UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _____________
Commission File No. 000-50258
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Belrose Capital Fund LLC
------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3613468
-------- ----------
(State of organization) ( I.R.S. Employer Identification No.)
The Eaton Vance Building
255 State Street
Boston, Massachusetts 02109
--------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 617-482-8260
------------
None
----
(Former Name, Former Address and Former Fiscal Year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
YES [X] NO [ ]
BELROSE CAPITAL FUND LLC
Index to Form 10-Q
PART I FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Statements of Assets and Liabilities
as of March 31, 2004 (Unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Changes in Net Assets
for the Three Months Ended March 31, 2004 (Unaudited) and the
Year Ended December 31, 2003 6
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 2004 and 2003 7
Financial Highlights (Unaudited) for the Three Months Ended
March 31, 2004 9
Notes to Condensed Consolidated Financial Statements as of
March 31, 2004 (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 19
Item 4. Controls and Procedures 21
PART II OTHER INFORMATION 21
Item 1. Legal Proceedings 21
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
EXHIBIT INDEX 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Assets and Liabilities
March 31, 2004 December 31,
(Unaudited) 2003
--------------- ------------
Assets:
Investment in Belvedere Capital Fund Company LLC
(Belvedere Company) $1,672,002,450 $1,640,828,100
Investment in Partnership Preference Units 80,892,360 56,717,736
Investment in other real estate 473,681,417 473,491,403
Short-term investments 6,105,000 7,614,214
--------------- ---------------
Total investments $2,232,681,227 $2,178,651,453
Cash 8,818,424 6,535,905
Escrow deposits - restricted 2,453,640 2,436,133
Distributions and interest receivable 221 400,960
Other assets 2,977,754 3,660,997
Open interest rate swap agreements, at value - 1,423,867
--------------- ---------------
Total assets $2,246,931,266 $2,193,109,315
--------------- ---------------
Liabilities:
Loan payable - Credit Facility $ 216,000,000 $ 183,300,000
Mortgages payable 344,219,483 344,219,483
Payables for Fund Shares redeemed 1,097,563 -
Open interest rate swap agreements, at value 2,940,460 -
Distributions payable to minority shareholders - 16,800
Security deposits 998,950 968,110
Swap interest payable 80,580 79,280
Accrued expenses:
Interest expense 2,337,702 2,319,122
Property taxes 1,749,922 1,959,252
Other expenses and liabilities 2,472,685 1,782,021
Minority interests in controlled subsidiaries 25,464,612 26,010,489
---------------- ---------------
Total liabilities $ 597,361,957 $ 560,654,557
---------------- ---------------
Net assets $1,649,569,309 $1,632,454,758
---------------- ---------------
Shareholders' Capital $1,649,569,309 $1,632,454,758
---------------- ---------------
Shares outstanding 17,029,475 17,032,796
---------------- ---------------
Net asset value and redemption price per Share $ 96.87 $ 95.84
---------------- ---------------
See notes to unaudited condensed consolidated financial statements
3
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
-------------- --------------
Investment Income:
Dividends allocated from Belvedere Company
(net of foreign taxes of $69,016 and $59,363, respectively) $ 5,768,065 $ 4,743,401
Interest allocated from Belvedere Company 27,983 88,575
Expenses allocated from Belvedere Company (2,500,325) (1,916,046)
------------- --------------
Net investment income allocated from
Belvedere Company $ 3,295,723 $ 2,915,930
Rental income 16,210,789 16,333,785
Distributions from Partnership Preference Units 2,774,410 996,581
Interest 59,187 19,785
------------- --------------
Total investment income $ 22,340,109 $ 20,266,081
------------- --------------
Expenses:
Investment advisory and administrative fees $ 1,407,583 $ 1,134,716
Property management fees 646,527 652,486
Distribution and servicing fees 821,760 612,071
Interest expense on mortgages 6,579,441 6,579,439
Interest expense on Credit Facility 740,230 732,292
Property and maintenance expenses 4,459,360 4,256,698
Property taxes and insurance 2,030,202 2,189,342
Miscellaneous 152,447 271,835
------------- --------------
Total expenses $ 16,837,550 $ 16,428,879
Deduct-
Reduction of investment advisory and administrative fees 410,995 305,442
------------- --------------
Net expenses $ 16,426,555 $ 16,123,437
------------- --------------
Net investment income before
minority interests in net income of
controlled subsidiaries $ 5,913,554 $ 4,142,644
Minority interests in net income
of controlled subsidiaries (473,208) (514,701)
------------- --------------
Net investment income $ 5,440,346 $ 3,627,943
------------- --------------
See notes to unaudited condensed consolidated financial statements
4
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited) (Continued)
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
--------------- ----------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions from Belvedere Company (identified cost basis) $ 6,066,514 $ (5,345,920)
Investment transactions in Partnership Preference Units (identified cost basis) 3,048,719 -
Interest rate swap agreements (1) (995,428) (1,051,283)
--------------- ----------------
Net realized gain (loss) $ 8,119,805 $ (6,397,203)
--------------- ----------------
Change in unrealized appreciation (depreciation) -
Investment in Belvedere Company (identified cost basis) $ 24,802,728 $ (57,789,631)
Investments in Partnership Preference Units (identified cost basis) (3,836,606) 4,960,598
Investments in other real estate (net of minority interests in
unrealized loss of controlled subsidiaries of $(1,019,085) and
$(4,734,953), respectively) 349,224 809,787
Interest rate swap agreements (4,364,327) (641,491)
--------------- ----------------
Net change in unrealized appreciation (depreciation) $ 16,951,019 $ (52,660,737)
--------------- ----------------
Net realized and unrealized gain (loss) $ 25,070,824 $ (59,057,940)
--------------- ----------------
Net increase (decrease) in net assets from operations $ 30,511,170 $ (55,429,997)
=============== ================
(1) Amount represents periodic payments made in connection with interest rate
swap agreements. (Note 5)
See notes to unaudited condensed consolidated financial statements
5
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Changes in Net Assets
Three Months
Ended Year Ended
March 31, 2004 December 31,
(Unaudited) 2003
--------------- ---------------
Increase (Decrease) in Net Assets:
Net investment income $ 5,440,346 $ 15,279,642
Net realized gain from investment transactions 8,119,805 2,449,130
Net change in unrealized appreciation (depreciation) of investments 16,951,019 311,836,713
--------------- ---------------
Net increase in net assets from operations $ 30,511,170 $ 329,565,485
--------------- ---------------
Transactions in Fund Shares -
Investment securities contributed $ - $ 95,047,136
Less - Selling commissions - (325,083)
--------------- ---------------
Net contributions $ - $ 94,722,053
Net asset value of Fund Shares issued to Shareholders in payment of
distributions declared $ 5,415,563 $ 348,050
Net asset value of Fund Shares redeemed (5,696,929) (33,374,471)
--------------- ---------------
Net increase in net assets from Fund Share transactions $ (281,366) $ 61,695,632
--------------- ---------------
Distributions -
Distributions to Shareholders $ (13,115,253) $ (808,014)
