1 million, respectively, on the
transactions (including sales to other investment funds advised by Boston
Management). In 2003, Belmar Realty acquired interests in additional Partnership
Preference Units for approximately $75.7 million. At December 31, 2003, the
estimated fair value of Belmar Realty's Partnership Preference Units totaled
$424.8 million compared to $550.4 million at December 31, 2002, a decrease of
$125.6 million or 23%. The decrease in value was due to fewer Partnership
Preference Units held at December 31, 2003, offset in part by increases in the
per unit value of the Partnership Preference Units held.
The Fund saw unrealized depreciation of the estimated fair value in its
Partnership Preference Units of approximately $12.3 million during the year
ended December 31, 2003 compared to approximately $17.8 million of unrealized
appreciation during the year ended December 31, 2002. During 2003, the Fund
reported net unrealized depreciation consisting of approximately $8.6 million of
unrealized appreciation as a result of increases in the per unit value of the
Partnership Preference Units held by Belmar Realty, offset by the
reclassification of previously unrealized appreciation as realized gains due to
the sales of Partnership Preference Units in the amount of approximately $20.9
million.
Distributions received from Partnership Preference Units for the year ended
December 31, 2003 totaled $45.0 million compared to $52.1 million for the year
ended December 31, 2002, a decrease of $7.1 million or 14%. The decrease was due
to fewer Partnership Preference Units held on average during the year ended
December 31, 2003.
18
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the year ended December 31,
2003, net realized and unrealized losses on the Fund's interest rate swap
agreements totaled approximately $7.2 million, compared to approximately $43.5
million of net realized and unrealized losses for the year ended December 31,
2002. Net realized and unrealized losses on swap agreements in 2003 consisted of
$22.4 million of net realized and unrealized gains due to changes in swap
agreement valuations, offset by $29.6 million of periodic payments made pursuant
to outstanding swap agreements (and classified as net realized losses on
interest rate swap agreements in the Fund's consolidated statement of
operations). In 2002, the Fund had net realized and unrealized losses of $2.8
million due to swap agreement valuation changes and $40.7 million of swap
agreement periodic payments. The positive contribution to 2003 Fund performance
from changes in swap agreement valuations was attributable to a rise in swap
rates during the year and swap agreements entered into by the Fund approaching
their optional termination dates. The negative impact on 2002 Fund performance
from changes in swap valuations was due primarily to a decline in swap rates
during the years.
On October 1, 2003, the Fund terminated all of its then outstanding swap
agreements and entered into new agreements to fix the cost of a substantial
portion of Fund borrowings under the Credit Facility. The Fund realized a loss
of approximately $26.8 million on the swap agreement terminations.
(b) LIQUIDITY AND CAPITAL RESOURCES.
- ------------------------------------
OUTSTANDING BORROWINGS. The Fund has entered into 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 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 December 31,
2004, the Fund had outstanding borrowings of $290.0 million and unused loan
commitments of $118.5 million under the Credit Facility.
As of December 31, 2004, Brazos had outstanding borrowings consisting of
fixed-rate secured mortgage debt obligations of $229.0 million.
LIQUIDITY. The Fund may redeem shares of Belvedere Company at any time. Both
Belvedere Company and the Portfolio normally follow the practice of satisfying
redemptions by distributing securities drawn from the Portfolio. Belvedere
Company and the Portfolio may also satisfy redemptions by distributing cash. As
of December 31, 2004, the Portfolio had cash and short-term investments totaling
$29.9 million. The Portfolio participates in a $150.0 million multi-fund
unsecured line of credit agreement with a group of banks. The Portfolio may
temporarily borrow from the line of credit to satisfy redemption requests in
cash or to settle investment transactions. The Portfolio had no outstanding
borrowings at December 31, 2004. To ensure liquidity for investors in the
Portfolio, the Portfolio may not invest more than 15% of its net assets in
illiquid assets. As of December 31, 2004, illiquid assets (consisting of
restricted securities not available for current public sale) constituted 0.02%
of the net assets of the Portfolio.
The liquidity of Belmar Realty's Real Estate Joint Venture investments is
extremely limited, and relies principally upon liquidation agreement with the
Operating Partner described in "Real Estate Joint Venture Investments" under
"The Fund's Real Estate Investments" in Item 1. Transfers of Belmar Realty's
interest in a Real Estate Joint Venture to parties other than the Operating
Partner are restricted by terms of the Real Estate Joint Venture's operative
agreement and lender consent requirements. The Partnership Preference Units held
by Belmar Realty are not registered under the Securities Act and are subject to
substantial restrictions on transfer. As such, they are illiquid. The liquidity
of Net Leased Property is also extremely limited.
(c) OFF-BALANCE SHEET ARRANGEMENTS.
- -----------------------------------
The Fund is required to disclose off-balance sheet arrangements that either
have, or are reasonably likely to have, a current or future effect on its
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to Shareholders. An off-balance sheet arrangement includes any
contractual arrangement to which an unconsolidated entity is a party and under
which the Fund has certain specified obligations. As of December 31, 2004, the
Fund did not have any such off-balance sheet arrangements.
19
(d) THE FUND'S CONTRACTUAL OBLIGATIONS.
- ---------------------------------------
The following table sets forth the amounts of payments due under the specified
contractual obligations outstanding on December 31, 2004:
Payments due:
- -------------------------------------------------------------------------------------------------------------------
Type of Obligation Total Less than 1 Year 1-3 Years 3-5 Years More than 5 years
- -------------------------------------------------------------------------------------------------------------------
Long Term Debt:
Mortgage Debt(1) $455,098,913 $ 4,747,863 $10,406,657 $11,712,426 $428,231,967
Borrowings under Credit Facility(2) $290,000,000 $ -- $ -- $ -- $290,000,000
Purchase Obligations(3) $ -- $ -- $ -- $ -- $ --
Other Long Term Liabilities:
Interest Rate Swap Agreements(4) $ 96,568,391 $17,614,924 $35,229,848 $35,229,848 $ 2,108,360
- -------------------------------------------------------------------------------------------------------------------
Total $841,667,304 $22,362,787 $45,636,505 $46,942,274 $720,340,327
- -------------------------------------------------------------------------------------------------------------------
(1) The property held by Belmar Realty is financed primarily through mortgages
issued to the Real Estate Joint Venture and the Net Leased Property. Each
mortgage is secured by the underlying property and is generally without
recourse to the other assets of the Fund or Belmar Realty, as described in
"Risks of Real Estate Investments" in Item 7A(b). The mortgages mature in
2012 and 2016. Mortgage obligations cannot be prepaid or otherwise disposed
of without incurring a substantial prepayment penalty or without the sale
of the associated property.
(2) To finance its real estate investments, the Fund has entered into a Credit
Facility as described in "Liquidity and Capital Resources" above. The
Credit Facility is secured by a pledge of the Fund's assets, excluding the
assets of Brazos and Bel Stamford, and expires in June 2010. The Credit
Facility is primarily used to finance the Fund's equity in its real estate
investments and will continue to be used for such purpose in the future.
(3) The Fund and Belmar Realty have entered into agreements with certain
service providers pursuant to which the Fund and Belmar Realty pay fees as
a percentage of assets. These fees include fees paid to Eaton Vance and its
affiliates (which are described in Item 13). These agreements generally
continue indefinitely unless terminated by the Fund or Belmar Realty (as
applicable) or the service provider. For the year ended December 31, 2004,
fees paid to Eaton Vance and its affiliates equaled approximately 1.12% of
the Fund's net assets. Because these fees are based on the Fund's assets
(which will fluctuate over time) it is not possible to specify the dollar
amounts payable in the future.
(4) The Fund has entered into interest rate swap agreements to fix the cost of
borrowings under the Credit Facility used to acquire equity in real estate
investments. Pursuant to the interest rate swap agreements, the Fund makes
cash payments to MLCS at fixed rates in exchange for floating rate payments
from MLCS that fluctuate with one-month LIBOR. The amounts disclosed in the
table represent the fixed interest amounts payable by the Fund. The
periodic floating rate payments that the Fund expects to receive pursuant
to the agreements will reduce the fixed interest cost to the Fund. The swap
agreements expire on June 25, 2010, subject to the Fund's right to
terminate earlier in the case of certain swaps.
(e) CRITICAL ACCOUNTING ESTIMATES.
- ----------------------------------
The Fund's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the Fund to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Estimates are deemed critical when a
different estimate could have reasonably been used or where changes in the
estimate are reasonably likely to occur from period to period, and where such
different or changed estimates would materially impact the Fund's financial
condition, changes in financial condition or results of operations. The Fund's
significant accounting policies are discussed in Note 2 of the consolidated
financial statements; critical estimates inherent in these accounting policies
are discussed in the following paragraphs.
The Fund has determined that the valuation of the Fund's real estate investments
(including the Real Estate Joint Venture, the Partnership Preference Units and
the Net Leased Property) involve critical estimates. The Fund's investments in
real estate are an important component of its total investment program. Market
prices for these investments are not readily available and therefore the
investments are stated in the Fund's consolidated financial statements at
estimated fair value. The estimated fair value of an investment represents the
amount at which Boston Management believes the investment could be sold in a
current transaction between willing parties in an orderly disposition, that is,
20
other than in a forced or liquidation sale. The Fund reports the estimated fair
value of its real estate investments on its consolidated statement of assets and
liabilities with any changes to estimated fair value charged to unrealized
appreciation or depreciation in the Fund's consolidated statement of operations.
The need to estimate the fair value of the Fund's real estate investments
introduces uncertainty into the Fund's reported financial condition and
performance because:
* such assets are, by their nature, difficult to value and estimated
values may not accurately reflect what the Fund could realize in a
current sale between willing parties;
* property appraisals and other factors used to determine the estimated
fair value of the Fund's real estate investments depend on estimates
of future operating results and supply and demand assumptions that may
not reflect actual current market conditions and full consideration of
all factors relevant to valuations;
* property appraisals and other factors used to determine the estimated
fair value of the Fund's real estate investments are not continuously
updated and therefore may not be current as of specific dates; and
* if the Fund were forced to sell illiquid assets on a distressed basis,
the proceeds may be substantially less than stated values.
As of December 31, 2004, the estimated fair value of the Fund's real estate
investments represented 24.1% of the Fund's total assets. As of December 31,
2004, adjusting for the minority interest of the Operating Partner that is the
principal minority investor in the Real Estate Joint Venture, the Fund's real
estate investments represented 30.6% of the Fund's net assets. The estimated
fair value of the Fund's real estate investments may change due to changes in
market conditions and changes in valuation assumptions made by property
appraisers and third party valuation service providers as described below.
As noted in Item 1, to satisfy certain requirements of the Code, the Fund
invests at least 20% of its assets (calculated in the manner prescribed) in real
estate investments (the 20% requirement). Should the estimated fair value of the
Fund's real estate investments decrease, the Fund may be required to acquire
additional real estate investments to satisfy the 20% requirement. Because the
Fund acquires real estate investments with borrowings, acquisitions of
additional real estate investments would increase the Fund's borrowings under
the Credit Facility and reduce the amounts otherwise available to the Fund
thereunder. Should the estimated fair value of the Fund's real estate
investments increase, real estate investments could represent a larger
percentage of the Fund's investment portfolio.
PARTNERSHIP PREFERENCE UNITS. Boston Management determines the estimated fair
value of the Fund's Partnership Preference Units based on analysis and
calculations performed primarily on a monthly basis by a third party service
provider. The service provider calculates an estimated price and yield (before
accrued distributions) for each issue of Partnership Preference Units based on
descriptions of such issue provided by Boston Management and certain publicly
available information including, but not limited to, the trading prices of
publicly issued debt and/or preferred stock instruments of the same or similar
issuers, which may be adjusted to reflect the illiquidity and other structural
characteristics of the Partnership Preference Units (such as call provisions).
Daily valuations of Partnership Preference Units are determined by adjusting
prices from the service provider to account for accrued distributions under the
terms of the Partnership Preference Units. If changes in relevant markets,
events that materially affect an issuer or other events that have a significant
effect on the price or yield of Partnership Preference Units occur, relevant
prices or yields may be recalculated to take such occurrences into account.
Valuations of Partnership Preference Units are inherently uncertain because they
are based on adjustments from the market prices of publicly-traded debt and/or
preferred stock instruments of the same or similar issuers to account for the
Partnership Preference Units' illiquidity, structural features (such as call
provisions) and other relevant factors. Each month Boston Management reviews the
analysis and calculations performed by the service provider. Boston Management
generally relies on the assumptions and judgments made by the service provider
in estimating the fair value of the Partnership Preference Units. If the
assumptions and estimates used by the service provider to calculate prices for
Partnership Preference Units were to change, it could materially impact the
estimated fair value of the Fund's holdings of Partnership Preference Units.
THE REAL ESTATE JOINT VENTURE. Boston Management determines the estimated fair
value of the Fund's interest in the Real Estate Joint Venture based primarily on
annual appraisals of the properties owned by such Real Estate Joint Venture
21
(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 the 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 year's 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 the 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 Partner. Each appraisal is
conducted in accordance with the Uniform Standards Board and the Code of
Professional Appraisal Practice of the Appraisal Institute (as well as other
relevant standards). Boston Management reviews the appraisal of each property
and generally relies on the assumptions and judgments made by the appraiser.
Property appraisals are inherently uncertain because they apply assumed discount
rates, capitalization rates, growth rates and inflation rates to the appraiser's
estimated stabilized cash flows, and due to the unique characteristics of a
property, which may affect its value but may not be taken into account. If the
assumptions and estimates used by the appraisers to determine the value of the
properties owned by the Fund's Real Estate Joint Venture were to change, it
could materially impact the estimated fair value of the Fund's Real Estate Joint
Venture. 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, provided such amount is indicative of fair value. Once an appraisal of a
property has been conducted, Boston Management bases the estimated fair value of
the property principally on the estimated value as determined by the appraiser.
Appraisals of newly acquired properties are conducted in the year following the
acquisition. If the initial appraised value of a newly acquired property differs
significantly from the transaction value of the property, it may materially
impact the estimated fair value of the Real Estate Joint Venture that holds the
property. Interim valuations of Real Estate Joint Venture assets may be adjusted
by Boston Management to reflect significant changes in economic circumstances or
recent independent evaluations of similar properties, and the results of
operations and distributions.
Boston Management determines the estimated fair value of the Fund's equity
interest in the Real Estate Joint Venture based on an estimate of the allocation
of equity interests between the Fund and the Operating Partner. This allocation
is generally calculated by a third party specialist, using current appraisals of
the properties owned by the Real Estate Joint Venture. The specialist uses a
financial model that considers (i) the 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 the Real
Estate Joint Venture is prepared quarterly and reviewed by Boston Management. If
the estimate of the allocation of equity interests in the Real Estate Joint
Venture were to change (because, for example, the appraisers' estimates of
property values or projected cash flows of the Real Estate Joint Venture
changed), it may materially impact the estimated fair value of the Fund's equity
interest in the Real Estate Joint Venture. 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. As of December 31, 2004, a
portion of the properties owned by Brazos has not been appraised. The
unappraised properties have been fair valued in good faith by Boston Management.
NET LEASED PROPERTY. Boston Management determines the estimated fair value of
the Net Leased Property based on an annual appraisal of the leased fee market
value of the property. These appraisals are conducted by independent, licensed
22
appraisers in a manner similar to the appraisals of the properties owned by the
Real Estate Joint Venture (described above). In deriving a leased fee market
value for the Net Leased Property, an appraiser considers the owner's rights as
specified by the contract terms of the lease with the tenant of the properties
as well as the probability of the tenant performing its lease obligations based
in part on the tenant's financial status. This form of appraisal assumes that
the amount that a prudent, informed purchaser-investor would pay for the Net
Leased Property relates to the predictability of the expected income stream and
that a more predictable income stream would result in a higher estimated value.
Boston Management reviews the appraisal of the Net Leased Property and generally
relies on the assumptions and judgments made by the appraiser. Appraisals of the
Net Leased Property may be conducted more frequently than once a year if Boston
Management determines that significant changes in economic circumstances have
occurred since the most recent appraisal. Appraisals of the Net Leased Property
are inherently uncertain because they apply assumed discount rates,
capitalization rates, growth rates and inflation rates to the expected income
stream from the property as defined by the contract terms of the lease, and due
to the unique characteristics of the property, which may affect its value but
cannot be taken into account. If the assumptions and estimates used by the
appraisers to determine the value of the property owned by the Fund's subsidiary
were to change, it could materially impact the estimated fair value of the
Fund's equity interest in the Net Leased Property.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- --------------------------------------------------------------------
(a) QUANTITATIVE INFORMATION ABOUT MARKET RISK.
- -----------------------------------------------
INTEREST RATE RISK. The Fund's primary exposure to interest rate risk arises
from its real estate investments that are financed by the Fund with floating
rate borrowings under the Credit Facility and by fixed-rate secured mortgage
debt obligations of the Real Estate Joint Venture 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 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 equity in real estate investments and
to mitigate in part the impact of interest rate changes on the Fund's net asset
value. Under the terms of the interest rate swap agreements, the Fund makes cash
payments at fixed rates in exchange for floating rate payments that fluctuate
with one-month LIBOR. The Fund's interest rate swap agreements will generally
increase in value when interest rates rise and decrease in value when interest
rates fall. In the future, the Fund may use other interest rate hedging
arrangements (such as caps, floors and collars) to fix or limit borrowing costs.
The use of interest rate hedging arrangements is a specialized activity that can
expose the Fund to significant loss.
The following table summarizes the contractual maturities and weighted-average
interest rates associated with the Fund's significant non-trading financial
instruments. The Fund has no market risk sensitive instruments held for trading
purposes. This information should be read in conjunction with Notes 7 and 8 to
the Fund's consolidated financial statements appearing on pages 36 to 79 of this
Annual Report on Form 10-K.
Interest Rate Sensitivity
Cost, Principal (Notional) Amount
by Contractual Maturity and Callable Date
for the Twelve Months Ended December 31,*
Estimated
Fair Value as
of December
2005 2006-2008 2009 Thereafter Total 31, 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive
liabilities:
- -----------------------
Long-term debt:
- -----------------------
Fixed-rate mortgages $455,098,913 $455,098,913 $576,506,000
Average interest rate 5.73% 5.73%
- -----------------------
23
Estimated
Fair Value as
of December
2005 2006-2008 2009 Thereafter Total 31, 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Variable-rate Credit
Facility $290,000,000 $290,000,000 $290,000,000
Average interest rate 2.60% 2.60%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative
financial instruments:
- -----------------------
Pay fixed/receive
variable interest
rate swap agreements $388,668,000 $388,668,000 $ 2,701,342
Average pay rate 4.53% 4.53%
Average receive rate 2.60% 2.60%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive
investments:
- -----------------------
Fixed-rate
Partnership
Preference Units:
- -----------------------
MHC Operating Limited
Partnership, 9%
Series D Cumulative
Redeemable Perpetual
Preference Units,
Callable 9/29/04,
Current Yield: 8.97% $20,544,240 $ 20,544,240 $ 20,064,000
PSA Institutional
Partners, L.P., 6.40%
Series NN Cumulative
Redeemable Perpetual
Preferred Units,
Callable 3/17/10,
Current Yield: 6.69% $ 13,387,321 $ 13,387,321 $ 13,275,600
Sun Communities
Operating L.P.,
8.875% Series A
Cumulative Redeemable
Perpetual Preferred
Units, Callable
9/29/04, Current Yield:
8.77% $26,227,200 $ 26,227,200 $ 30,348,000
23
* The amounts listed reflect the Fund's positions as of December 31, 2004.
The Fund's current positions may differ.
24
(b) QUALITATIVE INFORMATION ABOUT MARKET RISK.
- ----------------------------------------------
RISKS ASSOCIATED WITH EQUITY INVESTING. The Fund invests primarily in a
diversified portfolio of common stocks and is thereby subject to general stock
market risk. There can be no assurance that the performance of the Fund will
match that of the U.S. stock market or that of other equity funds. In managing
the Portfolio for long-term, after-tax returns, Boston Management generally
seeks to avoid or minimize sales of securities with large accumulated capital
gains, including contributed securities. Such securities constitute a
substantial portion of the assets of the Portfolio. Although the Portfolio may
utilize certain management strategies in lieu of selling appreciated securities,
the Portfolio's, and hence the Fund's, exposure to losses during stock market
declines may nonetheless be higher than funds that do not follow a general
policy of avoiding sales of highly-appreciated securities.
RISKS OF INVESTING IN FOREIGN SECURITIES. The Portfolio invests in securities
issued by foreign companies and the Fund may acquire foreign investments.
Foreign investments involve considerations and possible risks not typically
associated with investing in the United States. The value of foreign investments
to U.S. investors may be adversely affected by changes in currency rates.
Foreign brokerage commissions, custody fees and other costs of investing are
generally higher than in the United States, and foreign investments may be less
liquid, more volatile and subject to more government regulation than in the
United States. Foreign investments could be adversely affected by other factors
not present in the United States, including expropriation, confiscatory
taxation, lack of uniform accounting and auditing standards, armed conflict, and
potential difficulty in enforcing contractual obligations. These risks can be
more significant for investments in emerging markets.
RISKS OF CERTAIN INVESTMENT TECHNIQUES. In managing the Portfolio, Boston
Management may purchase or sell derivative instruments (which derive their value
by reference to other securities, indexes, instruments or currencies) to hedge
against securities price declines and currency movements, to add investment
exposure to individual securities and groups of securities and to enhance
returns. Such transactions may include, without limitation, the purchase and
sale of futures contracts on stocks and stock indexes and options thereon, the
purchase of put options and the sale of call options on securities held, equity
swaps, forward sales of stocks, and the purchase and sale of forward currency
exchange contracts and currency futures. The Portfolio may engage in short sales
of individual securities held and short sales of index or basket securities
whose constituents are held in whole or in part. The Portfolio may enter into
private contracts for the forward sale of stock held and may also lend portfolio
securities.
The use of these investment techniques is a specialized activity that may be
considered speculative and which can expose the Fund and the Portfolio to
significant risk of loss. Successful use of these investment techniques is
subject to the ability and performance of the investment adviser. The Fund's and
the Portfolio's ability to achieve their investment objectives may be adversely
affected by the use of these techniques. The writer of an option or a party to
an equity swap may incur losses that substantially exceed the payments, if any,
received from a counterparty. Forward sales, swaps, caps, floors, collars and
over-the-counter options are private contracts in which there is also a risk of
loss in the event of a default on an obligation to pay by the counterparty. Such
instruments may be difficult to value, may be illiquid and may be subject to
wide swings in valuation caused by changes in the price of the underlying
security, index, instrument or currency. In addition, if the Fund or the
Portfolio has insufficient cash to meet margin, collateral or settlement
requirements, it may have to sell assets to meet such requirements.
Alternatively, should the Fund or the Portfolio fail to meet these requirements,
the counterparty or broker may liquidate positions of the Fund or the Portfolio.
The Portfolio may also have to sell or deliver securities holdings in the event
that it is not able to purchase securities on the open market to cover its short
positions or to close out or satisfy an exercise notice with respect to options
positions it has sold. In any of these cases, such sales may be made at prices
or in circumstances that Boston Management considers unfavorable.
The Portfolio's ability to utilize covered short sales, certain equity swaps,
forward sales, futures and certain equity collar strategies (combining the
purchase of a put option and the sale of a call option) as a tax-efficient
management technique with respect to holdings of appreciated securities is
limited to circumstances in which the hedging transaction is closed out within
30 days of the end of the Portfolio's taxable year in which the hedging
transaction was initiated and the underlying appreciated securities position is
held unhedged for at least the next 60 days after such hedging transaction is
closed. In addition, dividends received on stock for which the Portfolio is
obligated to make related payments (pursuant to a short sale or otherwise) with
respect to positions in substantially similar or related property are subject to
federal income taxation at ordinary rates and do not qualify for favorable tax
treatment. Also, holding periods required to receive tax-advantaged treatment of
qualified dividends on a stock are suspended whenever the Portfolio has an
option (other than a qualified covered call option not in the money when
written) or contractual obligation to sell or an open short sale of
substantially identical stock, is the grantor of an option (other than a
qualified covered call option not in the money when written) to buy
substantially identical stock or has diminished risk of loss in such stock by
holding positions with respect to substantially similar or related property.
There can be no assurance that counterparties will at all times be willing to
25
enter into covered short sales, forward sales of stocks, interest rate hedges,
equity swaps and other derivative instrument transactions on terms satisfactory
to the Fund or the Portfolio. The Fund's and the Portfolio's ability to enter
into such transactions may also be limited by covenants under the Fund's Credit
Facility, the federal margin regulations and other laws and regulations. The
Portfolio's use of certain investment techniques may be constrained because the
Portfolio is a diversified, open-end management investment company registered
under the 1940 Act and because other investors in the Portfolio are regulated
investment companies under Subchapter M of the Code. Moreover, the Fund and the
Portfolio are subject to restrictions under the federal securities laws on their
ability to enter into transactions in respect of securities that are subject to
restrictions on transfer pursuant to the Securities Act.
RISKS OF REAL ESTATE INVESTMENTS. The success of the Fund's real estate
investments depends in part on many factors related to the real estate market.
