UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003
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Commission File No. 000-49775
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Belport Capital Fund LLC
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(Exact name of registrant as specified in its charter)
Delaware 04-3551830
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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
Registrant's telephone number: ------------
None
----
(Former Name, Former Address and Former Fiscal Year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
BELPORT CAPITAL FUND LLC
Index to Form 10-Q
PART I FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Statements of Assets and Liabilities
as of June 30, 2003 (Unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended June 30, 2003 and 2002 and for the
Six Months Ended June 30, 2003 and June 30, 2002 4
Condensed Consolidated Statements of Changes in Net Assets
(Unaudited) for the Six Months Ended June 30, 2003 and June
30, 2002 6
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 2003 and June 30, 2002 7
Financial Highlights (Unaudited) for the Six Months Ended
June 30, 2003 9
Notes to Condensed Consolidated Financial Statements as of
June 30, 2003 (Unaudited) 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 24
EXHIBIT INDEX 25
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
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BELPORT CAPITAL FUND LLC
Condensed Consolidated Statements of Assets and Liabilities
June 30, 2003 December 31,
(Unaudited) 2002
---------------- --------------
Assets:
Investment in Belvedere Capital Fund Company LLC
(Belvedere Capital) $1,453,987,522 $1,322,126,211
Investment in Partnership Preference Units 104,377,425 96,503,025
Investment in other real estate 475,529,298 493,950,506
Short-term investments - 622,978
---------------- --------------
Total investments $2,033,894,245 $1,913,202,720
Cash 7,335,417 7,452,296
Escrow deposits - restricted 4,717,695 2,272,211
Receivable for investments sold - 50,221,589
Dividends and interest receivable 570,668 570,704
Other assets 2,558,166 2,680,422
---------------- --------------
Total assets $2,049,076,191 $1,976,399,942
---------------- --------------
Liabilities:
Loan payable on Credit Facility $ 226,000,000 $ 226,000,000
Mortgages payable 361,107,500 361,107,500
Open interest rate swap contracts, at value 31,925,671 26,385,515
Payable for Fund Shares redeemed 6,031,640 -
Security deposits 883,892 798,511
Swap interest payable 204,889 189,454
Accrued expenses:
Interest expense 2,047,885 2,484,938
Property taxes 4,342,105 2,051,403
Other expenses and liabilities 3,167,974 2,799,285
Minority interests in controlled subsidiaries 22,520,691 29,941,272
---------------- --------------
Total liabilities $ 658,232,247 $ 651,757,878
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Net assets $1,390,843,944 $1,324,642,064
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Shareholders' Capital $1,390,843,944 $1,324,642,064
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Shares Outstanding 16,974,285 17,258,094
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Net asset value and redemption price per Share $ 81.94 $ 76.75
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See notes to unaudited condensed consolidated financial statements
3
BELPORT CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Investment Income:
Dividends allocated from Belvedere Capital
(net of foreign taxes of $92,080, $91,631,
$151,649 and $115,907, respectively) $ 5,064,663 $ 5,135,285 $ 9,922,050 $ 9,632,378
Interest allocated from Belvedere Capital 158,459 120,556 249,022 270,403
Expenses allocated from Belvedere Capital (2,129,108) (2,507,271) (4,097,457) (5,106,717)
-------------- -------------- -------------- --------------
Net investment income allocated from
Belvedere Capital $ 3,094,014 $ 2,748,570 $ 6,073,615 $ 4,796,064
Rental income 16,555,469 16,863,391 33,193,717 34,091,702
Dividends from Partnership Preference Units 2,203,828 2,203,828 4,407,656 4,407,656
Interest 34,814 42,706 102,067 84,830
-------------- -------------- -------------- --------------
Total investment income $21,888,125 $ 21,858,495 $43,777,055 $43,380,252
-------------- -------------- -------------- --------------
Expenses:
Investment advisory and administrative fees $ 1,373,131 $ 1,426,611 $ 2,678,860 $ 2,915,052
Property management fees 655,091 681,600 1,314,619 1,372,309
Distribution and servicing fees 655,212 808,819 1,282,877 1,664,204
Interest expense on mortgages 6,544,104 6,222,590 12,873,831 12,407,919
Interest expense on Credit Facility 926,512 1,334,844 1,953,094 2,646,748
Interest expense on swap contracts 2,305,806 1,821,933 4,472,721 3,858,007
Property and maintenance expenses 4,277,044 4,041,721 8,491,017 7,724,377
Property taxes and insurance 2,272,938 1,947,866 4,265,990 3,916,012
Miscellaneous 610,312 225,365 838,277 610,145
-------------- -------------- -------------- --------------
Total expenses $19,620,150 $ 18,511,349 $38,171,286 $37,114,773
Deduct-
Reduction of investment advisory
and administrative fees 336,633 409,283 650,070 833,103
-------------- -------------- -------------- --------------
Net expenses $19,283,517 $ 18,102,066 $37,521,216 $ 36,281,670
-------------- -------------- -------------- --------------
Net investment income before
minority interests in net income of
controlled subsidiaries $ 2,604,608 $ 3,756,429 $ 6,255,839 $ 7,098,582
Minority interests in net income
of controlled subsidiaries (544,906) (899,444) (1,203,165) (1,967,618)
-------------- -------------- -------------- --------------
Net investment income $ 2,059,702 $ 2,856,985 $ 5,052,674 $ 5,130,964
-------------- -------------- -------------- --------------
See notes to unaudited condensed consolidated financial statements
4
BELPORT CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited) (Continued)
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions from Belvedere
Capital (identified cost basis) $ 2,441,173 $ (6,972,021) $ (3,206,592) $ (17,066,297)
Investment transactions in other real estate
estate investments 323,384 - 323,384 -
-------------- -------------- -------------- --------------
Net realized gain (loss) $ 2,764,557 $ (6,972,021) $ (2,883,208) $ (17,066,297)
-------------- -------------- -------------- --------------
Change in unrealized appreciation
(depreciation) -
Investment in Belvedere Capital
(identified cost basis) $166,898,579 $(201,939,631) $108,244,918 $(180,358,627)
Investments in Partnership Preference Units
(identified cost basis) 3,578,312 1,618,787 7,874,400 2,609,025
Investments in other real estate
(net of minority interests in unrealized
gain (loss) of controlled subsidiaries of
$(1,134,599), $198,233, $(8,066,435)
and $6,753,186, respectively) (2,204,133) 198,234 (12,257,945) (16,662,227)
Interest rate swap contracts (5,286,834) (10,576,146) (5,540,156) (7,136,766)
-------------- -------------- -------------- --------------
Net change in unrealized appreciation
(depreciation) $162,985,924 $(210,698,756) $ 98,321,217 $(201,548,595)
-------------- -------------- -------------- --------------
Net realized and unrealized gain (loss) $165,750,481 $(217,670,777) $ 95,438,009 $(218,614,892)
-------------- -------------- -------------- --------------
Net increase (decrease) in net assets
from operations $167,810,183 $(214,813,792) $100,490,683 $(213,483,928)
============== =============== =============== ================