--------------- ---------------
Total distributions $ (13,115,253) $ (808,014)
--------------- ---------------
Net increase in net assets $ 17,114,551 $ 390,453,103
Net assets:
At beginning of period $1,632,454,758 $ 1,242,001,655
--------------- ---------------
At end of period $1,649,569,309 $ 1,632,454,758
=============== ===============
See notes to unaudited condensed consolidated financial statements
6
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
--------------- ---------------
Cash Flows From (For) Operating Activities -
Net increase (decrease) in net assets from operations $ 30,511,170 $ (55,429,997)
Adjustments to reconcile net increase (decrease) in net assets from operations
to net cash flows for operating activities -
Net investment income allocated from Belvedere Company (3,295,723) (2,915,930)
(Increase) decrease in escrow deposits (17,507) 584,576
Decrease in other assets 683,243 162,941
Decrease in distributions and interest receivable 400,739 38,959
Increase in interest payable for open swap agreements 1,300 9,263
Increase in security deposits, accrued interest and other expenses and liabilities 740,084 189,506
Decrease in accrued property taxes (209,330) (698,068)
Purchases of Partnership Preference Units (44,530,740) (8,033,600)
Proceeds from sales of Partnership Preference Units 19,568,229 -
Improvements to rental property (859,875) (705,109)
Decrease in short-term investments 1,509,214 -
Net decrease in investment in Belvedere Company - 1,404,502
Net interest incurred on interest rate swap agreements (995,428) (1,051,283)
Minority interests in net income of controlled subsidiaries 473,208 514,701
Net realized (gain) loss from investment transactions (8,119,805) 6,397,203
Net change in unrealized (appreciation) depreciation of investments (16,951,019) 52,660,737
--------------- ---------------
Net cash flows for operating activities $ (21,092,240) $ (6,871,599)
--------------- ---------------
Cash Flows From (For) Financing Activities -
Proceeds from Credit Facility $ 32,700,000 $ 9,000,000
Payments on behalf of investors (selling commissions) - (325,083)
Payments for Fund Shares redeemed (1,608,751) (1,268,422)
Distributions paid to minority shareholders (16,800) -
Distributions paid to Shareholders (7,699,690) (459,964)
Capital contributed to controlled subsidiaries - 123,317
--------------- ---------------
Net cash flows from financing activities $ 23,374,759 $ 7,069,848
--------------- ---------------
Net increase in cash $ 2,282,519 $ 198,249
Cash at beginning of period $ 6,535,905 $ 7,214,141
--------------- ---------------
Cash at end of period $ 8,818,424 $ 7,412,390
=============== ===============
See notes to unaudited condensed consolidated financial statements
7
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
--------------- ---------------
Supplemental Disclosure and Non-cash Investing and Financing Activities -
Securities contributed by Shareholders, invested in Belvedere Company $ - $ 95,047,136
Interest paid on loan - Credit Facility $ 709,343 $ 682,966
Interest paid on mortgages $ 6,476,132 $ 6,476,131
Interest paid on swap agreements $ 994,128 $ 1,042,020
Market value of securities distributed in payment of redemptions $ 2,990,615 $ 12,845,434
See notes to unaudited condensed consolidated financial statements
8
BELROSE CAPITAL FUND LLC as of March 31, 2004
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Highlights (Unaudited)
For the Three Months Ended March 31, 2004
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value - Beginning of period $ 95.840
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income (6) $ 0.319
Net realized and unrealized gain 1.481
- -----------------------------------------------------------------------------------------------------------------------------------
Total income from operations $ 1.800
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders $ (0.770)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.770)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value - End of period $ 96.870
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return (1) 1.89%
- -----------------------------------------------------------------------------------------------------------------------------------
As a Percentage As a Percentage
of Average Net of Average Gross
Ratios Assets(5) Assets (2)(5)
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses of Consolidated Real Property Subsidiaries
Interest and other borrowing costs (7) 1.31% (9) 1.01% (9)
Operating expenses (7) 1.42% (9) 1.10% (9)
Belrose Capital Fund LLC Expenses
Interest and other borrowing costs (4)(8) 0.18% (9) 0.14% (9)
Investment advisory and administrative fees,
servicing fees and other Fund operating expenses (3)(4) 1.08% (9) 0.83% (9)
-----------------------------------------------------
Total expenses 3.99% 3.08%
Net investment income 1.32% (9) 1.02% (9)
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 1,649,569
Portfolio turnover of Tax-Managed Growth Portfolio (the Portfolio) 0.61%
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Returns are calculated by determining the percentage change in net asset
value with all distributions reinvested. Total return is not computed on an
annualized basis.
(2) Average Gross Assets is defined as the average daily amount of all assets
of Belrose Capital Fund LLC (Belrose Capital) (including Belrose Capital's
interest in Belvedere Capital Fund Company LLC (Belvedere Company) and
Belrose Capital's ratable share of the assets of its directly and
indirectly controlled subsidiaries), without reduction by any liabilities.
For this purpose, the assets of Belrose Realty Corporation's (Belrose
Realty) controlled subsidiaries are reduced by the proportionate interests
therein of investors other than Belrose Realty.
(3) Includes Belrose Capital's share of Belvedere Company's allocated expenses,
including those expenses allocated from the Portfolio.
(4) Includes the expenses of Belrose Capital and Belrose Realty. Does not
include expenses of the real estate subsidiaries majority-owned by Belrose
Realty.
(5) For the purpose of calculating ratios, the income and expenses of Belrose
Realty's controlled subsidiaries are reduced by the proportionate interest
therein of investors other than Belrose Realty.
(6) Calculated using average shares outstanding.
(7) Includes Belrose Realty's proportional share of expenses incurred by its
majority-owned subsidiaries.
(8) Ratios do not include interest incurred in connection with the interest
rate swap agreements. Had such amounts been included, ratios would be
higher.
(9) Annualized.
See notes to unaudited condensed consolidated financial statements
9
BELROSE CAPITAL FUND LLC as of March 31, 2004
Notes to Condensed Consolidated Financial Statements (Unaudited)
1 Basis of Presentation
The condensed consolidated interim financial statements of Belrose Capital Fund
LLC (Belrose Capital) and its subsidiaries (collectively, the Fund) have been
prepared, without audit, in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted as permitted by such rules and regulations. All adjustments, consisting
of normal recurring adjustments, have been included. Management believes that
the disclosures are adequate to present fairly the financial position, results
of operations, cash flows and financial highlights as of the dates and for the
periods presented. It is suggested that these interim financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Fund's latest annual report on Form 10-K. Results for interim periods are
not necessarily indicative of those to be expected for the full fiscal year.
