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, 2001
Commission File No. 0002-25767
----------
Belair Capital Fund LLC
-----------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3404037
------------- ----------
(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 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 __
Page 1 of 22
Belair Capital Fund LLC
Index to Form 10Q
PART I - FINANCIAL INFORMATION
Page
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Assets and
Liabilities as of June 30, 2001 (Unaudited) and
December 31, 2000 3
Condensed Consolidated Statements of Operations
(Unaudited) for the Three Months Ended June 30,
2001 and 2000 and for the Six Months Ended
June 30, 2001 and 2000 4
Condensed Consolidated Statements of Changes in
Net Assets (Unaudited) for the Six Months Ended
June 30, 2001 and 2000 6
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Six Months Ended June 30,
2001 and 2000 7
Notes to Condensed Consolidated Financial Statements
as of June 30, 2001 (Unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 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 21
SIGNATURES 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Assets and Liabilities
June 30,
2001 December 31,
(Unaudited) 2000
--------------------- -------------------
Assets:
Investment in Belvedere Capital LLC $1,957,678,301 $2,132,795,139
Investment in real estate Partnership Preference Units 482,684,492 439,043,259
Investment in other real estate 326,392,896 157,812,925
Short-term investments 9,969,864 6,665,871
-------------------- -------------------
Total investments $2,776,725,553 $2,736,317,194
Cash 5,003,327 46,875,064
Dividends receivable 148,243 8,021,686
Deferred expenses 174,190 1,379,102
Escrow deposits - restricted 5,615,928 2,143,464
Swap interest receivable - 526,653
Other assets 303,992 286,469
-------------------- -------------------
Total assets $2,787,971,233 $2,795,549,632
-------------------- -------------------
Liabilities:
Loan payable $ 663,000,000 $643,000,000
Mortgage payable, net of unamortized debt issuance costs 226,312,371 111,088,447
Payable for Fund Shares redeemed 3,619,443 -
Open interest rate swap contracts, at value 14,540,921 4,834,653
Swap interest payable 2,246,266 -
Security deposits 893,697 394,546
Accrued expenses:
Interest expense 5,908,209 7,430,119
Accrued property taxes 1,859,509 659,702
Other accrued expenses and other liabilities 1,949,488 4,172,804
Minority interest in controlled subsidiaries 27,188,374 12,971,521
-------------------- -------------------
Total liabilities $ 947,518,278 $ 784,551,792
-------------------- -------------------
Net assets $1,840,452,955 $2,010,997,840
-------------------- -------------------
Shareholders' Capital
-------------------- -------------------
Shareholders' capital $1,840,452,955 $2,010,997,840
-------------------- -------------------
Shares Outstanding 14,696,725 15,106,086
-------------------- -------------------
Net Asset Value and Redemption Price Per Share $125.23 $133.13
-------------------- -------------------
3
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of
Operations (Unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
----------------- ------------------ ------------------ -----------------
Investment Income:
Dividends allocated from Belvedere Capital $4,670,963 $4,805,694 $ 9,405,546 $9,793,831
(net of foreign taxes of $31,173, $48,532,
$61,493 and $88,422, respectively)
Interest allocated from Belvedere Capital 253,126 1,238,677 1,105,040 2,074,393
Expenses allocated from Belvedere Capital (2,959,093) (3,349,395) (6,026,592) (6,652,288)
----------------- ------------------ ------------------ -----------------
Net investment income allocated from
Belvedere Capital $1,964,996 $2,694,976 $4,483,994 $5,215,936
Dividends from Partnership Preference
Units 3,824,112 15,496,609 14,957,328 29,185,203
Rental income 8,438,058 - 14,417,923 -
Interest 128,241 128,886 301,235 207,628
----------------- ------------------ ------------------ -----------------
Total investment income $14,355,407 $18,320,471 $34,160,480 $34,608,767
----------------- ------------------ ------------------ -----------------
Expenses:
Investment advisory and administrative fees $1,775,246 $1,809,910 $3,513,958 $3,527,449
Property management fees 338,301 - 577,142 -
Service fees 188,945 207,095 389,063 427,406
Interest expense on credit facility 8,614,967 12,762,520 18,984,326 23,798,763
Interest expense on mortgages 3,234,769 - 5,620,880 -
Interest expense/(income) on swap contracts 2,804,879 (177,548) 3,540,740 94,232
Property and maintenance 2,073,858 - 3,536,915 -
Property taxes and insurance 908,140 - 1,493,884 -
Legal and accounting services 192,065 264,553 241,065 404,217
Amortization of deferred expenses 18,780 27,466 54,429 54,831
Custodian and transfer agent fees 39,231 65,895 54,044 80,139
Printing and postage 4,179 2,307 6,618 4,800
Miscellaneous 230,669 16,901 524,520 49,701
----------------- ------------------ ------------------ -----------------
Total expenses $20,424,029 $14,979,099 $38,537,584 $28,441,538