These factors include, without limitation, general economic conditions, the
supply and demand for different types of real properties, the financial health
of tenants, changing transportation and logistics patterns (in the case of
industrial distribution properties), the timing of lease expirations and
terminations, fluctuations in rental rates and operating costs, exposure to
adverse environmental conditions and losses from casualty or condemnation,
fluctuations in interest rates, availability of financing, managerial
performance, government rules and regulations, and acts of God (whether or not
insured against). There can be no assurance that Belmar Realty's ownership of
real estate investments will be an economic success.
The success of investments in Partnership Preference Units depends upon factors
relating to the issuing partnerships that may affect such partnerships'
profitability and their ability to make distributions to holders of Partnership
Preference Units. Interests in the Real Estate Joint Venture and Partnership
Preference Units are not registered under the federal securities laws and are
subject to restrictions on transfer. Due to their illiquidity, they may be
difficult to value and the ongoing value of the investments is uncertain. See
"Critical Accounting Estimates" in Item 7. Investments in Partnership Preference
Units are valued primarily by referencing market trading prices for comparable
preferred equity securities or other fixed-rate instruments having similar
investment characteristics. The valuations of Partnership Preference Units
fluctuate over time to reflect, among other factors, changes in interest rates,
changes in the perceived riskiness of such units (including call risk), changes
in the perceived riskiness of comparable or similar securities trading in the
public market and the relationship between supply and demand for comparable or
similar securities trading in the public market. The valuation of Partnership
Preference Units will be adversely affected by increases in interest rates and
increases in the perceived riskiness of such units or comparable or similar
securities. Fluctuations in the value of Partnership Preference Units derived
from changes in general interest rates can be expected to be offset in part (but
not entirely) by changes in the value of interest rate swap agreements or other
interest rate hedges entered into by the Fund with respect to its borrowings
under the Credit Facility. Fluctuations in the value of Partnership Preference
Units that are derived from other factors besides general interest rate
movements (including issuer-specific and sector-specific credit concerns,
property or tenant-specific concerns, and changes in interest rate spread
relationships) will not be offset by changes in the value of interest rate swap
agreements or other interest rate hedges entered into by the Fund. Because the
Partnership Preference Units are not rated by a nationally-recognized rating
agency, they may be subject to more credit risk than securities that are rated
investment grade.
The performance of the Real Estate Joint Venture is substantially influenced by
the property management capabilities of the Operating Partner and conditions in
the specific real estate sub-markets in which the properties owned by the Real
Estate Joint Venture are located. The Operating Partner is subject to
substantial conflicts of interest in structuring, operating and winding up the
Real Estate Joint Venture. The Operating Partner had an economic incentive to
maximize the prices at which it sold properties to the Real Estate Joint Venture
and has a similar incentive to minimize the prices at which it may acquire
properties from the Real Estate Joint Venture. The Operating Partner may devote
greater attention or more resources to managing its wholly-owned properties than
properties held by the Real Estate Joint Venture. Future investment
opportunities identified by the Operating Partner will more likely be pursued
independently, rather than through, the Real Estate Joint Venture. Financial
difficulties encountered by the Operating Partner in its other businesses may
interfere with the operations of the Real Estate Joint Venture.
Belmar Realty's investments in Real Estate Joint Ventures may be significantly
concentrated in terms of geographic regions, property types and operators,
increasing the Fund's exposure to regional, property type and operator specific
risks. Given a lack of stand-alone operating history and relatively high
financial leverage, the Real Estate Joint Venture is not equivalent in quality
to real estate companies whose preferred equity or senior debt securities are
rated investment grade. Distributable cash flows from the Real Estate Joint
Venture may not be sufficient for Belmar Realty to receive its fixed annual
preferred return, or any returns in excess thereof.
26
The debt of Brazos is fixed-rate, secured by the underlying properties and
without recourse to Belmar Realty and the Fund. In connection with Real Estate
Joint Ventures that may be acquired in the future, Belmar Realty and the Fund
may be directly or indirectly responsible for certain liabilities constituting
exceptions to the generally non-recourse nature of the mortgage indebtedness,
including liabilities associated with fraud, misrepresentation, misappropriation
of funds, or breach of material covenants, and liabilities arising from
environmental conditions involving or affecting Real Estate Joint Venture
properties. To the extent practicable, the Fund and Belmar Realty will seek
indemnification from Operating Partners for certain of such potential
liabilities. The availability of financing and other financial conditions can
have a material impact on property values and therefore on the value of Real
Estate Joint Venture assets. Mortgage debt of the Real Estate Joint Venture
normally cannot be refinanced prior to maturity without substantial penalties.
The ongoing value of Belmar Realty's investments in the Real Estate Joint
Venture is substantially uncertain. The real property held through Belmar
Realty's Real Estate Joint Venture is stated at estimated fair value as
described in Item 7(e). The policies for valuing real estate investments involve
significant judgments that are based upon a number of factors, which may
include, without limitation, general economic conditions, the supply and demand
for different types of real properties, the financial health of tenants, the
timing of lease expirations and terminations, fluctuations in rental rates and
operating costs, exposure to adverse environmental conditions and losses from
casualty or condemnation, interest rates, availability of financing, managerial
performance and government rules and regulations. Given that such valuations
include many assumptions, values may differ from amounts ultimately realized.
Belmar Realty's investments in Net Leased Property are subject to general real
estate market risks similar to Real Estate Joint Ventures. Investments in Net
Leased Property are also subject to risks specific to this type of investment,
including a concentration of risk exposure to specific real estate submarkets
and individual properties and tenants. Principal among the risks of investing in
Net Leased Property is the risk that a major tenant fails to satisfy its lease
obligations due to financial distress or other reasons. A tenant's failure to
meet its lease obligations would expose Belmar Realty to substantial loss of
income without a commensurate reduction in debt service costs and other
expenses, and would transfer to Belmar Realty all the costs, expenses and
liabilities of property ownership and management borne by the tenant under the
terms of the lease. Re-leasing a property could involve considerable time and
expense. Re-leasing opportunities may be limited by the nature and location of
the property, which may not be well suited to the needs of other possible
tenants. Even if a property is re-leased, the property may not generate
sufficient rental income to cover debt service and other expenses.
Net Leased Property is generally illiquid, and the ongoing value of Belmar
Realty's investments in Net Leased Property is substantially uncertain. Net
Leased Property held is generally stated at estimated fair value based on annual
appraisals. See "Critical Accounting Estimates" in Item 7. Because the value of
Bel Stamford reflects in part the financial status of its principal tenant, any
reduction in the financial status of the tenant could have an adverse effect on
the appraised value of the property and the value realized upon the disposition
of such property. Tenants may hold rights to renew or extend expiring leases,
and exercise of such rights would extend Belmar Realty's risk exposure to a
particular tenant beyond the initial lease term. A tenant may also hold options
to purchase Net Leased Property, including options to purchase at below market
levels. The value received upon the disposition of Net Leased Property will
depend on real estate market conditions, lease and mortgage terms, tenant credit
quality, tenant purchase options, lender approvals and other factors affecting
valuation as may then apply. Because a sale of Net Leased Property is not
expected to occur for many years, market conditions and other valuation factors
at the time of sale cannot be predicted. Since the valuations of Net Leased
Property assume an orderly disposition of assets, amounts realized in a
distressed sale may differ substantially from stated values.
The mortgage debt associated with Net Leased Property is generally without
recourse to Belmar Realty and the Fund, except certain liabilities associated
with fraud, misrepresentation, misappropriation of funds, or breach of material
covenants. Mortgage debt associated with Net Leased Property generally cannot be
refinanced prior to maturity without substantial penalties. The terms of the
outstanding lease and mortgage debt obligations and restrictions on refinancing
such debt may limit Belmar Realty's ability to dispose of Net Leased Property.
Because the mortgage debt obligation of Bel Stamford is generally without
recourse to Belmar Realty, the Fund and Shareholders, the potential loss from
Belmar Realty's investments in Bel Stamford is normally limited to the amount of
its equity investment. The Fund and Belmar Realty may, however, be directly or
indirectly responsible for certain liabilities constituting exceptions to the
generally non-recourse nature of the mortgage indebtedness, including
liabilities associated with fraud, misrepresentation, misappropriation of funds,
or breach of material covenants, and liabilities arising from environmental
conditions involving or affecting Bel Stamford, increasing the potential for
loss under extraordinary circumstances.
27
Because all or substantially all of the rental payments on Net Leased Property
generally is dedicated to servicing the associated mortgage debt, during the
initial lease term Belmar Realty will not generate significant cash flow from
investments to offset Belmar Realty's operating expenses and the cost of Fund
borrowings used to finance Belmar Realty's equity therein. Such costs and
expenses must be provided from other sources of cash flow for Belmar Realty and
the Fund, which may include additional Fund borrowings under the Credit
Facility. Realized returns on investments in Net Leased Property generally are
deferred until the properties are sold or re-leased following the initial lease
term.
Changes in the value of real estate investments and other factors will cause the
performance of the Fund to deviate from the performance of the Portfolio. Over
time, the performance of the Fund can be expected to be more volatile than the
performance of the Portfolio.
RISKS OF INTEREST RATE SWAP AGREEMENTS. Interest rate swap agreements are
subject to changes in valuation caused principally by movements in interest
rates. Interest rate swap agreements are private contracts in which there is a
risk of loss in the event of a default on an obligation to pay by the
counterparty. Interest rate swap agreements may be difficult to value and may be
illiquid. Fluctuations in the value of Partnership Preference Units derived from
changes in general interest rates can be expected to be offset in part (but not
entirely) by changes in the value of interest rate swap agreements or other
interest rate hedges that may be entered into by the Fund with respect to its
borrowings.
RISKS OF LEVERAGE. Although intended to add to returns, the borrowing of funds
to purchase real estate investments exposes the Fund to the risk that the
returns achieved on the real estate investments will be lower than the cost of
borrowing to purchase such assets and that the leveraging of the Fund to buy
such assets will therefore diminish the returns achieved by the Fund as a whole.
In addition, there is a risk that the availability of financing will be
interrupted at some future time, requiring the Fund to sell assets to repay
outstanding borrowings or a portion thereof. It may be necessary to make such
sales at unfavorable prices. The Fund's obligations under the Credit Facility
are secured by a pledge of its assets, excluding the assets of Brazos and Bel
Stamford. In the event of default, the lender could elect to sell assets of the
Fund without regard to consequences of such action for Shareholders. The rights
of the lender to receive payments of interest on and repayments of principal of
borrowings under the Credit Facility are senior to the rights of the
Shareholders.
Under the terms of the Credit Facility, the Fund is not permitted to make
distributions of cash or securities while there is an event of default
outstanding under the Credit Facility. During such periods, the Fund would not
be able to honor redemption requests or make cash distributions. In addition,
the rights of lenders under the mortgages used to finance Real Estate Joint
Venture properties are senior to Belmar Realty's right to receive distributions
from the Real Estate Joint Venture.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ----------------------------------------------------
The consolidated financial statements required by Item 8 are contained on pages
36 to 79 to of this Annual Report on Form 10-K. The following is a summary of
unaudited quarterly results of operations of the Fund for the years ended
December 31, 2004 and 2003.
2004
--------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------------
Investment income $22,676,223 $21,556,022 $ 25,613,813 $ 22,830,443
Minority interest in net income
of controlled subsidiaries $ (48,115) $ 46,387 $ (854,163) $ (404,636)
Net investment income $ 7,053,996 $ 6,439,572 $ 5,704,716 $ 6,078,187
Net increase (decrease) in
net assets from operations $34,515,612 $34,699,315 $(52,781,248) $118,535,107
Per share data:(1)
Investment income $ 1.02 $ 0.99 $ 1.20 $ 1.09
Net investment income $ 0.32 $ 0.30 $ 0.27 $ 0.29
Net increase (decrease) in
net assets from operations $ 1.56 $ 1.59 $ (2.47) $ 5.65
28
2003
--------------------------------------------------------------
First Second Third Fourth
Quarter(2) Quarter(2) Quarter(2) Quarter
--------------------------------------------------------------
Investment income $ 24,737,532 $ 24,603,075 $22,963,420 $ 22,602,455
Minority interest in net income
of controlled subsidiaries $ (137,545) $ (94,806) $ (45,381) $ (158,098)
Net investment income (loss) $ 11,700,588 $ 11,435,095 $10,276,573 $ 10,311,763
Net increase (decrease) in net
assets from operations $(56,441,928) $214,324,671 $49,210,874 $204,695,633
Per share data:(1)
Investment income $ 1.06 $ 1.06 $ 1.00 $ 1.01
Net investment income (loss) $ 0.50 $ 0.49 $ 0.45 $ 0.46
Net increase (decrease) in net
assets from operations $ (2.42) $ 9.25 $ 2.15 $ 9.12
(1) Based on average Shares outstanding.
(2) Certain amounts have been reclassified to conform with the current year
presentation.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
- --------------------------------------------------------------------------------
There have been no changes in, or disagreements with, accountants on accounting
and financial disclosures.
ITEM 9A. CONTROLS AND PROCEDURES.
- ----------------------------------
Eaton Vance, as the Fund's manager, evaluated 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. The Fund's
disclosure controls and procedures are the controls and other procedures that
the Fund designed to ensure that it records, processess, summarizes and reports
in a timely manner the information that the Fund must disclose in reports that
it files or submits to the Securities and Exchange Commission. Based on that
evaluation, the Fund's Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2004, the Fund's disclosure controls and
procedures were effective.
The Fund's Chief Executive Officer and Chief Financial Officer have established
and maintain internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) of the 1934 Act). Fund management's report on internal
control over financial reporting, including its assessment of the Fund's
internal control over financial reporting, appears on page 58 of this Annual
Report on Form 10-K. The Fund's Chief Executive Officer and Chief Financial
Officer intend to report to the Board of Directors of Eaton Vance, Inc. 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.
ITEM 9B. OTHER INFORMATION.
- ---------------------------
None.
29
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
- ------------------------------------------
(a) MANAGEMENT.
- ---------------
Pursuant to the Fund's LLC Agreement, the Fund's manager, Eaton Vance, has the
authority to conduct the Fund's business. Eaton Vance appointed Thomas E. Faust
Jr. and Michelle A. Green to serve indefinitely as the Fund's Chief Executive
Officer and Chief Financial Officer, respectively. Information about Mr. Faust
appears below. Ms. Green, 35, is a Vice President of Eaton Vance and Boston
Management. She also serves as Chief Financial Officer of Belair Capital Fund
LLC, Belcrest Capital Fund LLC, Belport Capital Fund LLC and Belrose Capital
Fund LLC and as an officer of various other investment companies managed by
Eaton Vance or Boston Management. Ms. Green has been an employee of Eaton Vance
since 1997. As members of the Eaton Vance organization, Mr. Faust and Ms. Green
receive no compensation from the Fund for serving as Fund officers. There are no
other officers of the Fund. The Fund does not have a board of directors or
similar governing body.
The Board of Directors of Eaton Vance, Inc., the sole trustee of Eaton Vance,
oversees the accounting and financial reporting processes of the Fund and audits
of the Fund's financial statements. The directors of Eaton Vance, Inc. are James
B. Hawkes and William M. Steul. The Fund's audit committee financial expert (as
that term is defined in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act)
is Mr. Steul. Messrs. Hawkes and Steul are senior officers of Eaton Vance and,
as such, are not independent of Fund management. Information about Mr. Hawkes
and Mr. Steul appears below.
Boston Management is investment adviser to the Fund and the Portfolio and
manager of Belmar Realty. The portfolio manager of the Fund and the Portfolio is
Duncan W. Richardson, Senior Vice President and Chief Equity Investment Officer
of Eaton Vance and Boston Management. Mr. Richardson has been employed by the
Eaton Vance organization since 1987 and has served as portfolio manager of the
Fund since its inception and of the Portfolio and its predecessor since 1990. A
majority of Mr. Richardson's time is spent managing the Portfolio and related
entities. Boston Management has an experienced team of analysts that provides
Mr. Richardson with research and recommendations on investments.
The directors of Belmar Realty are Mr. Faust and Alan R. Dynner, each of whom is
described below. William R. Cross, President and portfolio manager of Belmar
Realty, has primary responsibility for providing research and analysis relating
to the Fund's real estate investments held through Belmar Realty. Mr. Cross is a
Vice President of Eaton Vance and Boston Management and has been employed by the
Eaton Vance organization since 1996. A majority of Mr. Cross's time is spent
managing the real estate investments of Belmar Realty and the real estate
subsidiaries of other investment funds advised by Boston Management. Mr. Cross,
Mr. Carlson and Mr. Dynner serve as trustees of the Real Estate Joint Venture
owned by Belmar Realty. Mr. Cross is also Chairman and President of the Real
Estate Joint Venture. Mr. Calson is a Vice President of Eaton Vance and Boston
Management and has been employed by the Eaton Vance organization since 2001.
Prior to joining Eaton Vance, Mr. Carlson was President of ILM Holding, nc., a
real estate holding company. Information about Mr. Dynner appears below.
As disclosed under "The Eaton Vance Organization" in Item 1, Eaton Vance and
Boston Management are wholly-owned subsidiaries of Eaton Vance Corp. The
non-voting common stock of Eaton Vance Corp. is listed and traded on the NYSE.
All shares of the voting common stock of Eaton Vance Corp. are held in a voting
trust, the voting trustees of which are senior officers of the Eaton Vance
organization. Eaton Vance, Inc., a wholly-owned subsidiary of Eaton Vance Corp.,
is the sole trustee of Eaton Vance and of Boston Management, each of which is a
Massachusetts business trust. The names of the executive officers and the
directors of Eaton Vance, Inc. and their ages and principal occupations (in
addition to their responsibilities described above) are set forth below.
James B. Hawkes (63) is Chairman, President and Chief Executive Officer of Eaton
Vance, Boston Management, Eaton Vance Corp. and Eaton Vance, Inc. and a Director
of Eaton Vance Corp. and Eaton Vance, Inc. He is Vice President and Director of
EV Distributors. He is also a Trustee and an officer of various investment
companies managed by Eaton Vance or Boston Management and has been employed by
Eaton Vance since 1970.
Thomas E. Faust Jr. (46) is Executive Vice President and Chief Investment
Officer of Eaton Vance, Boston Management, Eaton Vance Corp. and Eaton Vance,
Inc., and a Director of Eaton Vance Corp. He is also Chief Executive Officer of
Belair Capital Fund LLC, Belcrest Capital Fund LLC, Belport Capital Fund LLC and
Belrose Capital Fund LLC and is an officer of various other investment companies
managed by Eaton Vance or Boston Management. Mr. Faust has been employed by
Eaton Vance since 1985.
30
Alan R. Dynner (64) is Vice President, Chief Legal Officer and Secretary of
Eaton Vance, Boston Management, Eaton Vance Corp., EV Distributors and Eaton
Vance, Inc. He is also an officer of various investment companies managed by
Eaton Vance or Boston Management and has been employed by Eaton Vance since
1996.
William M. Steul (62) is Vice President and Chief Financial Officer of Eaton
Vance, Boston Management, Eaton Vance Corp. and Eaton Vance, Inc. and a Director
of Eaton Vance, Inc. He is also Vice President of EV Distributors. He has been
employed by Eaton Vance since 1994.
(b) COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.
- -------------------------------------------------------------------------
Section 16(a) of the 1934 Act requires the Fund's officers and directors and
persons who own more than ten percent of the Fund's Shares to file forms
reporting their affiliation with the Fund and reports of ownership and changes
in ownership of the Fund's Shares with the SEC. Eaton Vance, as manager of the
Fund, and the Directors and executive officers of Eaton Vance, Inc., the sole
trustee of Eaton Vance, also comply with Section 16(a). These persons and
entities are required by SEC regulations to furnish the Fund with copies of all
Section 16(a) forms they file. To the best of the Fund's knowledge, during the
year ended December 31, 2004 no Section 16(a) filings were required by such
persons or entities.
(c) CODE OF ETHICS.
- -------------------
The Fund has adopted a Code of Ethics that applies to the principal executive
officer and principal financial officer (who is also the Fund's principal
accounting officer). A copy of the Code of Ethics is available at no cost by
request to the Fund's Chief Financial Officer, 255 State Street, Boston, MA
02109 or by calling (800) 225-6265. If the Fund makes any substantive amendments
to the Code of Ethics or grants any waiver, including an implicit waiver, from a
provision of the Code of Ethics as applicable to the principal executive officer
or principal financial officer, the Fund will disclose the nature of such
amendment or waiver in a report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION.
- --------------------------------
As noted in Item 10, the officers of the Fund receive no compensation from the
Fund. The Fund's manager, Eaton Vance, and its affiliates receive certain fees
from the Fund for services provided to the Fund, which are described in Item 13
below.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. To the knowledge of the Fund,
no person beneficially owns more than 5% of the Shares of the Fund.
SECURITY OWNERSHIP OF MANAGEMENT. As of March 1, 2005, Eaton Vance, the manager
of the Fund, beneficially owned 1,117.175 Shares of the Fund. The Shares owned
by Eaton Vance represent less than 1% of the outstanding Shares of the Fund as
of March 1, 2005. None of the other entities or individuals named in response to
Item 10 above beneficially owned Shares of the Fund as of such date.
CHANGES IN CONTROL. Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------
The table below sets forth the fees, paid or payable by, or allocable to, the
Fund and Belmar Realty for the years ended December 31, 2004 and 2003 in
connection with services rendered by Eaton Vance and its affiliates. Each fee is
described following the table.
31
Year ended Year ended
December 31, December 31,
2004 2003
- -------------------------------------------------------------------------------
Fund Advisory and Administrative Fees* $ 1,684,719 $ 1,277,921
- -------------------------------------------------------------------------------
Belmar Real Estate Management Fees* $ 4,389,001 $ 4,060,122
- -------------------------------------------------------------------------------
Fund's Allocable Portion of the Portfolio's $ 8,392,976 $ 7,634,035
Advisory Fees**
- -------------------------------------------------------------------------------
Fund Servicing Fees $ 1,778,204 $ 1,658,867
- -------------------------------------------------------------------------------
Fund's Allocable Portion of Belvedere
Company's Servicing Fees $ 2,908,588 $ 2,617,051
- -------------------------------------------------------------------------------
Fund Distribution Fees* $ 1,874,514 $ 1,711,661
- -------------------------------------------------------------------------------
Aggregate Compensation Paid by the Fund to
Eaton Vance and its Affiliates $ 7,948,234 $ 7,049,704
- -------------------------------------------------------------------------------
* Boston Management has agreed to waive the portion of the investment
advisory and administrative fee payable by the Fund to the extent that such
fee, together with the distribution fee payable by the Fund exceeds 0.60%
of the average daily gross assets of the Fund reduced by that portion of
the advisory or management fees payable by the Portfolio and Belmar Realty
that is attributable to the value of the Fund's direct and indirect
investments therein. The amount shown reflects this waiver by Boston
Management.
** For the years ended December 31, 2004 and 2003, advisory fees paid or
payable by the Portfolio totaled $77,609,178 and $67,584,543, respectively.
For the year ended December 31, 2004, Belvedere Company's allocable portion
of that fee was $50,252,861 of which $8,392,976 was allocable to the Fund.
For the year ended December 31, 2003, Belvedere Company's allocable portion
of that fee was $41,671,111, of which $7,634,035 was allocable to the Fund.
THE FUND'S INVESTMENT ADVISORY AND ADMINISTRATIVE FEE. Under the terms of the
Fund's investment advisory and administrative agreement, Boston Management is
entitled to receive, subject to the fee waiver described in the next sentence, a
monthly advisory and administrative fee at the rate of 1/20 of 1% (equivalent to
0.60% annually) of the average daily gross assets of the Fund reduced by the
portion of the monthly advisory or management fees for such months payable by
the Portfolio and Belmar Realty that is attributable to the Fund's direct or
indirect investments therein (but no such reduction shall be made to the extent
that any such fee or portion thereof has been waived by Boston Management).
Boston Management has agreed to waive that portion of the monthly investment
advisory and administrative fee payable by the Fund to the extent that such fee,
together with the distribution fees payable by the Fund (see "Distribution Fees
Paid to EV Distributors" below), exceeds 1/20 of 1% of the average daily gross
assets of the Fund reduced by the portion of the monthly advisory or management
fees for such month payable by the Portfolio and Belmar Realty that is
attributable to the value of the Fund's direct or indirect investments therein
(but no such reduction shall be made to the extent that any such fee or portion
thereof has been waived by Boston Management). The term "gross assets of the
Fund" means the value of all Fund assets (including the Fund's interest in
Belvedere Company and the Fund's ratable share of the assets of its controlled
subsidiaries), without reduction by any liabilities.
BELMAR REALTY'S MANAGEMENT FEE. Under the terms of Belmar Realty's management
agreement with Boston Management, Boston Management receives a monthly
management fee at the rate of 1/20 of 1% (equivalent to 0.60% annually) of the
average daily gross assets of Belmar Realty. The term "gross assets of Belmar
Realty" means the current value of all assets of Belmar Realty, without
reduction by any liabilities.
THE PORTFOLIO'S INVESTMENT ADVISORY FEE. Under the terms of the Portfolio's
investment advisory agreement with Boston Management, Boston Management receives
a monthly advisory fee as follows:
Annual Fee Rate
Average Daily Net Assets for the Month (for each level)
------------------------------------------------------------
Up to $500 million 0.6250%
$500 million but less than $1 billion 0.5625%
$1 billion but less than $1.5 billion 0.5000%
$1.5 billion but less than $7 billion 0.4375%
$7 billion but less than $10 billion 0.4250%
$10 billion but less than $15 billion 0.4125%
$15 billion and over 0.4000%
32
In accordance with the terms of the 1940 Act, the Portfolio's Board of Trustees
considers the continuation of the Portfolio's investment advisory agreement
annually.