See notes to unaudited condensed consolidated financial statements
5
BELPORT CAPITAL FUND LLC
Condensed Consolidated Statements of Changes in Net Assets (Unaudited)
Six Months Six Months
Ended June 30, Ended June 30,
2003 2002
- ------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets:
Net investment income $ 5,052,674 $ 5,130,964
Net realized loss from investment transactions (2,883,208) (17,066,297)
Net change in unrealized appreciation (depreciation)
of investments 98,321,217 (201,548,595)
---------------------------------
Net increase (decrease) in net assets from operations $ 100,490,683 $ (213,483,928)
---------------------------------
Transactions in Fund Shares -
Net asset value of Fund Shares issued to Shareholders in
payment of distributions declared $ 6,479,733 $ -
Net asset value of Fund Shares redeemed (28,400,956) (29,420,505)
---------------------------------
Net decrease in net assets from Fund Share transactions $ (21,921,223) $ (29,420,505)
---------------------------------
Distributions -
Distributions to Shareholders $ (12,367,580) $ -
---------------------------------
Total distributions $ (12,367,580) $ -
---------------------------------
Net increase (decrease) in net assets $ 66,201,880 $ (242,904,433)
Net assets:
At beginning of period $1,324,642,064 $1,749,157,864
---------------------------------
At end of period $1,390,843,944 $1,506,253,431
---------------------------------
See notes to unaudited condensed consolidated financial statements
6
BELPORT CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Six Months
Ended June 30, Ended June 30,
2003 2002
- --------------------------------------------------------------------------------------------------------------------
Cash Flows From (For) Operating Activities -
Net increase (decrease) in net assets from operations $ 100,490,683 $(213,483,928)
Adjustments to reconcile net increase (decrease) in net assets from operations
to net cash flows from operating activities -
Amortization of debt issuance costs 134,817 97,466
Net investment income allocated from Belvedere Capital (6,073,615) (4,796,064)
Increase in escrow deposits (2,445,484) (2,636,048)
Decrease in receivable for investments sold 50,221,589 -
(Increase) decrease in other assets (12,561) 639,661
Decrease (increase) in dividends and interest receivable 36 (772,001)
Increase in interest payable for open swap contracts 15,435 19,259
Increase (decrease) in security deposits, accrued interest and
accrued other expenses and liabilities 17,017 (115,198)
Increase in accrued property taxes 2,290,702 2,384,916
Payments for investments in other real estate (5,026,960) -
Proceeds from sale of investment in
other real estate 5,356,755 -
Improvements to rental property (1,903,172) (1,509,598)
Net (increase) decrease in investment in Belvedere Capital (41,000,000) 2,977,326
Decrease in short-term investments 622,978 1,705,915
Minority interests in net income of controlled subsidiaries 1,203,165 1,967,618
Net realized loss from investment transactions 2,883,208 17,066,297
Net change in unrealized (appreciation) depreciation of
investments (98,321,217) 201,548,595
---------------------------------
Net cash flows from operating activities $ 8,453,376 $ 5,094,216
---------------------------------
Cash Flows From (For) Financing Activities -
Repayment of mortgage $ (6,410) $ -
Distributions paid to Shareholders (5,887,847) -
Payments for Fund Shares redeemed (2,118,686) (3,703,970)
Distributions paid to minority shareholders (557,312) (1,914,700)
---------------------------------
Net cash flows for financing activities $ (8,570,255) $ (5,618,670)
---------------------------------
Net increase (decrease) in cash $ (116,879) $ (524,454)
Cash at beginning of period $ 7,452,296 $ 10,001,955
---------------------------------
Cash at end of period $ 7,335,417 $ 9,477,501
=================================
See notes to unaudited condensed consolidated financial statements
7
BELPORT CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
Six Months Six Months
Ended June 30, Ended June 30,
2003 2002
- -------------------------------------------------------------------------------------------------
Supplemental Disclosure and Non-cash Investing and
Financing Activities -
Interest paid on loan - Credit Facility $ 1,781,333 $ 2,184,379
Interest paid on mortgages $ 12,775,879 $ 12,347,318
Interest paid on swap contracts $ 4,457,286 $ 3,838,748
Market value of securities distributed in payment of
redemptions $ 20,250,630 $ 25,716,535
Market value of real property and other assets, net
of current liabilities, assumed in conjunction with
acquisition of other real estate $ 64,628,785 $ -
Mortgage assumed in conjunction with acquisition of
other real estate $ 59,601,825 $ -
Market value of real property and other assets, net
of current liabilities, disposed of in conjunction with
sale of other real estate $ 64,603,784 $ -
Mortgage disposed of in conjunction with sale of
other real estate $ 59,595,415 $ -
See notes to unaudited condensed consolidated financial statements
8
BELPORT CAPITAL FUND LLC as of June 30, 2003
Condensed Consolidated Financial Statements (Continued)
Financial Highlights (Unaudited)
For the Six Months Ended June 30, 2003
- --------------------------------------------------------------------------------
Net asset value - Beginning of period $ 76.750
Income (loss) from operations
- --------------------------------------------------------------------------------
Net investment income (6) $ 0.295
Net realized and unrealized gain 5.615
- --------------------------------------------------------------------------------
Total income from operations $ 5.910
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Distributions
- --------------------------------------------------------------------------------
Distributions to Shareholders $ (0.720)
- --------------------------------------------------------------------------------
Total distributions $ (0.720)
- --------------------------------------------------------------------------------
Net asset value - End of period $ 81.940
- --------------------------------------------------------------------------------
Total Return(1) 7.74%
- --------------------------------------------------------------------------------
As a Percentage As a Percentage
of Average Net of Average Gross
Ratios Assets(5) Assets(2)(5)
- -----------------------------------------------------------------------------------------------
Expenses of Consolidated Real Property Subsidiaries
Interest and other borrowing costs(4) 1.62%(3) 1.13%(3)
Operating expenses(4) 1.77%(3) 1.23%(3)
Belport Capital Fund LLC Expenses
Interest and other borrowing costs(7) 0.99%(3) 0.69%(3)
Investment advisory and administrative fees,
servicing fees and other Fund operating expenses(7)(8) 1.26%(3) 0.87%(3)
-----------------------------------
Total expenses 5.64%(3) 3.92%(3)
- -----------------------------------------------------------------------------------------------
Net investment income 0.78%(3) 0.54%(3)
- -----------------------------------------------------------------------------------------------
Supplemental Data
- -----------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $1,390,844
Portfolio Turnover of Tax-Managed Growth Portfolio (the Portfolio) 11%
- -----------------------------------------------------------------------------------------------
(1) Returns are calculated by determining the percentage change in net asset
value with all distributions reinvested. Total return is not computed on an
annualized basis.
