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. 000-32633
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Belmar Capital Fund LLC
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(Exact name of registrant as specified in its charter)
Delaware 04-3508106
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(State of organization) (I.R.S. Employer Identification No.)
The Eaton Vance Building
255 State Street
Boston, Massachusetts 02109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 617-482-8260
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None
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(Former Name, Former Address and Former Fiscal Year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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
--- ---
BELMAR CAPITAL FUND LLC
Index to Form 10-Q
PART I FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Statements of Assets and Liabilities as of
June 30, 2003 (Unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended June 30, 2003 and June 30, 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 21
Item 4. Controls and Procedures 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
EXHIBIT INDEX 25
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
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BELMAR CAPITAL FUND LLC
Condensed Consolidated Statements of Assets and Liabilities
June 30, 2003 December 31,
(Unaudited) 2002
--------------- ---------------
Assets:
Investment in Belvedere Capital Fund Company LLC
(Belvedere Capital) $ 1,759,668,762 $ 1,645,261,953
Investment in Partnership Preference Units 564,457,347 550,352,892
Investment in other real estate 190,619,619 203,940,755
Short-term investments 3,499,133 -
--------------- ---------------
Total investments $ 2,518,244,861 $ 2,399,555,600
Cash 5,360,848 6,149,096
Escrow deposits - restricted 3,814,264 4,583,810
Dividends and interest receivable 3,857,954 2,456,370
Receivable for securities sold - 29,285,540
Other assets 3,259,186 3,608,880
--------------- ---------------
Total assets $ 2,534,537,113 $ 2,445,639,296
--------------- ---------------
Liabilities:
Loan payable - Credit Facility $ 596,500,000 $ 596,500,000
Mortgages payable 161,805,384 162,461,900
Open interest rate swap contracts, at value 33,845,164 47,057,312
Swap interest payable 1,144,894 1,696,469
Security deposits 804,009 776,772
Notes payable to minority shareholder 565,972 565,972
Accrued expenses:
Interest expense 1,208,793 2,487,473
Property taxes 1,611,872 3,143,437
Other expenses and liabilities 2,284,702 1,601,191
Minority interests in controlled subsidiaries 7,629,071 9,118,965
--------------- ---------------
Total liabilities $ 807,399,861 $ 825,409,491
--------------- ---------------
Net assets $ 1,727,137,252 $ 1,620,229,805
--------------- ---------------
Shareholders' Capital $ 1,727,137,252 $ 1,620,229,805
--------------- ---------------
Shares Outstanding 23,015,462 23,190,678
--------------- ---------------
Net asset value and redemption price per Share $ 75.04 $ 69.87
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See notes to unaudited condensed consolidated financial statements
3
BELMAR CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Three Months 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 $112,152, $110,981,
$184,755 and $140,336, respectively) $ 6,156,100 $ 6,226,651 $ 12,106,567 $ 11,671,790
Interest allocated from Belvedere Capital 184,836 146,166 303,678 327,524
Expenses allocated from Belvedere Capital (2,580,274) (3,038,724) (5,008,200) (6,184,777)
--------------- --------------- --------------- ---------------
Net investment income allocated from
Belvedere Capital $ 3,760,662 $ 3,334,093 $ 7,402,045 $ 5,814,537
Dividends from Partnership Preference Units 12,150,878 13,191,317 24,635,410 27,103,846
Rental income 8,657,559 8,770,649 17,245,049 17,513,538
Interest 33,976 46,494 58,103 58,389
--------------- --------------- --------------- ---------------
Total investment income $ 24,603,075 $ 25,342,553 $ 49,340,607 $ 50,490,310
--------------- --------------- --------------- ---------------
Expenses:
Investment advisory and administrative fees $ 1,801,410 $ 1,996,181 $ 3,537,849 $ 4,100,935
Property management fees 334,588 347,172 673,575 694,821
Distribution and servicing fees 826,426 996,600 1,586,055 2,040,086
Interest expense on mortgages 3,612,337 3,805,226 7,160,183 7,626,983
Interest expense on Credit Facility 2,162,197 3,546,268 4,907,997 7,223,852
Interest expense on swap contracts 9,551,052 9,840,142 19,242,769 20,037,973
Property and maintenance expenses 3,109,717 2,851,751 5,888,310 5,558,137
Property taxes and insurance 1,196,216 1,248,259 2,373,519 2,478,566
Miscellaneous 447,974 221,139 644,784 504,128
--------------- --------------- --------------- ---------------
Total expenses $ 23,041,917 $ 24,852,738 $ 46,015,041 $ 50,265,481
Deduct-
Reduction of investment advisory
and administrative fees 417,691 500,383 799,699 1,015,852
--------------- --------------- --------------- ---------------
Net expenses $ 22,624,226 $ 24,352,355 $ 45,215,342 $ 49,249,629
--------------- --------------- --------------- ---------------
Net investment income before
minority interest in net income of
controlled subsidiary $ 1,978,849 $ 990,198 $ 4,125,265 $ 1,240,681
Minority interest in net income
of controlled subsidiary (94,806) (97,540) (232,351) (211,932)
--------------- --------------- --------------- ---------------
Net investment income $ 1,884,043 $ 892,658 $ 3,892,914 $ 1,028,749