SERVICING FEES PAID BY THE FUND. Pursuant to a servicing agreement between the
Fund and EV Distributors, the Fund pays a servicing fee to EV Distributors for
providing certain services and information to the Shareholders of the Fund. The
servicing fee is paid on a quarterly basis at an annual rate of 0.25% of the
Fund's average daily net assets. With respect to Shareholders who subscribed
through a subagent, EV Distributors has assigned servicing responsibilities and
fees to the applicable subagent, beginning twelve months after the issuance of
Shares of the Fund to such persons. The Fund's allocated share of the servicing
fee paid by Belvedere Company is credited toward the Fund's servicing fee
payment, thereby reducing the amount of the servicing fee payable by the Fund.
SERVICING FEES PAID BY BELVEDERE COMPANY. Pursuant to a servicing agreement
between Belvedere Company and EV Distributors, Belvedere Company pays a
servicing fee to EV Distributors for providing certain services and information
to direct and indirect investors in Belvedere Company. The servicing fee is paid
on a quarterly basis, at an annual rate of 0.15% of Belvedere Company's average
daily net assets. With respect to investors in Belvedere Company and
Shareholders of the Fund who subscribed through a subagent, EV Distributors has
assigned servicing responsibilities and fees to the applicable subagent,
beginning twelve months after the issuance of shares of Belvedere Company or
Shares of the Fund to such persons. The Fund assumes its allocated share of
Belvedere Company's servicing fee. The servicing fee payable in respect of the
Fund's investment in Belvedere Company is credited toward the Fund servicing fee
described above.
DISTRIBUTION FEES PAID TO EV DISTRIBUTORS. Under the terms of the Fund's
placement agreement with EV Distributors, EV Distributors receives a monthly
distribution fee at an annual rate of 0.10% of the average daily net assets of
the Fund as compensation for its services as placement agent. The distribution
fee accrued from the Fund's initial closing and will continue for a period of
ten years (subject to the annual approval of Eaton Vance, Inc.).
CERTAIN REAL ESTATE INVESTMENT TRANSACTIONS. During the year ended December 31,
2004, Belmar Realty entered into the following real estate investment
transactions with real estate subsidiaries of other investment funds advised by
Boston Management:
* Belmar Realty purchased Partnership Preference Units from Belterra
Realty Corporation, which realized a gain of approximately $3.0
million on the transaction;
* Belmar Realty sold Partnership Preference Units to Belair Real Estate
Corporation, realizing a gain of approximately $8.0 million on the
transaction;
* Belmar Realty sold Partnership Preference Units to Belcrest Realty
Corporation, realizing a gain of approximately $18.5 million on the
transactions;
* Belmar Realty sold Partnership Preference Units to Belrose Realty
Corporation, realizing a gain of approximately $3.0 million on the
transactions;
* Belmar Realty sold Partnership Preference Units to Bel Holdings LLC,
realizing a gain of approximately $0.5 million on the transactions;
and
* Belmar Realty and Bel Apartments sold Partnership Preference Units to
Belterra Realty Corporation, realizing a gain of approximately $2.7
million and $0.5 million on the transactions respectively.
33
The prices of the real estate investments purchased and sold by Belmar Realty
were determined in good faith by Boston Management after consideration of
factors, data and information that it considered relevant. See "Critical
Accounting Estimates" in Item 7(e).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- ------------------------------------------------
The following table presents fees for the professional audit services rendered
by Deloitte & Touche LLP for the audit of the Fund's annual financial statements
for the years ended December 31, 2004 and 2003 and fees billed for other
services rendered by Deloitte & Touche LLP during those periods.
Year ended December 31, 2004 2003
- --------------------------------------------------------------------------------
Audit fees $199,358 $123,906
Audit related fees(1) 39,790 35,040
Tax fees(2) 328,703 151,774
All other fees(3) -- 4,200
-----------------------
Total $567,851 $314,920
-----------------------
(1) Audit related fees consist of assurance and related services that are
reasonably related to the performance of the audit of the Fund's
consolidated financial statements. The category includes fees related to
the performance of audits and attest services not required by statute or
regulation and accounting consultations regarding the application of
generally accepted accounting principles to proposed transactions.
(2) Tax fees consist of the aggregate fees billed for professional services
rendered by Deloitte & Touche LLP for tax compliance, tax advice and tax
planning.
(3) Other fees consist primarily of the aggregate fees billed for professional
services rendered by Deloitte & Touche LLP related to agreed upon
procedures for requirements by lenders.
The Directors of Eaton Vance, Inc. review all audit, audit-related and tax fees
at least annually. The Directors pre-approved all audit, audit-related and tax
services for the years ended December 31, 2004 and 2003. The Directors have
concluded that the provision of the audit-related, tax and other services listed
above is compatible with maintaining the independence of Deloitte & Touche LLP.
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
- ----------------------------------------------------------------
(a) Please see the Fund's consolidated financial statements followed by the
Portfolio's financial statements on pages 36 to 79 of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K:
None.
(c) A list of the exhibits filed as a part of this Form 10-K is included in the
Exhibit Index appearing on page 81 hereof.
34
BELMAR 2004
Appendix A
The Fund's Investment Structure as of December 31, 2004
[Chart depicting (1) the Fund investing in Belvedere Company and Belmar Realty;
(2) Belvedere Company investing in the Portfolio; and (3) Belmar Realty
investing in Brazos and Bel Stamford. The Fund is followed by footnote (A);
Belvedere Company is followed by footnote (B); the Portfolio is followed by
footnote (C); Belmar Realty is followed by footnote (D); Brazos is followed by
footnote (E); and Bel Stamford is followed by footnote (F). The footnotes appear
below.]
(A) Eaton Vance is the manager of the Fund; Boston Management is the Fund's
investment adviser. (B) Boston Management is the manager of Belvedere Company.
(C) Boston Management is the Portfolio's investment adviser. (D) Boston
Management is the manager of Belmar Realty. Belmar Realty also holds investments
in Partnership Preference Units. (E) Belmar Realty owns a majority interest in
this Real Estate Joint Venture. (F) Bel Stamford is a wholly-owned subsidiary of
Belmar Realty.
35
BELMAR CAPITAL FUND LLC
CONSOLIDATED PORTFOLIOS OF INVESTMENTS
As of December 31, 2004
INVESTMENT IN BELVEDERE CAPITAL
FUND COMPANY LLC -- 75.7%
SECURITY SHARES VALUE
- -------------------------------------------------------------------------------------
Investment in Belvedere Capital Fund Company LLC
(Belvedere Company) 11,843,299 $ 2,015,871,844
- -------------------------------------------------------------------------------------
TOTAL INVESTMENT IN BELVEDERE COMPANY
(IDENTIFIED COST, $2,289,690,157) $ 2,015,871,844
- -------------------------------------------------------------------------------------
PARTNERSHIP PREFERENCE UNITS -- 2.4%
SECURITY UNITS VALUE
- -------------------------------------------------------------------------------------
MHC Operating Limited Partnership, L.P.
(Illinois Limited Partnership affiliate of
Equity Lifestyle Properties, Inc.), 9%
Series D Cumulative Redeemable
Perpetual Preference Units, Callable
from 9/29/04+(1) 800,000 $ 20,064,000
PSA Institutional Partners, L.P. (California
Limited Partnership affiliate of Public
Storage, Inc.), 6.40% Series NN Cumulative
Redeemable Perpetual Preferred Units,
Callable from 3/17/10+(1) 555,000 13,275,600
Sun Communities Operating L.P.
(Michigan Limited Partnership affiliate of
Sun Communities, Inc.), 8.875% Series A
Cumulative Redeemable Perpetual Preferred
Units, Callable from 9/29/04+(1) 1,200,000 30,348,000
- -------------------------------------------------------------------------------------
TOTAL PARTNERSHIP PREFERENCE UNITS
(IDENTIFIED COST, $60,158,761) $ 63,687,600
- -------------------------------------------------------------------------------------
OTHER REAL ESTATE INVESTMENTS -- 21.8%
DESCRIPTION VALUE
- -------------------------------------------------------------------------------------
Bel Stamford(1)(2) $ 278,000,000
Rental property(1)(3) 298,506,000
Investment in management contracts(1)(4) 2,990,359
- -------------------------------------------------------------------------------------
TOTAL OTHER REAL ESTATE INVESTMENTS
(IDENTIFIED COST, $638,556,732) $ 579,496,359
- -------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 0.1%
PRINCIPAL
AMOUNT
(000'S
SECURITY OMITTED) VALUE
- -------------------------------------------------------------------------------------
Investors Bank & Trust Company --
Time Deposit, 2.25%, 1/3/05 $ 1,700 $ 1,700,000
- -------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(AT AMORTIZED COST, $1,700,000) $ 1,700,000
- -------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100.0%
(IDENTIFIED COST, $2,990,105,650) $ 2,660,755,803
- -------------------------------------------------------------------------------------
See notes to consolidated financial statements
36
As of December 31, 2003
INVESTMENT IN BELVEDERE CAPITAL
FUND COMPANY LLC -- 75.8%
SECURITY SHARES VALUE
- -------------------------------------------------------------------------------------
Investment in Belvedere Capital Fund Company LLC
(Belvedere Company) 12,559,085 $ 1,966,911,184
- -------------------------------------------------------------------------------------
TOTAL INVESTMENT IN BELVEDERE COMPANY
(IDENTIFIED COST, $2,352,813,010) $ 1,966,911,184
- -------------------------------------------------------------------------------------
PARTNERSHIP PREFERENCE UNITS -- 16.4%
SECURITY UNITS VALUE
- -------------------------------------------------------------------------------------
Bel Holdings, LLC+(1)(5) 236,138 $ 23,872,204
Cabot Industrial Properties, L.P. (Delaware
Limited Partnership affiliate of Cabot
Industrial Trust), 8.625% Series B
Cumulative Redeemable Preferred Units,
Callable from 4/29/04+(1) 1,300,000 67,379,000
Camden Operating, L.P. (Delaware Limited
Partnership affiliate of Camden Property
Trust), 7% Series B Cumulative Redeemable
Perpetual Preferred Units, Callable
from 12/2/08+(1) 2,530,000 61,377,800
Essex Portfolio, L.P. (California Limited
Partnership affiliate of Essex Property
Trust, Inc.), 7.875% Series B Cumulative
Redeemable Preferred Units, Callable
from 2/6/03+(1)(6) 325,000 15,659,215
Essex Portfolio, L.P. (California Limited
Partnership affiliate of Essex Property
Trust, Inc.), 9.30% Series D Cumulative
Redeemable Preferred Units, Callable
from 7/28/10+(1) 2,000,000 51,221,200
MHC Operating Limited Partnership
(Illinois Limited Partnership affiliate of
Manufactured Home Communities, Inc.),
9% Series D Cumulative Redeemable
Perpetual Preference Units, Callable
from 9/29/04+(1) 800,000 20,104,000
PSA Institutional Partners, L.P. (California
Limited Partnership affiliate of Public
Storage, Inc.), 9.50% Series N Cumulative
Redeemable Perpetual Preferred Units,
Callable from 3/17/05+(1) 2,555,000 66,430,000
Prentiss Properties Acquisition Partners, L.P.
(Delaware Limited Partnership affiliate of
Prentiss Properties Trust), 8.30% Series B
Cumulative Redeemable Perpetual Preferred
Units, Callable from 6/25/03+(1) 663,536 32,599,524
Price Development Company, L.P.
(Maryland Limited Partnership affiliate of
J.P. Realty, Inc.), 8.95% Series B
Cumulative Redeemable Preferred
Partnership Units, Callable
from 7/28/04+(1) 800,000 $ 19,648,000
Regency Centers, L.P. (Delaware Limited
Partnership affiliate of Regency Realty
Corporation), 9.125% Series D
Cumulative Redeemable Preferred Units,
Callable from 9/29/04+(1) 150,000 15,349,500
Sun Communities Operating L.P.
(Michigan Limited Partnership affiliate of
Sun Communities, Inc.), 8.875%
Series A Cumulative Redeemable
Perpetual Preferred Units, Callable
from 9/29/04+(1) 2,000,000 51,140,000
- -------------------------------------------------------------------------------------
TOTAL PARTNERSHIP PREFERENCE UNITS
(IDENTIFIED COST, $376,394,227) $ 424,780,443
- -------------------------------------------------------------------------------------
OTHER REAL ESTATE INVESTMENTS -- 7.1%
DESCRIPTION VALUE
- -------------------------------------------------------------------------------------
Rental property(1)(3) $ 185,138,810
- -------------------------------------------------------------------------------------
TOTAL OTHER REAL ESTATE INVESTMENTS
(IDENTIFIED COST, $229,939,890) $ 185,138,810
- -------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 0.7%
PRINCIPAL
AMOUNT
(000'S
SECURITY OMITTED) VALUE
- -------------------------------------------------------------------------------------
Investors Bank & Trust Company --
Time Deposit, 1.01%, 1/2/04 $ 16,973 $ 16,973,476
- -------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(AT AMORTIZED COST, $161,973,476) $ 16,973,476
- -------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100.0%
(IDENTIFIED COST, $2,976,120,603) $ 2,593,803,913
- -------------------------------------------------------------------------------------
See notes to consolidated financial statements
37
The following footnotes are for the years ended December 31, 2004 and December
31, 2003:
+ Security exempt from registration under the Securities Act of 1933. At
December 31, 2004 and 2003, the value of these securities totaled
$63,687,600 and $424,780,443, or 3.3% and 22.1% of net assets,
respectively.
(1) Investment valued at fair value using methods determined in good faith by
or at the direction of the manager of Belmar Realty Corporation.
(2) Bel Stamford represents one office building located in Connecticut.
(3) At December 31, 2004, rental property represents twenty-three industrial
distribution properties located in eight states. At December 31, 2003,
rental property represents nineteen multi-family residential properties
located in eight states. None of the values of the individual properties
represent more than 5% of net assets, respectively.
(4) See Note 5 -- Investment Transactions.
(5) The sole investment of Bel Holdings LLC is as follows: Vornado Realty, LP
(Delaware Limited Partnership affiliate of Vornado Realty Trust), 7% Series
D-10 Cumulative Redeemable Preferred Units, Callable from 11/17/08. See
Note 1B.
(6) On January 8, 2004, the call date was changed to 12/31/09.
See notes to consolidated financial statements
38
BELMAR CAPITAL FUND LLC
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 2004 DECEMBER 31, 2003
- ----------------------------------------------------------------------------------------------
ASSETS
Investments, at value (identified cost, $2,990,105,650
and $2,976,120,603, respectively) $ 2,660,755,803 $ 2,593,803,913
Cash 6,789,395 6,605,096
Escrow deposits -- restricted -- 3,817,390
Open interest rate swap agreements, at value 2,701,342 2,090,845
Distributions and interest receivable 6,511 1,960,318
Other assets 6,789,882 3,661,857
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,677,042,933 $ 2,611,939,419
- ----------------------------------------------------------------------------------------------
LIABILITIES
Loan payable -- Credit Facility $ 290,000,000 $ 513,000,000
Mortgages payable 455,098,913 161,157,192
Payable for Fund Shares redeemed -- 1,361,403
Distributions payable to minority shareholders -- 16,800
Security deposits 502,487 744,420
Swap interest payable 144,508 242,283
Notes payable to minority shareholder -- 565,972
Accrued expenses:
Interest expense 1,903,452 1,423,780
Property taxes 30,839 3,281,589
Other expenses and liabilities 2,879,715 1,586,790
Minority interests in controlled subsidiaries 15,995,521 7,947,333
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 766,555,435 $ 691,327,562
- ----------------------------------------------------------------------------------------------
NET ASSETS $ 1,910,487,498 $ 1,920,611,857
- ----------------------------------------------------------------------------------------------
SHAREHOLDERS' CAPITAL $ 1,910,487,498 $ 1,920,611,857
- ----------------------------------------------------------------------------------------------
FUND SHARES OUTSTANDING 20,880,411 22,261,334
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE $ 91.50 $ 86.28
- ----------------------------------------------------------------------------------------------
See notes to consolidated financial statements
39
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends allocated from Belvedere Company
(net of foreign taxes, $410,963, $301,745
and $230,203, respectively) $ 31,399,615 $ 25,889,334 $ 23,452,669
Interest allocated from Belvedere Company 136,313 410,423 677,946
Expenses allocated from Belvedere Company (11,656,198) (10,585,603) (11,284,744)
- ---------------------------------------------------------------------------------------------------------------------
Net investment income allocated from
Belvedere Company $ 19,879,730 $ 15,714,154 $ 12,845,871
Distributions from Partnership Preference Units 14,708,477 44,949,869 52,071,790
Rental income 57,195,941 33,969,790 34,819,869
Interest 633,453 272,669 77,305
Miscellaneous income 258,900 -- --
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME $ 92,676,501 $ 94,906,482 $ 99,814,835
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment advisory and administrative fees $ 7,948,234 $ 7,049,704 $ 7,647,360
Property management fees 1,359,591 1,342,305 1,375,915
Distribution and servicing fees 3,652,718 3,370,528 3,672,900
Interest expense on mortgages 28,190,253 14,303,813 14,882,677
Interest expense on Credit Facility 8,260,789 8,670,248 13,623,896
Property and maintenance expenses 10,854,510 11,853,270 11,756,824
Property taxes and insurance 5,475,612 4,696,646 4,734,164
Miscellaneous 2,337,282 1,171,780 797,636
- ---------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES $ 68,078,989 $ 52,458,294 $ 58,491,372
- ---------------------------------------------------------------------------------------------------------------------
Deduct --
Reduction of investment advisory and
administrative fees $ 1,874,514 $ 1,711,661 $ 1,847,235
- ---------------------------------------------------------------------------------------------------------------------
NET EXPENSES $ 66,204,475 $ 50,746,633 $ 56,644,137
- ---------------------------------------------------------------------------------------------------------------------
Net investment income before minority
interests in net income of controlled subsidiaries $ 26,472,026 $ 44,159,849 $ 43,170,698
Minority interests in net income of controlled
subsidiaries (1,247,532) (435,830) (424,054)
- ---------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 25,224,494 $ 43,724,019 $ 42,746,644
- ---------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) --
Investment transactions, securities sold short
and foreign currency transactions allocated from
Belvedere Company (identified cost basis) $ 45,278,877 $ 22,323,706 $ (1,023,197)
Investment transactions (identified cost basis) -- -- (763,095)
Investment transactions in other investment
(identified cost basis) -- -- (2,338,586)
Investment transactions in Partnership Preference
Units (identified cost basis) 45,834,076 39,965,989 5,116,279
Investment transactions in other real
estate (net of minority interests in realized loss
of controlled subsidiaries of $(27,592,937), $0
and $(476,023), respectively) (19,408,521) -- (1,782,650)
Interest rate swap agreements(1) (14,032,550) (56,378,606) (40,731,435)
- ---------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS) $ 57,671,882 $ 5,911,089 $ (41,522,684)
- ---------------------------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investments, securities sold short, and foreign
currency allocated from Belvedere Company
(identified cost basis) $ 112,083,513 $ 343,808,846 $ (424,007,010)
Investments in Partnership Preference Units
(identified cost basis) (44,857,377) (12,322,752) 17,761,335
Investments in other real estate (net of minority
interests in unrealized appreciation (depreciation)
of controlled subsidiaries of $1,505,726,
$(1,889,589) and $(3,723,223), respectively) (15,764,223) (18,480,109) (8,518,155)
Interest rate swap agreements 610,497 49,148,157 (2,818,002)
- ---------------------------------------------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) $ 52,072,410 $ 362,154,142 $ (417,581,832)
- ---------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) $ 109,744,292 $ 368,065,231 $ (459,104,516)
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 134,968,786 $ 411,789,250 $ (416,357,872)
- ---------------------------------------------------------------------------------------------------------------------
(1) Amounts include periodic payments made in connection with interest rate
swap agreements of $11,595,294, $29,626,765 and $40,731,435, respectively
(Note 2).
See notes to consolidated financial statements
40
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Net investment income $ 25,224,494 $ 43,724,019 $ 42,746,644
Net realized gain (loss) from investment transactions,
securities sold short, foreign currency, transactions
and interest rate swap agreements 57,671,882 5,911,089 (41,522,684)
Net change in unrealized appreciation (depreciation)
of investments, securities sold short, foreign
currency and interest rate swap agreements 52,072,410 362,154,142 (417,581,832)
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 134,968,786 $ 411,789,250 $ (416,357,872)
- ---------------------------------------------------------------------------------------------------------------------
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 (129,608,009) (90,690,145) (72,096,456)
- ---------------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS $ (119,506,457) $ (72,086,772) $ (72,096,456)
- ---------------------------------------------------------------------------------------------------------------------
Distributions --
Distributions to Shareholders $ (25,586,688) $ (39,320,426) $ --
- ---------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS $ (25,586,688) $ (39,320,426) $ --
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS $ (10,124,359) $ 300,382,052 $ (488,454,328)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS
At beginning of year $ 1,920,611,857 $ 1,620,229,805 $ 2,108,684,133
- ---------------------------------------------------------------------------------------------------------------------
AT END OF YEAR $ 1,910,487,498 $ 1,920,611,857 $ 1,620,229,805
- ---------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
41
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
- ---------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH
Cash Flows From (For) Operating Activities --
Net increase (decrease) in net assets from operations $ 134,968,786 $ 411,789,250 $ (416,357,872)
Adjustments to reconcile net increase (decrease) in
net assets from operations to net cash flows from
(for) operating activities --
Net investment income allocated from Belvedere
Company (19,879,730) (15,714,154) (12,845,871)
(Increase) decrease in escrow deposits (504,789) 766,420 1,251,018
Decrease in receivable for securities sold -- 29,285,540 --
(Increase) decrease in other assets (1,003,263) (52,977) 372,239
Decrease in distributions and interest receivable 1,953,807 496,052 2,478,889
(Decrease) increase in interest payable for open
swap agreements (97,775) (1,454,186) 248,825
Increase (decrease) in security deposits, accrued
interest and accrued other expenses and liabilities 4,324,537 (1,110,446) (1,104,644)
(Decrease) increase in accrued property taxes (614,721) 138,152 108,785
Purchases of Partnership Preference Units (108,352,710) (75,672,618) --
Proceeds from sales of Partnership Preference Units 470,422,252 228,888,304 60,076,602
Proceeds from sale of common stock -- -- 90,874,505
Payments for investments in other real estate (479,708,008) -- (67,401,013)
Proceeds from sale of investment in other real estate 182,557,032 -- --
Proceeds from other investments -- -- 65,062,425
Cash assumed in connection with acquisition of other
real estate 15,051 -- --
Decrease in cash due to sale of other real estate (1,297,376) -- (17,946)
Decrease (increase) in short-term investments 15,273,476 (16,973,476) 3,919,805
Improvements to rental property (1,217,999) (1,567,752) (1,963,230)
Net increase in investment in Belvedere Company -- (25,866,250) (116,904,831)
Interest incurred on interest rate swap agreements (11,595,294) (29,626,765) (40,731,435)
Payment for termination of interest rate swap
agreements (2,437,256) (26,751,841) --
Minority interests in net income of controlled
subsidiaries 1,247,532 435,830 424,054
Net realized gain (loss) from investment
transactions, securities sold short, foreign
currency transactions and interest rate swap
agreements (57,671,882) (5,911,089) 41,522,684
Net change in unrealized (appreciation) depreciation
of investments, securities sold short, foreign
currency, and interest rate swap agreements (52,072,410) (362,154,142) 417,581,832
- ---------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 74,309,260 $ 108,943,852 $ 26,594,821
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows From (For) Financing Activities --
Proceeds from Credit Facility $ 347,000,000 $ 3,500,000 $ 61,000,000
Repayment of Credit Facility (570,000,000) (87,000,000) (78,000,000)
Proceeds from mortgage 215,000,000 -- --
Repayments of mortgage (5,174,535) (1,304,708) (1,237,423)
Payments for Fund Shares redeemed (2,687,952) (3,265,017) (3,715,985)
Payment on notes payable to minority shareholder -- -- (134,028)
Decrease in minority interest (210,000) -- --
Distributions paid to Shareholders (15,485,136) (20,717,053) --
Distributions paid to minority shareholders (446,326) -- (16,800)
Return of capital distributed to minority shareholder (43,000,000) -- --
Capital contributed to controlled subsidiary 878,988 298,926 --
- ---------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FOR FINANCING ACTIVITIES $ (74,124,961) $ (108,487,852) $ (22,104,236)
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH $ 184,299 $ 456,000 $ 4,490,585
- ---------------------------------------------------------------------------------------------------------------------
CASH AT BEGINNING OF YEAR $ 6,605,096 $ 6,149,096 $ 1,658,511
- ---------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 6,789,395 $ 6,605,096 $ 6,149,096
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE AND NON-CASH INVESTING AND
FINANCING ACTIVITIES
Interest paid on loan -- Credit Facility $ 8,234,733 $ 8,248,335 $ 11,186,341
Interest paid on mortgages $ 26,002,996 $ 13,933,726 $ 14,515,550
Interest paid on swap agreements $ 11,693,069 $ 31,080,951 $ 40,482,610
Market value of securities distributed in payment of
redemptions $ 128,281,460 $ 86,063,725 $ 68,380,471
Market value of common stock received from Belvedere
Company $ -- $ -- $ 120,923,140
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 $ -- $ --
Mortgages assumed in conjunction with acquisitions of
other real estate $ 244,129,496 $ -- $ --
Market value of minority interests assumed in
conjunction with the acquisitions of other real estate $ 116,686,185 $ -- $ --
Market value of real property and other assets, net of
current liabilities, disposed of in conjunction with
the sale of other real estate $ 379,783,597 $ -- $ 10,281,661
Mortgage disposed of in conjunction with the sale of
one multifamily property in other real estate $ 160,013,240 $ -- $ 11,776,683
Market value of minority interests disposed of in
conjunction with the sale of other real estate $ 40,158,768 $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
42
BELMAR CAPITAL FUND LLC
CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL HIGHLIGHTS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
- ---------------------------------------------------------------------------------------------------------------------
Net asset value -- Beginning of year $ 86.280 $ 69.870 $ 87.370
- ---------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
Net investment income(1) $ 1.170 $ 1.905 $ 1.803
Net realized and unrealized gain (loss) 5.200 16.205 (19.303)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INCOME (LOSS) FROM OPERATIONS $ 6.370 $ 18.110 $ (17.500)
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Distributions to Shareholders $ (1.150) $ (1.700) $ --
- ---------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS $ (1.150) $ (1.700) $ --
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE -- END OF YEAR $ 91.500 $ 86.280 $ 69.870
- ---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(2) 7.48% 26.48% (20.03)%
- ---------------------------------------------------------------------------------------------------------------------
RATIOS AS PERCENTAGE OF AVERAGE NET ASSETS(3):
Expenses of Consolidated Real Property Subsidiaries
Interest and other borrowing costs(4) 1.47% 0.58% 0.64%
Operating expenses(4) 0.94% 0.74% 0.78%
Belmar Capital Fund LLC Expenses
Interest and other borrowing costs(5)(6) 0.44% 0.51% 0.74%
Investment advisory and administrative fees,
servicing fees and other Fund operating expenses
(5)(7) 1.23% 1.17% 1.16%
------------------------------------------------------------
Total expenses 4.08% 3.00% 3.32%
Net investment income 1.34% 2.55% 2.32%
- ---------------------------------------------------------------------------------------------------------------------
RATIOS AS PERCENTAGE OF AVERAGE GROSS ASSETS(3)(8):
Expenses of Consolidated Real Property Subsidiaries
Interest and other borrowing costs(4) 1.01% 0.41% 0.45%
Operating expenses(4) 0.64% 0.52% 0.54%
Belmar Capital Fund LLC Expenses
Interest and other borrowing costs(5)(6) 0.30% 0.35% 0.52%
Investment advisory and administrative fees,
servicing fees and other Fund operating expenses
(5)(7) 0.86% 0.82% 0.82%
------------------------------------------------------------
Total expenses 2.81% 2.10% 2.33%
Net investment income 0.93% 1.79% 1.63%
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $ 1,910,487 $ 1,920,612 $ 1,620,230
Portfolio turnover of Tax-Managed Growth Portfolio
(the Portfolio) 3% 15% 23%
- ---------------------------------------------------------------------------------------------------------------------
(1) Calculated using average shares outstanding.