(2) Average Gross Assets is defined as the average daily amount of all assets
of Belport Capital Fund LLC (Belport Capital) (including Belport Capital's
interest in Belvedere Capital Fund Company LLC (Belvedere Capital) and
Belport Capital's ratable share of the assets of its directly and
indirectly controlled subsidiaries), without reduction by any liabilities.
For this purpose, the assets of Belport Realty Corporation's (Belport
Realty) controlled subsidiaries are reduced by the proportionate interests
therein of investors other than Belport Realty.
(3) Annualized.
(4) Includes Belport Realty's proportional share of expenses incurred by its
majority-owned subsidiaries.
(5) For the purpose of calculating ratios, the income and expenses of Belport
Realty's controlled subsidiaries are reduced by the proportionate interest
therein of investors other than Belport Realty.
(6) Calculated using average shares outstanding.
(7) Includes the expenses of Belport Capital and Belport Realty. Does not
include expenses of the real estate subsidiaries majority-owned by Belport
Realty.
(8) Includes Belport Capital's share of Belvedere Capital's allocated expenses,
including those expenses allocated from the Portfolio.
See notes to unaudited condensed consolidated financial statements
9
BELPORT CAPITAL FUND LLC as of June 30, 2003
Notes to Condensed Consolidated Financial Statements (Unaudited)
1 Basis of Presentation
The condensed consolidated interim financial statements of Belport Capital Fund
LLC (Belport Capital) and its subsidiaries (collectively, the Fund) have been
prepared by the Fund, without audit, in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted as permitted by such rules and regulations. All adjustments, consisting
of normal recurring adjustments, have been included. Management believes that
the disclosures are adequate to present fairly the financial position, results
of operations, cash flows and financial highlights at the dates and for the
periods presented. It is suggested that these interim financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Fund's latest annual report on Form 10-K. Results for interim periods are
not necessarily indicative of those to be expected for the full fiscal year.
The balance sheet at December 31, 2002 has been derived from the December 31,
2002 audited financial statements but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements as permitted by the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Certain amounts in the prior period's condensed consolidated financial
statements have been reclassified to conform with the current period
presentation.
2 Estate Freeze
Shareholders in Belport Capital are entitled to restructure their Fund Share
interests under what is termed an Estate Freeze Election. Under this election,
Fund Shares are divided into Preferred Shares and Common Shares. Preferred
Shares have a preferential right over the corresponding Common Shares equal to
(i) 95% of the original capital contribution made in respect of the undivided
Shares from which the Preferred Shares and Common Shares were derived, plus (ii)
an annuity priority return equal to 8.5% of the Preferred Shares' preferential
interest in the original capital contribution of the undivided Fund Shares. The
associated Common Shares are entitled to the remaining 5% of the original
capital contribution in respect of the undivided Shares, plus any returns
thereon in excess of the fixed annual priority of the Preferred Shares. At June
30, 2003 and December 31, 2002, the Preferred Shares were valued at $81.94 and
$76.75, 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.
10
3 Investment Transactions
The following table summarizes the Fund's investment transactions for the six
months ended June 30, 2003 and June 30, 2002:
Six Months Ended Six Months Ended
Investment Transaction June 30, 2003 June 30, 2002
- --------------------------------------------------------------------------------
Increases in investment in Belvedere Capital $ 41,000,000 $ 12,161,350
Decreases in investment in Belvedere Capital $ 20,250,630 $ 40,855,212
Acquisitions of other real estate(1) $ 5,026,960 $ -
Sales of other real estate(1) $ 5,356,755 $ -
- --------------------------------------------------------------------------------
(1) In March 2003, Bel Oakbrook LLC (Bel Oakbrook), a wholly-owned subsidiary
of Belport Realty Corporation (Belport Realty), acquired a 100% ownership
interest in CRIC Oakbrook 2, LLC (CRIC Oakbrook), an other real estate
investment. In May 2003, Belport Realty sold its interest in Bel Oakbrook
to another fund sponsored by Eaton Vance Management. A gain of
$323,384 was recognized on the transaction.
4 Indirect Investment in Portfolio
The following table summarizes the Fund's investment in Tax-Managed Growth
Portfolio (the Portfolio) through Belvedere Capital Fund Company LLC (Belvedere
Capital), for the six months ended June 30, 2003 and June 30, 2002, including
allocations of income and expenses for the respective periods then ended:
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
- ----------------------------------------------------------------------------------------------------
Belvedere Capital's interest in the Portfolio(1) $9,599,217,401 $9,414,074,868
The Fund's investment in Belvedere Capital(2) $1,453,987,522 $1,541,299,575
Income allocated to Belvedere Capital from the Portfolio $ 66,798,353 $ 59,178,086
Income allocated to the Fund from Belvedere Capital $ 10,171,072 $ 9,902,781
Expenses allocated to Belvedere Capital from the Portfolio $ 20,113,419 $ 22,716,704
Expenses allocated to the Fund from Belvedere Capital $ 4,097,457 $ 5,106,717
- ----------------------------------------------------------------------------------------------------
(1) As of June 30, 2003 and 2002, the value of Belvedere Capital's interest in
the Portfolio represents 61.7% and 57.0% of the Portfolio's net assets,
respectively.
(2) As of June 30, 2003 and 2002, the Fund's investment in Belvedere Capital
represents 15.1% and 16.4% of Belvedere Capital's net assets, respectively.
A summary of the Portfolio's Statement of Assets and Liabilities at June 30,
2003, December 31, 2002 and June 30, 2002 and its operations for the six months
ended June 30, 2003, for the year ended December 31, 2002 and for the six months
ended June 30, 2002 follows:
June 30, December 31, June 30,
2003 2002 2002
------------------------------------------------------
Investments, at value $15,616,951,272 $14,544,149,182 $16,438,266,069
Other assets 26,660,614 70,073,039 258,245,026
- --------------------------------------------------------------------------------------
Total assets $15,643,611,886 $14,614,222,221 $16,696,511,095
Total liabilities 93,843,137 42,700,633 171,302,142
- --------------------------------------------------------------------------------------
Net assets $15,549,768,749 $14,571,521,588 $16,525,208,953
======================================================================================
Dividends and interest $ 109,393,140 $ 213,292,082 104,789,317
- --------------------------------------------------------------------------------------
Investment adviser fee $ 31,979,032 $ 71,564,552 $ 38,983,369
Other expenses 985,298 2,577,489 1,249,484
- --------------------------------------------------------------------------------------
Total expenses $ 32,964,330 $ 74,142,041 $ 40,232,853
- --------------------------------------------------------------------------------------
11
Net investment income $ 76,428,810 $ 139,150,041 $ 64,556,464
Net realized losses (29,306,399) (459,996,840) (198,388,599)
Net change in unrealized
appreciation (depreciation) 1,126,151,279 (3,312,547,564) (1,921,047,828)
- -------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $ 1,173,273,690 $(3,633,394,363) $(2,054,879,963)
- -------------------------------------------------------------------------------------
5 Interest Rate Swap Agreements
Belport Capital has entered into current and forward interest rate swap
agreements in connection with its real estate investments and the associated
borrowings. Under such agreements, Belport Capital has agreed to make periodic
payments at fixed rates in exchange for payments at floating rates. The notional
or contractual amounts of these instruments may not necessarily represent the
amounts potentially subject to risk. The measurement of the risks associated
with these investments is meaningful only when considered in conjunction with
all related assets, liabilities and agreements. As of December 31, 2002, Belport
Capital had entered into interest rate swap agreements with Citibank, N.A.