--------------- --------------- --------------- ---------------
See notes to unaudited condensed consolidated financial statements
4
BELMAR 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) $ 2,922,615 $ (118,185,963) $ (4,318,937) $ (130,723,188)
Investment transactions in Partnership
Preference Units (identified cost basis) 1,172,600 2,285,305 1,811,300 2,285,305
Investment transactions in other real estate
(net of minority interest in realized loss of
controlled subsidiary of $0, $(483,457),
$0, and $(483,457), respectively) - (1,797,001) - (1,797,001)
--------------- --------------- --------------- ---------------
Net realized gain (loss) $ 4,095,215 $ (117,697,659) $ (2,507,637) $ (130,234,884)
--------------- --------------- --------------- ---------------
Change in unrealized appreciation
(depreciation) -
Investment in Belvedere Capital
(identified cost basis) $ 202,414,631 $ (135,368,463) $ 129,298,443 $ (108,446,689)
Investments in Partnership Preference Units
(identified cost basis) 11,475,814 21,142,806 26,287,255 21,073,173
Investments in other real estate
(net of minority interest in unrealized
gain (loss) of controlled subsidiary of
$(1,734,236), $550,045, $(1,722,246)
and $(210,400), respectively) (10,917,092) 1,912,828 (12,300,380) 2,673,275
Interest rate swap contracts 5,372,060 (8,966,738) 13,212,148 (839,108)
--------------- --------------- --------------- ---------------
Net change in unrealized appreciation
(depreciation) $ 208,345,413 $ (121,279,567) $ 156,497,466 $ (85,539,349)
--------------- --------------- --------------- ---------------
Net realized and unrealized gain (loss) $ 212,440,628 $ (238,977,226) $ 153,989,829 $ (215,774,233)
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations $ 214,324,671 $ (238,084,568) $ 157,882,743 $ (214,745,484)
=============== =============== =============== ===============
See notes to unaudited condensed consolidated financial statements
5
BELMAR 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 $ 3,892,914 $ 1,028,749
Net realized loss from investment transactions (2,507,637) (130,234,884)
Net change in unrealized appreciation (depreciation)
of investments 156,497,466 (85,539,349)
---------------- -----------------
Net increase (decrease) in net assets from operations $ 157,882,743 $ (214,745,484)
---------------- -----------------
Transactions in Fund Shares -
Net asset value of Fund Shares issued to Shareholders in
payment of distributions declared $ 18,603,337 $ -
Net asset value of Fund Shares redeemed (30,258,245) (39,273,372)
---------------- -----------------
Net decrease in net assets from Fund Share transactions $ (11,654,908) $ (39,273,372)
---------------- -----------------
Distributions -
Distributions to Shareholders $ (39,320,388) $ -
---------------- -----------------
Total distributions $ (39,320,388) $ -
---------------- -----------------
Net increase (decrease) in net assets $ 106,907,447 $ (254,018,856)
Net assets:
At beginning of period $ 1,620,229,805 $ 2,108,684,133
---------------- -----------------
At end of period $ 1,727,137,252 $ 1,854,665,277
================ =================
See notes to unaudited condensed consolidated financial statements
6
BELMAR 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 $ 157,882,743 $ (214,745,484)
Adjustments to reconcile net increase (decrease) in net assets from operations
to net cash flows from operating activities -
Amortization of debt issuance costs 169,002 177,558
Net investment income allocated from Belvedere Capital (7,402,045) (5,814,537)
Decrease in escrow deposits 769,546 2,431,430
Decrease in receivable for securities sold 29,285,540 -
Decrease in other assets 180,692 378,024
Increase in dividends and interest receivable (1,401,584) (1,862,066)
Decrease in interest payable for open swap contracts (551,575) (63,851)
Decrease in security deposits, accrued interest and
accrued other expenses and liabilities (567,932) (1,132,963)
Decrease in accrued property taxes (1,531,565) (1,335,243)
Proceeds from sales of Partnership Preference Units 13,994,100 30,488,828
Decrease in cash due to sale of one multifamily real estate property - (17,946)
(Increase) decrease in short-term investments (3,499,133) 3,919,805
Improvements to rental property (701,489) (1,101,239)
Net increase in investment in Belvedere Capital (10,866,251) (24,696,694)
Minority interest in net income of controlled subsidiary 232,351 211,932
Net realized loss from investment transactions 2,507,637 130,234,884
Net change in unrealized (appreciation) depreciation of investments (156,497,466) 85,539,349
---------------- ----------------
Net cash flows from operating activities $ 22,002,571 $ 2,611,787
Cash Flows From (For) Financing Activities -
Payments on mortgages $ (656,516) $ (643,863)
Payments for Fund Shares redeemed (1,417,252) (1,857,864)
Payment on notes payable to minority shareholder - (134,028)
Distributions paid to Shareholders (20,717,051) -
---------------- ----------------
Net cash flows for financing activities $ (22,790,819) $ (2,635,755)
Net decrease in cash $ (788,248) $ (23,968)
Cash at beginning of period $ 6,149,096 $ 1,658,511
---------------- ----------------
Cash at end of period $ 5,360,848 $ 1,634,543
================ ================
See notes to unaudited condensed consolidated financial statements
7
BELMAR 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 $ 4,637,461 $ 5,982,934
Interest paid on mortgages $ 6,962,700 $ 7,571,410
Interest paid on swap contracts $ 19,794,344 $ 20,101,824
Market value of securities distributed in payment of