(2) Returns are calculated by determining the percentage change in net asset
value with all distributions reinvested.
(3) For the purpose of calculating ratios, the income and expenses of Belmar
Realty Corporation's (Belmar Realty's) controlled subsidiaries are reduced
by the proportionate interests therein of investors other than Belmar
Realty.
(4) Includes Belmar Realty's proportional share of expenses incurred by its
majority-owned subsidiaries.
(5) Includes the expenses of Belmar Capital Fund LLC (Belmar Capital) and
Belmar Realty. Does not include expenses of the real estate subsidiaries
majority-owned by Belmar Realty.
(6) Ratios do not include interest incurred in connection with the interest
rate swap agreements. Had such amounts been included, ratios would be
higher.
(7) Includes Belmar Capital's share of Belvedere Company's allocated expenses,
including those expenses allocated from the Portfolio.
(8) Average Gross Assets is defined as the average daily amount of all assets
of Belmar Capital (including Belmar Capital's interest in Belvedere Company
and Belmar Capital's ratable share of the assets of its directly and
indirectly controlled subsidiaries (Note 1)), without reduction by any
liabilities. For this purpose, the assets of Belmar Realty controlled
subsidiaries are reduced by the proportionate interests therein of
investors other than Belmar Realty.
See notes to consolidated financial statements
43
BELMAR CAPITAL FUND LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 ORGANIZATION
A INVESTMENT OBJECTIVE -- Belmar Capital Fund LLC (Belmar Capital) is a Delaware
limited liability company established to offer diversification and tax-sensitive
investment management to investors holding large and concentrated positions in
equity securities of selected publicly-traded companies. The investment
objective of Belmar Capital is to achieve long-term, after-tax returns for
Belmar Capital shareholders (Shareholders). Belmar Capital pursues this
objective primarily by investing indirectly in Tax-Managed Growth Portfolio (the
Portfolio), a diversified, open-end management investment company registered
under the Investment Company Act of 1940, as amended. The Portfolio is organized
as a trust under the laws of the state of New York. Belmar Capital maintains its
investment in the Portfolio by investing in Belvedere Capital Fund Company LLC
(Belvedere Company), a separate Massachusetts limited liability company that
invests exclusively in the Portfolio. The performance of Belmar Capital and
Belvedere Company is directly and substantially affected by the performance of
the Portfolio. Separate from its investment in the Portfolio through Belvedere
Company, Belmar Capital invests in real estate assets through a controlled
subsidiary, Belmar Realty Corporation (Belmar Realty). Such investments include
income-producing preferred equity interests in real estate operating
partnerships (Partnership Preference Units) affiliated with publicly-traded real
estate investment trusts (REITs) and interests in leasehold improvements held
through Bel Stamford Investors LLC (Bel Stamford) and joint ventures that are
controlled subsidiaries of Belmar Realty.
B SUBSIDIARIES -- Belmar Realty invests directly and indirectly in Partnership
Preference Units and indirectly in real property through controlled
subsidiaries, Bel Alliance Apartments, LLC (Bel Apartments) (for the period in
which Belmar Realty held an interest in Bel Apartments), Bel Stamford, Brazos
Property Trust (Brazos) and Cimmaron Property Trust (Cimmaron) (for the period
in which Belmar Realty held an interest in Cimmaron). At December 31, 2003,
Belmar Realty's investments in Partnership Preference Units were held directly
except for its indirect investment in Partnership Preference Units of Vornado
Realty, LP (a Delaware Limited Partnership) which was held through its 29.6%
investment in Bel Holdings LLC. Vornado Realty, LP is the sole investment of Bel
Holdings LLC. At December 31, 2004, Belmar Realty did not hold an interest in
Bel Holdings LLC.
Belmar Realty -- Belmar Capital owns 100% of the common stock issued by Belmar
Realty and intends to hold all of Belmar Realty's common stock at all times.
Additionally, 2,100 shares of preferred stock of Belmar Realty are outstanding
at December 31, 2004 and 2003.
The preferred stock has a par value of $0.01 per share and is redeemable by
Belmar Realty at a redemption price of $100 per share after the occurrence of
certain tax events or after December 31, 2005. Dividends on the preferred stock
are cumulative and payable annually equal to $8 per share. The interest in
preferred stock is recorded as minority interest on the Consolidated Statements
of Assets and Liabilities.
Bel Apartments -- Bel Apartments, a majority-owned subsidiary of Belmar Realty
since September 2000, sold all of its multifamily residential properties
(represented by 19 multifamily residential properties consisting of 5,403 units
(collectively the Bel Apartment Properties) located in eight states, to an
affiliate of the Bel Apartments minority shareholder (the Bel Apartments
Minority Shareholder) in October 2004. Concurrent with this sale, Belmar Realty
acquired the outstanding minority interest in Bel Apartments for a nominal
amount. Prior to acquiring the interest of the Bel Apartments Minority
Shareholder Belmar Realty owned 100% of the Class A units of Bel Apartments,
representing 60% of the voting interests in Bel Apartments, and the Bel
Apartments Minority Shareholder owned 100% of the Class B units, representing
40% of the voting interests in Bel Apartments. The primary distinctions between
the two classes of units are the distribution priority and voting rights. Class
A units have priority in distributions and greater voting rights than Class B
units. In December 2004, Belmar Realty sold its interest in Bel Apartments to
another fund advised by Boston Management and Research (Boston Management).
Belmar Realty did not own an interest in Bel Apartments at December 31, 2004.
Bel Stamford -- Bel Stamford, a wholly-owned subsidiary of Belmar Realty
acquired in January 2004, owns a 100% indirect interest in leasehold
improvements of an office building and attached facilities in Stamford,
Connecticut. The real property is leased to a single tenant on a triple net
lease basis (Net Leased Property) pursuant to a non-cancelable, fixed term
operating lease expiring in December 2017, with options to extend for renewal
periods extending no later than December 2057. The Net Leased Property is 100%
leased at December 31, 2004.
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). On December 31, 2004, Brazos owns twenty-three industrial
distribution properties located in eight states (New Jersey, Pennsylvania,
Indiana, Florida, South Carolina, North Carolina, Tennessee and Ohio). The
44
average occupancy rate was approximately 85% at December 31, 2004. Belmar Realty
owns 100% of the Class A shares of Brazos, representing 80% of the voting
interests in Brazos and a minority shareholder (the Brazos Minority Shareholder)
owns 100% of the Class B shares, representing 20% 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. Class A shares have priority in distributions and greater voting rights
than Class B shares. 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.
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 investment fund advised by Boston Management. Prior to
selling its interest Belmar Realty owned 100% of the Class A shares of Cimmaron,
representing 60% of the voting interests in Cimmaron and a minority shareholder
(the Cimmaron Minority Shareholder) owned 100% of the Class B shares,
representing 40% of the voting interests in Cimmaron. The primary distinctions
between the two classes of shares are the distribution priority and voting
rights. Class A shares have priority in distributions and greater voting rights
than Class B shares. Belmar Realty did not own an interest in Cimmaron at
December 31, 2004.
The audited financial statements of the Portfolio, including the Portfolio of
Investments, are included elsewhere in this report and should be read in
conjunction with these financial statements.
2 SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed in the preparation of the consolidated financial statements. The
policies are in conformity with accounting principles generally accepted in the
United States of America.
A PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include
the accounts of Belmar Capital and its majority owned subsidiaries. Belmar
Capital and Belmar Realty consolidate all investments in affiliates in which
their ownership exceeds 50 percent. The accompanying consolidated financial
statements include the accounts of Belmar Capital and Belmar Realty and may also
include Bel Stamford, Bel Apartments, Brazos and Cimmaron (collectively, the
Fund). All material intercompany accounts and transactions have been eliminated.
B BASIS OF PRESENTATION -- Belmar Capital is an investment company and, as such,
presents its assets at fair value. Fixed liabilities are generally stated at
their principal value.
C INVESTMENT COSTS -- The Fund's investment assets were principally acquired
through contributions of common stock by Shareholders in exchange for Shares of
the Fund, through purchases of Partnership Preference Units and other real
estate investments, and through contributions of real estate investments by each
respective Minority Shareholder in exchange for cash and a minority interest in
controlled subsidiaries. Upon receipt of common stock from Shareholders, Belmar
Capital immediately exchanged the contributed securities into Belvedere Company
for shares thereof, and Belvedere Company, in turn, immediately thereafter
exchanged the contributed securities into the Portfolio for an interest in the
Portfolio. The initial cost at which the Fund's investments of contributed
securities is carried in the consolidated financial statements is the value of
the contributed securities as of the close of business on the day prior to their
contribution to the Fund. The initial tax basis of the Fund's investment in the
Portfolio through Belvedere Company is the same as the contributing
Shareholders' basis in securities contributed to the Fund. The initial tax and
financial reporting basis of the Fund's investment in Partnership Preference
Units and other real estate investments purchased by the Fund is the purchase
cost. The initial cost at which the Fund's investment in real estate contributed
is carried in the consolidated financial statements is the market value on
contribution date. The initial tax basis of real estate investments contributed
is the contributor's tax basis at the time of contribution or the fair value at
the time of contribution, depending on the taxability of the contribution.
D INVESTMENT AND OTHER VALUATIONS -- The Fund's investments may consist of
shares of Belvedere Company, Partnership Preference Units, real property
investments and short-term debt securities. Belvedere Company's only investment
is an interest in the Portfolio, the value of which is derived from a
proportional interest therein.
45
Additionally, the Fund has entered into interest rate swap agreements (Note 7).
The valuation policy followed by the Fund, Belvedere Company and the Portfolio
is as follows:
Securities listed on a U.S. securities exchange generally are valued at the last
sale price on the day of valuation or, if no sales took place on such date, at
the mean between the closing bid and asked prices therefore on the exchange
where such securities are principally traded. Equity securities listed on the
NASDAQ National Market generally are valued at the official NASDAQ closing
price. Unlisted or listed securities for which closing sales prices or closing
quotations are not available are valued at the mean between the latest available
bid and asked prices or, in the case of preferred equity securities held by the
Portfolio that are not listed or traded in the over-the-counter market, by an
independent pricing service. Exchange-traded options are valued at the last sale
price for the day of valuation as quoted on the principal exchange or board of
trade on which the options are traded or, in the absence of sales on such date,
at the mean between the latest bid and asked prices therefore. Futures positions
on securities and currencies generally are valued at closing settlement prices.
Short-term debt securities with a remaining maturity of 60 days or less are
valued at amortized cost. If short-term debt securities were acquired with a
remaining maturity of more than 60 days, their amortized cost value will be
based on their value on the sixty-first day prior to maturity. Other fixed
income and debt securities, including listed securities and securities for which
price quotations are available, will normally be valued on the basis of
valuations furnished by a pricing service. Foreign securities and currencies are
valued in U.S. dollars, based on foreign currency exchange rate quotations
supplied by an independent quotation service. The daily valuation of foreign
securities generally is determined as of the close of trading on the principal
exchange on which such securities trade. Events occurring after the close of
trading on foreign exchanges may result in adjustments to the valuation of
foreign securities to more accurately reflect their fair value as of the close
of regular trading on the New York Stock Exchange (NYSE). When valuing foreign
equity securities that meet certain criteria, the Trustees have approved the use
of a fair value service that values such securities to reflect market trading
that occurs after the close of the applicable foreign markets of comparable
securities or other instruments that have a strong correlation to the securities
held by the Portfolio. Investments held by the Portfolio for which valuations or
market quotations are unavailable are valued at fair value using methods
determined in good faith by or at the direction of the Trustees of the Portfolio
considering relevant factors, data and information including the market value of
freely tradable securities of the same class in the principal market on which
such securities are normally traded. Interest rate swap agreements are valued by
Boston Management, as investment adviser of Belmar Capital, based upon dealer
and counterparty quotes and pricing models which take into consideration the
market trading prices of interest rate swap agreements that have similar terms
to the interest rate swap agreements the Fund has entered.
Market prices for the Fund's real estate investments (including Partnership
Preference Units, joint ventures and Net Leased Properties) are not readily
available and therefore they are stated in the Fund's consolidated financial
statements at estimated fair value. The estimated fair value of an investment
represents the amount at which Boston Management (as manager of Belmar Realty)
believes the investment could be sold in a current transaction between willing
parties in an orderly disposition, that is, other than in a forced or
liquidation sale. In valuing these investments, Boston Management considers
relevant factors, data and information. With respect to investments in
Partnership Preference Units, Boston Management considers information from
dealers and similar firms with knowledge of such issues and/or the prices of
comparable preferred equity securities and other fixed or adjustable rate
instruments having similar investment characteristics. Real estate investments,
other than Partnership Preference Units, are primarily valued based upon
independent valuations (ie, appraisals), that represent the amount at which
Boston Management believes the investments could be sold in a current
transaction between willing parties and assume an orderly disposition, that is,
other than in a forced or liquidation sale. Detailed real property valuations
are performed at least annually and reviewed periodically. When a property has
not been appraised (such as when a propety has been recently acquired), 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 a property has been conducted, Boston Management bases the
estimated fair value of the property principally on the estimated value as
determined by the appraiser. Appraisals of newly acquired properties are
conducted in the year following the acquisition. Interim valuations of
properties may be adjusted to reflect significant changes in economic
circumstances or recent evaluations of similar properties, and the results of
operations and distributions. The equity value of each real estate joint venture
between Belmar Realty and the respective Minority Shareholder is estimated using
a financial model that considers (i) the terms of the joint venture agreements
relating to allocation of distributable cash flow, (ii) the expected duration of
the joint venture; and (iii) the projected property values and cash flows from
the properties based on estimates used in the independent valuations. If
detailed real property valuations have not been performed on every property
within a joint venture (such as when a joint venture recently acquired the
properties) then Boston Management allocates equity interest based on the
contractual ownership interest of Belmar Realty and the respective Minority
Shareholder. Interim valuations reflect results of operations and distributions,
and may be adjusted if there has been a significant change in economic
circumstances or recent independent evaluations of similar properties. The
valuation of real estate investments includes many assumptions, including, but
not limited to, a current transaction between willing parties and an orderly
disposition of assets. If the assumptions used to value a real estate investment
change, it may materially impact the estimated fair value of that investment.
46
If a rental property securing a mortgage note payable has an estimated fair
value lower than the outstanding principal balance, the mortgage note payable
may be adjusted to the estimated fair value of the property securing the
mortgage note. No such adjustments have been made to mortgage notes payable at
December 31, 2004 and 2003.
Changes in the fair value of the Fund's investments are recorded as unrealized
appreciation or depreciation in the Consolidated Statements of Operations.
E INTEREST RATE SWAPS -- Belmar Capital has entered into interest rate swap
agreements with respect to its borrowings and real estate investments. Pursuant
to these agreements, Belmar Capital makes periodic payments to the counterparty
at predetermined fixed rates in exchange for floating-rate payments from the
counterparty at a predetermined spread to one-month or three-months LIBOR. Net
interest paid and accrued or received and earned is recorded as realized gains
or losses and changes in the underlying values of the swaps are recorded as
unrealized appreciation (depreciation), each in the Consolidated Statements of
Operations. Belmar Capital is exposed to credit loss in the event of
non-performance by the swap counterparty. Risks may arise from the unanticipated
movements in the value of interest rates.
F RENTAL OPERATIONS -- The apartment units held by Bel Apartments (for the
period during which Belmar Realty maintained an interest in Bel Apartments) were
leased to residents generally for a term averaging approximately one year, with
monthly payments due in advance.
Bel Stamford holds an interest in leasehold improvements leased to a single
tenant on a triple net lease basis pursuant to a non-cancelable, fixed-term
operating lease expiring in December 2017, with options to extend for renewal
periods extending no later than December 2057. During the initial lease term the
rental income from the office building and attached facilities, together with
any related payments received, are expected to equal the payments due under the
mortgage.
The properties held by Brazos and Cimmaron (for the period during which Belmar
Realty maintained an interest in Cimmaron) are leased under fixed long-term
operating leases. At December 31, 2004, the minimum lease payments expected to
be received by Bel Stamford and Brazos from leases with lease periods greater
than one year are as follows:
TWELVE MONTHS ENDING DECEMBER 31, AMOUNT
- --------------------------------------------------------------
2005 $ 47,970,113
2006 35,887,793
2007 35,207,628
2008 33,039,222
2009 30,154,702
Thereafter 183,203,797
- --------------------------------------------------------------
$ 365,463,255
- --------------------------------------------------------------
The mortgage escrow accounts consisted of deposits for real estate taxes,
insurance, reserve for replacements and capital repairs that were required under
the mortgage agreements. The mortgage escrow accounts were held and controlled
by the mortgage lenders (Note 8).
Certain of the costs incurred in connection with acquisitions of properties have
been capitalized. Significant betterments and improvements are capitalized as
part of real property.
G INCOME -- Dividend income and distributions from Partnership Preference Units
are recorded on the ex-dividend date and interest income is recorded on the
accrual basis. Rental income is recorded on the accrual basis based upon the
terms of the lease agreements.
Belvedere Company's net investment income or loss consists of Belvedere
Company's pro rata share of the net investment income or loss of the Portfolio,
less all actual or accrued expenses of Belvedere Company, determined in
accordance with accounting principles generally accepted in the United States of
America. The Fund's net investment income or loss consists of the Fund's pro
rata share of the net investment income or loss of Belvedere Company, plus all
income earned on the Fund's direct and indirect investments (including
Partnership Preference Units and real property), less all actual and accrued
expenses of the Fund determined in accordance with accounting principles
generally accepted in the United States of America.
H DEFERRED COSTS -- Mortgage origination expenses incurred in connection with
the financing of real estate joint ventures are capitalized and amortized over
the terms of the respective loans. Deferred loan costs are included in other
assets and amortization expense is included in interest expense in the
accompanying consolidated financial statements.
47
I INCOME TAXES -- Belmar Capital, Belvedere Company and the Portfolio are
treated as partnerships for federal income tax purposes. As a result, Belmar
Capital, Belvedere Company and the Portfolio do not incur federal income tax
liability, and the shareholders and partners thereof are individually
responsible for taxes on items of partnership income, gain, loss and deduction.
The policy of Belmar Realty, Bel Apartments, Brazos and Cimmaron (for the period
during which Belmar Realty maintained an interest in Bel Apartments and
Cimmaron) is to comply with the Internal Revenue Code of 1986, as amended,
applicable to REITs. Belmar Realty and Brazos will generally not be subject to
federal income tax to the extent that they distribute their earnings to their
stockholders each year and maintain their qualification as a REIT. Bel Stamford
is a single member liability company treated as pass-through entity for federal
tax purposes.
Net investment income and capital gains determined in accordance with income tax
regulations may differ from such amounts determined in accordance with generally
accepted accounting principles. Such differences could be significant and are
primarily due to differences in the cost basis of securities and other
contributed investments, depreciation on real estate assets, periodic payments
made in connection with interest rate swap agreements and the character of
distributions received from REITs and Partnership Preference Units.
J OTHER -- Investment transactions are accounted for on a trade-date basis.
K USE OF ESTIMATES -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of income and expense during the reporting period. Actual
results could differ from those estimates.
L RECLASSIFICATIONS -- Certain amounts in the prior years' consolidated
financial statements have been reclassified to conform with the current year
presentation.
M INDEMNIFICATIONS -- Under Belmar Capital's Limited Liability Company
Agreement, Belmar Capital's officers, its manager, investment adviser, and any
affiliate, associate, officer, employee or trustee thereof, and any manager,
director, officer or employee of Belmar Realty or any other controlled
subsidiary may be indemnified against certain liabilities and expenses arising
out of their duties to the Fund. Shareholders also may be indemnified against
personal liability for the liabilities of Belmar Capital. Additionally, in the
normal course of business, the Fund enters into agreements with service
providers that may contain indemnification clauses. The Fund's maximum exposure
under these arrangements is unknown as this would involve future claims that may
be made against the Fund that have not yet occurred.
3 DISTRIBUTIONS TO SHAREHOLDERS
Belmar Capital intends to distribute at the end of each year, or shortly
thereafter, all of its net investment income for the year, if any, and
approximately 18% of its net realized capital gains for such year (reduced
during the year ended December 31, 2003 from 22% to reflect the reduction in
federal long-term capital gains tax rates), if any, other than precontribution
gains allocated to a Shareholder in connection with a tender offer or other
extraordinary event with respect to a security contributed by that Shareholder
or such Shareholder's predecessor in interest. In addition, whenever a
distribution in respect of a precontribution gain is made, Belmar Capital
intends to make a supplemental distribution to compensate Shareholders receiving
such distributions for taxes that may be due on income specially allocated in
connection with the precontribution gain and supplemental distributions. Capital
gain distributions that are made with respect to realized precontribution gains
and the associated supplemental distributions (collectively, Special
Distributions) are made solely to the Shareholders to whom such realized
precontribution gain is allocated. There were no Special Distributions paid or
accrued during the years ended December 31, 2004, 2003 and 2002.
The Fund's distributions generally are based on determinations of net investment
income and net realized capital gains for federal income tax purposes. Such
amounts may differ from net investment income (or loss) and net realized gain
(or loss) as set forth in the Fund's financial statements due to differences in
the treatment of various income, gain, loss, expense and other items for federal
income tax purposes and under generally accepted accounting principles.
In addition, Belmar Realty and Brazos intend to distribute substantially all of
their taxable income earned by the respective entities during the year.
Distributions made to Shareholders electing the Fund's Estate Freeze feature
(Note 4) will be paid, first, to holders of Preferred Shares to the extent of
the unpaid cumulative annual priority return of the Preferred Shares and,
second, to the holders of the associated Common Shares. Distributions made in
respect of any realized precontribution gains and associated supplemental
48
distributions will be apportioned between Preferred Shares and Common Shares
consistent with the allocation to the Preferred Shares and Common Shares of such
realized precontribution gains. It is expected that substantially all Belmar
Capital distributions in respect of Estate Freeze Shares will be paid to holders
of Preferred Shares rather than holders of Common Shares. Distributions on
Estate Freeze Shares may be reinvested in Belmar Capital to purchase undivided
Fund Shares at the Fund's net asset value per share on the date of reinvestment.