The balance sheet at December 31, 2003 has been derived from the December 31,
2003 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 Belrose Capital are entitled to restructure their Fund Share
interests under what is termed an Estate Freeze Election. Under this election,
Fund Shares are divided into Preferred Shares and Common Shares. Preferred
Shares have a preferential right over the corresponding Common Shares equal to
(i) 95% of the original capital contribution made in respect of the undivided
Shares from which the Preferred Shares and Common Shares were derived, plus (ii)
an annuity priority return equal to 7.75% of the Preferred Shares' preferential
interest in the original capital contribution of the undivided Fund Shares. The
associated Common Shares are entitled to the remaining 5% of the original
capital contribution in respect of the undivided Shares, plus any returns
thereon in excess of the fixed annual priority of the Preferred Shares. The
existence of restructured Fund Shares does not adversely affect Shareholders who
do not participate in the election nor do the restructured Fund Shares have
preferential rights to Fund Shares that have not been restructured. Shareholders
who subdivide Fund Shares under this election sacrifice certain rights and
privileges that they would otherwise have with respect to the Fund Shares so
divided, including redemption rights and voting and consent rights. Upon the
twentieth anniversary of the issuance of the associated undivided Fund Shares to
the original holders thereof, Preferred and Common Shares will automatically
convert into full and fractional undivided Fund Shares. The allocation of
Belrose Capital's net asset value per Share at March 31, 2004 and December 31,
2003, between Preferred and Common shares that have been restructured is as
follows:
Per Share Value At Per Share Value At
March 31, 2004 December 31, 2003
------------------------------------------------------
Preferred Common Preferred Common
Date of Contribution Shares Shares Shares Shares
- --------------------------------------------------------------------------------
February 19, 2003 $ 75.38 $ 21.49 $ 74.80 $ 21.04
10
3 Investment Transactions
The following table summarizes the Fund's investment transactions for the three
months ended March 31, 2004 and March 31, 2003:
Three Months Ended Three Months Ended
Investment Transaction March 31, 2004 March 31, 2003
- ------------------------------------------------------------------------------------------------
Increases in investment in Belvedere Company $ - $ 95,047,136
Decreases in investment in Belvedere Company $ 2,990,615 $ 14,249,936
Purchases of Partnership Preference Units (1) $ 44,530,740 $ 8,033,600
Sales of Partnership Preference Units $ 19,568,229 $ -
(1) Purchases of Partnership Preference Units during the three months ended
March 31, 2004 and March 31, 2003, represent Partnership Preference Units
purchased from other investment funds advised by Boston Management and
Research.
4 Indirect Investment in the Portfolio
The following table summarizes the Fund's investment in Tax-Managed Growth
Portfolio (the Portfolio) through Belvedere Capital Fund Company LLC (Belvedere
Company), for the three months ended March 31, 2004 and March 31, 2003,
including allocations of income, expenses and net realized and unrealized gains
(losses) for the respective periods then ended:
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
- -----------------------------------------------------------------------------------------------------------------------
Belvedere Company's interest in the Portfolio (1) $ 11,520,846,141 $ 8,400,349,853
The Fund's investment in Belvedere Company (2) $ 1,672,002,450 $ 1,284,892,115
Income allocated to Belvedere Company from the Portfolio $ 39,365,471 $ 32,398,573
Income allocated to the Fund from Belvedere Company $ 5,796,048 $ 4,831,976
Expenses allocated to Belvedere Company from the Portfolio $ 12,634,511 $ 9,667,954
Expenses allocated to the Fund from Belvedere Company $ 2,500,325 $ 1,916,046
Net realized gain(loss) allocated to Belvedere Company from the Portfolio $ 41,048,575 $ (37,772,155)
Net realized gain(loss) allocated to the Fund from Belvedere Company $ 6,066,514 $ (5,345,920)
Change in unrealized appreciation (depreciation) allocated to Belvedere
Company from the Portfolio $ 163,577,445 $ (389,828,192)
Change in unrealized appreciation (depreciation) allocated to the Fund
from Belvedere Company $ 24,802,728 $ (57,789,631)
---------------------------------------------------------------------------------------------------------------------
(1) As of March 31, 2004 and 2003, the value of Belvedere Company's interest in
the Portfolio represents 63.9% and 61.1% of the Portfolio's net assets,
respectively.
(2) As of March 31, 2004 and 2003, the Fund's investment in Belvedere Company
represents 14.5% and 15.3% of Belvedere Company's net assets, respectively.
A summary of the Portfolio's Statement of Assets and Liabilities at March 31,
2004, December 31, 2003 and March 31, 2003 and its operations for the three
months ended March 31, 2004, for the year ended December 31, 2003 and for the
three months ended March 31, 2003 follows:
11
March 31, December 31, March 31,
2004 2003 2003
--------------------------------------------------------------------
Investments, at value $ 18,003,359,532 $ 17,584,390,762 $ 13,797,517,752
Other assets 25,944,066 25,462,745 24,535,362
- ---------------------------------------------------------------------------------------------------------
Total assets $ 18,029,303,598 $ 17,609,853,507 $ 13,822,053,114
Total liabilities 254,697 264,502 73,659,303
- ------------------------------------------------------ --------------------------------------------------
Net assets $ 18,029,048,901 $ 17,609,589,005 $ 13,748,393,811
=========================================================================================================
Dividends and interest $ 62,101,320 $ 232,925,912 $ 53,431,732
- ---------------------------------------------------------------------------------------------------------
Investment adviser fee $ 19,348,796 $ 67,584,543 $ 15,490,999
Other expenses 598,921 2,295,653 477,083
- ---------------------------------------------------------------------------------------------------------
Total expenses $ 19,947,717 $ 69,880,196 $ 15,968,082
- ---------------------------------------------------------------------------------------------------------
Net investment income $ 42,153,603 $ 163,045,716 $ 37,463,650
Net realized gain (loss) 64,894,806 70,909,770 (62,969,970)
Net change in unrealized
appreciation (depreciation) 261,922,214 3,174,709,110 (649,928,537)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $ 368,970,623 $ 3,408,664,596 $ (675,434,857)
- ---------------------------------------------------------------------------------------------------------
5 Interest Rate Swap Agreements
Belrose Capital has entered into interest rate swap agreements with Merrill
Lynch Capital Services, Inc. in connection with its real estate investments and
the associated borrowings. Under such agreements, Belrose Capital has agreed to
make periodic payments at fixed rates in exchange for payments at floating
rates. The notional or contractual amounts of these instruments may not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these investments is meaningful only when
considered in conjunction with all related assets, liabilities and agreements.