redemptions $ 28,840,993 $ 37,415,508
Market value of real property and other assets, net of
current liabilities, disposed of in conjunction with the sale
of one multifamily property in other real estate $ - $ 10,276,498
Mortgage disposed of in conjunction with the sale of one
multifamily property in other real estate $ - $ 11,771,520
See notes to unaudited condensed consolidated financial statements
8
BELMAR 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 $ 69.870
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Income (loss) from operations
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Net investment income (6) $ 0.168
Net realized and unrealized gain 6.702
- ------------------------------------------------------------------------------------------------------------------------------------
Total income from operations $ 6.870
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Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders $ (1.700)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (1.700)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value - End of period $ 75.040
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (1) 10.00%
- ------------------------------------------------------------------------------------------------------------------------------------
As a Percentage As a Percentage
of Average Net of Average Gross
Ratios Assets(5) Assets (2)(5)
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses of Consolidated Real Property Subsidiaries
Interest and other borrowing costs (7) 0.68% (8) 0.46% (8)
Operating expenses (7) 0.86% (8) 0.58% (8)
Belmar Capital Fund LLC Expenses
Interest and other borrowing costs (4) 3.02% (8) 2.04% (8)
Investment advisory and administrative fees,
servicing fees and other Fund operating expenses (3)(4) 1.22% (8) 0.83% (8)
--------------------------------------------
Total expenses 5.78% (8) 3.91% (8)
Net investment income 0.49% (8) 0.33% (8)
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 1,727,137
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 Belmar Capital Fund LLC (Belmar Capital)
(including Belmar Capital's interest in Belvedere Capital Fund Company LLC (Belvedere Capital) and Belmar Capital's ratable
share of the assets of its directly and indirectly controlled subsidiaries), without reduction by any liabilities. For this
purpose, the assets of Belmar Realty Corporation's (Belmar Realty) controlled subsidiary are reduced by the proportionate
interests therein of investors other than Belmar Realty.
(3) Includes Belmar Capital's share of Belvedere Capital's allocated expenses, including those expenses allocated from the
Portfolio.
(4) Includes the expenses of Belmar Capital and Belmar Realty. Does not include expenses of the real estate subsidiary
majority-owned by Belmar Realty.
(5) For the purpose of calculating ratios, the income and expenses of Belmar Realty's controlled subsidiary are reduced by the
proportionate interests therein of investors other than Belmar Realty.
(6) Calculated using average shares outstanding.
(7) Includes Belmar Realty's proportional share of expenses incurred by its majority-owned subsidiary.
(8) Annualized.
See notes to unaudited condensed consolidated financial statements
9
BELMAR 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 Belmar Capital Fund
LLC (Belmar 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 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 June
30, 2003 and December 31, 2002, the Preferred Shares were valued at $75.04 and
$69.87, 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 $10,000,000 $57,542,029
Decreases in investment in Belvedere Capital $27,974,742 $70,260,843
Sales of Partnership Preference Units (1) $13,994,100 $30,488,828
- ---------------------------------------------------------------------------------------------------------------------
(1) Sales of Partnership Preference Units for the six months ended June 30,
2003 and 2002 include certain sales to other funds sponsored by Eaton Vance
Management for which a gain of $638,700 and $2,285,305 was recognized,
respectively.
In June 2002, one of the multifamily residential properties owned by Bel
Alliance Apartments, LLC (Bel Apartments) was sold to an affiliate of the
minority shareholder in Bel Apartments for which a loss of $1,797,001 was
recognized.
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) $ 1,759,668,762 $1,883,770,915
Income allocated to Belvedere Capital from the Portfolio $ 66,798,353 $ 59,178,086
Income allocated to the Fund from Belvedere Capital $ 12,410,245 $ 11,999,314
Expenses allocated to Belvedere Capital from the Portfolio $ 20,113,419 $ 22,716,704
Expenses allocated to the Fund from Belvedere Capital $ 5,008,200 $ 6,184,777
- ------------------------------------------------------------------------------------------------------------------------
(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 18.3% and 20.0% 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:
11
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
- -------------------------------------------------------------------------------------------------------
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 Cancelable Interest Rate Swap Agreements
Belmar Capital has entered into cancelable interest rate swap agreements 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. As of June 30, 2003 and December 31, 2002,
Belmar Capital has entered into cancelable interest rate swap agreements with
Merrill Lynch Capital Services, Inc. as listed below.