4 SHAREHOLDER TRANSACTIONS
Belmar Capital may issue an unlimited number of full and fractional Fund Shares.
Transactions in Fund Shares were as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2002
- -----------------------------------------------------------------------------------------------
Issued to Shareholders electing to receive
payment of distributions in Fund Shares 118,507 253,148 --
Redemptions (1,499,430) (1,182,492) (943,826)
- -----------------------------------------------------------------------------------------------
NET DECREASE (1,380,923) (929,344) (943,826)
- -----------------------------------------------------------------------------------------------
Redemptions of Fund Shares held less than three years are generally subject to a
redemption fee of 1% of the net asset value of Fund Shares redeemed. The
redemption fee is paid to Eaton Vance Distributors, Inc. (EV Distributors) by
Belmar Capital on behalf of the redeeming Shareholder. No charge is levied on
redemptions of Fund Shares acquired through the reinvestment of distributions,
Fund Shares redeemed in connection with a taxable tender offer or other taxable
corporate event or Fund Shares redeemed following the death of all of the
initial holders of the Fund Shares redeemed. In addition, no fee applies to
redemptions made pursuant to a Systematic Redemption Plan, whereby a Shareholder
can redeem up to 2% of Fund Shares held on a quarterly basis. For the year ended
December 31, 2004, EV Distributors did not receive redemption fees. For the
years ended December 31, 2003 and 2002, EV Distributors received $340,087 and
$293,328 in redemption fees, respectively.
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
December 31, 2004 and 2003, the Preferred Shares were valued at $91.50 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.
5 INVESTMENT TRANSACTIONS
The following table summarizes the Fund's investment transactions other than
short-term obligations for the years ended December 31, 2004, 2003 and 2002:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
INVESTMENT TRANSACTION 2004 2003 2002
- ---------------------------------------------------------------------------------------------
Increases in investment in
Belvedere Company $ -- $ 25,000,000 $ 246,297,586
Decreases in investment in
Belvedere Company(1) $ 128,281,460 $ 85,197,475 $ 318,696,366
Acquisition of other real
property(2)(3) $ 479,708,008 $ -- $ --
Sale of other real
property(3)(4) $ 182,557,032 $ -- $ --
Sale of common stock(1) $ -- $ -- $ 120,160,045
Sale of other investments(5) $ -- $ -- $ 65,062,425
Purchases of Partnership
Preference Units(6) $ 108,352,710 $ 75,672,618 $ --
Sales of Partnership
Preference Units(7) $ 470,422,252 $ 228,888,304 $ 60,076,602
- ---------------------------------------------------------------------------------------------
(1) Included in decreases in investment in Belvedere Company for the year ended
December 31, 2002 is the receipt of common stock through a
redemption-in-kind of $120,923,140. Belmar Capital subsequently sold the
common stock during the year ended December 31, 2002 recognizing a loss of
$763,095.
(2) In January 2004, Belmar Realty purchased indirect investments in real
property through its wholly-owned subsidiary, Bel Stamford for $16,058,060.
49
(3) On June 30, 2004 and August 4, 2004 Belmar Realty purchased indirect
investments in real property through two controlled subsidiaries, Brazos
and Cimmaron, for $7,791,240 and $298,641,468 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
proceeds of $159,062,857 for which a gain of $908,060 was recognized on the
transaction.
(4) In May 2004, Bel Apartments 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. The Fund recognized a loss of $19,408,521 on this
transaction. Concurrent with this sale, Belmar Realty acquired the
outstanding minority interest in Bel Apartments for a nominal amount. In
December 2004, the Fund sold its remaining interest in Bel Apartments to
another fund advised by Boston Management and recognized a gain of $433,833
which is included in the net gains recognized from sales of Partnership
Preference Units (included below in note 7). In June 2002, a multifamily
residential property owned by Bel Apartments was sold to an affiliate of
the Bel Apartments Minority Shareholder. Belmar Capital recognized a loss
of $1,782,650, net of the minority interest in such loss of $476,023.
(5)During the year ended December 31, 2002, Belmar Capital purchased
$67,401,012 of other investments and subsequently sold the investments
recognizing a loss of $2,338,586.
(6) Purchases of Partnership Preference Units for the years ended December 31,
2004, and 2003 represent purchases of Partnership Preference Units
purchased from other investment funds advised by Boston Management. There
were no purchases of Partnership Preference Units for the year ended
December 31, 2002.
(7) Sales of Partnership Preference Units for the years ended December 31,
2004, 2003, and 2002 include Partnership Preference Units sold to other
investment funds advised by Boston Management for which net gains of
$33,340,051, $7,239,933 and $5,116,279 were recognized, respectively.
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 Brazos's interest in the management contracts is $2,990,359.
Such value is estimated based upon discounting expected cash flows over the
terms of the agreements. The value of such interests will be reviewed at least
annually however will be adjusted when there has been a significant change in
economic circumstances since the most recent valuation.
6 INDIRECT INVESTMENT IN THE PORTFOLIO
The following table summarizes the Fund's investment in the Portfolio through
Belvedere Company, for the years ended December 31, 2004, 2003 and 2002,
including allocations of income, expenses, and net realized and unrealized gains
(losses) for the years then ended:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2002
- -----------------------------------------------------------------------------------------------------
Belvedere Company's interest in the
Portfolio(1) $ 12,806,516,230 $ 11,100,012,615 $ 8,753,268,522
The Fund's investment in Belvedere
Company(2) $ 2,015,871,844 $ 1,966,911,184 $ 1,645,261,953
Income allocated to Belvedere Company
from the Portfolio $ 189,728,234 $ 143,671,130 $ 123,096,851
Income allocated to the Fund from
Belvedere Company $ 31,535,928 $ 26,299,757 $ 24,130,615
Expenses allocated to Belvedere Company
from the Portfolio $ 51,953,817 $ 43,085,940 $ 42,648,896
Expenses allocated to the Fund from
Belvedere Company(3) $ 11,656,198 $ 10,585,603 $ 11,284,744
Net realized gain (loss) from investment
transactions, securities sold short and
foreign currency transactions allocated
to Belvedere Company from the
Portfolio $ 276,250,393 $ 128,352,887 $ (2,190,956)
Net realized gain (loss) from investment
transactions, securities sold short and
foreign currency transactions allocated
to the Fund from Belvedere Company $ 45,278,877 $ 22,323,706 $ (1,023,197)
Net change in unrealized appreciation
(depreciation) of investments, securities
sold short and foreign currency allocated
to Belvedere Company from the Portfolio $ 691,783,587 $ 1,892,271,872 $ (2,139,304,336)
Net change in unrealized appreciation
(depreciation) of investments, securities
sold short and foreign currency allocated
to the Fund from Belvedere Company $ 112,083,513 $ 343,808,846 $ (424,007,010)
- -----------------------------------------------------------------------------------------------------
50
(1) As of December 31, 2004, 2003 and 2002 the value of Belvedere Company's
interest in the Portfolio represents 66.9%, 63.0% and 60.1% of the
Portfolio's net assets, respectively. (2) As of December 31, 2004, 2003 and
2002, the Fund's investment in Belvedere Company represents 15.7%, 17.7%,
and 18.8% of Belvedere Company's net assets, respectively. (3) Allocated
expenses include $8,676,304, $7,893,121 and $8,418,124 of expenses
allocated from the Portfolio, operating expenses of $71,305, $75,431 and
$71,205 and service fees of $2,908,588, $2,617,051 and $2,795,415, for the
years ended December 31, 2004, 2003 and 2002, respectively (Note 9).
7 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 December 31, 2004 and 2003 are listed below.
INITIAL UNREALIZED UNREALIZED
NOTIONAL OPTIONAL FINAL APPRECI- APPRECI-
AMOUNT TERMI- TERMI- ATION AT ATION AT
EFFECTIVE (000'S FIXED FLOATING NATION NATION DECEMBER 31, DECEMBER 31,
DATE OMITTED) RATE RATE DATE DATE 2004 2003
- -------------------------------------------------------------------------------------------------
LIBOR +
06/04 $ 279,760 4.875% 0.00% -- 6/12 $ --* $ --
LIBOR +
02/04 58,363 4.90% 0.20% 8/04 6/10 129,965 --
LIBOR +
10/03 58,363 4.95% 0.20% 2/04 6/10 --** 133,207
LIBOR +
10/03 55,831 4.875% 0.20% 4/04 6/10 136,605 154,214
LIBOR +
10/03 43,010 4.755% 0.20% 7/04 6/10 203,743 163,545
LIBOR +
10/03 56,978 4.695% 0.20% 9/04 6/10 341,914 232,978
LIBOR +
10/03 64,418 4.565% 0.20% 3/05 6/10 581,263 316,702
LIBOR +
10/03 110,068 3.973% 0.20% -- 6/10 1,307,852 1,090,199
- -------------------------------------------------------------------------------------------------
$ 2,701,342 $ 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
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.
On October 1, 2003, new interest rate swap agreements were entered into to fix a
portion of the cost of Belmar Capital's borrowings under the Credit Facility
(Note 8B) established on June 30, 2003. Concurrently, all interest rate swap
agreements outstanding on September 30, 2003 were terminated, resulting in
realized losses of $26,751,841.
8 DEBT
A MORTGAGES -- Rental property held by Belmar Realty's controlled subsidiaries,
Bel Apartments (during the period which Belmar Realty maintained an interest in
Bel Apartments), Brazos and Bel Stamford, is financed through mortgages issued
to the controlled subsidiaries. The mortgages held by Bel Apartments were
secured by the rental property, mortgage loan deposit accounts, including all
subaccounts thereunder, and an assignment of certain leases and rents, and were
without recourse to Belmar Capital and Belmar Realty. The mortgage debt
obligation of Brazos is secured by all of the Brazos properties and is generally
without recourse to the other assets of Belmar Capital and Belmar Realty. The
mortgage debt obligation of a controlled subsidiary of Bel Stamford is generally
without recourse to Belmar Capital, Belmar Realty and Shareholders.
The estimated fair value of the aggregate rental property securing the loans was
$576,506,000 and $185,138,810 at December 31, 2004 and 2003, respectively.
Amounts outstanding at December 31, 2004 and 2003 are as follows:
MONTHLY
ANNUAL PRINCIPAL BALANCE AT BALANCE AT
MATURITY INTEREST AND INTEREST DECEMBER 31, DECEMBER 31,
DATE RATE PAYMENT 2004 2003
- -------------------------------------------------------------------------------
October 1, 2010 8.58% $ 165,866 $ --(1) $ 20,950,165
October 1, 2010 8.54% 458,550 --(1) 58,120,436
October 1, 2010 8.54% 207,681 --(1) 26,323,618
October 1, 2010 8.55% 364,480 --(1) 46,158,028
October 1, 2027 7.68% 73,293 --(1) 9,604,945
October 11, 2016 6.00% 1,513,419 225,751,737(2) --
January 1, 2013 6.29% 90,893 14,347,176(3) --
November 1, 2012 5.40% 967,500 215,000,000(4) --
- -------------------------------------------------------------------------------
$ 455,098,913 $ 161,157,192
- -------------------------------------------------------------------------------
51
(1) Upon the sale of Bel Apartment's interest in the Bel Apartment Properties
in October 2004, Bel Apartment did not retain any contingent liabilities
associated with the mortgage debt secured by the properties.
(2) In January 2004, a wholly-owned subsidiary of Belmar Realty, Bel Stamford,
assumed a mortgage note to finance its interest in leasehold improvements
of an office building and attached facilities. The mortgage note balance at
the date of the transaction was $229,674,914.
(3) 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. Principal and interest payments are due monthly with a balloon
payment of $12,395,774 due on January 1, 2013.
(4) On October 21, 2004, Brazos obtained first mortgage financing for its
investment in real properties in the amount of $215,000,000. Interest
payments are due monthly, starting November 1, 2004, with the unpaid
principal due on November 1, 2012.
Principal payments due under the mortgage notes for the years subsequent to
December 31, 2004 are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------------------------------
2005 $ 4,747,863
2006 5,045,286
2007 5,361,371
2008 5,660,549
2009 6,051,877
Thereafter 428,231,967
- ------------------------------------------------
$ 455,098,913
- ------------------------------------------------
The estimated market value of the mortgage notes payable is approximately
$463,100,000 and $182,000,000 at December 31, 2004 and 2003, respectively. The
mortgage notes payable cannot be prepaid or otherwise disposed of without
incurring a substantial prepayment penalty or without the sale of the rental
property financed by the mortgage notes payable. Management generally has no
current plans to prepay or otherwise dispose of the mortgage notes payable or
sell the related rental property prior to the maturity date. The market value of
the mortgages are based on estimates using discounted cash flow analysis and
currently prevailing rates. Considerable judgment is necessary in interpreting
market data to develop estimates of market value. The use of different
assumptions or estimation methodologies may have a material effect on the
estimated market value.
B CREDIT FACILITY -- On June 30, 2003, Belmar Capital refinanced its credit
facility with Citicorp North America, Inc. with two new credit arrangements with
DrKW Holdings, Inc. (DrKW) and Merrill Lynch Mortgage Capital, Inc. (Merrill
Lynch) (collectively, the Credit Facility). The Credit Facility has a seven-year
maturity and will expire on June 25, 2010. Belmar Capital's obligations under
the Credit Facility are secured by a pledge of its assets, excluding the assets
of Bel Stamford and Brazos.
The credit arrangement with DrKW is a term loan facility that accrues interest
at a rate of one-month LIBOR plus 0.20% per annum.
The credit arrangement with Merrill Lynch is a revolving loan facility in the
amount of $118,500,000, including the ability to issue letters of credit up to
$10,000,000. This credit arrangement accrues interest at a rate of one-month
LIBOR plus 0.38% per annum. A commitment fee of 0.10% per annum is paid on the
unused commitment amount. Belmar Capital pays all fees associated with issuing
the letters of credit.
In August 2004, Belmar Capital made borrowings under its credit arrangement with
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 5). The borrowing under the Temporary Arrangement
accrued interest at a rate of one-month LIBOR plus 0.90% and was for a term of
sixty days, subject to a thirty-day extension. Any unused amount of the increase
pertaining to the Temporary Arrangement was subject to a commitment fee of 0.10%
per annum.
On October 21, 2004, Brazos obtained first mortgage financing for its investment
in real properties in the amount of $215,000,000. The proceeds from this
financing were distributed to Belmar Realty and the Brazos Minority Shareholder
in accordance with their equity interests. Belmar Realty's 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.
The following table summarizes Belmar Capital's Credit Facility.
AT DECEMBER 31, 2004 AT DECEMBER 31, 2003
- ------------------------------------------------------------------------------------------
Total amount available under Credit Facility $ 408,500,000 $ 631,500,000
DrKW borrowings outstanding $ 290,000,000 $ 513,000,000
Merrill Lynch borrowings outstanding $ -- $ --
Outstanding letters of credit $ -- $ --
- ------------------------------------------------------------------------------------------
Borrowings under the Credit Facility have been used to purchase the Fund's
interests in real estate investments, to pay organizational costys and selling
52
expenses and to provide for the liquidity needs of the Fund. Additional
borrowings under the Credit Facility may be made in the future for these
purposes.
C 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 was 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 December 31, 2003, the aggregate principal amount outstanding
under the notes was $565,972. At December 31, 2003, total interest payable to
the Bel Apartments Minority Shareholder was $101,403.
Belmar Realty also loaned $900,000 and $150,000 to Bel Apartments in August and
December 2001, respectively. Interest on the notes was 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 December 31, 2003, the
aggregate principal amount outstanding under the notes was $866,708. At December
31, 2003 total interest payable to Belmar Realty was $155,286. 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 interests in the multifamily properties
(Note 5).
9 MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Belmar Capital and the Portfolio have engaged Boston Management as investment
adviser. Under the terms of the advisory agreement with the Portfolio, Boston
Management receives a monthly advisory fee of 5/96 of 1% (0.625% annually) of
the average daily net assets of the Portfolio up to $500,000,000 and at reduced
rates as daily net assets exceed that level. Certain of the advisory fee rate
reductions are pursuant to an agreement between the portfolio's Board of
Trustees and Boston Management. Those reductions may not be changed without
Trustee and interestholder approval. For the years ended December 31, 2004, 2003
and 2002, the advisory fee applicable to the Portfolio was 0.43%, 0.44% and
0.44% of average daily net assets, respectively.
In addition, Boston Management is, subject to the fee cap described below,
entitled to receive a monthly advisory and administrative fee of 1/20 of 1%
(0.60% annually) of the average daily gross assets of Belmar Capital. The term
"gross assets" with respect to Belmar Capital is defined to include the current
value of all of Belmar Capital's assets including Belmar Capital's interest in
Belvedere Company and Belmar Capital's ratable share of the assets of its
directly and indirectly controlled subsidiaries, without reduction by any
liabilities. Belmar Realty pays Boston Management a monthly management fee at a
rate of 1/20 of 1% (equivalent to 0.60% annually) of the average daily gross
assets of Belmar Realty. The term "gross assets" with respect to Belmar Realty
is defined to include the current value of all assets of Belmar Realty,
including Belmar Realty's ratable share of the assets of its controlled
subsidiaries, without reduction by any liabilities. For this purpose, the assets
of Belmar Realty's controlled subsidiaries are reduced by the proportionate
interests therein of investors other than Belmar Realty.
Eaton Vance Management and Boston Management do not receive separate
compensation for serving as manager of Belmar Capital and manager of Belvedere
Company, respectively.
As compensation for its services as Placement Agent, Belmar Capital pays Eaton
Vance Distributors (EV Distributors) a monthly distribution fee at a rate of
1/120 of 1% (equivalent to 0.10% annually) of Belmar Capital's average daily net
assets.
Payments to the Eaton Vance organization for investment advisory, management,
administration and distribution services made by or in respect of Belmar Capital
on a direct or indirect basis are subject to a monthly fee cap at a rate of 1/20
of 1% (equivalent to 0.60% annually) of the average daily gross assets of Belmar
Capital (as defined above). Payments subject to the monthly fee cap are the
distribution fee paid to EV Distributors, Belmar Capital's attributable share of
the advisory and management fees paid by the Portfolio and Belmar Realty, and
Belmar Capital's advisory and administrative fee. Boston Management has agreed
to waive a portion of the monthly advisory and administrative fee otherwise
payable by Belmar Capital as necessary to comply with the monthly fee cap.
Pursuant to a servicing agreement between Belvedere Company and EV Distributors,
Belvedere Company pays a servicing fee to EV Distributors for providing certain
services and information to Shareholders. With respect to Shareholders who
subscribe through a subagent, EV Distributors assigns servicing responsibilities
and fees to the applicable subagent beginning twelve months after the issuance
of Fund Shares to such persons. The servicing fee is paid on a quarterly basis
at an annual rate of 0.15% of Belvedere Company's average daily net assets.
Pursuant to a servicing agreement between Belmar Capital and EV Distributors,
53
Belmar Capital pays a servicing fee to EV Distributors on a quarterly basis at
an annual rate of 0.25% of Belmar Capital's average daily net assets, less
Belmar Capital's allocated share of the servicing fee payable by Belvedere
Company.
Management services for the real property held by Bel Apartments, Brazos and
Cimmaron (for the period during which Belmar Realty maintained interest in Bel
Apartments and Cimmaron) are provided by an affiliate of each respective
entity's Minority Shareholder (Note 1B). Each management agreement provides for
a management fee and allows for reimbursement of payroll and other direct
expenses incurred by the managers in conjunction with managing each respective
entity's properties (Note 1B). In addition to the fees noted above, an affiliate
of the Brazos Minority Shareholder also receives a REIT administration fee.
The table below sets forth the fees, paid or payable by, or allocable to, the
Fund and Belmar Realty for the years ended December 31, 2004, 2003 and 2002 in
connection with the services rendered by Eaton Vance, its affiliates, and
affiliates of Belmar Realty's controlled subsidiaries.
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2002
- -----------------------------------------------------------------------------------
Advisory fee allocated to
Belvedere Company from
the Portfolio $ 50,252,861 $ 41,671,111 $ 41,180,780
Advisory fee allocated to the
Fund from Belvedere Company $ 8,392,976 $ 7,634,035 $ 8,125,471
Advisory fee and administrative
fee and management fee
incurred directly by the
Fund $ 7,948,234 $ 7,049,704 $ 7,647,360
Distribution fees $ 1,874,514 $ 1,711,661 $ 1,847,235
Reduction of advisory and
administrative fees $ 1,874,514 $ 1,711,661 $ 1,847,235
Servicing fees of Belvedere
Company $ 17,418,515 $ 14,288,579 $ 14,167,556
Servicing fees allocated to the
Fund from Belvedere Company $ 2,908,588 $ 2,617,051 $ 2,795,415
Servicing fees incurred directly
by the Fund $ 1,778,204 $ 1,658,867 $ 1,825,665
Servicing fees paid or accrued to
subagents $ 4,676,253 $ 4,268,598 $ 4,606,555
Property management fees $ 1,359,591 $ 1,342,305 $ 1,375,915
REIT administration fee $ 319,454 $ -- $ --
- -----------------------------------------------------------------------------------
10 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 by its investment
adviser to be high in quality and attractive in their long-term investment
prospects. Separate from its 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 in
real property through controlled subsidiaries, Bel Apartments, Bel Stamford,
Brazos and Cimmaron (for the period during which Belmar Capital maintained an
interest in Bel Apartments and Cimmaron) (Note 1 and Note 5).
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 (Note 2). No reportable segments have been aggregated. Reportable
information by segment is as follows:
TAX-
MANAGED
FOR THE YEAR ENDED GROWTH REAL
DECEMBER 31, 2004 PORTFOLIO* ESTATE TOTAL
- -----------------------------------------------------------------------------------
Revenue $ 19,879,730 $ 72,201,124 $ 92,080,854
Interest expense
on mortgages -- (28,190,253) (28,190,253)
Interest expense on
Credit Facility (1,652,158) (4,873,866) (6,526,024)
Operating expenses (1,684,719) (23,969,912) (25,654,631)
Minority interest in net income
of controlled subsidiaries -- (1,247,532) (1,247,532)
- -----------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 16,542,853 $ 13,919,561 $ 30,462,414
Net realized gain 45,278,877 12,393,005 57,671,882
Net change in unrealized
appreciation (depreciation) 112,083,513 (60,011,103) 52,072,410
- -----------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
NET ASSETS FROM OPERATIONS
OF REPORTABLE SEGMENTS $ 173,905,243 $ (33,698,537) $ 140,206,706
- -----------------------------------------------------------------------------------
54
TAX-
MANAGED
FOR THE YEAR ENDED GROWTH REAL
DECEMBER 31, 2003 PORTFOLIO* ESTATE TOTAL
- -----------------------------------------------------------------------------------
Revenue $ 15,714,154 $ 78,922,925 $ 94,637,079
Interest expense on mortgages -- (14,303,813) (14,303,813)
Interest expense on Credit
Facility (1,040,430) (7,109,603) (8,150,033)
Operating expenses (1,277,920) (22,735,245) (24,013,165)
Minority interest in net income
of controlled subsidiary -- (435,830) (435,830)
- -----------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 13,395,804 $ 34,338,434 $ 47,734,238
Net realized gain (loss) 22,323,706 (16,412,617) 5,911,089
Net change in unrealized
appreciation (depreciation) 343,808,846 18,345,296 362,154,142
- -----------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS OF
REPORTABLE SEGMENTS $ 379,528,356 $ 36,271,113 $ 415,799,469
- -----------------------------------------------------------------------------------
TAX-
MANAGED
FOR THE YEAR ENDED GROWTH REAL
DECEMBER 31, 2002 PORTFOLIO* ESTATE TOTAL
- -----------------------------------------------------------------------------------
Revenue $ 12,845,871 $ 86,920,215 $ 99,766,086
Interest expense on mortgages -- (14,882,677) (14,882,677)
Interest expense on Credit
Facility (136,239) (12,806,462) (12,942,701)
Operating expenses (1,246,862) (22,848,604) (24,095,466)
Minority interest in net income
of controlled subsidiary -- (424,054) (424,054)
- -----------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 11,462,770 $ 35,958,418 $ 47,421,188
Net realized loss (1,786,292) (37,397,806) (39,184,098)
Net change in unrealized
appreciation (depreciation) (424,007,010) 6,425,178 (417,581,832)
- -----------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN NET
ASSETS FROM OPERATIONS OF
REPORTABLE SEGMENTS $ (414,330,532) $ 4,985,790 $ (409,344,742)
- -----------------------------------------------------------------------------------
The following tables reconcile the reported segment information reported to the
consolidated financial statements for the periods indicated:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2002
- -------------------------------------------------------------------------------------------------------
Revenue:
Revenue from reportable
segments $ 92,080,854 $ 94,637,079 $ 99,766,086
Unallocated amounts:
Interest earned on cash not invested in the
Portfolio or in subsidiaries 595,647 269,403 48,749
- -------------------------------------------------------------------------------------------------------
TOTAL REVENUE $ 92,676,501 $ 94,906,482 $ 99,814,835
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations:
Net increase (decrease) in net assets from
operations of reportable segments $ 140,206,706 $ 415,799,469 $ (409,344,742)
Unallocated investment income:
Interest earned on cash not invested in the
Portfolio or in subsidiaries 595,647 269,403 48,749
Unallocated expenses(1):
Realized loss -- -- (2,338,586)
Distribution and servicing fees (3,652,718) (3,370,528) (3,672,900)
Interest expense on Credit Facility (1,734,765) (520,215) (681,195)
Audit, tax and legal fees (326,449) (279,016) (242,914)
Other operating expenses (119,635) (109,863) (129,284)
- -------------------------------------------------------------------------------------------------------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS $ 134,968,786 $ 411,789,250 $ (416,357,872)
- -------------------------------------------------------------------------------------------------------
(1) Unallocated expenses represent costs incurred that pertain to the overall
operation of Belmar Capital, and do not pertain to either operating
segment.