Interest rate swap agreements open at March 31, 2004 and December 31, 2003 are
listed below.
Notional Initial
Amount Optional Final Unrealized Unrealized
(000's Fixed Floating Termination Termination Depreciation at Appreciation at
omitted) Rate Rate Date Date March 31, 2004 December 31, 2003
- -------------- ------------ ----------------- -------------- -------------- ---------------------- ------------------
$31,588 4.180% LIBOR + 0.30% 7/09 6/10 $ (662,940) $ 210,531
37,943 4.160% LIBOR + 0.30% 11/09 6/10 (816,645) 252,843
83,307 4.045% LIBOR + 0.30% - 6/10 (1,460,875) 960,493
- -------------- ------------ ----------------- -------------- -------------- ---------------------- ------------------
$ (2,940,460) $ 1,423,867
- -------------- ------------ ----------------- -------------- -------------- ---------------------- ------------------
6 Debt
On March 16, 2004, Belrose Capital amended its credit agreement with DrKW
Holdings, Inc. to establish a borrowing limit of $216,000,000 under that
agreement. Borrowings under this credit arrangement accrue interest at a rate of
one-month LIBOR plus 0.30% per annum. As of March 31, 2004, outstanding
borrowings under this credit arrangement totaled $216,000,000.
12
7 Segment Information
Belrose Capital pursues its investment objective primarily by investing
indirectly in the Portfolio through Belvedere Company. The Portfolio is a
diversified investment company that emphasizes investments in common stocks of
domestic and foreign growth companies that are considered to be high in quality
and attractive in their long-term investment prospects. Separate from its
investment in Belvedere Company, Belrose Capital invests in real estate assets
through its subsidiary Belrose Realty Corporation (Belrose Realty). Belrose
Realty invests directly in Partnership Preference Units and indirectly in real
property through controlled subsidiaries, Bel Apartment Properties Trust,
Katahdin Property Trust LLC and Bel Communities Property Trust.
Belrose Capital evaluates performance of the reportable segments based on the
net increase (decrease) in net assets from operations of the respective segment,
which includes net investment income (loss), net realized gain (loss) and
unrealized appreciation (depreciation). The accounting policies of the
reportable segments are the same as those for the Fund on a consolidated basis.
No reportable segments have been aggregated. Reportable information by segment
is as follows:
Tax-Managed
For the Three Months Ended Growth Real
March 31, 2004 Portfolio* Estate Total
- --------------------------------------------------------------------------------------------------------------------
Revenue $ 3,295,723 $ 19,021,305 $ 22,317,028
Interest expense on mortgages - (6,579,441) (6,579,441)
Interest expense on Credit Facility - (614,391) (614,391)
Operating expenses (301,807) (7,925,863) (8,227,670)
Minority interest in net income of controlled
subsidiaries - (473,208) (473,208)
- --------------------------------------------------------------------------------------------------------------------
Net investment income $ 2,993,916 $ 3,428,402 $ 6,422,318
Net realized gain 6,066,514 2,053,291 8,119,805
Change in unrealized appreciation (depreciation) 24,802,728 (7,851,709) 16,951,019
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations
of reportable segments $ 33,863,158 $ (2,370,016) $ 31,493,142
- --------------------------------------------------------------------------------------------------------------------
Tax-Managed
For the Three Months Ended Growth Real
March 31, 2003 Portfolio* Estate Total
- --------------------------------------------------------------------------------------------------------------------
Revenue $ 2,915,930 $ 17,346,911 $ 20,262,841
Interest expense on mortgages - (6,579,439) (6,579,439)
Interest expense on Credit Facility - (695,677) (695,677)
Operating expenses (195,414) (7,893,295) (8,088,709)
Minority interest in net income of controlled
subsidiaries - (514,701) (514,701)
- --------------------------------------------------------------------------------------------------------------------
Net investment income $ 2,720,516 $ 1,663,799 $ 4,384,315
Net realized loss (5,345,920) (1,051,283) (6,397,203)
Change in unrealized appreciation (depreciation) (57,789,631) 5,128,894 (52,660,737)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations
of reportable segments $ (60,415,035) $ 5,741,410 $ (54,673,625)
- --------------------------------------------------------------------------------------------------------------------
Tax-Managed
Growth Real
At March 31, 2004 Portfolio* Estate Total
- --------------------------------------------------------------------------------------------------------------------
Segment assets $ 1,672,002,450 $ 567,251,073 $ 2,239,253,523
Segment liabilities 1,097,563 561,389,044 562,486,607
- --------------------------------------------------------------------------------------------------------------------
Net assets (liabilities) of reportable segments $ 1,670,904,887 $ 5,862,029 $ 1,676,766,916
- --------------------------------------------------------------------------------------------------------------------
At December 31, 2003
- --------------------------------------------------------------------------------------------------------------------
Segment assets $ 1,640,828,100 $ 544,254,775 $ 2,185,082,875
Segment liabilities - 533,483,765 533,483,765
- --------------------------------------------------------------------------------------------------------------------
Net assets (liabilities) of reportable segments $ 1,640,828,100 $ 10,771,010 $ 1,651,599,110
- --------------------------------------------------------------------------------------------------------------------
* Belrose Capital invests indirectly in Tax-Managed Growth Portfolio through
Belvedere Company.
The following tables reconcile the reported segment information to the condensed
consolidated financial statements for the periods indicated:
13
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
---------------- ----------------
Revenue:
Revenue from reportable segments $ 22,317,028 $ 20,262,841
Unallocated amounts:
Interest earned on cash not invested in the Portfolio or in subsidiaries 23,081 3,240
---------------- ----------------
Total revenue $ 22,340,109 $ 20,266,081
---------------- ----------------
Net increase (decrease) in net assets from operations:
Net increase (decrease) in net assets from operations of reportable segments $ 31,493,142 $(54,673,625)
Unallocated amounts:
Interest earned on cash not invested in the Portfolio or in subsidiaries 23,081 3,240
Unallocated amounts (1):
Distribution and servicing fees (821,760) (612,071)
Audit, tax and legal fees (36,773) (85,248)
Interest expense on Credit Facility (125,839) (36,615)
Other operating expenses (20,681) (25,678)
---------------- ----------------
Total net increase (decrease) in net assets from operations $ 30,511,170 $(55,429,997)
---------------- ----------------
March 31, 2004 December 31, 2003
---------------- -------------------
Net assets:
Net assets of reportable segments $1,676,766,916 $1,651,599,110
Unallocated cash (2) 1,572,743 412,226
Short-term investments (2) 6,105,000 7,614,214
Loan payable - Credit Facility (3) (34,763,915) (27,026,426)
Other liabilities (111,435) (144,366)
----------------- -------------------
Total net assets $1,649,569,309 $1,632,454,758
----------------- -------------------
(1) Unallocated amounts represent expenses incurred that pertain to the overall
operation of Belrose Capital, and do not pertain to either operating
segment.