(Citibank) and Merrill Lynch Capital Services, Inc (MLCS). Effective June 30,
2003, MLCS assumed all swap agreements previously entered into with Citibank
(Note 6).
Notional Unrealized Unrealized
Amount Depreciation Depreciation
Effective (000's Fixed Floating Termination at June 30, at December 31,
Date omitted) Rate Rate Date 2003 2002
- ---------------------------------------------------------------------------------------
03/01 $49,080 5.8075% LIBOR + 0.40% 3/08 $ 6,307,231 $ 529,706
05/01 73,980 5.79% LIBOR + 0.40% 3/08 9,452,533 8,088,686
07/01 34,905 5.995% LIBOR + 0.40% 3/08 4,785,332 4,169,274
12/01 57,509 5.841% LIBOR + 0.40% 3/08 7,477,955 6,440,259
03/08 49,080 6.45% LIBOR + 0.40% 2/10 1,128,867 5,416,263
03/08 73,980 6.92% LIBOR + 0.40% 9/10 2,773,753 1,741,327
- ---------------------------------------------------------------------------------------
Total $31,925,671 $26,385,515
- ---------------------------------------------------------------------------------------
6 Debt
Credit Facility - Effective on June 30, 2003, Belport Capital refinanced the
existing credit facility with Citicorp North America, Inc. with two new credit
arrangements (collectively, the Credit Facility) totaling $275,000,000. The
Credit Facility has a seven-year maturity and will expire on June 25, 2010.
Belport Capital's obligations under the Credit Facility are secured by a pledge
of its assets, excluding the assets of Bel Multifamily Property Trust (Bel
Multifamily) and Monadnock Property Trust LLC (Monadnock).
The credit arrangement with DrKW Holdings, Inc. is for $221,000,000. This credit
arrangement accrues interest at a rate of one-month LIBOR + 0.20% per annum. As
of June 30, 2003, outstanding borrowings under this credit arrangement totaled
$221,000,000.
The credit arrangement with Merrill Lynch Mortgage Capital is for $54,000,000,
and includes the ability to issue letters of credit up to $10,000,000. This
credit arrangement accrues interest at a rate of one-month LIBOR + 0.38% per
annum. A commitment fee of 0.10% per annum is paid on the unused commitment
amount. Belport Capital pays all fees associated with issuing the letters of
credit. As of June 30, 2003, outstanding borrowings under this credit
arrangement totaled $5,000,000, as well as a letter of credit outstanding for
$1,299,000. The letter of credit was issued as a substitute for funding certain
mortgage escrow accounts required by the lender of Bel Multifamily. The letter
of credit expires on June 30, 2004 and automatically extends for one-year
periods not to extend beyond June 15, 2010. Fees paid or accrued under the terms
of the letter of credit issued under the existing Credit Facility totaled $4,025
for the six months ended June 30, 2003.
12
Mortgages - In May 2003, in conjunction with the sale of Belport Realty's
interest in Bel Oakbrook (Note 3), the mortgage payable by CRIC Oakbrook was
disposed of. At the time of the transaction, the loan balance was $59,595,415.
7 Segment Information
Belport Capital pursues its investment objective primarily by investing
indirectly in the Portfolio through Belvedere Capital. The Portfolio is a
diversified investment company that emphasizes investments in common stocks of
domestic and foreign growth companies that are considered to be high in quality
and attractive in their long-term investment prospects. Separate from its
investment in Belvedere Capital, Belport Capital invests in real estate assets
through its subsidiary, Belport Realty. Belport Realty invests directly in
Partnership Preference Units and indirectly in real property through controlled
subsidiaries, Bel Multifamily, Monadnock and Bel Oakbrook (for the period from
March 19, 2003 to May 13, 2003).
Belport Capital evaluates performance of the reportable segments based on the
net increase (decrease) in net assets from operations of the respective segment,
which includes net investment income (loss), realized gain (loss) and unrealized
gain (loss). The accounting policies of the reportable segments are the same as
those for Belport Capital on a consolidated basis. No reportable segments have
been aggregated. Reportable information by segment is as follows:
For the Three Months Ended Tax Managed Real
June 30, 2003 Growth Portfolio* Estate Total
- --------------------------------------------------------------------------------------
Revenue $ 3,094,014 $ 18,776,535 $ 21,870,549
Interest expense on mortgages - (6,544,104) (6,544,104)
Interest expense on Credit Facility - (880,186) (880,186)
Interest expense on swap contracts - (2,305,806) (2,305,806)
Operating expenses (237,868) (8,495,397) (8,733,265)
Minority interest in net income of
controlled Subsidiaries - (544,906) (544,906)
- --------------------------------------------------------------------------------------
Net investment income $ 2,856,146 $ 6,136 $ 2,862,282
Net realized gain 2,441,173 323,384 2,764,557
Change in unrealized gain (loss) 166,898,579 (3,912,655) 162,985,924
- --------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations of reportable segments $172,195,898 $ (3,583,135) $168,612,763
- --------------------------------------------------------------------------------------
For the Three Months Ended Tax Managed Real
June 30, 2003 Growth Portfolio* Estate Total
- --------------------------------------------------------------------------------------
Revenue $ 2,748,570 $ 19,100,773 $ 21,849,343
Interest expense on mortgages - (6,222,590) (6,222,590)
Interest expense on Credit Facility - (1,294,340) (1,294,340)
Interest expense on swap contracts - (1,821,933) (1,821,933)
Operating expenses (279,392) (7,490,078) (7,769,470)
Minority interest in net income of
controlled Subsidiaries - (899,444) (899,444)
- --------------------------------------------------------------------------------------
Net investment income $ 2,469,178 $ 1,372,388 $ 3,841,566
Net realized loss (6,972,021) - (6,972,021)
Change in unrealized gain (loss) (201,939,631) (8,759,125) (210,698,756)
- --------------------------------------------------------------------------------------
Net decrease in net assets from operations
of reportable segments $(206,442,474) $ (7,386,737) $(213,829,211)
- --------------------------------------------------------------------------------------
13
For the Six Months Ended Tax Managed Real
June 30, 2003 Growth Portfolio* Estate Total
- --------------------------------------------------------------------------------------
Revenue $ 6,073,615 $ 37,646,581 $ 43,720,196
Interest expense on mortgages - (12,873,831) (12,873,831)
Interest expense on Credit Facility - (1,855,439) (1,855,439)
Interest expense on swap contracts - (4,472,721) (4,472,721)
Operating expenses (476,083) (16,278,101) (16,754,184)
Minority interest in net income of
controlled Subsidiaries - (1,203,165) (1,203,165)
- --------------------------------------------------------------------------------------
Net investment income $ 5,597,532 $ 963,324 $ 6,560,856
Net realized gain (loss) (3,206,592) 323,384 (2,883,208)
Change in unrealized gain (loss) 108,244,918 (9,923,701) 98,321,217
- --------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations of reportable segments $110,635,858 $ (8,636,993) $101,998,865