55
TAX-
MANAGED
GROWTH REAL
AT DECEMBER 31, 2004 PORTFOLIO* ESTATE TOTAL
- -------------------------------------------------------------------------------------------------------
Segments assets $ 2,015,871,844 $ 658,486,334 $ 2,674,358,178
Segment liabilities 86,014,107 670,844,012 756,858,119
- -------------------------------------------------------------------------------------------------------
NET ASSETS (LIABILITIES) OF REPORTABLE SEGMENTS $ 1,929,857,737 $ (12,357,678) $ 1,917,500,059
- -------------------------------------------------------------------------------------------------------
TAX-
MANAGED
GROWTH REAL
AT DECEMBER 31, 2003 PORTFOLIO* ESTATE TOTAL
- -------------------------------------------------------------------------------------------------------
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 table reconciles the reported segment information to the
consolidated financial statements for the periods indicated:
DECEMBER 31, 2004 DECEMBER 31, 2003
- ----------------------------------------------------------------------------
Net assets:
Net assets of reportable segments $ 1,917,500,059 $ 1,953,187,951
Unallocated amounts:
Cash(1) 984,755 5,019,018
Short-term investments(1) 1,700,000 16,973,476
Loan payable -- Credit Facility(2) (9,454,900) (54,357,683)
Other liabilities (242,416) (210,905)
- ----------------------------------------------------------------------------
TOTAL NET ASSETS $ 1,910,487,498 $ 1,920,611,857
- ----------------------------------------------------------------------------
(1) Unallocated cash and short-term investments represent cash and cash
equivalents not currently invested in the Portfolio or real estate assets.
(2) 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.
11 SUBSEQUENT EVENT (UNAUDITED)
On January 27, 2005, the Fund made a distribution of $1.12 per share to
Shareholders of record on January 26, 2005
56
BELMAR CAPITAL FUND LLC
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF BELMAR CAPITAL FUND LLC AND SUBSIDIARIES
We have audited the accompanying consolidated statements of assets and
liabilities, including the consolidated portfolio of investments, of Belmar
Capital Fund LLC and subsidiaries, (collectively, the Fund) as of December 31,
2004 and 2003, and the related consolidated statements of operations, changes in
net assets, cash flows, and financial highlights for each of the three years in
the period ended December 31, 2004. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2004 and 2003 by correspondence with the
custodian. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of the Fund as of December 31, 2004 and 2003, and the results of its
operations, the changes in its net assets, its cash flows, and the financial
highlights for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in INTERNAL CONTROL -- INTEGRATED FRAMEWORK issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 11, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 11, 2005
57
BELMAR CAPITAL FUND LLC
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Eaton Vance Management ("Eaton Vance"), as manager of Belmar Capital Fund LLC
(the "Fund"), with the participation of the Fund's Chief Executive Officer and
Chief Financial Officer, (collectively referred to in this report as
"management") is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the 1934 Act. The Fund's internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
During the second quarter of 2004, the Fund acquired an interest in a new real
estate joint venture, Brazos Property Trust ("Brazos"). As of December 31, 2004,
Brazos owned 23 industrial distribution properties located in 7 states.
Management concluded that it was not possible to conduct an assessment of
internal control over financial reporting of Brazos. Brazos represents
approximately 11.7% of the Fund's consolidated total assets and 10.0% of the
total investment income as of and for the period ended December 31, 2004. In
accordance with guidance from the staff of the Securities and Exchange
Commission, management intends to include an assessment of internal control over
financial reporting of Brazos in its report on internal control over financial
reporting for the fiscal year ended December 31, 2005.
Management assessed the effectiveness of the Fund's internal control over
financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.
Based on its assessment and those criteria, management believes that the Fund
maintained effective internal control over financial reporting as of December
31, 2004.
The Fund's independent registered public accounting firm has issued an
attestation report on management's assessment of the Fund's internal control
over financial reporting. That report appears on the following page.
March 11, 2005
58
BELMAR CAPITAL FUND LLC
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF BELMAR CAPITAL FUND LLC AND SUBSIDIARIES
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Belmar
Capital Fund LLC and subsidiaries (the "Fund") maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in INTERNAL CONTROL -- INTEGRATED FRAMEWORK issued by the Committee
of Sponsoring Organizations of the Treadway Commission. As described in
Management's Report on Internal Control Over Financial Reporting, management
excluded from their assessment the internal control over financial reporting at
Brazos Property Trust, which was acquired on June 30, 2004. Brazos Property
Trust represents approximately 11.7% of the Fund's consolidated total assets and
10.0% of the total investment income as of and for the period ended December 31,
2004. Accordingly, our audit did not include the internal control over financial
reporting at Brazos Property Trust. The Fund's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria established in INTERNAL
CONTROL -- INTEGRATED FRAMEWORK issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in INTERNAL
CONTROL -- INTEGRATED FRAMEWORK issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2004 of the Fund and our
report dated March 11, 2005 expressed an unqualified opinion on those financial
statements.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 11, 2005
59
TAX-MANAGED GROWTH PORTFOLIO as of December 31, 2004
PORTFOLIO OF INVESTMENTS
COMMON STOCKS -- 99.8%
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
AEROSPACE AND DEFENSE -- 2.8%
Boeing Company (The) 796,801 $ 41,250,388
General Dynamics 735,000 76,881,000
Honeywell International, Inc. 277,798 9,836,827
Northrop Grumman Corp. 3,497,103 190,102,519
Raytheon Company 340,663 13,227,944
Rockwell Collins, Inc. 190,614 7,517,816
Teledyne Technologies Incorporated(1) 6,117 180,023
United Technologies Corp. 1,897,601 196,117,063
- ------------------------------------------------------------------------------------------------------
$ 535,113,580
- ------------------------------------------------------------------------------------------------------
AIR FREIGHT AND LOGISTICS -- 2.9%
FedEx Corporation 2,106,578 $ 207,476,867
Robinson (C.H.) Worldwide, Inc. 1,098,233 60,973,896
United Parcel Service, Inc. Class B 3,401,734 290,712,188
- ------------------------------------------------------------------------------------------------------
$ 559,162,951
- ------------------------------------------------------------------------------------------------------
AIRLINES -- 0.0%
Southwest Airlines, Inc. 294,642 $ 4,796,772
- ------------------------------------------------------------------------------------------------------
$ 4,796,772
- ------------------------------------------------------------------------------------------------------
AUTO COMPONENTS -- 0.2%
ArvinMeritor, Inc. 8,000 $ 178,960
Borg-Warner Automotive, Inc. 381,499 20,665,801
Dana Corp. 25,000 433,250
Delphi Automotive Systems Corp. 6,199 55,915
Johnson Controls, Inc. 234,164 14,855,364
Visteon Corp. 9,828 96,020
- ------------------------------------------------------------------------------------------------------
$ 36,285,310
- ------------------------------------------------------------------------------------------------------
AUTOMOBILES -- 0.1%
DaimlerChrysler AG 7,000 $ 336,350
Ford Motor Co. 145,050 2,123,532
General Motors Corp. 13,492 540,490
Harley-Davidson, Inc. 140,700 8,547,525
Honda Motor Co. Ltd. ADR 20,000 521,200
- ------------------------------------------------------------------------------------------------------
$ 12,069,097
- ------------------------------------------------------------------------------------------------------
BEVERAGES -- 4.0%
Anheuser-Busch Companies, Inc. 4,421,625 $ 224,309,036
Brown-Forman Corp. Class A 547,732 27,802,876
Brown-Forman Corp. Class B 45,820 $ 2,230,518
Coca-Cola Company (The) 3,442,924 143,328,926
Coca-Cola Enterprises, Inc. 1,756,930 36,631,991
PepsiCo., Inc. 6,267,913 327,185,059
- ------------------------------------------------------------------------------------------------------
$ 761,488,406
- ------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY -- 1.7%
Amgen, Inc.(1) 4,060,747 $ 260,496,920
Applera Corp. - Celera Genomics Group(1) 26,000 357,500
Biogen Idec Inc.(1) 11,200 746,032
Genzyme Corp. - General Division(1) 564,926 32,805,253
Gilead Sciences, Inc.(1) 115,482 4,040,715
Incyte Pharmaceuticals, Inc.(1) 14,294 142,797
Invitrogen Corp.(1) 429,910 28,859,858
Vertex Pharmaceuticals, Inc.(1) 13,000 137,410
- ------------------------------------------------------------------------------------------------------
$ 327,586,485
- ------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS -- 1.0%
American Standard Companies, Inc.(1) 977,738 $ 40,400,134
Masco Corporation 4,157,854 151,886,407
Water Pik Technologies(1) 2,141 37,960
- ------------------------------------------------------------------------------------------------------
$ 192,324,501
- ------------------------------------------------------------------------------------------------------
CAPITAL MARKETS -- 4.1%
Affiliated Managers Group(1) 20,520 $ 1,390,025
Bank of New York Co., Inc. (The) 402,028 13,435,776
Bear Stearns Companies, Inc. 88,001 9,003,382
Credit Suisse Group(1) 155,136 6,521,607
Federated Investors, Inc. 1,666,768 50,669,747
Franklin Resources, Inc. 1,462,116 101,836,379
Goldman Sachs Group, Inc. 832,738 86,638,062
Investors Financial Services Corp. 453,428 22,662,331
Knight Trading Group, Inc.(1) 1,750,000 19,162,500
Legg Mason, Inc. 26,461 1,938,533
Lehman Brothers Holdings, Inc. 99,493 8,703,648
Mellon Financial Corporation 221,912 6,903,682
Merrill Lynch & Co., Inc. 2,108,147 126,003,946
Morgan Stanley Dean Witter & Co. 4,737,998 263,053,649
Northern Trust Corp. 368,571 17,905,179
Nuveen Investments Class A 150,000 5,920,500
Piper Jaffray Companies, Inc.(1) 41,059 1,968,779
Price (T. Rowe) Group, Inc. 191,743 11,926,415
See notes to financial statements
60
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
CAPITAL MARKETS (CONTINUED)
Raymond James Financial, Inc. 147,337 $ 4,564,500
Schwab (Charles) & Co. 857,261 10,252,842
State Street Corp. 131,670 6,467,630
UBS AG 63,392 5,314,785
Waddell & Reed Financial, Inc., Class A 340,438 8,133,064
- ------------------------------------------------------------------------------------------------------
$ 790,376,961
- ------------------------------------------------------------------------------------------------------
CHEMICALS -- 1.0%
Airgas, Inc. 353,715 $ 9,376,985
Arch Chemicals, Inc. 4,950 142,461
Bayer AG ADR 40,000 1,359,200
Dow Chemical Co. (The) 247,183 12,238,030
DuPont (E.I.) de Nemours & Co. 1,328,903 65,182,692
Ecolab, Inc. 258,423 9,078,400
MacDermid, Inc. 61,937 2,235,926
Monsanto Company 19,181 1,065,505
Olin Corp. 9,900 217,998
PPG Industries, Inc. 23,542 1,604,623
Rohm and Haas, Co. 2,601 115,042
RPM, Inc. 70,138 1,378,913
Sigma-Aldrich Corp. 630,897 38,144,033
Solutia Inc.(1) 20,293 23,743
Valspar Corp. 818,316 40,923,983
- ------------------------------------------------------------------------------------------------------
$ 183,087,534
- ------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS -- 8.6%
AmSouth Bancorporation 626,715 $ 16,231,919
Associated Banc-Corp 1,061,378 35,248,363
Bank of America Corporation 4,845,034 227,668,148
Bank of Hawaii Corp. 69,735 3,538,354
Bank of Montreal 267,204 12,863,201
Banknorth Group, Inc. 10,000 366,000
BB&T Corp. 1,826,737 76,814,291
Canadian Imperial Bank of Commerce 100,000 6,026,000
City National Corp. 273,260 19,305,819
Colonial Bancgroup, Inc. (The) 253,936 5,391,061
Comerica, Inc. 331,589 20,233,561
Commerce Bancshares, Inc. 155,154 7,788,731
Compass Bancshares, Inc. 301,339 14,666,169
Fifth Third Bancorp 1,355,381 64,082,414
First Citizens BancShares, Inc. 30,600 4,536,450
First Financial Bancorp 47,933 838,828
First Horizon National Corp. 155,551 $ 6,705,804
First Midwest Bancorp, Inc. 815,329 29,588,289
Hibernia Corp. Class A 187,345 5,528,551
HSBC Holdings PLC ADR 592,965 50,485,040
Huntington Bancshares, Inc. 586,532 14,534,263
Keycorp 625,951 21,219,739
M&T Bank Corp. 47,419 5,113,665
Marshall & Ilsley Corp. 629,932 27,842,994
National City Corp. 1,677,060 62,973,603
North Fork Bancorporation, Inc. 1,785,892 51,522,984
PNC Bank Corp. 156,003 8,960,812
Popular, Inc. 1,432 41,285
Regions Financial Corp. 2,282,030 81,217,448
Royal Bank of Canada 349,353 18,669,424
Royal Bank of Scotland Group PLC 50,837 1,707,348
S&T Bancorp, Inc. 100,000 3,769,000
Societe Generale 809,647 81,960,387
Southwest Bancorporation of Texas, Inc. 1,255,140 29,232,211
SunTrust Banks, Inc. 1,307,505 96,598,469
Synovus Financial Corp. 1,345,581 38,456,705
TCF Financial Corporation 72,500 2,330,150
U.S. Bancorp 5,276,270 165,252,776
Valley National Bancorp 164,652 4,552,628
Wachovia Corp. 2,239,760 117,811,376
Wells Fargo & Company 2,391,184 148,612,086
Westamerica Bancorporation 268,474 15,654,719
Whitney Holding Corp. 347,200 15,620,528
Zions Bancorporation 250,076 17,012,670
- ------------------------------------------------------------------------------------------------------
$ 1,638,574,263
- ------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES AND SUPPLIES -- 2.0%
Allied Waste Industries, Inc.(1) 1,674,390 $ 15,538,339
Apollo Group, Inc. Class A(1) 18,411 1,485,952
Avery Dennison Corp. 1,157,598 69,421,152
Banta Corp. 42,341 1,895,183
Block (H&R), Inc. 732,354 35,885,346
Cendant Corp. 549,359 12,844,013
Century Business Services, Inc.(1) 185,000 806,600
Cintas Corp. 1,399,270 61,371,982
Consolidated Graphics, Inc.(1) 70,215 3,222,869
Deluxe Corporation 32,000 1,194,560
Donnelley (R.R.) & Sons Co. 91,260 3,220,565
Equifax, Inc. 80,000 2,248,000
See notes to financial statements
61
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES AND SUPPLIES (CONTINUED)
Gevity HR, Inc. 78,125 $ 1,606,250
HNI Corp. 1,470,565 63,307,823
Hudson Highland Group, Inc.(1) 11,581 333,533
Ikon Office Solutions, Inc. 83,040 959,942
Imagistics International Inc.(1) 809 27,231
Laureate Education Inc.(1) 520,213 22,936,191
Manpower, Inc. 2,000 96,600
Miller (Herman) Inc. 541,800 14,969,934
Monster Worldwide Inc.(1) 154,426 5,194,891
Navigant Consulting, Inc.(1) 463,017 12,316,252
Pitney Bowes, Inc. 42,343 1,959,634
School Specialty Corp.(1) 49,197 1,897,036
ServiceMaster Co. 1,224,880 16,891,095
Steelcase Inc. 123,000 1,702,320
Waste Management, Inc. 1,145,998 34,311,180
- ------------------------------------------------------------------------------------------------------
$ 387,644,473
- ------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT -- 1.2%
3Com Corp.(1) 873,949 $ 3,644,367
ADC Telecommunications, Inc.(1) 301,164 807,119
Alcatel S.A. ADR(1) 43,728 683,469
Avaya, Inc.(1) 56,571 973,021
Ciena Corp.(1) 380,378 1,270,463
Cisco Systems, Inc.(1) 4,475,139 86,370,183
Comverse Technology, Inc.(1) 375,922 9,191,293
Corning, Inc.(1) 3,645,380 42,906,123
Enterasys Networks, Inc.(1) 55,945 100,701
JDS Uniphase Corp.(1) 52,451 166,270
Lucent Technologies, Inc.(1) 555,464 2,088,545
Motorola, Inc. 980,426 16,863,327
Nokia Corp., Class A, ADR 2,050,478 32,130,990
Nortel Networks Corp.(1) 1,135,030 3,961,255
Qualcomm, Inc. 758,638 32,166,251
Riverstone Networks, Inc.(1) 28,706 30,572
Tellabs, Inc.(1) 110,405 948,379
- ------------------------------------------------------------------------------------------------------
$ 234,302,328
- ------------------------------------------------------------------------------------------------------
COMPUTERS AND PERIPHERALS -- 3.4%
Dell Inc.(1) 4,460,429 $ 187,962,478
EMC Corp.(1) 1,388,652 20,649,255
Gateway, Inc.(1) 95,621 574,682
Hewlett-Packard Co. 1,094,183 22,945,018
International Business Machines Corp. 2,426,216 $ 239,176,373
Lexmark International Group, Inc.(1) 1,804,885 153,415,225
McData Corp., Class A(1) 17,982 107,173
Network Appliance, Inc.(1) 488,000 16,211,360
Palmone, Inc.(1) 65,230 2,058,007
Sun Microsystems, Inc.(1) 366,670 1,972,685
- ------------------------------------------------------------------------------------------------------
$ 645,072,256
- ------------------------------------------------------------------------------------------------------
CONSTRUCTION AND ENGINEERING -- 0.1%
Dycom Industries, Inc.(1) 149,711 $ 4,569,180
Jacobs Engineering Group, Inc.(1) 229,985 10,990,983
- ------------------------------------------------------------------------------------------------------
$ 15,560,163
- ------------------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS -- 0.1%
CRH plc 329,450 $ 8,812,801
Vulcan Materials Company 184,512 10,076,200
- ------------------------------------------------------------------------------------------------------
$ 18,889,001
- ------------------------------------------------------------------------------------------------------
CONSUMER FINANCE -- 1.2%
American Express Co. 772,583 $ 43,550,504
Capital One Financial Corp. 1,411,152 118,833,110
MBNA Corporation 456,002 12,854,696
Providian Financial Corp.(1) 457,296 7,531,665
SLM Corp. 905,499 48,344,592
- ------------------------------------------------------------------------------------------------------
$ 231,114,567
- ------------------------------------------------------------------------------------------------------
CONTAINERS AND PACKAGING -- 0.1%
Bemis Co. 295,186 $ 8,586,961
Caraustar Industries, Inc.(1) 167,599 2,819,015
Sealed Air Corp.(1) 37,014 1,971,736
Sonoco Products Co. 160,690 4,764,459
Temple-Inland, Inc. 57,962 3,964,601
- ------------------------------------------------------------------------------------------------------
$ 22,106,772
- ------------------------------------------------------------------------------------------------------
DISTRIBUTORS -- 0.1%
Genuine Parts Company 323,060 $ 14,234,024
- ------------------------------------------------------------------------------------------------------
$ 14,234,024
- ------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES -- 1.7%
Citigroup Inc. 4,110,278 $ 198,033,194
Finova Group, Inc.(1) 175,587 28,094
See notes to financial statements
62
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
ING groep, N.V. ADR 257,281 $ 7,782,750
Moody's Corp. 67,543 5,866,110
Morgan (J.P.) Chase & Co. 2,952,221 115,166,141
- ------------------------------------------------------------------------------------------------------
$ 326,876,289
- ------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES -- 2.1%
Alltel Corp. 1,632,558 $ 95,929,108
AT&T Corp. 495,955 9,452,902
BCE, Inc. 3,400,000 82,042,000
BellSouth Corp. 455,705 12,664,042
Cincinnati Bell Inc.(1) 169,013 701,404
Citizens Communications Co. 13,568 187,103
Deutsche Telekom AG(1) 2,006,790 45,513,997
McLeodUSA(1) 21,974 15,821
PTEK Holdings, Inc.(1) 28,000 299,880
Qwest Communications International, Inc.(1) 59,924 266,063
RSL Communications Ltd.(1)(2) 247,161 0
SBC Communications, Inc. 1,464,924 37,751,091
Sprint Corp. - FON Group 101,903 2,532,290
Talk America Holdings, Inc.(1) 9,703 64,234
Telefonos de Mexico ADR 2,000,000 76,640,000
Verizon Communications 1,050,565 42,558,388
- ------------------------------------------------------------------------------------------------------
$ 406,618,323
- ------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 0.3%
Ameren Corp. 5,000 $ 250,700
American Electric Power, Inc. 960 32,966
Exelon Corp. 1,002,000 44,158,140
PG&E Corp.(1) 47,705 1,587,622
Southern Co. (The) 65,985 2,211,817
TECO Energy, Inc. 34,145 523,784
TXU Corp. 250,196 16,152,654
Wisconsin Energy Corp. 9,576 322,807
- ------------------------------------------------------------------------------------------------------
$ 65,240,490
- ------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 0.5%
American Power Conversion Corp. 34,704 $ 742,666
Baldor Electric Co. 149,060 4,103,622
Emerson Electric Co. 1,111,539 77,918,884
Rockwell International Corp. 156,699 7,764,435
Roper Industries, Inc. 23,122 1,405,124
Thomas & Betts Corp.(1) 114,600 3,523,950
- ------------------------------------------------------------------------------------------------------
$ 95,458,681
- ------------------------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT AND INSTRUMENTS -- 0.7%
Agilent Technologies, Inc.(1) 569,891 $ 13,734,373
Arrow Electronics, Inc.(1) 8,750 212,625
Dionex Corp.(1) 139,750 7,919,633
Flextronics International Ltd.(1) 293,053 4,049,992
Jabil Circuit, Inc.(1) 2,127,971 54,433,498
Molex, Inc., Class A 65,367 1,742,031
National Instruments Corp. 735,687 20,047,471
PerkinElmer, Inc. 254,526 5,724,290
Plexus Corp.(1) 158,108 2,056,985
Sanmina Corp.(1) 1,140,602 9,660,899
Solectron Corporation(1) 1,752,794 9,342,392
X-Rite Incorporated 288,000 4,610,880
- ------------------------------------------------------------------------------------------------------
$ 133,535,069
- ------------------------------------------------------------------------------------------------------
ENERGY EQUIPMENT AND SERVICES -- 0.7%
Baker Hughes, Inc. 457,426 $ 19,518,367
Core Laboratories N.V.(1) 31,290 730,622
Grant Prideco, Inc.(1) 35,444 710,652
Halliburton Company 990,930 38,884,093
National-Oilwell, Inc.(1) 514,062 18,141,248
Schlumberger Ltd. 567,476 37,992,518
Smith International, Inc.(1) 140,000 7,617,400
Transocean Sedco Forex, Inc.(1) 106,247 4,503,810
- ------------------------------------------------------------------------------------------------------
$ 128,098,710
- ------------------------------------------------------------------------------------------------------
FOOD AND STAPLES RETAILING -- 2.2%
Albertson's, Inc. 1,022,529 $ 24,417,993
Casey's General Stores, Inc. 89,966 1,632,883
Costco Wholesale Corp. 927,132 44,882,460
CVS Corp. 132,268 5,961,319
Kroger Co. (The)(1) 1,357,551 23,811,445
Safeway, Inc.(1) 1,649,342 32,558,011
Sysco Corp.(2)(3) 30,000 1,143,381
Sysco Corp. 1,749,792 66,789,561
Sysco Corp.(2)(3) 25,000 953,892
Walgreen Co. 800,825 30,727,655
Wal-Mart Stores, Inc. 3,481,821 183,909,785
Winn-Dixie Stores, Inc. 204,622 931,030
- ------------------------------------------------------------------------------------------------------
$ 417,719,415
- ------------------------------------------------------------------------------------------------------
FOOD PRODUCTS -- 2.8%
Archer-Daniels-Midland Co. 1,143,641 $ 25,514,631
See notes to financial statements
63
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
FOOD PRODUCTS (CONTINUED)
Campbell Soup Co. 1,242,265 $ 37,131,301
Conagra Inc. 1,657,734 48,820,266
Dean Foods Co.(1) 443,988 14,629,405
Del Monte Foods, Co.(1) 99,492 1,096,402
General Mills, Inc. 186,227 9,257,344
Heinz (H.J.) Co. 292,208 11,393,190
Hershey Foods Corp. 507,333 28,177,275
JM Smucker Co. 12,365 582,021
Kellogg Co. 59,640 2,663,522
Kraft Foods, Inc. 465 16,559
McCormick & Co., Inc. 1,624 62,686
Nestle SA 275,000 71,773,953
Sara Lee Corp. 3,789,758 91,484,758
Smithfield Foods, Inc.(1) 4,207,530 124,500,813
Tyson Foods, Inc. 315,272 5,801,005
Wrigley (Wm.) Jr. Company Class A 902,761 62,462,034
- ------------------------------------------------------------------------------------------------------
$ 535,367,165
- ------------------------------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT AND SUPPLIES -- 1.4%
Advanced Medical Optics(1) 3,558 $ 146,376
Bausch & Lomb, Inc. 29,250 1,885,455
Baxter International, Inc. 221,749 7,659,210
Becton & Dickinson and Co. 64,173 3,645,026
Biomet, Inc. 419,890 18,219,027
Boston Scientific Corporation(1) 1,110,370 39,473,654
Dentsply International, Inc. 10,928 614,154
Edwards Lifesciences Corp.(1) 10,353 427,165
Guidant Corp. 74,638 5,381,400
Hillenbrand Industries, Inc. 586,943 32,598,814
Hospira, Inc.(1) 246,711 8,264,819
Lumenis Ltd.(1) 100,000 193,500
Medtronic, Inc. 2,312,831 114,878,316
St. Jude Medical, Inc.(1) 48,028 2,013,814
Steris Corp.(1) 8,125 192,725
Stryker Corp. 36,741 1,772,753
VISX, Inc.(1) 50,000 1,293,500
Waters Corp.(1) 165,841 7,759,700
Zimmer Holdings, Inc.(1) 285,489 22,873,379
- ------------------------------------------------------------------------------------------------------
$ 269,292,787
- ------------------------------------------------------------------------------------------------------
HEALTH CARE PROVIDERS AND SERVICES -- 1.9%
AmerisourceBergen Corp. 141,513 $ 8,303,983
Andrx Group(1) 180,170 $ 3,933,111
Beverly Enterprises, Inc.(1) 357,143 3,267,858
Cardinal Health, Inc. 1,840,995 107,053,859
Caremark Rx, Inc.(1) 701,471 27,659,002
Cigna Corp. 11,836 965,463
Express Scripts, Inc.(1) 26,658 2,037,738
HCA Inc. 140 5,594