(2) Unallocated cash and short-term investments represent cash and cash
equivalents not invested in the Portfolio or real estate assets.
14
(3) Unallocated amount of loan payable-Credit Facility represents borrowings
not specifically used to fund real estate investments. Such borrowings are
generally used to pay selling commissions, organization expenses and other
liquidity needs of the Fund.
7 Subsequent Events
On May 3, 2004, Belrose Realty entered into an agreement to establish and
acquire a majority interest in a controlled subsidiary. This controlled
subsidiary will indirectly own certain industrial properties with an estimated
value of approximately $200,000,000 at acquisition. Belrose Realty is expected
to own an 80% interest in the controlled subsidiary and a minority shareholder
will own the remaining interest. Based on the terms of the current agreements,
Belrose Realty expects to acquire the investment in the third quarter of 2004.
The minority shareholder of the controlled subsidiary, or an affiliate thereof,
will manage the real property.
It is expected that the real property will be financed through first mortgage
loans secured by the properties and an assignment of certain leases and rents.
The loans are expected to be without recourse to Belrose Capital and Belrose
Realty. No financing agreement has been entered into at this time.
On May 3, 2004, Belrose Capital entered into a forward interest rate swap
agreement with Merrill Lynch Capital Services, Inc. in anticipation of its
future investment in the controlled subsidiary for the purpose of hedging the
interest rate of substantially all of the expected fixed-rate mortgage financing
of the real property over an expected 8-year term. Under such agreement, Belrose
Capital has agreed to made periodic payments at fixed rates in exchange for
payments at floating rates. The notional amount of the contract is $108,200,000,
which approximates Belrose Capital's expected 80% interest in the anticipated
secured debt of the controlled subsidiary. The floating interest rate to be
received by Belrose Capital is three-month LIBOR and the fixed interest rate to
be paid by Belrose Capital is 4.875%. The swap agreement entered into by Belrose
Capital is effective in June 2004 and terminates in June 2012.
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 BELROSE CAPITAL FUND
LLC (THE FUND) COULD DIFFER MATERIALLY FROM THOSE CONTAINED IN THE
FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS. THE FUND UNDERTAKES NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS, OR OTHERWISE, EXCEPT AS REQUIRED BY
APPLICABLE LAW. FACTORS THAT COULD AFFECT THE FUND'S PERFORMANCE INCLUDE A
DECLINE IN THE U.S. STOCK MARKETS OR IN GENERAL ECONOMIC CONDITIONS, ADVERSE
DEVELOPMENTS AFFECTING THE REAL ESTATE INDUSTRY, OR FLUCTUATIONS IN INTEREST
RATES.
The following discussion should be read in conjunction with the Fund's unaudited
condensed consolidated financial statements and related notes in Item 1 above.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2004 COMPARED TO THE
QUARTER ENDED MARCH 31, 2003
- --------------------------------------------------------------------------------
(a) RESULTS OF OPERATIONS.
- ---------------------------
Increases and decreases in the Fund's net asset value per share are derived from
net investment income or loss, and realized and unrealized gains and losses on
investments. The Fund's net investment income (or loss) is determined by
subtracting the Fund's total expenses from its investment income and then
deducting the minority interest in net income of the controlled subsidiaries of
Belrose Realty Corporation (Belrose Realty). The Fund's investment income
includes the net investment income allocated to the Fund from Belvedere Capital
Fund Company LLC (Belvedere Company), rental income from the properties owned by
Belrose Realty's controlled subsidiaries, partnership income allocated to the
income-producing preferred equity interests in real estate operating
partnerships (Partnership Preference Units) owned by Belrose Realty and interest
earned on the Fund's short-term investments (if any). The net investment income
of Belvedere Company allocated to the Fund includes dividends, interest and
expenses allocated to Belvedere Company by Tax-Managed Growth Portfolio (the
Portfolio) less the expenses of Belvedere Company allocated to the Fund. The
Fund's total expenses include the Fund's investment advisory and administrative
fees, distribution and servicing fees, interest expense from mortgages on
properties owned by Belrose Realty's controlled subsidiaries, interest expense
on the Fund's credit arrangements (the Credit Facility), property management
fees, property taxes, insurance, maintenance and other expenses relating to the
properties owned by Belrose Realty's controlled subsidiaries, and other
miscellaneous expenses. The Fund's realized and unrealized gains and losses are
the result of transactions in, or changes in value of, security investments held
through the Fund's indirect interest (through Belvedere Company) in the
Portfolio, real estate investments held through Belrose Realty, the Fund's
interest rate swap agreements and any other direct investments of the Fund, as
well as periodic payments made by the Fund pursuant to interest rate swap
agreements.
Realized and unrealized gains and losses on investments have the most
significant impact on the Fund's net asset value per share and result primarily
from sales of such investments and changes in their underlying value. The
investments of the Portfolio consist primarily of common stocks of domestic and
foreign growth companies that are considered to be high in quality and
attractive in their long-term investment prospects. Because the securities
holdings of the Portfolio are broadly diversified, the performance of the
Portfolio cannot be attributed to one particular stock or one particular
industry or market sector. The performance of the Portfolio and the Fund are
substantially influenced by the overall performance of the U.S. stock market, as
well as by the relative performance versus the overall market of specific stocks
and classes of stocks in which the Portfolio maintains large positions.
PERFORMANCE OF THE FUND.(1) The Fund's investment objective is to achieve
long-term, after-tax returns for Shareholders. Eaton Vance Management (Eaton
Vance), as the Fund's manager, measures the Fund's success in achieving its
objective based on the investment returns of the Fund, using the Standard &
Poor's 500 Composite Index (the S&P 500) as the Fund's primary performance
benchmark. The S&P 500 is a broad-based unmanaged index of common stocks widely
used as a measure of U.S. stock market performance. Eaton Vance's primary focus
in pursuing total return is on the Fund's common stock portfolio, which consists
of its indirect interest in the Portfolio. In measuring the performance of the
Fund's real estate investments held through Belrose Realty, Eaton Vance
considers whether, through current returns and changes in valuation, the real
- --------------------------
(1) Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Returns are calculated by
determining the percentage change in net asset value with all distributions
reinvested. The Portfolio's total return for the period reflects the total
return of another fund that invests in the Portfolio, adjusted for certain
fund expenses. Performance is for the stated time period only and is not
annualized; due to market volatility, the Fund's current performance may be
lower or higher. The performance of the Fund and the Portfolio is compared
to that of their benchmark, the S&P 500. It is not possible to invest
directly in an Index.