- --------------------------------------------------------------------------------------
For the Six Months Ended Tax Managed Real
June 30, 2003 Growth Portfolio* Estate Total
- ---------------------------------------------------------------------------------------
Revenue $ 4,796,064 $ 38,567,463 $ 43,363,527
Interest expense on mortgages - (12,407,919) (12,407,919)
Interest expense on Credit Facility - (2,514,411) (2,514,411)
Interest expense on swap contracts - (3,858,007) (3,858,007)
Operating expenses (592,856) (14,840,195) (15,433,051)
Minority interest in net income of
controlled Subsidiaries - (1,967,618) (1,967,618)
- ---------------------------------------------------------------------------------------
Net investment income $ 4,203,208 $ 2,979,313 $ 7,182,521
Net realized loss (17,066,297) - (17,066,297)
Change in unrealized gain (loss) (180,358,627) (21,189,968) (201,548,595)
- ---------------------------------------------------------------------------------------
Net decrease in net assets from
operations of reportable segments $(193,221,716) $(18,210,655) $(211,432,371)
- ---------------------------------------------------------------------------------------
* Belport Capital invests indirectly in Tax-Managed Growth Portfolio through
Belvedere Capital.
The following tables reconcile the reported segment information to the condensed
consolidated financial statements for the periods indicated:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
-----------------------------------------------------------------------
Revenue:
Revenue from reportable segments $ 21,870,549 $ 21,849,343 $ 43,720,196 $ 43,363,527
Unallocated revenue 17,576 9,152 56,859 16,725
------------------------------------------------------------------
Total revenue $ 21,888,125 $ 21,858,495 $ 43,777,055 $ 43,380,252
------------------------------------------------------------------
Net increase (decrease) in net assets
from operations:
Net increase (decrease) in net
assets from operations of
reportable segments $168,612,763 $(213,829,211) $ 101,998,865 $(211,432,371)
Unallocated revenue 17,576 9,152 56,859 16,725
Unallocated expenses ** (820,156) (993,733) (1,565,041) (2,068,282)
-------------------------------------------------------------------
Total net increase (decrease) in net
assets from operations $167,810,183 $(214,813,792) $ 100,490,683 $(213,483,928)
-------------------------------------------------------------------
** Unallocated expenses include costs of Belport Capital to operate the Fund
such as servicing and distribution fees, as well as other miscellaneous
administrative costs of Belport Capital.
14
Tax-Managed Growth Real
At June 30, 2003 Portfolio* Estate Total
- --------------------------------------------------------------------------------------
Segment assets $1,453,987,522 $593,032,982 $2,047,020,504
Segment liabilities 6,031,640 640,773,898 646,805,538
- --------------------------------------------------------------------------------------
Net assets of reportable segments $1,447,955,882 $(47,740,916) $1,400,214,966
- --------------------------------------------------------------------------------------
At December 31, 2002
- --------------------------------------------------------------------------------------
Segment assets $1,372,347,800 $601,083,507 $1,973,431,307
Segment liabilities - 640,369,917 640,369,917
- --------------------------------------------------------------------------------------
Net assets of reportable segments $1,372,347,800 $(39,286,410) $1,333,061,390
- --------------------------------------------------------------------------------------
* Belport Capital invests indirectly in Tax-Managed Growth Portfolio through
Belvedere Capital.
Net assets: June 30, 2003 December 31, 2002
--------------- -----------------
Net assets of reportable segments $1,400,214,966 $1,333,061,390
Unallocated cash 2,054,656 2,345,657
Other assets 1,031 622,978
Loan payable- Credit Facility (11,300,000) (11,300,000)
Other liabilities (126,709) (87,961)
--------------- -----------------
Total net assets $1,390,843,944 $1,324,642,064
--------------- -----------------
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
- --------------------------------------------------------------------------------
The information in this report contains forward-looking statements within the
meaning of the federal securities laws. Forward-looking statements typically are
identified by use of terms such as "may," "will," "should," "might," "expect,"
"anticipate," "estimate," and similar words, although some forward-looking
statements are expressed differently. The actual results of Belport Capital Fund
LLC (the Fund) could differ materially from those contained in the
forward-looking statements due to a number of factors. The Fund undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events, or otherwise, except as required by
applicable law. Factors that could affect the Fund's performance include a
decline in the U.S. stock markets or in general economic conditions, adverse
developments affecting the real estate industry, or fluctuations in interest
rates.
The following discussion should be read in conjunction with the Fund's unaudited
condensed consolidated financial statements and related notes in Item 1 above.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2003 COMPARED TO THE
QUARTER ENDED JUNE 30, 2002
- --------------------------------------------------------------------------------
PERFORMANCE OF THE FUND.(1) The Fund's total return was 13.58% for the quarter
ended June 30, 2003. This return reflects an increase in the Fund's net asset
value per share from $72.14 to $81.94 during the period. For comparison, the
Standard & Poor's 500 Index (the S&P 500), an unmanaged index of large
capitalization stocks commonly used as a benchmark for the U.S. equity market,
had a total return of 15.39% over the same period. The performance of the Fund
exceeded that of Tax-Managed Growth Portfolio (the Portfolio) by approximately
0.04% during the period. Last year, the Fund had a total return performance of
- -12.39% for the quarter ended June 30, 2002. This return reflected a decrease in
the Fund's net asset value per share from $98.46 to $86.26 during the period.
For comparison, the S&P 500 had a total return of -13.39% over the same period.
The performance of the Fund trailed that of the Portfolio by approximately 0.75%
during that period.
PERFORMANCE OF THE PORTFOLIO. The total return of the Portfolio for the quarter
ended June 30, 2003 was 13.54% compared to the 15.39% return achieved by the S&P
500 over the same period. The S&P 500 enjoyed a strong rally in the quarter,
posting its best quarterly return since the fourth quarter of 1998. Encouraging
fiscal and monetary policies, resilient consumer spending and positive earnings
momentum contributed to the market's strength during the period. In general,
small capitalization stocks outperformed large capitalization holdings during
the quarter and value investing outperformed growth, a continuing theme from the
same period last year. The total return of the Portfolio for the quarter ended
June 30, 2002 was -11.64%.