Health Management Associates, Inc., Class A 856,502 19,459,725
IDX Systems Corp.(1) 60,000 2,067,600
IMS Health, Inc. 280,530 6,511,101
McKesson HBOC, Inc. 2,631 82,771
Medco Health Solutions, Inc.(1) 170,891 7,109,066
Parexel International Corp.(1) 27,837 565,091
Renal Care Group, Inc.(1) 480,046 17,276,856
Schein (Henry), Corp.(1) 1,188,477 82,765,538
Service Corp. International(1) 142,389 1,060,798
Stewart Enterprises, Inc.(1) 114,000 796,860
Sunrise Assisted Living, Inc.(1) 144,000 6,675,840
Tenet Healthcare Corp.(1) 3,961 43,492
UnitedHealth Group, Inc. 201,976 17,779,947
Ventiv Health, Inc.(1) 160,833 3,268,127
WellPoint Inc.(1) 404,000 46,460,000
- ------------------------------------------------------------------------------------------------------
$ 365,149,420
- ------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS AND LEISURE -- 1.9%
Brinker International, Inc.(1) 304,144 $ 10,666,330
Carnival Corporation 565,071 32,565,042
CBRL Group, Inc. 62,047 2,596,667
Darden Restaurants Inc. 184,714 5,123,966
Evans (Bob) Farms, Inc. 51,662 1,350,445
Gaylord Entertainment Co.(1) 428,482 17,794,857
International Game Technology 400,000 13,752,000
International Speedway Corporation 118,344 6,248,563
Jack in the Box, Inc.(1) 500,000 18,435,000
Lone Star Steakhouse & Saloon, Inc. 145,981 4,087,468
Marriott International, Inc. 288,169 18,148,884
McDonald's Corp. 690,866 22,149,164
MGM Grand, Inc.(1) 94,445 6,869,929
Navigant International, Inc.(1) 44,278 538,863
Outback Steakhouse, Inc. 1,641,207 75,134,456
Papa John's International, Inc.(1) 195,330 6,727,165
Royal Caribbean Cruises Ltd. 500,000 27,220,000
Sonic Corp.(1) 159,765 4,872,833
See notes to financial statements
64
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS AND LEISURE (CONTINUED)
Starbucks Corp.(1) 1,229,375 $ 76,663,825
Yum! Brands, Inc. 236,779 11,171,233
- ------------------------------------------------------------------------------------------------------
$ 362,116,690
- ------------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES -- 0.6%
Blyth Industries, Inc. 708,382 $ 20,939,772
D.R. Horton Inc. 468,942 18,903,052
Department 56, Inc.(1) 255,162 4,248,447
Fortune Brands Inc. 128,148 9,890,463
Helen of Troy Ltd.(1) 20,000 672,200
Interface, Inc. Class A(1) 75,467 752,406
Leggett & Platt, Inc. 1,813,805 51,566,476
Maytag Corp. 27,073 571,240
Newell Rubbermaid, Inc. 374,251 9,053,132
Snap-On, Inc. 42,453 1,458,685
- ------------------------------------------------------------------------------------------------------
$ 118,055,873
- ------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS -- 1.7%
Clorox Co. (The) 53,688 $ 3,163,834
Colgate-Palmolive Co. 699,356 35,779,053
Energizer Holdings(1) 168,981 8,396,666
Kimberly-Clark Corp. 1,476,156 97,145,826
Procter & Gamble Co. 3,229,777 177,896,117
- ------------------------------------------------------------------------------------------------------
$ 322,381,496
- ------------------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES -- 2.9%
3M Co. 697,787 $ 57,267,379
General Electric Co. 11,805,529 430,901,809
Teleflex, Inc. 33,700 1,750,378
Tyco International Ltd. 2,017,132 72,092,298
- ------------------------------------------------------------------------------------------------------
$ 562,011,864
- ------------------------------------------------------------------------------------------------------
INSURANCE -- 5.9%
21st Century Insurance Group 70,700 $ 961,520
Aegon N.V. ADR 5,311,829 72,825,176
AFLAC Inc. 2,190,281 87,260,795
Allstate Corp. (The) 199,712 10,329,105
American International Group, Inc. 5,670,853 372,404,917
AON Corp. 824,293 19,667,631
Berkshire Hathaway, Inc., Class A(1) 450 39,555,000
Berkshire Hathaway, Inc., Class B(1) 40,634 119,301,424
Chubb Corporation 7,077 544,221
Commerce Group, Inc. 120,000 $ 7,324,800
Gallagher (Arthur J.) and Co. 821,773 26,707,623
Hartford Financial Services Group, Inc. 13,797 956,270
Jefferson-Pilot Corp. 186,921 9,712,415
Lincoln National Corp. 52,903 2,469,512
Manulife Financial Corp. 74,958 3,463,060
Marsh & McLennan Cos., Inc. 1,080,587 35,551,312
MetLife, Inc. 1,869,700 75,741,547
Old Republic International Corp. 240,548 6,085,864
Progressive Corp.(2)(3) 10,900 923,369
Progressive Corp. 1,991,008 168,917,119
Safeco Corp. 173,122 9,043,893
St. Paul Companies, Inc. (The) 311,524 11,548,195
Torchmark Corp. 417,159 23,836,465
UICI 43,597 1,477,938
UnumProvident Corp. 53,710 963,557
XL Capital Ltd., Class A 187,100 14,528,315
- ------------------------------------------------------------------------------------------------------
$ 1,122,101,043
- ------------------------------------------------------------------------------------------------------
INTERNET AND CATALOG RETAIL -- 0.5%
Amazon.com Inc.(1) 23,500 $ 1,040,815
eBay, Inc.(1) 619,501 72,035,576
IAC/InterActivecorp(1) 806,192 22,267,023
- ------------------------------------------------------------------------------------------------------
$ 95,343,414
- ------------------------------------------------------------------------------------------------------
INTERNET SOFTWARE AND SERVICES -- 0.0%
Retek, Inc.(1) 110,742 $ 681,063
- ------------------------------------------------------------------------------------------------------
$ 681,063
- ------------------------------------------------------------------------------------------------------
IT SERVICES -- 2.8%
Accenture Ltd.(1) 4,838,000 $ 130,626,000
Acxiom Corp. 647,804 17,037,245
Affiliated Computer Services(1) 183,730 11,058,709
Automatic Data Processing, Inc. 1,553,046 68,877,590
BISYS Group, Inc. (The)(1) 280,492 4,614,093
Ceridian Corp.(1) 27,490 502,517
Certegy, Inc. 42,862 1,522,887
Computer Sciences Corp.(1) 362,598 20,439,649
CSG Systems International, Inc.(1) 25,200 471,240
DST Systems, Inc.(1) 391,634 20,411,964
eFunds Corp.(1) 17,645 423,656
Electronic Data Systems Corp. 77,336 1,786,462
See notes to financial statements
65
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
IT SERVICES (CONTINUED)
First Data Corp. 3,776,540 $ 160,654,012
Fiserv, Inc.(1) 300,000 12,057,000
Gartner Group, Inc., Class A(1) 4,811 59,945
Gartner Group, Inc., Class B(1) 27,576 338,909
Keane, Inc.(1) 50,295 739,337
Paychex, Inc. 1,398,101 47,647,282
Perot Systems Corp.(1) 725,507 11,629,877
Safeguard Scientifics, Inc.(1) 26,579 56,347
SunGard Data Systems, Inc.(1) 773,601 21,916,116
- ------------------------------------------------------------------------------------------------------
$ 532,870,837
- ------------------------------------------------------------------------------------------------------
LEISURE EQUIPMENT AND PRODUCTS -- 0.0%
Eastman Kodak Co. 113,722 $ 3,667,535
Mattel, Inc. 1,096 21,361
- ------------------------------------------------------------------------------------------------------
$ 3,688,896
- ------------------------------------------------------------------------------------------------------
MACHINERY -- 3.1%
Caterpillar, Inc. 53,830 $ 5,248,963
Danaher Corporation 4,031,970 231,475,398
Deere & Co. 3,350,000 249,240,000
Donaldson Company, Inc. 80,440 2,620,735
Dover Corp. 165,567 6,943,880
Federal Signal Corp. 283,471 5,006,098
Illinois Tool Works, Inc. 809,040 74,981,827
ITT Industries, Inc. 4,214 355,872
Nordson Corporation 163,978 6,570,598
Parker-Hannifin Corporation 30,653 2,321,658
Tecumseh Products Co., Class A 125,700 6,008,460
Wabtec 94,504 2,014,825
- ------------------------------------------------------------------------------------------------------
$ 592,788,314
- ------------------------------------------------------------------------------------------------------
MEDIA -- 5.3%
ADVO, Inc. 750,000 $ 26,737,500
Arbitron, Inc.(1) 11,555 452,725
Belo (A.H.) Corp. 542,924 14,246,326
Cablevision Systems Corp.(1) 207,410 5,165,546
Catalina Marketing Corp. 88,490 2,621,959
Clear Channel Communications, Inc. 145,017 4,856,619
Comcast Corp. Class A(1) 1,968,785 65,521,165
Comcast Corp. Class A Special(1) 1,280,622 42,055,626
Disney (Walt) Company 4,834,833 134,408,357
EchoStar Communications, Class A 35,150 1,168,386
Entercom Communications Corp.(1) 220,000 $ 7,895,800
Gannett Co., Inc. 1,562,342 127,643,341
Havas Advertising, S.A. ADR 3,142,938 17,565,880
Interpublic Group of Companies, Inc.(1) 1,134,505 15,202,367
Knight Ridder, Inc. 18,123 1,213,154
Lamar Advertising Co.(1) 241,409 10,327,477
Liberty Media Corp. Class A(1) 1,013,104 11,123,882
Liberty Media Corp. Class B(1) 32,876 381,362
Liberty Media International Inc. Class A(1) 50,655 2,341,781
Liberty Media International Inc. Class B(1) 1,643 80,408
McClatchy Co. (The) 48,066 3,451,619
McGraw-Hill Companies, Inc. (The) 446,964 40,915,085
Meredith Corp. 190,000 10,298,000
New York Times Co. (The), Class A 303,168 12,369,254
News Corp. Inc. - Class A 187,934 3,506,848
Omnicom Group, Inc. 2,318,719 195,514,386
Proquest Company(1) 115,000 3,415,500
Publicis Groupe SA 360,784 11,681,944
Reuters Holdings plc ADR 1,431 61,461
Scripps (The E.W) Company 51,066 2,465,466
Time Warner Inc.(1) 4,102,164 79,746,068
Tribune Co. 1,428,878 60,212,919
Univision Communications, Inc.(1) 401,298 11,745,992
Viacom, Inc., Class A 29,774 1,104,020
Viacom, Inc., Class B 971,451 35,351,102
Vivendi Universal S.A. ADR(1) 490,725 15,737,551
Washington Post Co. (The) 14,970 14,715,809
Westwood One, Inc.(1) 122,400 3,296,232
WPP Group plc 139,450 1,529,144
WPP Group plc ADR 256,051 13,993,187
- ------------------------------------------------------------------------------------------------------
$ 1,012,121,248
- ------------------------------------------------------------------------------------------------------
METALS AND MINING -- 0.4%
Alcoa, Inc. 797,947 $ 25,071,495
Allegheny Technologies, Inc. 21,408 463,911
Inco, Ltd.(1) 200,000 7,356,000
Nucor Corp. 442,924 23,182,642
Phelps Dodge Corp. 14,862 1,470,149
Steel Dynamics, Inc. 311,800 11,810,984
Worthington Industries, Inc. 75,160 1,471,633
- ------------------------------------------------------------------------------------------------------
$ 70,826,814
- ------------------------------------------------------------------------------------------------------
See notes to financial statements
66
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
MULTILINE RETAIL -- 1.8%
99 Cents Only Stores(1) 1,142,232 $ 18,458,469
Dollar General Corp. 101,456 2,107,241
Dollar Tree Stores, Inc.(1) 813,306 23,325,616
Family Dollar Stores, Inc. 2,618,411 81,772,976
Kohls Corp.(1) 55 2,704
May Department Stores Co. (The) 607,760 17,868,144
Neiman Marcus Group, Inc. (The) 6 401
Nordstrom, Inc. 65,692 3,069,787
Penney (J.C.) Company, Inc. 223,408 9,249,091
Sears, Roebuck & Co. 23,074 1,177,466
Target Corp. 3,547,475 184,220,377
- ------------------------------------------------------------------------------------------------------
$ 341,252,272
- ------------------------------------------------------------------------------------------------------
MULTI-UTILITIES AND UNREGULATED POWER -- 0.1%
AES Corporation(1) 49,542 $ 677,239
Dominion Resources, Inc. 10,464 708,831
Duke Energy Corp. 417,416 10,573,147
Dynegy, Inc.(1) 63,525 293,486
National Fuel Gas Co. 4,000 113,360
- ------------------------------------------------------------------------------------------------------
$ 12,366,063
- ------------------------------------------------------------------------------------------------------
OFFICE ELECTRONICS -- 0.0%
Xerox Corp.(1) 42,878 $ 729,355
Zebra Technologies Corp., Class A(1) 13,500 759,780
- ------------------------------------------------------------------------------------------------------
$ 1,489,135
- ------------------------------------------------------------------------------------------------------
OIL AND GAS -- 7.8%
Amerada Hess Corp. 18,947 $ 1,560,854
Anadarko Petroleum Corp. 2,557,003 165,719,364
Apache Corporation 2,075,352 104,950,551
Ashland, Inc. 85,716 5,004,100
BP plc ADR 5,081,540 296,761,936
Burlington Resources, Inc. 4,259,405 185,284,118
ChevronTexaco Corporation 311,976 16,381,860
ConocoPhillips 1,675,581 145,490,698
Devon Energy Corp. 1,015,400 39,519,368
El Paso Corp. 148,709 1,546,574
Exxon Mobil Corp. 6,231,588 319,431,201
Kerr - McGee Corp. 267,327 15,448,827
Kinder Morgan, Inc. 1,781,672 130,293,673
Marathon Oil Corp. 1,450 54,535
Murphy Oil Corporation 19,518 1,570,223
Newfield Exploration Company(1) 60,000 $ 3,543,000
Royal Dutch Petroleum Co. 83,074 4,766,786
Total Fina Elf SA ADR 400,000 43,936,000
Valero Energy Corp. 103,020 4,677,108
Williams Companies Inc (The) 219,065 3,568,569
- ------------------------------------------------------------------------------------------------------
$ 1,489,509,345
- ------------------------------------------------------------------------------------------------------
PAPER AND FOREST PRODUCTS -- 0.2%
Georgia-Pacific Corp. 598,732 $ 22,440,475
International Paper Co. 112,154 4,710,468
Louisiana-Pacific Corp. 70,750 1,891,855
MeadWestvaco Corp. 84,358 2,858,893
Neenah Paper Inc.(1) 44,890 1,463,414
Weyerhaeuser Co. 89,778 6,034,877
- ------------------------------------------------------------------------------------------------------
$ 39,399,982
- ------------------------------------------------------------------------------------------------------
PERSONAL PRODUCTS -- 1.5%
Avon Products, Inc. 173,400 $ 6,710,580
Gillette Company 3,950,586 176,907,241
Lauder (Estee) Companies, Inc. 2,092,312 95,765,120
- ------------------------------------------------------------------------------------------------------
$ 279,382,941
- ------------------------------------------------------------------------------------------------------
PHARMACEUTICALS -- 6.2%
Abbott Laboratories 2,821,474 $ 131,621,762
Allergan, Inc. 38,300 3,104,981
Bristol-Myers Squibb Company 4,566,981 117,006,053
Elan Corp., PLC ADR(1) 31,838 867,586
Forest Laboratories, Inc.(1) 56,800 2,548,048
GlaxoSmithKline plc 430,517 20,402,201
Johnson & Johnson 3,181,341 201,760,646
King Pharmaceuticals, Inc.(1) 505,637 6,269,899
Lilly (Eli) & Co. 3,412,870 193,680,373
Merck & Co., Inc. 2,317,124 74,472,365
Mylan Laboratories, Inc. 27,992 494,899
Novo Nordisk ADR 292,277 15,858,950
Pfizer, Inc. 8,662,582 232,936,830
Schering AG ADR 25,000 1,856,250
Schering-Plough Corp. 2,515,998 52,534,038
Sepracor, Inc.(1) 4,000 237,480
Teva Pharmaceutical Industries Ltd. ADR 2,282,011 68,140,848
Watson Pharmaceuticals, Inc.(1) 865,911 28,410,540
Wyeth Corp. 790,783 33,679,448
- ------------------------------------------------------------------------------------------------------
$ 1,185,883,197
- ------------------------------------------------------------------------------------------------------
See notes to financial statements
67
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
REAL ESTATE -- 0.2%
AvalonBay Communities, Inc. 28,867 $ 2,173,685
Catellus Development Corp. 419,601 12,839,791
Forest City Enterprises - Class A 38,663 2,225,056
Jones Lang Lasalle, Inc.(1) 154,567 5,782,351
Plum Creek Timber Co., Inc. 198,791 7,641,526
Trammell Crow Co.(1) 764,200 13,839,662
- ------------------------------------------------------------------------------------------------------
$ 44,502,071
- ------------------------------------------------------------------------------------------------------
ROAD AND RAIL -- 0.2%
ANC Rental Corporation(1) 459,525 $ 46
Burlington Northern Santa Fe Corp. 207,932 9,837,263
CSX Corporation 38,134 1,528,411
Florida East Coast Industries, Inc. 121,978 5,501,208
Heartland Express, Inc. 653,154 14,676,370
Kansas City Southern Industries, Inc.(1) 15,215 269,762
Norfolk Southern Corp. 3,990 144,398
Union Pacific Corp. 7,811 525,290
- ------------------------------------------------------------------------------------------------------
$ 32,482,748
- ------------------------------------------------------------------------------------------------------
SEMICONDUCTORS AND SEMICONDUCTOR
EQUIPMENT -- 2.0%
Agere Systems, Inc.(1) 6,495 $ 8,898
Agere Systems, Inc., Class B(1) 159,398 215,187
Altera Corp.(1) 66,116 1,368,601
Analog Devices, Inc. 778,870 28,755,880
Applied Materials, Inc.(1) 1,741,642 29,782,078
Broadcom Corp. - Class A(1) 530,892 17,137,194
Broadcom Corp. - Class A(1)(2)(3) 35,000 1,128,105
Conexant Systems, Inc.(1) 134,174 267,006
Cypress Semiconductor Corporation(1) 152,742 1,791,664
Freescale Semiconductor-B(1) 101,704 1,867,286
Intel Corp. 9,580,974 224,098,982
KLA-Tencor Corp.(1) 148,373 6,911,214
Linear Technologies Corp. 187,760 7,277,578
LSI Logic Corporation(1) 132,810 727,799
Maxim Integrated Products Co. 374,351 15,868,739
Mindspeed Technologies Inc.(1) 44,724 124,333
Skyworks Solutions, Inc.(1) 98,685 930,600
Taiwan Semiconductor ADR 866 7,352
Teradyne, Inc.(1) 27,996 477,892
Texas Instruments, Inc. 1,912,604 47,088,310
Xilinx, Inc. 59,554 1,765,776
- ------------------------------------------------------------------------------------------------------
$ 387,600,474
- ------------------------------------------------------------------------------------------------------
SOFTWARE -- 2.1%
Adobe Systems, Inc. 258,794 $ 16,236,736
Cadence Design Systems, Inc.(1) 900,000 12,429,000
Cognos, Inc.(1) 77,000 3,392,620
Computer Associates International, Inc. 33,070 1,027,154
Compuware Corp.(1) 150,944 976,608
Electronic Arts Inc.(1) 21,405 1,320,260
Fair, Isaac and Co., Inc. 997,172 36,576,269
Henry (Jack) & Associates 201,006 4,002,029
Intuit, Inc.(1) 921,314 40,547,029
Microsoft Corp. 7,312,311 195,311,827
Oracle Corp.(1) 817,568 11,217,033
PalmSource, Inc.(1) 20,208 257,450
Parametric Technology Corp.(1) 94,600 557,194
Reynolds & Reynolds, Co. 216,412 5,737,082
Sap AG ADR 600,000 26,526,000
Siebel Systems, Inc.(1) 179,184 1,881,432
Symantec Corporation(1) 1,499,722 38,632,839
VERITAS Software Corp.(1) 243,942 6,964,544
Wind River Systems, Inc.(1) 91,910 1,245,381
- ------------------------------------------------------------------------------------------------------
$ 404,838,487
- ------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL -- 2.0%
Abercrombie & Fitch Co. 11,225 $ 527,014
AutoNation, Inc.(1) 1,493,099 28,682,432
Best Buy Co., Inc. 113,610 6,750,706
Burlington Coat Factory Warehouse Corp. 238,448 5,412,770
CarMax, Inc.(1) 67,797 2,105,097
Circuit City Stores, Inc. 216,000 3,378,240
Gap, Inc. (The) 541,012 11,426,173
Home Depot, Inc. (The) 4,281,726 183,000,969
Limited Brands, Inc. 762,510 17,552,980
Lowe's Companies 875,941 50,445,442
Office Depot, Inc.(1) 205,276 3,563,591
Officemax Inc. 2,192 68,785
Payless Shoesource, Inc.(1) 23,100 284,130
Pep Boys - Manny, Moe & Jack (The) 83,415 1,423,894
Radioshack Corp. 631,599 20,766,975
Sherwin-Williams Co. (The) 80,569 3,595,794
Staples, Inc. 158,266 5,335,147
Tiffany & Co. 57,286 1,831,433
TJX Companies, Inc. (The) 1,716,834 43,144,038
Too, Inc.(1) 38,284 936,427
- ------------------------------------------------------------------------------------------------------
$ 390,232,037
- ------------------------------------------------------------------------------------------------------
See notes to financial statements
68
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
TEXTILES, APPAREL AND LUXURY GOODS -- 0.7%
Coach, Inc.(1) 365,720 $ 20,626,608
Nike Inc., Class B 1,329,222 120,547,143
Unifi, Inc.(1) 1,208 4,627
- ------------------------------------------------------------------------------------------------------
$ 141,178,378
- ------------------------------------------------------------------------------------------------------
THRIFTS AND MORTGAGE FINANCE -- 0.7%
Countrywide Financial Corp. 1,499,998 $ 55,514,926
Fannie Mae 345,171 24,579,627
Freddie Mac 135,586 9,992,688
Golden West Financial Corporation 74,590 4,581,318
MGIC Investment Corp. 85,000 5,857,350
Radian Group, Inc. 30,800 1,639,792
Washington Mutual, Inc. 927,674 39,222,057
- ------------------------------------------------------------------------------------------------------
$ 141,387,758
- ------------------------------------------------------------------------------------------------------
TOBACCO -- 0.2%
Altria Group Inc. 763,945 $ 46,677,040
UST, Inc. 439 21,120
- ------------------------------------------------------------------------------------------------------
$ 46,698,160
- ------------------------------------------------------------------------------------------------------
TRADING COMPANIES AND DISTRIBUTORS -- 0.0%
United Rentals, Inc.(1) 401,179 $ 7,582,283
- ------------------------------------------------------------------------------------------------------
$ 7,582,283
- ------------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES -- 0.1%
Nextel Communications, Inc., Class A(1) 134,072 $ 4,022,160
Telephone and Data Systems, Inc. 70,844 5,451,446
Vodafone Group plc ADR 213,962 5,858,280
- ------------------------------------------------------------------------------------------------------
$ 15,331,886
- ------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $14,860,534,853) $ 19,109,250,562
- ------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS -- 0.0%
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
MULTI-UTILITIES AND UNREGULATED POWER -- 0.0%
Enron Corp.(1)(2) 11,050 $ 0
- ------------------------------------------------------------------------------------------------------
$ 0
- ------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(IDENTIFIED COST $4,500,777) $ 0
- ------------------------------------------------------------------------------------------------------
PREFERRED STOCKS -- 0.0%
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS -- 0.0%
Wachovia Corp. (Dividend Equalization Preferred Shares)(1) 166,518 $ 167
- ------------------------------------------------------------------------------------------------------
$ 167
- ------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(IDENTIFIED COST $39,407) $ 167
- ------------------------------------------------------------------------------------------------------
WARRANTS -- 0.0%
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT -- 0.0%
Lucent Technologies, Inc. 18,106 $ 28,607
- ------------------------------------------------------------------------------------------------------
$ 28,607
- ------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(IDENTIFIED COST $0) $ 28,607
- ------------------------------------------------------------------------------------------------------
RIGHTS -- 0.0%
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
BANKS -- 0.0%
Bank United Corp. (Litigation Contingent Payment
Rights)(1)(2) 102,072 $ 6,124
- ------------------------------------------------------------------------------------------------------
$ 6,124
- ------------------------------------------------------------------------------------------------------
COMPUTERS AND BUSINESS EQUIPMENT -- 0.0%
Seagate Technology, Inc. (Tax Refund Rights)(1)(2) 197,392 $ 0
- ------------------------------------------------------------------------------------------------------
$ 0
- ------------------------------------------------------------------------------------------------------
INTEGRATED TELECOMMUNICATION SERVICES -- 0.0%
McLeodUSA (Escrow Rights)(1)(2) 1,592,200 $ 0
- ------------------------------------------------------------------------------------------------------
$ 0
- ------------------------------------------------------------------------------------------------------
TOTAL RIGHTS
(IDENTIFIED COST $50,596) $ 6,124
- ------------------------------------------------------------------------------------------------------
See notes to financial statements
69
SHORT-TERM INVESTMENTS -- 0.1%
PRINCIPAL
AMOUNT
SECURITY (000'S OMITTED) VALUE
- ------------------------------------------------------------------------------------------------------
Investors Bank & Trust Company --
Time Deposit, 2.25%, 1/3/05 $ 7,668 $ 7,668,000
- ------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(AT AMORTIZED COST, $7,668,000) $ 7,668,000
- ------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER -- 0.1%
PRINCIPAL
AMOUNT
SECURITY (000'S OMITTED) VALUE
- ------------------------------------------------------------------------------------------------------
Societe Generale North America, 2.32%, 1/5/05 $ 22,295 $ 22,289,253
- ------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(AT AMORTIZED COST, $22,289,253) $ 22,289,253
- ------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100.0%
(IDENTIFIED COST $14,895,082,886) $ 19,139,242,713
- ------------------------------------------------------------------------------------------------------
SECURITIES SOLD SHORT -- -1.0%
SECURITY SHARES VALUE
- ------------------------------------------------------------------------------------------------------
American International Group, Inc. 3,000,000 $ (197,010,000)
- ------------------------------------------------------------------------------------------------------
TOTAL SECURITIES SOLD SHORT
(PROCEEDS $169,710,627) $ (197,010,000)
- ------------------------------------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES
EXCLUDING SECURITIES SOLD SHORT -- 1.0% $ 198,909,689
- ------------------------------------------------------------------------------------------------------
NET ASSETS -- 100.0% $ 19,141,142,402
- ------------------------------------------------------------------------------------------------------
ADR - American Depositary Receipt
(1) Non-income producing security.