16
estate investments achieve returns that over the long-term exceed the cost of
the borrowing incurred to acquire such investments and thereby add to Fund
returns. The Fund has entered into interest rate swap agreements to fix the cost
of its borrowings under the Credit Facility used to acquire Belrose Realty's
equity in its real estate investments and to mitigate in part the impact of
interest rate changes on the Fund's net asset value.
The Fund's total return was 1.89% for the quarter ended March 31, 2004. This
return reflects an increase in the Fund's net asset value per share from $95.84
to $96.87 and a distribution of $0.77 per share during the period. For
comparison, the S&P 500 had a total return of 1.69% over the same period. The
performance of the Fund trailed that of the Portfolio by approximately 0.23%
during the period. Last year, the Fund's total return was -4.42% for the quarter
ended March 31, 2003. This return reflected a decrease in the Fund's net asset
value per share from $76.86 to $73.42 and a distribution of $0.05 per share
during the period. For comparison, the S&P 500 had a total return of -3.15% over
the same period. The performance of the Fund exceeded that of the Portfolio by
approximately 0.29% during that period.
PERFORMANCE OF THE PORTFOLIO. For the quarter ended March 31, 2004, the
Portfolio's total return was 2.12%, compared to -4.71% for the quarter ended
March 31, 2003. International unrest coupled with weak employment, a struggling
dollar and surging oil prices pressured domestic markets in the first quarter of
2004. Like the quarter ended March 31, 2003, volatility was high during the
first quarter of 2004. However, unlike the first quarter of 2003, major indices
experienced positive returns in 2004 as fiscal and monetary stimuli supported
robust corporate earnings and productivity growth. During the first quarter of
2004, companies on average reported better than expected sales trends, increased
dividends and initiated sizeable share buybacks reflecting a steady global
economic recovery. While large capitalization stocks outperformed smaller
capitalization stocks during the first quarter of 2003, small capitalization
stocks outperformed large-cap companies during the later months of 2003, and
continued to do so in the first quarter of 2004. In addition, during the first
quarter of 2004 higher quality stocks regained performance leadership over last
year's prevailing higher volatility stocks.
During the quarter ended March 31, 2004, the Portfolio's sector allocation
remained similar to its allocation at March 31, 2003. The Portfolio's stronger
quarterly performance relative to the S&P 500 during the first quarter of 2004
resulted from its diversified industry exposure and positive stock selection
decisions. During the quarter ended March 31, 2004, the Portfolio remained
underweight in the information technology sector, the market's weakest
performing sector. Stock selection by the Portfolio's investment adviser, Boston
Management and Research (Boston Management), in the computer peripherals and
electronic equipment industries was particularly beneficial to the Portfolio's
performance during the first quarter of 2004. Similar to the first quarter of
2003, valuation concerns prompted a de-emphasis of the telecommunication sector
during the first quarter of 2004. However, telecommunication services stocks
generally performed well during the first quarter of 2004. Similar to the first
quarter of 2003, the Portfolio was overweight the industrials sector. During the
first quarter of 2004, attractive valuations and positive secular business
trends helped machinery, building products and airfreight stocks of the
aforementioned sector advance higher.
In the first quarter of 2003, Boston Management began increasing the Portfolio's
exposure to the energy sector, a change from its previous underweight stance
versus the S&P 500. This allocation shift has aided performance, as oil
exploration and other energy equipment and service names benefited from rising
oil prices. Although the Portfolio's relative overweight of the financials
sector contributed to its positive return during the quarter ended March 31,
2004, the sub-par performance of its commercial bank and capital market stocks
hindered returns during the quarter. While Boston Management remained optimistic
on the consumer, it slightly trimmed the Portfolio's relative overweight in the
consumer discretionary and staples sectors. Portfolio holdings in leisure,
retail, and personal products benefited from continued consumer spending driven
by tax refunds, strong refinancing activity and increases in wages and salaries.
The Portfolio maintained an underweight of the healthcare sector relative to the
S&P 500 during the quarter ended March 31, 2004, but added to holdings of
stronger quarterly performers such as healthcare equipment and service
companies.
PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate investments are
held through Belrose Realty. As of March 31, 2004, real estate investments
included majority interests in real estate joint ventures (the Real Estate Joint
Ventures) and a portfolio of Partnership Preference Units that are affiliated
with publicly traded real estate investment trusts (REITs). As of March 31,
2004, the estimated fair value of the Fund's real estate investments represented
24.7% of the Fund's total assets. Adjusting for the minority interest of the
real estate operating company that is the principal minority investor in each
Real Estate Joint Venture as of March 31, 2004, the Fund's real estate
investments represented 28.3% of the Fund's net assets.
Like the quarter ended March 31, 2003, operations of Belrose Realty's Real
Estate Joint Ventures were impacted by weak multifamily market fundamentals
during the quarter ended March 31, 2004. Rental income from real estate
operations decreased to approximately $16.2 million for the quarter ended March
17
31, 2004 compared to approximately $16.3 million for the quarter ended March 31,
2003, a decrease of $0.1 million or 1%. This decrease was due to reduced
apartment rental rates, increased rent concessions and lower occupancy levels at
properties owned by the Real Estate Joint Ventures, trends that continued from
2003.
Property operating expenses for Belrose Realty's Real Estate Joint Ventures were
approximately $7.1 million for each of the quarters ended March 31, 2004 and
March 31, 2003 (property operating expenses are before certain operating
expenses of Belrose Realty of approximately $0.8 million for each of the
quarters ended March 31, 2004 and March 31, 2003). The near-term outlook for
multifamily property operations continues to be weak. While anticipated economic
and employment growth is expected to lead to improvements over the longer term,
significant employment growth has not yet occurred in most markets and low
interest rates have contributed to continued apartment move-outs due to new home
purchases and increased competition for new residents from ongoing development
of new multifamily properties. As a result, Boston Management, Belrose Realty's
manager, expects that real estate operating results in 2004 will continue to be
similar to 2003's results.
At March 31, 2004, the estimated fair value of the real properties held through
Belrose Realty was approximately $473.7 million compared to approximately $467.4
million at March 31, 2003, an increase of $6.3 million or 1%. The modest
increase in estimated real property values at March 31, 2004 resulted from lower
capitalization rates in a lower-return environment, which more than offset the
impact on property values of lower near-term income expectations. Belrose Realty
saw unrealized appreciation in the estimated fair value of its other real estate
investments (which includes Real Estate Joint Ventures) of approximately $0.3
million during the quarter ended March 31, 2004 compared to approximately $0.8
million in unrealized appreciation during the quarter ended March 31, 2003.
During the quarter ended March 31, 2003, weak market conditions were also
present, but changes in asset values for multifamily properties were generally
modest as decreases in capitalization rates largely offset declining income
level expectations.