----------------- ------------------ ------------------ -----------------
Net investment income (loss) before minority
interest in net income of controlled (6,068,622) 3,341,372 (4,377,104) 6,167,229
subsidiaries
Minority interest in net income of controlled
subsidiaries (174,292) - (190,043) -
----------------- ------------------ ------------------ -----------------
Net investment income (loss) $(6,242,914) $3,341,372 $(4,567,147) $6,167,229
----------------- ------------------ ------------------ -----------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions from Belvedere
Capital (identified cost basis) $(7,301,594) $16,445,271 $(1,257,901) $48,297,917
Investment transactions in Partnership
Preference Units (identified cost basis) - (48,619) (1,142,610) (2,946,213)
----------------- ------------------ ------------------ -----------------
Net realized gain (loss) $(7,301,594) $16,396,652 $(2,400,511) $45,351,704
----------------- ------------------ ------------------ -----------------
Change in unrealized appreciation
(depreciation) -
Investment in Belvedere Capital
(identified cost basis) $110,600,345 $(33,067,459) $(144,544,220) $60,470,766
4
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Operations
(Unaudited) (Continued)
Investments in Partnership Preference
Units (identified cost basis) 12,236,705 12,313,512 44,783,843 (1,367,252)
Interest rate swap contracts 4,461,941 (4,727,393) (9,706,268) 524,637
Investment in real property (net of minority
interest in unrealized gain of controlled
subsidiary of $75,597) (2,187,232) - (2,187,232) -
----------------- ------------------ ------------------ -----------------
Net change in unrealized
appreciation (depreciation) $125,111,759 $(25,481,340) $(111,653,877) $59,628,151
----------------- ------------------ ------------------ -----------------
Net realized and unrealized gain (loss) $117,810,165 $(9,084,688) $(114,054,388) $ 104,979,855
----------------- ------------------ ------------------ -----------------
Net increase (decrease) in net assets from
operations $111,567,251 $(5,743,316) $(118,621,535) $111,147,084
================= ================== ================== =================
5
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Changes in Net Assets (Unaudited)
Six Months Six Months
Ended Ended
June 30, 2001 June 30, 2000
------------------- ------------------
Increase (Decrease) in Net Assets:
Net investment income (loss) $ (4,567,147) $ 6,167,229
Net realized gain (loss) on investment transactions (2,400,511) 45,351,704
Net change in unrealized appreciation (depreciation) of
investments (111,653,877) 59,628,151
------------------- ------------------
Net increase (decrease) in net assets from
operations $ (118,621,535) $ 111,147,084
------------------- ------------------
Transactions in Fund Shares -
Net asset value of Fund Shares redeemed $ (51,286,054) $ (89,640,998)
------------------- ------------------
Net decrease in net assets from Fund Share transactions $ (51,286,054) $ (89,640,998)
------------------- ------------------
Distributions to Shareholders
Special distributions to Fund Shareholders $ - $ (5,104,441)
Minority shareholders of controlled subsidiaries (637,296) -
------------------- ------------------
Total distributions to Shareholders $ (637,296) $ (5,104,441)
------------------- ------------------
Net increase (decrease) in net assets $ (170,544,885) $ 16,401,645
Net assets:
Beginning of period $2,010,997,840 $2,094,369,753
------------------- ------------------
End of period $1,840,452,955 $2,110,771,398
=================== ==================
6
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Six Months
Ended Ended
June 30, June 30,
2001 2000
------------------ ------------------
Cash Flows From (For) Operating Activities -
Net investment income (loss) $ (4,567,147) $ 6,167,229
Adjustments to reconcile net investment income (loss) to net
cash flows used for operating activities -
Amortization of deferred expenses 54,429 54,831
Amortization of debt issuance costs 87,104 -
Net investment income allocated from Belvedere Capital (4,483,994) (5,215,936)
(Increase) decrease in dividends receivable 7,873,443 (1,613,074)
Increase (decrease) in interest payable for open swap contracts 2,772,919 (365,363)
Increase in escrow deposits (317,545) -
Increase in deferred expenses - (2,388,784)
Increase in other assets (928,173) -
Increase in accrued property taxes 1,199,807 -
Increase (decrease) in accrued interest and operating
expenses and other liabilities (5,239,147) 859,523
Increase (decrease) in minority interest (52,500) 159,500
Payments for investments in other real property (41,261,497) (33,988,289)
Cash assumed in connection with acquisition of real estate
investments 1,745,868 -
Purchases of Partnership Preference Units (9,386,616) (101,895,368)
Sales of Partnership Preference Units 9,386,616 12,733,012
Improvements to property (868,093) -
Net (increase) decrease in investment in Belvedere Capital (9,529,159) 41,398,714
Increase in short-term investments (3,303,993) (5,855,757)
Minority interest in net income of controlled subsidiaries 190,043 -