Notional Initial
Amount Optional Final Unrealized Unrealized
(000's Fixed Floating Termination Termination Depreciation Depreciation2002
omitted) Rate Rate Date Date At June 30, 2003 At December 21, 2002
- ------------------------------------------------------------------------------------------------------------------------------
$27,500 8.96% LIBOR + 0.40% 3/05 3/30 $ 3,156,704 $ 3,589,811
19,146 9.09% LIBOR + 0.40% 4/04 3/30 1,177,538 1,721,750
43,181 9.20% LIBOR + 0.40% 6/03 3/30 -* 1,544,077
21,766 9.24% LIBOR + 0.40% 4/03 3/30 -* 491,825
38,102 9.11% LIBOR + 0.40% 2/04 3/30 1,846,254 3,020,889
20,659 9.13% LIBOR + 0.40% 11/03 3/30 622,280 1,317,687
23,027 9.05% LIBOR + 0.40% 7/04 3/30 1,793,759 2,366,994
10,773 9.54% LIBOR + 0.40% 4/03 3/30 -* 253,235
12,984 9.50% LIBOR + 0.40% 6/03 3/30 -* 483,956
9,608 9.46% LIBOR + 0.40% 11/03 3/30 301,995 647,043
13,274 9.42% LIBOR + 0.40% 2/04 3/30 670,835 1,111,586
12,063 9.38% LIBOR + 0.40% 4/04 3/30 774,068 1,145,024
10,799 9.35% LIBOR + 0.40% 7/04 3/30 882,642 1,178,045
41,185 9.31% LIBOR + 0.40% 9/04 3/30 3,821,606 4,841,445
7,255 9.26% LIBOR + 0.40% 3/05 3/30 881,375 1,013,121
22,982 9.17% LIBOR + 0.40% 2/03 3/30 -* 163,553
28,305 9.15% LIBOR + 0.40% 4/03 3/30 -* 631,854
32,404 9.13% LIBOR + 0.40% 6/03 3/30 -* 1,146,899
3,383 9.08% LIBOR + 0.40% 11/03 3/30 101,246 213,883
12,062 9.00% LIBOR + 0.40% 2/04 3/30 575,298 936,025
24,622 8.985% LIBOR + 0.40% 4/04 3/30 1,489,606 2,167,107
9,184 8.97% LIBOR + 0.40% 7/04 3/30 705,597 927,854
13,454 8.93% LIBOR + 0.40% 9/04 3/30 1,169,034 1,459,523
17,888 8.87% LIBOR + 0.40% 3/05 3/30 2,015,626 2,283,727
12
39,407 7.46% LIBOR + 0.40% - 9/10 9,474,035 8,423,378
11,776 8.34% LIBOR + 0.40% 3/05 3/30 1,167,966 1,287,360
2,338 8.41% LIBOR + 0.40% 9/04 3/30 181,690 220,542
23,636 8.48% LIBOR + 0.40% 2/04 3/30 1,036,010 1,623,935
20,265 8.60% LIBOR + 0.40% 6/03 3/30 -* 655,632
28,629 8.66% LIBOR + 0.40% 2/03 3/30 -* 189,552
- ------------------------------------------------------------------------------------------------------------------------------
$ 33,845,164 $ 47,057,312
- ------------------------------------------------------------------------------------------------------------------------------
* Agreement was terminated on the Initial Optional Termination Date.
6 Debt
Credit Facility - Effective on June 30, 2003, Belmar Capital refinanced the
existing credit facility with Citicorp North America, Inc. with two new credit
arrangements (collectively, the Credit Facility) totaling $700,000,000. 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 Apartments.
The credit arrangement with DrKW Holdings, Inc. is for $581,500,000. 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
$581,500,000.
The credit arrangement with Merrill Lynch Mortgage Capital is for $118,500,000
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. Belmar Capital pays all fees associated with issuing the letters of
credit. As of June 30, 2003, outstanding borrowings under this credit
arrangement totaled $15,000,000 and there were no letters of credit issued
during the six months ended June 30, 2003.
7 Segment Information
Belmar 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, Belmar Capital invests in real estate assets
through its subsidiary Belmar Realty Corporation (Belmar Realty). Belmar Realty
invests directly in Partnership Preference Units and indirectly in real property
through a controlled subsidiary, Bel Apartments.