On May 3, 2004, Belrose Realty entered into agreements to establish Deerfield
Property Trust (Deerfield), form ProLogis Six Rivers Limited Partnership (in
association with subsidiaries of other investment funds advised by Boston
Management and ProLogis, a publicly-held REIT) (Six Rivers) and merge Six Rivers
with Keystone Property Trust, a publicly-held REIT (Keystone). It is expected
that the merger will be consummated during the third quarter of 2004, subject to
the satisfaction of certain conditions precedent. Upon the ultimate consummation
of the transactions, Belrose Realty will own an 80% interest in Deerfield and
ProLogis will own a 20% interest in Deerfield. Deerfield will own a partnership
interest in Six Rivers through which it will own 100% of the economic interest
in certain industrial properties acquired through the merger of Six Rivers and
Keystone and valued at approximately $200 million at the date of acquisition.
Prologis, or an affiliate thereof, will manage the properties. It is anticipated
that Keystone's existing direct fixed-rate obligations will be retired after the
merger date. It is anticipated that first mortgage financing estimated to be
60-65% of the property value will be obtained in connection with the acquisition
and will be secured by the properties. There can be no assurance that the
conditions precedent to the consummation of the transactions described above
will be satisfied or that the financing required to acquire the properties will
be obtained.
During the quarter ended March 31, 2004, Belrose Realty experienced scheduled
redemptions of certain of its Partnership Preference Units totaling
approximately $19.6 million, recognizing a gain of $3.0 million on the
transactions. During the quarter ended March 31, 2004, Belrose Realty also
acquired interests in additional Partnership Preference Units (including
acquisitions from other investment funds advised by Boston Management) totaling
approximately $44.5 million. At March 31, 2004, the estimated fair value of the
Partnership Preference Units totaled $80.9 million compared to $54.8 million at
March 31, 2003, an increase of $26.1 million or 48%. The increase in value was
due to the increase in the number of Partnership Preference Units held at March
31, 2004. In the current low interest rate environment, issuers have been
redeeming Partnership Preference Units as Belrose Realty's call protections
expire or restructuring the terms of outstanding Partnership Preference Units in
advance of their call dates. As a result, many of the higher-yielding
Partnership Preference Units held by Belrose Realty during the quarter ended
March 31, 2003 were no longer held at March 31, 2004. Boston Management expects
this trend to continue through 2004.
The Fund saw unrealized depreciation in the estimated fair value of its
Partnership Preference Units of approximately $3.8 million during the quarter
ended March 31, 2004 compared to unrealized appreciation of approximately $5.0
million for the quarter ended March 31, 2003. For the quarter ended March 31,
2004, net unrealized depreciation of $3.8 million consisted of approximately
$1.4 million of unrealized depreciation as a result of decreases in per unit
values of the Partnership Preference Units held by Belrose Realty at March 31,
2004 (as described above), and approximately $2.4 million of unrealized
depreciation resulting from the reclassification of previously recorded
unrealized appreciation as realized gains due to sales of Partnership Preference
Units during the quarter ended March 31, 2004. During the quarter ended March
18
31, 2003, Belrose Realty's investments in Partnership Preference Units generally
benefited from declining interest rates and tightening spreads in
income-oriented securities, particularly in real estate-related securities.
Distributions from Partnership Preference Units for the quarter ended March 31,
2004 totaled $2.8 million compared to $1.0 million for the quarter ended March
31, 2003, an increase of $1.8 million. The increase was due to the larger number
of Partnership Preference Units held during the quarter ended March 31, 2004.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the quarter ended March 31,
2004, net realized and unrealized losses on the Fund's interest rate swap
agreements totaled approximately $5.4 million, compared to net realized and
unrealized losses of $1.7 million for the quarter ended March 31, 2003. Net
realized and unrealized losses on swap agreements for the quarter ended March
31, 2004 consisted of $4.4 million of unrealized depreciation due to changes in
swap agreement valuations and $1.0 million of periodic payments made pursuant to
outstanding swap agreements (and classified as realized losses on interest rate
swap agreements). For the quarter ended March 31, 2003, the Fund had unrealized
depreciation of $0.6 million due to swap agreement valuation changes and $1.1
million of swap agreement periodic payments. The impact on Fund performance from
changes in swap agreement valuations for the quarter ended March 31, 2004 was
attributable to a decline in swap rates during the period. During the quarter
ended March 31, 2003, relevant swap rates were substantially unchanged resulting
in minimal impact on Fund performance from changes in swap agreement valuations
during the period.
(b) LIQUIDITY AND CAPITAL RESOURCES.
- -------------------------------------
OUTSTANDING BORROWINGS. The Fund has entered into credit arrangements with DrKW
Holdings, Inc. and Merrill Lynch Mortgage Capital, Inc. (collectively, the
Credit Facility) primarily to finance the Fund's equity in its real estate
investments and will continue to use the Credit Facility for such purpose in the
future. The Credit Facility may also be used for other purposes, including any
short-term liquidity needs of the Fund. In the future, the Fund may increase the
size of the Credit Facility (subject to lender consent) and the amount of
outstanding borrowings thereunder. As of March 31, 2004, the Fund had
outstanding borrowings of $216.0 million and unused loan commitments of $54.9
million under the Credit Facility. On March 16, 2004, the Fund amended its loan
agreement with DrKW Holdings, Inc. to establish a borrowing limit of $216.0
million under that agreement.
On May 3, 2004, Belrose Realty entered an agreement to establish and acquire a
majority interest in a Real Estate Joint Venture, Deerfield. Belrose Realty's
acquisition of its interest in Deerfield is expected to occur in the third
quarter of 2004. Deerfield is expected to indirectly own industrial properties
with a value of approximately $200 million at acquisition. Belcrest Realty will
own 80% of the interests in Deerfield. The amount of Belrose Realty's net
investment in Deerfield will depend in part on the terms of the anticipated
mortgage financing to be obtained for the real estate assets, closing costs and
other consideration. The Fund plans to increase its borrowings under the
existing Credit Facility to fund its equity in Deerfield and has begun
discussions with DrKW Holdings, Inc. and Merrill Lynch Mortgage Capital, Inc. in
anticipation of its investment in Deerfield.