The performance of the Portfolio trailed the performance of the S&P 500 during
the quarter ended June 30, 2003 primarily due to the Portfolio's relatively more
defensive tilt and its de-emphasis of stocks considered by the Portfolio's
investment adviser, Boston Management and Research (Boston Management), to be of
lower quality. Higher volatility, lower quality stocks exhibited strong momentum
across most industry groups during the period.
The Portfolio's sector allocation during the quarter remained very similar to
its positioning relative to the S&P 500 during the year ended December 31, 2002,
with no major sector or industry shifts. The Portfolio's exposure to
pharmaceuticals in the health care sector and media investments in the consumer
discretionary sector was particularly beneficial to the Portfolio's performance
during the quarter.
Boston Management remained cautious in the technology and telecommunications
sectors during the quarter, maintaining an underweight allocation comparable to
the same period a year ago. The Portfolio continued its de-emphasis of stocks in
the semiconductor equipment, peripherals, and wireless telecommunication
industries. This posture has added to performance over longer time periods and
during the same period a year ago, but hindered the Portfolio's performance
during the second quarter of 2003.
The Portfolio's overweight of the industrials sector in the areas of airfreight
logistics and aerospace and defense, another continuing theme from last year,
detracted from quarterly results, but has positively contributed to 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. Comparison to the S&P 500 is for
reference only. It is not possible to invest directly in an index.
16
Portfolio's longer-term returns. The Portfolio's continued de-emphasis of the
utilities and materials sectors and the quality of its stock selection in those
sectors was beneficial to performance during the quarter.
PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate operations are
conducted primarily through Real Estate Joint Ventures that are majority-owned
by Belport Realty Corporation (Belport Realty), a controlled subsidiary of the
Fund. During the quarter ended June 30, 2003, the Fund's real estate operations
continued to be impacted by weaker multifamily market fundamentals, as well as
the uncertain outlook for the U.S. economy.
Rental income from real estate operations decreased to $16.6 million for the
quarter ended June 30, 2003 from $16.9 million for the quarter ended June 30,
2002, a decline of $0.3 million or 2%. This decrease in rental income resulted
primarily from increased rent concessions or reduced apartment rental rates and
lower occupancy levels at properties owned by the Fund's Real Estate Joint
Ventures, a trend that continued from 2002.
Property operating expenses increased to $7.2 million for the quarter ended June
30, 2003 from $6.7 million for the quarter ended June 30, 2002, an increase of
$0.5 million or 7% (property operating expenses are before debt service and
certain operating expenses of Belport Realty of approximately $1.3 million for
the quarter ended June 30, 2003 and approximately $0.8 million for the quarter
ended June 30, 2002). The increase was principally due to a 17% increase in
property tax and insurance expenses and a 6% increase in property and
maintenance expenses for the period. Given the continued uncertain outlook for
the U.S. economy as a whole, Boston Management, Belport Realty's manager,
expects that real estate operating results in 2003 will continue to be modestly
below the levels of 2002.
At June 30, 2003, the estimated fair value of the real properties held through
Belport Realty was $475.5 million compared to $496.7 million at June 30, 2002, a
decrease of $21.2 million or 4%. The decrease in real property value resulted
from declines in near-term earnings expectations and the economic downturn. The
Fund saw unrealized depreciation in the estimated fair value of its other real
estate investments (which includes the Fund's Real Estate Joint Ventures) of
approximately $2.2 million during the quarter ended June 30, 2003 compared to
approximately $0.2 million in unrealized appreciation for the quarter ended June
30, 2002. Despite weaker market conditions, declines in asset values for
multifamily properties during the quarter have generally been modest as
decreases in capitalization rates have continued to significantly offset
declining income level expectations. During the quarter ended June 30, 2003, the
Fund sold its investment in Bel Oakbrook LLC, that was acquired in March 2003,
to another investment fund advised by Boston Management and recognized a gain of
$0.3 million on the transaction.
For the quarter ended June 30, 2003, the Fund's investments in Partnership
Preference Units continued to benefit from declining interest rates and
tightening spreads in income-oriented securities, particularly in real
estate-related securities. At June 30, 2003, the estimated fair value of the
Fund's Partnership Preference Units totaled $104.4 million compared to $95.1
million at June 30, 2002, an increase of $9.3 million or 10%. The Fund saw
unrealized appreciation in the estimated fair value of its Partnership
Preference Units of approximately $3.6 million during the quarter ended June 30,
2003 compared to unrealized appreciation of approximately $1.6 million for the
quarter ended June 30, 2002. Dividends received from Partnership Preference
Units totaled $2.2 million for the quarters ended June 30, 2003 and 2002.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the quarter ended June 30,
2003, interest rate swap agreement values depreciated by $5.3 million, compared
to a decline for the three months ended June 30, 2002 of $10.6 million. The
depreciation in both periods was caused by declines in swap rates, with a
smaller decline in 2003.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 2002
- --------------------------------------------------------------------------------
PERFORMANCE OF THE FUND. The Fund's total return was 7.74% for the six months
ended June 30, 2003. This return reflects an increase in the Fund's net asset
value per share from $76.75 to $81.94 and a distribution of $0.72 per share
during the period. For comparison, the S&P 500 had a total return of 11.75% over
the same period. The performance of the Fund trailed that of the Portfolio by
approximately 0.45% during the period. Last year, the Fund had a total return
performance of -12.31% for the six months ended June 30, 2002. This return
17
reflected a decrease in the Fund's net asset value per share from $98.37 to
$86.26. For comparison, the S&P 500 had a total return of -13.15% over the same
period. The performance of the Fund trailed that of the Portfolio by
approximately 1.37% for the six months ended June 30, 2002.
PERFORMANCE OF THE PORTFOLIO. The total return of the Portfolio for the six
months ended June 30, 2003 was 8.19% compared to the 11.75% return achieved by
the S&P 500 over the same period. Market performance during the first six
months of 2003 remained volatile, but markets proved resilient, achieving
impressive returns and positively concluding the first half of the year. War
angst, questionable economic recovery, and the SARS outbreak were just a few of
the factors contributing to increased volatility and unsettled investor
sentiment during the period. During the second quarter of 2003, an easing of
geopolitical concerns, positive consumer data, a strong housing market, and a
low interest rate environment provided significant support and a boost to the
equity markets. The Portfolio's total return for the quarter ended June 30, 2002
was -10.94%.
The Portfolio's performance trailed the S&P 500 in the first six months of 2003,
mostly due to its lower exposure to higher volatility, lower quality stocks,
which were the strongest price performers during the first six months of 2003.
Despite this short-term performance, the Portfolio is committed to its
investment strategy of seeking quality stocks that are reasonably priced in
relation to their fundamental value.