(2) Security valued at fair value using methods determined in good faith by or
at the direction of the Trustees.
(3) Security subject to restrictions on resale (see Note 7).
See notes to financial statements
70
TAX-MANAGED GROWTH PORTFOLIO as of December 31, 2004
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
As of December 31, 2004
ASSETS
Investments, at value (identified cost, $14,895,082,886) $ 19,139,242,713
Cash 2,563
Deposits with brokers for securities sold short 169,710,627
Dividends and interest receivable 24,103,436
Receivable for investments sold 4,256,707
Tax reclaim receivable 1,180,262
- -------------------------------------------------------------------------------------------
TOTAL ASSETS $ 19,338,496,308
- -------------------------------------------------------------------------------------------
LIABILITIES
Securities sold short, at value (proceeds received of $169,710,627) $ 197,010,000
Payable for dividends on securities sold short 225,000
Payable to affiliate for Trustees' fees 6,053
Accrued expenses 112,853
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 197,353,906
- -------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO INVESTORS' INTEREST IN PORTFOLIO $ 19,141,142,402
- -------------------------------------------------------------------------------------------
SOURCES OF NET ASSETS
Net proceeds from capital contributions and withdrawals $ 14,924,128,572
Net unrealized appreciation (computed on the basis of identified cost) 4,217,013,830
- -------------------------------------------------------------------------------------------
TOTAL $ 19,141,142,402
- -------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Year Ended
December 31, 2004
INVESTMENT INCOME
Dividends (net of foreign taxes, $3,794,755) $ 291,107,513
Interest 1,157,693
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME $ 292,265,206
- -------------------------------------------------------------------------------------------
EXPENSES
Investment adviser fee $ 77,609,178
Trustees' fees and expenses 25,376
Custodian fee 1,999,827
Dividends on securities sold short 225,000
Legal and accounting services 94,573
Miscellaneous 304,587
- -------------------------------------------------------------------------------------------
TOTAL EXPENSES $ 80,258,541
- -------------------------------------------------------------------------------------------
Deduct --
Reduction of custodian fee $ 39
Reduction of investment adviser fee 26,667
- -------------------------------------------------------------------------------------------
TOTAL EXPENSE REDUCTIONS $ 26,706
- -------------------------------------------------------------------------------------------
NET EXPENSES $ 80,231,835
- -------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 212,033,371
- -------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) --
Investment transactions (identified cost basis) $ 152,362,325
Foreign currency transactions 60,515
- -------------------------------------------------------------------------------------------
NET REALIZED GAIN $ 152,422,840
- -------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) --
Investments (identified cost basis) $ 1,345,093,649
Securities sold short (27,299,373)
Foreign currency 84,431
- -------------------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) $ 1,317,878,707
- -------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN $ 1,470,301,547
- -------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 1,682,334,918
- -------------------------------------------------------------------------------------------
See notes to financial statements
71
STATEMENTS OF CHANGES IN NET ASSETS
INCREASE (DECREASE) YEAR ENDED YEAR ENDED
IN NET ASSETS DECEMBER 31, 2004 DECEMBER 31, 2003
- -------------------------------------------------------------------------------------------------------
From operations --
Net investment income $ 212,033,371 $ 163,045,716
Net realized gain from investment
transactions, securities sold short
and foreign currency transactions 152,422,840 70,909,770
Net change in unrealized appreciation
(depreciation) of investments,
securities sold short and
foreign currency 1,317,878,707 3,174,709,110
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 1,682,334,918 $ 3,408,664,596
- -------------------------------------------------------------------------------------------------------
Capital transactions --
Contributions $ 1,775,098,351 $ 1,351,483,956
Withdrawals (1,925,879,872) (1,722,081,135)
- -------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS FROM
CAPITAL TRANSACTIONS $ (150,781,521) $ (370,597,179)
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS $ 1,531,553,397 $ 3,038,067,417
- -------------------------------------------------------------------------------------------------------
NET ASSETS
At beginning of year $ 17,609,589,005 $ 14,571,521,588
- -------------------------------------------------------------------------------------------------------
AT END OF YEAR $ 19,141,142,402 $ 17,609,589,005
- -------------------------------------------------------------------------------------------------------
See notes to financial statements
72
SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA+
Ratios (As a percentage of average daily net assets):
Net expenses 0.45% 0.45% 0.45% 0.45% 0.45%
Net expenses after custodian fee reduction 0.45% -- -- -- --
Net investment income 1.18% 1.05% 0.85% 0.64% 0.67%
Portfolio Turnover 3% 15% 23% 18% 13%
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(1) 9.67% 23.88% (19.52)% (9.67)% --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S OMITTED) $ 19,141,142 $ 17,609,589 $ 14,571,522 $ 18,335,865 $ 18,385,069
- ---------------------------------------------------------------------------------------------------------------------------------
+ The operating expenses of the Portfolio reflect a reduction of the
investment adviser fee. Had such action not been taken, the ratios would
have been as follows:
Ratios (As a percentage of average daily net assets):
Expenses 0.45% -- -- -- --
Expenses after custodian fee reduction 0.45% -- -- -- --
Net investment income 1.18% -- -- -- --
(1) Total return is required to be disclosed for fiscal years beginning after
December 15, 2000.
See notes to financial statements
73
TAX-MANAGED GROWTH PORTFOLIO as of December 31, 2004
NOTES TO FINANCIAL STATEMENTS
1 SIGNIFICANT ACCOUNTING POLICIES
Tax-Managed Growth Portfolio (the Portfolio) is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The Portfolio, which was organized as a trust under the laws
of the State of New York on December 1, 1995, seeks to provide long-term
after-tax returns by investing in a diversified portfolio of equity securities.
The Declaration of Trust permits the Trustees to issue interests in the
Portfolio. The following is a summary of significant accounting policies
consistently followed by the Portfolio in the preparation of its financial
statements. The policies are in conformity with accounting principles generally
accepted in the United States of America.
A INVESTMENT VALUATIONS -- Securities listed on a U.S. securities exchange
generally are valued at the last sale price on the day of valuation or, if no
sales took place on such date, at the mean between the closing bid and asked
prices therefore on the exchange where such securities are principally traded.
Equity securities listed on the NASDAQ National Market System generally are
valued at the official NASDAQ closing price. Unlisted or listed securities for
which closing sales prices or closing quotations are not available are valued at
the mean between the latest available bid and asked prices or, in the case of
preferred equity securities that are not listed or traded in the
over-the-counter market, by an independent pricing service. Exchange-traded
options are valued at the last sale price for the day of valuation as quoted on
the principal exchange or board of trade on which the options are traded or, in
the absence of sales on such date, at the mean between the latest bid and asked
prices therefore. Futures positions on securities and currencies generally are
valued at closing settlement prices. Short-term debt securities with a remaining
maturity of 60 days or less are valued at amortized cost. If short-term debt
securities were acquired with a remaining maturity of more than 60 days, their
amortized cost value will be based on their value on the sixty-first day prior
to maturity. Other fixed income and debt securities, including listed securities
and securities for which price quotations are available, will normally be valued
on the basis of valuations furnished by a pricing service. Foreign securities
and currencies are valued in U.S. dollars, based on foreign currency exchange
rate quotations supplied by an independent quotation service. The daily
valuation of foreign securities generally is determined as of the close of
trading on the principal exchange on which such securities trade. Events
occurring after the close of trading on foreign exchanges may result in
adjustments to the valuation of foreign securities to more accurately reflect
their fair value as of the close of regular trading on the New York Stock
Exchange. When valuing foreign equity securities that meet certain criteria, the
Trustees have approved the use of a fair value service that values such
securities to reflect market trading that occurs after the close of the
applicable foreign markets of comparable securities or other instruments that
have a strong correlation to the securities held by the Portfolio. Investments
held by the Portfolio for which valuations or market quotations are unavailable
are valued at fair value using methods determined in good faith by or at the
direction of the Trustees of the Portfolio considering relevant factors, data
and information including the market value of freely tradable securities of the
same class in the principal market on which such securities are normally traded.
B INCOME TAXES -- The Portfolio is treated as a partnership for federal tax
purposes. No provision is made by the Portfolio for federal or state taxes on
any taxable income of the Portfolio because each investor in the Portfolio is
ultimately responsible for the payment of any taxes on its share of such taxable
income. Since some of the Portfolio's investors are regulated investment
companies that invest all or substantially all of their assets in the Portfolio,
the Portfolio normally must satisfy the applicable source of income and
diversification requirements (under the Internal Revenue Code) in order for its
investors to satisfy them. The Portfolio will allocate, at least annually among
its investors, each investor's distributive share of the Portfolio's net
investment income, net realized capital gains or losses, and any other items of
income, gain, loss, deduction or credit.
C FUTURES CONTRACTS -- Upon the entering of a financial futures contract, the
Portfolio is required to deposit either in cash or securities an amount (initial
margin) equal to a certain percentage of the purchase price indicated in the
financial futures contract. Subsequent payments are made or received by the
Portfolio (margin maintenance) each day, dependent on daily fluctuations in the
value of the underlying security, and are recorded for book purposes as
unrealized gains or losses by the Portfolio. The Portfolio's investment in
financial futures contracts is designed to hedge against anticipated future
changes in the price of current or anticipated portfolio positions. Should
prices move unexpectedly, the Portfolio may not achieve the anticipated benefits
of the financial futures contracts and may realize a loss.
D PUT OPTIONS -- Upon the purchase of a put option by the Portfolio, the premium
paid is recorded as an asset in the Statement of Assets and Liabilities, the
value of which is marked-to-market daily. When a purchased option expires, the
Portfolio will realize a loss in the amount of the premium paid. When the
Portfolio enters into a closing sale transaction, the Portfolio will realize a
74
gain or loss depending on whether the sales proceeds from the closing sale
transaction are greater or less than the premium paid. When the Portfolio
exercises a put option, settlement is made in cash. The risk associated with
purchasing options is limited to the premium originally paid.
E SECURITIES SOLD SHORT -- The Portfolio may sell a security short if it owns at
least an equal amount of the security sold short or another security
exchangeable for an equal amount of the security sold short in anticipation of a
decline in the market price of the securities or in order to hedge portfolio
positions. The Portfolio will generally borrow the security sold in order to
make delivery to the buyer. Upon executing the transaction, the Portfolio
records the proceeds as deposits with brokers in the Statement of Assets and
Liabilities and establishes an offsetting payable for securities sold short for
the securities due on settlement. The proceeds are retained by the broker as
collateral for the short position. The liability is marked-to-market and the
Portfolio is required to pay the lending broker any dividend or interest income
earned while the short position is open. A gain or loss is recognized when the
security is delivered to the broker. The Portfolio may recognize a loss on the
transaction if the market value of the securities sold increases before the
securities are delivered.
F FOREIGN CURRENCY TRANSLATION -- Investment valuations, other assets and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investment securities and income and expenses are converted
into U.S. dollars based upon currency exchange rates prevailing on the
respective dates of such transactions. Recognized gains or losses on investment
transactions attributable to foreign currency exchange rates are recorded for
financial statement purposes as net realized gains and losses on investments.
That portion of unrealized gains and losses on investments that results from
fluctuations in foreign currency exchange rates is not separately disclosed.
G INDEMNIFICATIONS -- Under the Portfolio's organizational documents, its
officers and Trustees may be indemnified against certain liabilities and
expenses arising out of the performance of their duties to the Portfolio.
Interestholders in the Portfolio are jointly and severally liable for the
liabilities and obligations of the Portfolio in the event that the Portfolio
fails to satisfy such liabilities and obligations; provided, however, that, to
the extent assets are available in the Portfolio, the Portfolio may, under
certain circumstances, indemnify interestholders from and against any claim or
liability to which such holder may become subject by reason of being or having
been an interestholder in the Portfolio. Additionally, in the normal course of
business, the Fund enters into agreements with the service providers that may
contain indemnification clauses. The Portfolio's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Portfolio that have not yet occurred.
H OTHER -- Investment transactions are accounted for on a trade-date basis.
Dividend income is recorded on the ex-dividend date. However, if the ex-dividend
date has passed, certain dividends from foreign securities are recorded as the
Portfolio is informed of the ex-dividend date. Interest income is recorded on
the accrual basis.
I EXPENSE REDUCTION -- Investors Bank & Trust Company (IBT) serves as custodian
of the Portfolio. Pursuant to the custodian agreement, IBT receives a fee
reduced by credits which are determined based on the average daily cash balances
the Portfolio maintains with IBT. All credit balances used to reduce the
Portfolio's custodian fees are reported as a reduction of expenses on the
Statement of Operations.
J USE OF ESTIMATES -- The preparation of the financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of income and expense during the reporting period. Actual
results could differ from those estimates.
2 INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The investment adviser fee is earned by Boston Management and Research (BMR), a
wholly-owned subsidiary of Eaton Vance Management (EVM), as compensation for
management and investment advisory services rendered to the Portfolio. Under the
advisory agreement, BMR receives a monthly advisory fee in the amount of 0.625%
annually of average daily net assets of the Portfolio up to $500,000,000 and at
reduced rates as daily net assets exceed that level. Certain of the advisory fee
rate reductions are pursuant to an agreement between the Portfolio's Board of
Trustees and BMR. Those reductions may not be changed without Trustee and
interestholder approval. For the year ended December 31, 2004, the advisory fee
was 0.43% of the Portfolio's average daily net assets. BMR has also agreed to
reduce the investment adviser fee by an amount equal to that portion of
75
commissions paid to broker dealers in execution of Portfolio security
transactions that is consideration for third-party research services. For the
year ended December 31, 2004, BMR waived $26,667 of its advisory fee. Except for
Trustees of the Portfolio who are not members of EVM's or BMR's organization,
officers and Trustees receive remuneration for their services to the Portfolio
out of such investment adviser fee. Trustees of the Portfolio who are not
affiliated with the Investment Adviser may elect to defer receipt of all or a
percentage of their annual fees in accordance with the terms of the Trustees'
Deferred Compensation Plan. For the year ended December 31, 2004, no significant
amounts have been deferred.
Certain officers and Trustees of the Portfolio are officers of the above
organizations.
3 INVESTMENT TRANSACTIONS
For the year ended December 31, 2004, purchases and sales of investments, other
than short-term obligations, aggregated $534,673,041 and $946,726,635,
respectively. In addition, investments having an aggregate market value of
$808,158,950 at dates of withdrawal were distributed in payment for capital
withdrawals. During the year ended December 31, 2004, investors contributed
securities with a value of $1,370,704,943.
4 FEDERAL INCOME TAX BASIS OF UNREALIZED APPRECIATION (DEPRECIATION)
The cost and unrealized appreciation (depreciation) in value of the investments
owned at December 31, 2004 as computed on a federal income tax basis, were as
follows:
AGGREGATE COST $ 4,833,216,291
- ---------------------------------------------------------
Gross unrealized appreciation $ 14,307,238,475
Gross unrealized depreciation (1,212,053)
- ---------------------------------------------------------
NET UNREALIZED APPRECIATION $ 14,306,026,422
- ---------------------------------------------------------
5 FINANCIAL INSTRUMENTS
The Portfolio may trade in financial instruments with off-balance sheet risk in
the normal course of its investing activities to assist in managing exposure to
various market risks. These financial instruments include written options,
forward foreign currency exchange contracts and financial futures contracts and
may involve, to a varying degree, elements of risk in excess of the amounts
recognized for financial statement purposes.
The notional or contractual amounts of these instruments represent the
investment the Portfolio has in particular classes of financial instruments and
does not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered. The Portfolio did
not have any open obligations under these financial instruments at December 31,
2004.
6 LINE OF CREDIT
The Portfolio participates with other portfolios and funds managed by BMR and
EVM and its affiliates in a $150 million unsecured line of credit agreement with
a group of banks. Borrowings will be made by the Portfolio solely to facilitate
the handling of unusual and/or unanticipated short-term cash requirements.
Interest is charged to each participating portfolio or fund based on its
borrowings at an amount above either the Eurodollar rate or Federal Funds rate.
In addition, a fee computed at an annual rate of 0.1% on the daily unused
portion of the line of credit is allocated among the participating portfolios
and funds at the end of each quarter. The Portfolio did not have any significant
borrowings or allocated fees during the year ended December 31, 2004.
7 RESTRICTED SECURITIES
At December 31, 2004, the Portfolio owned the following securities (representing
0.02% of net assets) which were restricted as to public resale and not
registered under the Securities Act of 1933. The securities are eligible for
resale after December 15, 2005, except for the 25,000 shares of Sysco Corp.
which are eligible for resale after March 3, 2005. The securities are valued at
fair value using methods determined in good faith by or at the direction of the
Trustees.
DATE OF
COMMON STOCKS ACQUISITION SHARES COST FAIR VALUE
- ----------------------------------------------------------------------------------------
Broadcom Corp. - Class A 12/15/04 35,000 $ 1,121,815 $ 1,128,105
Progressive Corp. 12/15/04 10,900 943,939 923,369
Sysco Corp. 3/3/04 25,000 994,756 953,892
Sysco Corp. 12/15/04 30,000 1,115,824 1,143,381
- ----------------------------------------------------------------------------------------
$ 4,176,334 $ 4,148,747
- ----------------------------------------------------------------------------------------
76
TAX-MANAGED GROWTH PORTFOLIO as of December 31, 2004
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE TRUSTEES AND INVESTORS OF TAX-MANAGED GROWTH PORTFOLIO:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Tax-Managed Growth Portfolio (the Portfolio) as
of December 31, 2004, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended and the supplementary data for each of the five years in the
period then ended. These financial statements and supplementary data are the
responsibility of the Portfolio's management. Our responsibility is to express
an opinion on these financial statements and supplementary data based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Portfolio's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of December 31, 2004, by correspondence with the
custodian. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and supplementary data present fairly,
in all material respects, the financial position of Tax-Managed Growth Portfolio
at December 31, 2004, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended and
its supplementary data for each of the five years in the period then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 18, 2005
77
BELMAR CAPITAL FUND LLC
INVESTMENT ADVISER OF
TAX-MANAGED GROWTH PORTFOLIO AND
BELMAR CAPITAL FUND LLC
Boston Management and Research
The Eaton Vance Building
255 State Street
Boston, MA 02109
MANAGER OF BELMAR
REALTY CORPORATION
Boston Management and Research
The Eaton Vance Building
255 State Street
Boston, MA 02109
MANAGER OF BELMAR CAPITAL FUND LLC
Eaton Vance Management
The Eaton Vance Building
255 State Street
Boston, MA 02109
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116
78
THIS PAGE INTENTIONALLY LEFT BLANK
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BELMAR CAPITAL FUND LLC
(Registrant)
By: /s/ Michelle A. Green
-------------------------
Michelle A. Green
Duly Authorized Officer and
Principal Accounting Officer
Date: March 15, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Thomas E. Faust Jr.
--------------------------
Thomas E. Faust Jr.
Chief Executive Officer
Date: March 15, 2005
By: /s/ Michelle A. Green
-------------------------
Michelle A. Green
Chief Financial Officer
Date: March 15, 2005
80
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3 Copy of Limited Liability Company Agreement of the Fund dated
March 17, 2000 filed as Exhibit 3 to the Fund's Initial
Registration Statement on Form 10 and incorporated herein by
reference. (Note: the LLC Agreement also defines the rights of
the holders of Shares of the Fund.)
3(a) Copy of Amendment No. 1 to the Fund's Limited Liability Company
Agreement dated December 30, 2003 filed as Exhibit 3(a) to the
Fund's Report on Form 10-K for the period ended December 31,
2003.
4.1 Copy of Loan and Security Agreement between the Fund and DrKW
Holdings, Inc., as lender, dated June 25, 2003 filed as Exhibit
4.1 to the Fund's Report on Form 10-Q for the period ended June
30, 2003 and incorporated herein by reference.
4.2 Copy of Loan and Security Agreement between the Fund and MLMC, as
Agent, and MLCS dated June 25, 2003 filed as Exhibit 4.2 to the
Fund's Report on Form 10-Q for the period ended June 30, 2003 and
incorporated herein by reference.
4.2(a) Copy of 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. filed as Exhibit 4.2(a) to the Fund's
Report on Form 10-Q for the period ended September 30, 2004 and
incorporated herein by reference.
10(1) Copy of Investment Advisory and Administration Agreement between
the Fund and Boston Management and Research dated March 10, 2000
filed as Exhibit 10(1) to the Fund's Initial Registration
Statement on Form 10 and incorporated herein by reference.
10(2) Copy of Management Agreement between Belmar Realty Corporation
and Boston Management and Research dated March 10, 2000 filed as
Exhibit 10(2) to the Fund's Initial Registration Statement on
Form 10 and incorporated herein by reference.
10(2)(a) Copy of Amendment No. 1 to Management Agreement between Belmar
Realty Corporation and Boston Management and Research dated as of
January 2, 2001 filed as Exhibit 10(2)(a) to the Fund's Report on
Form 10-Q for the period ended September 30, 2001 and
incorporated herein by reference.
10(3) Copy of Investor Servicing Agreement between the Fund and Eaton
Vance Distributors, Inc. dated December 15, 1999 filed as Exhibit
10(3) to the Fund's Initial Registration Statement on Form 10 and
incorporated herein by reference.
10(4) Copy of Custody and Transfer Agency Agreement between the Fund
and Investors Bank & Trust Company dated December 15, 1999 filed
as Exhibit 10(4) to the Fund's Initial Registration Statement on
Form 10 and incorporated herein by reference.
21 List of Subsidiaries of the Fund filed herewith.
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed
herewith.
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed
herewith.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed
herewith.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed
herewith.
99.3 Form N-CSR of Eaton Vance Tax-Managed Growth Portfolio (File No.
811-7409) for its year ended December 31, 2004 filed
electronically with the Securities and Exchange Commission under
the Investment Company Act of 1940 on March 8, 2004 (incorporated
herein by reference pursuant to Rule 12b-32).
81