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 gain (loss). The accounting policies of the reportable segments are
the same as those for Belmar Capital on a consolidated basis. No reportable
segments have been aggregated. Reportable information by segment is as follows:
FOR THE THREE MONTHS ENDED TAX-MANAGED REAL
JUNE 30, 2003 GROWTH PORTFOLIO* ESTATE TOTAL
- ------------------------------------------------------------------------------------------------------------------------
Revenue $ 3,760,662 $ 20,809,126 $ 24,569,788
Interest expense on mortgages - (3,612,337) (3,612,337)
Interest expense on Credit Facility (216,220) (1,853,653) (2,069,873)
Interest expense on swap contracts - (9,551,052) (9,551,052)
Operating expenses (285,940) (6,036,774) (6,322,714)
Minority interest in net income of controlled
subsidiaries - (94,806) (94,806)
- ------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) $ 3,258,502 $ (339,496) $ 2,919,006
Net realized gain 2,922,615 1,172,600 4,095,215
Change in unrealized gain (loss) 202,414,631 5,930,782 208,345,413
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS OF
REPORTABLE SEGMENTS $ 208,595,748 $ 6,763,886 $ 215,359,634
- ------------------------------------------------------------------------------------------------------------------------
13
FOR THE THREE MONTHS ENDED TAX-MANAGED REAL
JUNE 30, 2002 GROWTH PORTFOLIO* ESTATE TOTAL
- ---------------------------------------------------------------------------------------------------------------------
Revenue $ 3,334,093 $ 21,976,122 $ 25,310,215
Interest expense on mortgages - (3,805,226) (3,805,226)
Interest expense on Credit Facility - (3,296,716) (3,296,716)
Interest expense on swap contracts - (9,840,142) (9,840,142)
Operating expenses (315,383) (5,619,002) (5,934,385)
Minority interest in net income of controlled
subsidiaries - (97,540) (97,540)
- ---------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) $ 3,018,710 $ (682,504) $ 2,336,206
Net realized (loss) gain (118,185,963) 488,304 (117,697,659)
Change in unrealized gain (loss) (135,368,463) 14,088,896 (121,279,567)
- ---------------------------------------------------------------------------------------------------------------------
NET (DECREASES) INCREASE IN NET ASSETS FROM
OPERATIONS OF REPORTABLE SEGMENTS $ (250,535,716) $ 13,894,696 $ (236,641,020)
- ---------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED TAX-MANAGED REAL
JUNE 30, 2003 GROWTH PORTFOLIO* ESTATE TOTAL
- ---------------------------------------------------------------------------------------------------------------------
Revenue $ 7,402,045 $ 41,881,844 $ 49,283,889
Interest expense on mortgages - (7,160,183) (7,160,183)
Interest expense on Credit Facility (490,800) (4,269,957) (4,760,757)
Interest expense on swap contracts - (19,242,769) (19,242,769)
Operating expenses (556,588) (11,551,328) (12,107,916)
Minority interest in net income of controlled
subsidiaries - (232,351) (232,351)
- ---------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) $ 6,354,657 $ (574,744) $ 5,779,913
Net realized (loss) gain (4,318,937) 1,811,300 (2,507,637)
Change in unrealized gain (loss) 129,298,443 27,199,023 156,497,466
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS OF
REPORTABLE SEGMENTS $ 131,334,163 $ 28,435,579 $ 159,769,742
- ---------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED TAX-MANAGED REAL
JUNE 30, 2002 GROWTH PORTFOLIO* ESTATE TOTAL
- ---------------------------------------------------------------------------------------------------------------------
Revenue $ 5,814,537 $ 44,643,435 $ 50,457,972
Interest expense on mortgages - (7,626,983) (7,626,983)
Interest expense on Credit Facility - (6,790,421) (6,790,421)
Interest expense on swap contracts - (20,037,973) (20,037,973)
Operating expenses (709,605) (11,325,903) (12,035,508)
Minority interest in net income of controlled
subsidiaries - (211,932) (211,932)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) $ 5,104,932 $ (1,349,777) $ 3,755,155
Net realized (loss) gain (130,723,188) 488,304 (130,234,884)
Change in unrealized gain (loss) (108,446,689) 22,907,340 (85,539,349)
- ---------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN NET ASSETS FROM
OPERATIONS OF REPORTABLE SEGMENTS $ (234,064,945) $ 22,045,867 $ (212,019,078)
- ---------------------------------------------------------------------------------------------------------------------
TAX-MANAGED REAL
AT JUNE 30, 2003 GROWTH PORTFOLIO* ESTATE TOTAL
- ---------------------------------------------------------------------------------------------------------------------
Segment assets $1,759,668,762 $ 767,384,570 $ 2,527,053,332
Segment liabilities 59,652,223 723,760,080 783,412,303
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS OF REPORTABLE SEGMENTS $1,700,016,539 $ 43,624,490 $ 1,743,641,029
- ---------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2002
- ---------------------------------------------------------------------------------------------------------------------
Segment assets $1,674,547,493 $ 766,408,400 $ 2,440,955,893
Segment liabilities 59,758,486 753,620,279 813,378,765
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS OF REPORTABLE SEGMENTS $1,614,789,007 $ 12,788,121 $ 1,627,577,128
- ---------------------------------------------------------------------------------------------------------------------
*Belmar Capital invests indirectly in Tax-Managed Growth Portfolio through Belvedere Capital.