Boston Management continued to de-emphasize health care investments during the
period, a directional move initiated last year that has been positive for the
Portfolio's relative returns. Boston Management continued to emphasize
industrial company investments, especially in the airfreight logistics and
aerospace and defense areas, which has helped the Portfolio's longer-term
record, but detracted from first half results. The Portfolio also maintained an
overweight stance in the consumer discretionary and consumer staples sectors
during the period, as it did in the first half of 2002.
Lack of earning visibility during the period reinforced the Portfolio's cautious
weighting in the telecommunications and information technology sectors. Both of
the aforementioned sectors were de-emphasized last year as well. The Portfolio's
underweight of diversified telecommunication service and software holdings
relative to the S&P 500 was particularly beneficial to relative performance in
the first half of 2003. Boston Management also continued to underweight the
Portfolio's exposure to the materials and utilities sectors, a similar stance to
last year's allocation.
PERFORMANCE OF REAL ESTATE INVESTMENTS. Rental income for the six months ended
June 30, 2003 decreased to $33.2 million from $34.1 million for the six months
ended June 30, 2002, a decline of $0.9 million or 3%. Property operating
expenses increased to $14.1 million for the six months ended June 30, 2003 from
$13.0 million for the six months ended June 30, 2002, an increase of $1.1
million or 8% (property operating expenses are before debt service and certain
operating expenses of Belport Realty of approximately $2.2 million for the six
months ended June 30, 2003 and approximately $1.8 million for the six months
ended June 30, 2002). The increase was due to a 9% increase in property tax and
insurance expenses and to a 10% increase in property and maintenance expenses.
As in 2002, real estate operations during the period were affected by weaker
multifamily market fundamentals in most regions combined with lower occupancy
levels and increased rent concessions or reduced apartment rents.
At June 30, 2003, the estimated fair value of the real properties held through
Belport Realty was $475.5 million compared to $496.7 million at June 30, 2002, a
decrease of $21.2 million or 4%. The decrease in real property value resulted
from declines in near-term earnings expectations and the economic downturn. The
Fund saw unrealized depreciation in the estimated fair value of its other real
estate investments of approximately $12.3 million during the six months ended
June 30, 2003 compared to unrealized depreciation of approximately $16.7 million
for the six months ended June 30, 2002. Declines in asset values for multifamily
properties during the period have generally been modest as decreases in
capitalization rates have largely offset declining income level expectations.
During the six months ended June 30, 2003, the Fund sold its investment in Bel
Oakbrook LLC, that was acquired in March 2003, to another investment fund
advised by Boston Management and recognized a gain of $0.3 million on the
transaction.
For the six months ended June 30, 2003, the Fund's investments in Partnership
Preference Units continued to benefit from declining interest rates and
tightening spreads in income-oriented securities, particularly in real
18
estate-related securities. At June 30, 2003, the estimated fair value of the
Fund's Partnership Preference Units totaled $104.4 million compared to $95.1
million at June 30, 2002, an increase of $9.3 million or 10%. The Fund saw
unrealized appreciation in the estimated fair value of its Partnership
Preference Units of approximately $7.9 million during the six months ended June
30, 2003 compared to unrealized depreciation of approximately $2.6 million for
the six months ended June 30, 2002. Dividends received from Partnership
Preference Units totaled $4.4 million for the six months ended June 30, 2003 and
2002.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the six months ended June 30,
2003, interest rate swap agreement values depreciated by approximately $5.5
million compared to depreciation of approximately $7.1 million for the six
months ended June 30, 2002. The depreciation was caused by a decline in swap
rates during the periods.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Effective June 30, 2003, the Fund refinanced its Credit Facility with Citicorp
North America by entering into new credit arrangements with DrKW Holdings, Inc.
(DrKW) and Merrill Lynch Mortgage Capital, Inc. (MLMC) (collectively, the Credit
Facility), which together total $275 million. The Credit Facility is secured by
a pledge of the Fund's assets, excluding the assets of Bel Multifamily Property
Trust and Monadnock Property Trust LLC, and has a seven-year maturity. The
Credit Facility will expire in June 2010.
The Credit Facility is primarily used to fund the Fund's equity in real estate
investments and will continue to be used for such purpose in the future. The
Credit Facility also provides for selling commissions, organizational expenses
and any short-term liquidity needs of the Fund. Under certain circumstances, the
Fund may increase the size of the Credit Facility and the amount of outstanding
borrowings thereunder for these purposes.
The Fund has a $221 million credit arrangement with DrKW. Borrowings under the
DrKW credit arrangement accrue interest at a rate of one-month LIBOR plus 0.20%
per annum. As of June 30, 2003, outstanding borrowings under the DrKW credit
arrangement totaled $221 million.
The Fund has a $54 million credit arrangement with MLMC, including up to $10
million under letters of credit. Borrowings under the MLMC credit arrangement
accrue interest at a rate of one-month LIBOR plus 0.38% per annum. As of June
30, 2003, outstanding borrowings under the MLMC credit arrangement totaled $5
million, with an additional $1.3 million outstanding under letters of credit.
The unused loan commitment amount totaled approximately $47.7 million. A
commitment fee of 0.10% per annum is paid on the unused commitment amount. The
Fund pays all fees associated with issuing the letters of credit.
The Fund has entered into interest rate swap agreements with respect to its
borrowings and real estate investments. Pursuant to these agreements, the Fund
makes periodic payments to the counterparty at predetermined fixed rates, in
exchange for floating-rate payments that fluctuate with one-month LIBOR. During
the terms of the outstanding swap agreements, changes in the underlying values
of the swaps are recorded as unrealized gains or losses.
As of June 30, 2003 and June 30, 2002, the unrealized depreciation related to
the interest rate swap agreements was $31.9 million and $9.5 million,
respectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
The Fund's discussion and analysis of its financial condition and results of
operations are based upon its unaudited condensed consolidated financial
statements, which have been 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. The Fund bases these estimates, judgments and assumptions on
historical experience and on other various factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
The Fund's critical accounting policies affect the Fund's more significant
estimates and assumptions used in valuing the Fund's real estate investments and
interest rate swap agreements. Prices are not readily available for these types
of investments and therefore they are valued on an ongoing basis by Boston
19
Management, in its capacity as manager of Belport Realty, in the case of the
real estate investments, and in its capacity as the Fund's investment adviser,
in the case of the interest rate swap agreements.