The Fund has entered into interest rate swap agreements with respect to its real
estate investments and associated borrowings. Pursuant to these agreements, the
Fund makes periodic payments to the counterparty at predetermined fixed rates,
in exchange for floating-rate payments at a predetermined spread plus one-month
LIBOR. During the terms of the outstanding interest rate swap agreements,
changes in the underlying values of the agreements are recorded as unrealized
appreciation or depreciation. As of March 31, 2004, the unrealized depreciation
related to the interest rate swap agreements was approximately $2.9 million. As
of March 31, 2003, the unrealized depreciation related to the interest rate swap
agreements was approximately $12.2 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- -------------------------------------------------------------------
INTEREST RATE RISK. The Fund's primary exposure to interest rate risk arises
from its real estate investments that are financed by the Fund with floating
rate borrowings under the Fund's Credit Facility and by fixed-rate secured
mortgage debt obligations of the Real Estate Joint Ventures. Partnership
Preference Units are fixed rate instruments whose values will generally decrease
when interest rates rise and increase when interest rates fall. The interest
rates on borrowings under the Fund's Credit Facility are reset at regular
intervals based on one-month LIBOR. The Fund has entered into interest rate swap
agreements to fix the cost of its borrowings under the Credit Facility used to
acquire Belrose Realty's equity in its real estate investments and to mitigate
in part the impact of interest rate changes on the Fund's net asset value. Under
the terms of the interest rate swap agreements, the Fund makes cash payments at
fixed rates in exchange for floating rate payments that fluctuate with one-month
LIBOR. The Fund's interest rate swap agreements will generally increase in value
when interest rates rise and decrease in value when interest rates fall. In the
19
future, the Fund may use other interest rate hedging arrangements (such as caps,
floors and collars) to fix or limit borrowing costs. The use of interest rate
hedging arrangements is a specialized activity that can expose the Fund to
significant loss.
The following table summarizes the contractual maturities and weighted-average
interest rates associated with the Fund's significant non-trading financial
instruments. The Fund has no market risk sensitive instruments held for trading
purposes. This information should be read in conjunction with Note 5 and Note 6
to the Fund's unaudited condensed consolidated financial statements in Item 1
above.
Interest Rate Sensitivity
Cost, Principal (Notional) Amount
by Contractual Maturity and Callable Date
for the Twelve Months Ended March 31,*
Estimated
2005 2006-2009 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------
Rate sensitive
liabilities:
- ------------------------
Long-term debt:
- ------------------------
Fixed-rate mortgages $344,219,483 $344,219,483 $405,400,000
Average interest rate 7.53% 7.53%
- ------------------------
Variable-rate Credit
Facility $216,000,000 $216,000,000 $216,000,000
Average interest rate 1.39% 1.39%
- ------------------------------------------------------------------------------------------------------------
Rate sensitive
derivative financial
instruments:
- ------------------------
Pay fixed/receive
variable interest rate
swap agreements $152,838,000 $152,838,000 $ (2,940,460)
Average pay rate 4.10% 4.10%
Average receive rate 1.39% 1.39%
- ------------------------------------------------------------------------------------------------------------
Rate sensitive
investments:
- ------------------------
Fixed-rate Partnership
Preference Units:
- ------------------------
Essex Portfolio, L.P.,
7.875% Series B
Cumulative Redeemable
Preferred Units,
Callable 12/31/09,
Current Yield: 7.58% $16,616,170 $ 16,616,170 $ 20,776,840
Kilroy Realty, L.P.,
7.45% Series A
Cumulative Redeemable
Preferred Units,
Callable 9/30/09,
Current Yield: 7.82% $15,898,220 $ 15,898,220 $ 19,064,520
Liberty Property L.P.,
9.25% Series B
Cumulative Redeemable
Preferred Units,
Callable 7/28/04,
Current Yield: 9.06% $18,130,840 $18,130,840 $ 17,871,000
PSA Institutional
Partners, L.P., 6.4%
Series NN Cumulative
Redeemable Perpetual
Preferred Units,
Callable 3/17/10,
Current Yield: 6.90% $26,399.900 $26,399,900 $ 23,180,000
* The investments listed reflect holdings as of March 31, 2004. The Fund's
current holdings may differ.
20
ITEM 4. CONTROLS AND PROCEDURES.
- ---------------------------------
Eaton Vance, as the Fund's manager, conducted an evaluation of the effectiveness
of the Fund's disclosure controls and procedures (as defined by Rule 13a-15(e)
of the 1934 Act) as of the end of the period covered by this report, with the
participation of the Fund's Chief Executive Officer and Chief Financial Officer.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Fund's disclosure controls and procedures were
effective. There were no changes in the Fund's internal control over financial
reporting that occurred during the quarter ended March 31, 2004 that have
materially affected, or are reasonably likely to materially affect, the Fund's
internal control over financial reporting.
As the Fund's manager, the complete and entire management, control and operation
of the Fund are vested in Eaton Vance. The Fund's Chief Executive Officer and
Chief Financial Officer intend to report to the Board of Directors of Eaton
Vance, Inc. (the sole trustee of Eaton Vance) any significant deficiency in the
design or operation of internal control over financial reporting which could
adversely affect the Fund's ability to record, process, summarize and report
financial data, and any fraud, whether or not material, that involves management
or other employees who have a significant role in the Fund's internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ---------------------------
Although in the ordinary course of business, the Fund, Belrose Realty and
Belrose Realty's controlled subsidiaries may become involved in legal
proceedings, the Fund is not aware of any material pending legal proceedings to
which any of them is subject.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
- --------------------------------------------------------------------------------
As described in the Fund's Annual Report on Form 10-K for the year ended
December 31, 2003, shares of the Fund may be redeemed by Shareholders on any
business day. Redemptions are met at the net asset value per share of the Fund
(less any applicable redemption fee). The right to redeem is available to all
Shareholders and all outstanding Fund shares are eligible (except for shares
subject to an estate freeze election as described in Item 5 of the Fund's Report
on Form 10-K for the fiscal year ending December 31, 2003). During each month in
the quarter ended March 31, 2004, the total number of shares redeemed and the
average price paid per share were as follows:
Total No. of Shares Average Price Paid Per
Month Ended Redeemed(1) Share
- -------------------------------------------------------------------------
January 31, 2004 0 $ --
- -------------------------------------------------------------------------
February 29, 2004 2,783.858 $97.45
- -------------------------------------------------------------------------
March 31, 2004 57,362.723 $94.47
- -------------------------------------------------------------------------
Total 60,146.581 $94.66
- -------------------------------------------------------------------------
(1) All shares redeemed during the periods were redeemed at the option of
Shareholders pursuant to the Fund's redemption policy. The Fund has not
announced any plans or programs to repurchase shares other than at the
option of Shareholders.
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 March 31, 2004.
ITEM 5. OTHER INFORMATION.
- ---------------------------
None.
21
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(b) Amendment No. 2 dated March 16, 2004 to the Loan and Security
Agreement between Belrose Capital Fund LLC and DrKW Holdings, 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.
22
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 May 10, 2004.
BELROSE CAPITAL FUND LLC
/s/ Michelle A. Alexander
-------------------------
Michelle A. Alexander
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
23
EXHIBIT INDEX
-------------
4.1(b) Amendment No. 2 dated March 16, 2004 to the Loan and Security Agreement
between Belrose Capital Fund LLC and DrKW Holdings, 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
24