14
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 $ 24,569,788 $ 25,310,215 $ 49,283,889 $ 50,457,972
Unallocated revenue 33,287 32,338 56,718 32,338
------------------ ------------------ ------------------ ------------------
TOTAL REVENUE $ 24,603,075 $ 25,342,553 $ 49,340,607 $ 50,490,310
------------------ ------------------ ------------------ ------------------
Net increase (decrease) in net assets from
operations:
Net increase (decrease) in net assets from
operations of reportable segments $ 215,359,634 $(236,641,020) $ 159,769,742 $ (212,019,078)
Unallocated revenue 33,287 32,338 56,718 32,338
Unallocated expenses ** (1,068,250) (1,475,886) (1,943,717) (2,758,744)
------------------ ------------------ ------------------ ------------------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS $ 214,324,671 $(238,084,568) $ 157,882,743 $ (214,745,484)
------------------ ------------------ ------------------ ------------------
** Unallocated expenses include Belmar Capital's costs to operate the Fund such
as servicing and distribution fees as well as other miscellaneous administrative
costs of Belmar Capital.
JUNE 30, 2003 DECEMBER 31, 2002
------------------ ------------------
Net assets:
Net assets of reportable segments $ 1,743,641,029 $1,627,577,128
Unallocated cash 3,984,648 4,683,403
Short-term investments 3,499,133 -
Loan payable - Credit Facility (23,860,000) (11,930,000)
Other liabilities (127,558) (100,726)
------------------ ------------------
TOTAL NET ASSETS $ 1,727,137,252 $1,620,229,805
------------------ ------------------
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 Belmar Capital Fund
LLC (the Fund) could differ materially from those contained in the
forward-looking statements due to a number of factors. The Fund undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events, or otherwise, except as required by
applicable law. Factors that could affect the Fund's performance include a
decline in the U.S. stock markets or in general economic conditions, adverse
developments affecting the real estate industry, or fluctuations in interest
rates.
The following discussion should be read in conjunction with the Fund's unaudited
condensed consolidated financial statements and related notes in Item 1 above.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2003 COMPARED TO THE
QUARTER ENDED JUNE 30, 2002
PERFORMANCE OF THE FUND.1 The Fund's total return was 14.08% for the quarter
ended June 30, 2003. This return reflects an increase in the Fund's net asset
value per share from $65.48 to $75.04 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
0.54% during the period. Last year, the Fund had a total return performance of
- -11.31% for the quarter ended June 30, 2002. This return reflected a decrease in
the Fund's net asset value per share from $88.34 to $78.35 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 exceeded that of the Portfolio by approximately
0.33% 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
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.
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
PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate investments
include Partnership Preference Units and an interest in a Real Estate Joint
Venture. 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. Because the Fund sold Partnership Preference Units
over the past twelve months, the estimated fair value of the Fund's investment
in Partnership Preference Units has declined. At June 30, 2003, the estimated
fair value of the Fund's Partnership Preference Units totaled $564.5 million
compared to $580.4 million at June 30, 2002, a decrease of $15.9 million or 3%.
The decrease in value, due to fewer Partnership Preference Units held at June
30, 2003, was offset in part by increases in the per unit value of the
Partnership Preference Units held by the Fund at June 30, 2003. The Fund saw
unrealized appreciation in the estimated fair value of its Partnership
Preference Units of approximately $11.5 million during the quarter ended June
30, 2003 compared to approximately $21.1 million during the quarter ended June
30, 2002.
During the quarter ended June 30, 2003, the Fund recognized gains of $1.2
million on the sales of interests in Partnership Preference Units (including
sales to another investment fund advised by Boston Management). During the
quarter ended June 30, 2002, the Fund recognized gains of $2.3 million on sales
of Partnership Preference Units. Dividends received from Partnership Preference
Units for the quarter ended June 30, 2003 totaled $12.2 million compared to
$13.2 million for the quarter ended June 30, 2002, a decrease of $1.0 million or
8%. The decrease was due to fewer Partnership Preference Units being held during
the quarter ended June 30, 2003.
The Fund conducts its real estate operations through a Real Estate Joint Venture
that is majority-owned by Belmar Realty Corporation (Belmar 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 $8.7 million for the
quarter ended June 30, 2003 compared to $8.8 million for the quarter ended June
30, 2002, a decrease of $0.1 million or 1%. 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 Venture.