In estimating the value of the Fund's investments in real estate, Boston
Management takes into account relevant factors, data and information, including,
with respect to investments in Partnership Preference Units, information from
dealers and similar firms with knowledge of such issues and the prices of
comparable preferred equity securities and other fixed or adjustable rate
instruments having similar investment characteristics. Real estate investments
other than Partnership Preference Units are generally stated at estimated fair
values, which represent the amount at which the investments could be sold in a
current transaction between willing parties, that is, other than in a forced or
liquidation sale. Detailed investment valuations are performed at least annually
and reviewed periodically. Interim valuations reflect results of operations and
distributions, and may be adjusted if there has been a significant change in
economic circumstances since the most recent independent valuation. Given that
such valuations include many assumptions, including but not limited to the
assumption that the investment could be sold in a transaction between willing
parties, values may differ from amounts ultimately realized. Boston Management,
as the Fund's investment adviser, determines the value of interest rate swaps,
and, in doing so, may consider among other things, dealer and counter-party
quotes and pricing models.
The policies for valuing real estate investments involve significant judgments
that are based upon, 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. The
valuations of Partnership Preference Units held by the Fund through its
investment in Belport Realty fluctuate over time to reflect, among other
factors, changes in interest rates, changes in 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 value of interest rate swaps may be subject to wide swings in valuation
caused principally by changes in interest rates. Interest rate swaps may be
difficult to value since such instruments may be considered 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 entered into by the Fund with respect to its borrowings.
Fluctuations in the value of real estate investments derived from other factors
besides general interest rate movements (including issuer-specific and
sector-specific credit concerns, property-specific concerns and changes in
interest rate spread relationships) will not be offset by changes in the value
of interest rate swap agreements or other interest rate hedges entered into by
the Fund. Changes in the valuation of Partnership Preference Units not offset by
changes in the valuation of interest rate swap agreements or other interest rate
hedges entered into by the Fund and changes in the value of other real estate
investments will cause the performance of the Fund to deviate from the
performance of the Portfolio.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- -------------------------------------------------------------------
The Fund's primary exposure to interest rate risk arises from its real estate
investments that are financed by the Fund with floating rate borrowings under
the Fund's Credit Facility and by fixed-rate secured mortgage debt obligations
of the Real Estate Joint Ventures and Net Leased Properties. The interest rates
on borrowings under the Fund's Credit Facility are reset at regular intervals
based on a fixed and predetermined premium to LIBOR for short-term extensions of
credit. The Fund utilizes cancelable interest rate swap agreements to fix the
cost of its borrowings under the Credit Facility and to mitigate 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. 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 value of Partnership Preference Units and, to a lesser degree, other real
estate investments is sensitive to interest rate risk. Increases in interest
rates generally will have an adverse affect on the value of Partnership
Preference Units and other real estate investments.
20
The following table summarizes the contractual maturities and weighted-average
interest rates associated with the Fund's significant non-trading financial
instruments. The Fund has no market risk sensitive instruments held for trading
purposes. This information should be read in conjunction with Note 5 to the
Fund's unaudited condensed consolidated financial statements in Item 1 above.
Interest Rate Sensitivity
Cost, Principal (Notional) Amount by Contractual Maturity
For the Twelve Months Ended June 30,
Estimated
2004-2007 2008 Thereafter Total Fair Value
- ---------------------------------------------------------------------------------------------------------------------
Rate sensitive
liabilities:
- ------------------------
Long-term debt:
- ------------------------
Fixed-rate mortgages $361,107,500 $361,107,500 $397,000,000
Average interest rate 6.78% 6.78%
- ------------------------
Variable-rate Credit
Facilities $226,000,000 $226,000,000 $226,000,000
Average interest rate 1.32% 1.32%
- --------------------------------------------------------------------------------------------------------------------
Rate sensitive
derivative
financial instruments:
- ------------------------
Pay fixed/
Receive variable
interest rate
swap contracts $215,474,000 $123,060,000 $338,534,000 $(31,925,671)
Average pay rate 5.84% 6.73% 6.16%
Average receive rate 1.32% 1.32%
- -------------------------------------------------------------------------------------------------------------------
Rate sensitive
investments:
- ------------------------
Fixed-rate Partnership
Preference Units:
- ------------------------
Essex Portfolio, L.P.,
7.875% Series B
Cumulative Redeemable
Preferred Units,
Callable 2/6/03,
Current Yield: 8.03% $ 34,821,762 $ 34,821,762 $ 42,894,425
PSA Institutional
Partners, L.P., 9.50%
Series N Cumulative
Redeemable Perpetual
Preferred Units,
Callable 3/17/05,
Current Yield: 8.99% $ 34,905,000 $ 34,905,000 $ 34,346,000
Prentiss Properties
Acquisition Partners,
L.P., 8.30% Series B
Cumulative Redeemable
Perpetual Preferred
Units, Callable
6/25/03, Current
Yield: 8.41% $ 22,687,060 $ 22,687,060 $ 27,137,000
ITEM 4. CONTROLS AND PROCEDURES.
- ---------------------------------
Eaton Vance Management (Eaton Vance), as the Fund's manager, with the
participation of the Fund's Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of the Fund's disclosure controls
21
and procedures (as defined by Rule 13a-15(e) of the Securities Exchange Act of
1934, as amended) as of the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Fund's disclosure controls and procedures were effective.
There were no changes in the Fund's internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, the Fund's internal
control over financial reporting.
As the Fund's manager, the complete and entire management, control and operation
of the Fund are vested in Eaton Vance. The Fund's organizational structure does
not provide for a board of directors or a board audit committee. As such, the
Fund's Chief Executive Officer and Chief Financial Officer intend to report to
Eaton Vance any significant deficiency in the design or operation of internal
control over financial reporting which could adversely affect the Fund's ability
to record, process, summarize and report financial data, and any fraud, whether
or not material, that involves management or other employees who have a
significant role in the Fund's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ---------------------------
Although in the ordinary course of business, the Fund, Belport Realty and
Belport Realty's controlled subsidiaries may become involved in legal
proceedings, the Fund is not aware of any material pending legal proceedings to
which any of them is subject.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
- ---------------------------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- -----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the three months
ended June 30, 2003.
ITEM 5. OTHER INFORMATION.
- ---------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
- ------------------------------------------
(a) The following is a list of all exhibits filed as part of this Form 10-Q:
4.1 Loan and Security Agreement between Belport Capital Fund LLC and DrKW
Holdings, Inc., as Lender
4.2 Loan and Security Agreement among Belport Capital Fund LLC, Merrill
Lynch Mortgage Capital, Inc., as Agent, the Lenders referred to
therein and Merrill Lynch Capital Services, Inc.
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
22
(b) Reports on Form 8-K:
None.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer on August 14, 2003.
BELPORT CAPITAL FUND LLC
/s/ Michelle A. Alexander
------------------------
Michelle A. Alexander
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
24
EXHIBIT INDEX
-------------
4.1 Loan and Security Agreement between Belport Capital Fund LLC and DrKW
Holdings, Inc., as Lender
4.2 Loan and Security Agreement among Belport Capital Fund LLC, Merrill Lynch
Mortgage Capital, Inc., as Agent, the Lenders referred to therein and
Merrill Lynch Capital Services, Inc.
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
25