Property operating expenses totaled $4.6 million for the quarter ended June 30,
2003 compared to $4.4 million for the quarter ended June 30, 2002, an increase
of $0.2 million or 5% (property operating expenses are before debt service and
certain operating expenses of Belmar Realty of approximately $1.4 million for
the quarter ended June 30, 2003 and approximately $1.2 million for the quarter
ended June 30, 2002). The increase in operating expenses was principally due to
a 9% increase in property and maintenance expenses. Property tax and insurance
expenses did not significantly change. Given the continued uncertain outlook for
the U.S. economy as a whole, Boston Management, Belmar 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
Belmar Realty was $190.6 million compared to $217.8 million at June 30, 2002, a
decrease of $27.2 million or 12%. The decrease in real property value was due to
declines in near-term earnings expectations and the economic downturn. The
decrease in value was partially offset by decreases in capitalization rates
during the year. The Fund saw unrealized depreciation in the estimated fair
value of its other real estate investments (which includes the Fund's Real
Estate Joint Venture) of approximately $10.9 million during the quarter ended
June 30, 2003 compared to approximately $1.9 million of unrealized appreciation
during the quarter ended June 30, 2002.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the quarter ended June 30,
2003, interest rate swap agreement values appreciated by $5.4 million, due to
the exercise of early termination options on a number of swap agreements and the
remaining agreements approaching their initial optional termination dates. The
appreciation was offset by a slight decline in swap rates. For the quarter ended
June 30, 2002, interest rate swap agreement valuations decreased by $9.0 million
due to a decline in swap rates. Approximately 73% of the notional amount of the
Fund's existing swap agreements will reach their initial optional termination
dates over the next five quarters.
17
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 10.00% for the six months
ended June 30, 2003. This return reflects an increase in the Fund's net asset
value per share from $69.87 to $75.04 and a distribution of $1.70 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 exceeded that of the Portfolio by
approximately 1.81% during the period. Last year, the Fund had a total return
performance of -10.32% for the six months ended June 30, 2002. This return
reflected a decrease in the Fund's net asset value per share from $87.37 to
$78.35. For comparison, the S&P 500 had a total return of -13.15% over the same
period. The performance of the Fund exceeded that of the Portfolio by
approximately 0.62% 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. 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 estate-related securities. Because the Fund sold
Partnership Preference Units over the past twelve months, the estimated fair
value of the Fund's investment in Partnership Preference Units has declined. At
June 30, 2003, the estimated fair value of the Fund's Partnership Preference
Units totaled $564.5 million compared to $580.4 million at June 30, 2002, a
decrease of $15.9 million or 3%. The decrease in value, due to fewer Partnership
Preference Units held at June 30, 2003, was offset in part by increases in the
value per unit of the Partnership Preference Units held by the Fund at June 30,
2003. The Fund saw unrealized appreciation in the estimated fair value of its
Partnership Preference Units of approximately $26.3 million during the six
months ended June 30, 2003 compared to unrealized appreciation of approximately
$21.1 million during the six months ended June 30, 2002.
During the six months ended June 30, 2003 and 2002, the Fund sold certain of its
Partnership Preference Units (including sales to another investment fund advised
by Boston Management) and recognized gains of $1.8 million and $2.3 million on
the transactions, respectively. Dividends received from Partnership Preference
18
Units for the six months ended June 30, 2003 totaled $24.6 million compared to
$27.1 million for the six months ended June 30, 2002, a decrease of $2.5 million
or 9%. The decrease was due to fewer Partnership Preference Units being held
during the six months ended June 30, 2003.
For the six months ended June 30, 2003, rental income from properties owned by
the Fund's Real Estate Joint Venture decreased to $17.2 million from $17.5
million for the six months ended June 30, 2002, a decline of $0.3 million or 2%.
Property operating expenses increased to $8.9 million for the six months ended
June 30, 2003 from $8.7 million for the six months ended June 30, 2002, an
increase of $0.2 million or 2% (property operating expenses are before debt
service and certain operating expenses of Belmar Realty of approximately $2.7
million for the six months ended June 30, 2003 and approximately $2.6 million
for the six months ended June 30, 2002). The increase in operating expenses was
due to a 6% increase in property and maintenance expenses, offset in part by a
4% decline in property tax and insurance expense. As in 2002, real estate
operations during the period were affected by weaker multifamily market
fundamentals in most regions with lower occupancy levels and increased rent
concessions.
At June 30, 2003, the estimated fair value of the real properties held through
Belmar Realty was $190.6 million compared to $217.8 million at June 30, 2002, a
decrease of $27.2 million or 12%. The decrease in real property value was due to
declines in near-term earnings expectations and the economic downturn. The Fund
saw unrealized depreciation of the estimated fair value of its other real estate
of approximately $12.3 million during the six months ended June 30, 2003
compared to unrealized appreciation of approximately $2.7 million during the six
months ended June 30, 2002.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the six months ended June 30,
2003, interest rate swap agreement values appreciated by approximately $13.2
million compared to depreciation of approximately $0.8 million for the six
months ended June 30, 2002. The appreciation during the first half of 2003 is
primarily due to the exercise of early termination options on a number of swap
agreements and the remaining agreements approaching their initial optional
termination dates. The appreciation from approaching terminations was offset in
part by a decline in swap rates during the period. The depreciation for the six
months ended June 30, 2002 was caused by swap rate decreases during the period.
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 $700 million. The Credit Facility is secured by
a pledge of the Fund's assets, excluding the assets of Bel Alliance Apartments,
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 $581.5 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 $581.5 million.
The Fund has a $118.5 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 $15
million.
There were no amounts outstanding under letters of credit at June 30, 2003. The
unused loan commitment amount totaled approximately $103.5 million. A commitment
fee of 0.10% per annum is paid on the unused commitment amount. The Fund pays
all fees associated with issuing 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.
19
As of June 30, 2003 and June 30, 2002, the unrealized depreciation related to
the interest rate swap agreements was $33.8 million and $45.1 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
Management, in its capacity as manager of Belmar 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 Belmar 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.
20
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 Venture. 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.
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
2004-2008 Thereafter Total Fair Value
- --------------------------------------------------------------------------------
Rate sensitive
liabilities:
- ------------------------
Long-term debt:
- ------------------------
Fixed-rate mortgages $161,805,384 $161,805,384 $185,000,000
Average interest rate 8.50% 8.50%
- ------------------------
Variable-rate Credit
Facility $596,500,000 $596,500,000 $596,500,000
Average interest rate 1.32% 1.32%
- --------------------------------------------------------------------------------
Rate sensitive
derivative financial
instruments:
- ------------------------
Pay fixed/
receive variable
interest rate
swap contracts $380,368,000 $380,368,000 $(33,845,164)
Average pay rate 8.88% 8.88%
Average receive rate 1.32% 1.32%
- --------------------------------------------------------------------------------
Rate sensitive
investments:
- ------------------------
Fixed-rate Partnership
Preference Units:
- ------------------------
Cabot Industrial
Properties, L.P.,
8.625% Series B
Cumulative Redeemable
Preferred Units,
Callable 4/29/04,
Current Yield: 8.44% $ 55,831,200 $ 55,831,200 $ 66,391,000
21
Camden Operating,
L.P., 8.50% Series B
Cumulative Redeemable
Perpetual Preferred
Units, Callable
2/23/04, Current
Yield: 8.34% $ 58,869,144 $ 58,869,144 $ 69,587,700
CP Limited
Partnership, 8.125%
Series A Cumulative
Redeemable Preferred
Units, Callable
4/20/03, Current
Yield: 8.41% $ 60,844,550 $ 60,844,550 $ 72,416,700
Essex Portfolio, L.P.,
7.875% Series B
Cumulative Redeemable
Preferred Units,
Callable 2/6/03,
Current Yield: 8.03% $ 11,997,050 $ 11,997,050 $ 15,932,215
Essex Portfolio, L.P.,
9.30% Series D
Cumulative Redeemable
Preferred Units,
Callable 7/28/04,
Current Yield: 8.97% $ 43,009,575 $ 43,009,575 $ 51,841,200
Essex Portfolio, L.P.,
9.125% Series C
Cumulative Redeemable
Preferred Units,
Callable 11/24/03,
Current Yield: 8.92% $ 3,383,200 $ 3,383,200 $ 4,091,224
Kilroy Realty, L.P.,
8.075% Series A
Cumulative Redeemable
Preferred Units,
Callable 2/06/03,
Current Yield: 8.79% $ 14,511,020 $ 14,511,020 $ 18,102,212
Kilroy Realty, L.P.,
9.375% Series C
Redeemable Preferred
Units, Callable
11/24/03, Current
Yield: 9.49% $ 30,266,640 $ 30,266,640 $ 34,584,130
PSA Institutional
Partners, L.P., 9.50%
Series N Cumulative
Redeemable Perpetual
Preferred Units,
Callable 3/17/05,
Current Yield: 8.99% $ 64,418,165 $ 64,418,165 $ 67,503,100
Prentiss Properties
Acquisition Partners,
L.P., 8.30% Series B
Cumulative Redeemable
Perpetual Preferred
Units, Callable
6/25/03, Current
Yield: 8.41% $ 37,660,205 $ 37,660,205 $ 47,540,866
Regency Centers, L.P.,
8.125% Series A
Cumulative Redeemable
Preferred Units,
Callable 6/25/03,
Current Yield: 8.09% $ 39,693,050 $ 39,693,050 $ 50,220,000
Regency Centers, L.P.,
9.125% Series D
Cumulative Redeemable
Preferred Units,
Callable 9/29/04,
Current Yield: 8.79% $ 12,924,525 $ 12,924,525 $ 15,567,000
Sun Communities
Operating L.P., 8.875%
Series A Cumulative
Redeemable Perpetual
Preferred Units,
Callable 9/29/04,
Current Yield: 8.76% $ 44,052,800 $ 44,052,800 $ 50,680,000
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
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
22
control over financial reporting which could adversely affect the Fund's ability
to record, process, summarize and report financial data, and any fraud, whether
or not material, that involves management or other employees who have a
significant role in the Fund's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Although in the ordinary course of business, the Fund, Belmar Realty and Belmar
Realty's controlled subsidiary 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 Belmar Capital Fund LLC and DrKW
Holdings, Inc., as Lender
4.2 Loan and Security Agreement among Belmar 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
(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.
BELMAR 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 Belmar Capital Fund LLC and DrKW
Holdings, Inc., as Lender
4.2 Loan and Security Agreement among Belmar 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