------------------ ------------------
Net cash flows used for operating activities $(56,627,635) $ (89,949,762)
Cash Flows From (For) Financing Activities -
Proceeds from loan $20,000,000 $ 126,000,000
Return of Capital (268,065) -
Payments for Fund Shares redeemed (4,338,741) (24,955,530)
Distributions paid (637,296) (4,012,689)
--------------------------------------
Net cash flows from financing activities $14,755,898 $ 97,031,781
Net increase (decrease) in cash $(41,871,737) $ 7,082,019
Cash at beginning of period $46,875,064 $ 3,802,594
------------------ ------------------
Cash at end of period $ 5,003,327 $ 10,884,613
================== ==================
7
SUPPLEMENTAL DISCLOSURE AND NON-CASH INVESTING AND
FINANCING ACTIVITIES-
Change in unrealized appreciation of investments and
open swap contracts $(111,653,877) $ 59,628,151
Interest paid for loan $ 21,159,340 $ 24,228,338
Interest paid for swap contracts $ 767,821 $ 459,595
Interest paid for mortgages $ 4,880,672 $ -
Market value of securities distributed in payment of redemptions $ 43,327,870 $ 65,757,848
Market value of real property and other assets, net of current
liabilities, contributed to Bel Residential $ - $158,305,656
Market value of real property and other assets, net of current
liabilities, contributed to Katahdin $ 170,124,083 $ -
Mortgage assumed in connection with the acquisition of real property $ 115,850,000 $112,630,517
8
BELAIR CAPITAL FUND LLC as of June 30, 2001
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1 Organization
Belair Capital Fund LLC (Belair Capital) is a Massachusetts limited liability
company established to offer diversification and tax-sensitive investment
management to persons holding large and concentrated positions in equity
securities of selected publicly-traded companies. The investment objective of
Belair Capital is to achieve long-term, after-tax returns for Shareholders.
Belair Capital pursues this objective primarily by investing indirectly in
Tax-Managed Growth Portfolio (the Portfolio), a diversified, open-end management
investment company registered under the Investment Company Act of 1940, as
amended. The Portfolio is organized as a trust under the laws of the State of
New York. Belair Capital maintains its investment in the Portfolio by investing
in Belvedere Capital Fund Company LLC (Belvedere Capital), a separate
Massachusetts limited liability company that invests exclusively in the
Portfolio. The performance of Belair Capital and Belvedere Capital are directly
and substantially affected by the performance of the Portfolio. Separate from
its investment in the Portfolio through Belvedere Capital, Belair Capital
invests in real estate assets including income-producing preferred equity
interests in real estate operating partnerships (Partnership Preference Units)
affiliated with publicly-traded real estate investment trusts (REITs) and
interests in controlled real property subsidiaries.
During the six months ended June 30, 2001, Belair Realty Corporation (BREC)
purchased a majority interest in Katahdin Property Trust, LLC (Katahdin).
Katahdin owns six multi-family residential properties located in five states
(Florida, North Carolina, New Mexico, Texas and Washington). BREC owns Class A
units of Katahdin, representing approximately 75% of equity interest in
Katahdin, and a minority shareholder owns Class B units, representing
approximately 25% of the equity interest in Katahdin. The equity interest of the
Katahdin minority shareholder is recorded as a minority interest on the
Consolidated Statement of Assets and Liabilities. The primary distinction
between the two classes of shares is the distribution priority and the voting
rights. BREC has priority in distributions and has greater voting rights than
the holder of Class B units.
The accompanying condensed consolidated financial statements of Belair Capital
include the accounts of BREC, Bel Residential Properties Trust (Bel Residential)
and Katahdin (collectively, the Fund). All material intercompany accounts and
transactions have been eliminated.
2 Interim Financial Statements
The condensed consolidated interim financial statements of Belair Capital Fund
and subsidiaries as of June 30, 2001 and June 30, 2000 and for the six months
ended June 30, 2001 and June 30, 2000 have been prepared by the Fund, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. 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 and cash flows at the dates and for the periods presented. It is
suggested that these interim financial statements be read in conjunction with
9
the financial statements and the notes thereto included in the Fund's latest
annual report on Form 10-K. Results for the interim period are not necessarily
indicative of those to be expected for the full fiscal year.
Reclassifications have been made to the prior period's financial statements to
conform to the current period's presentation.
3 Investment Transactions
Increases and decreases of the Fund's investment in Belvedere Capital for the
six months ended June 30, 2001 aggregated $68,831,528 and $102,630,239,
respectively, and for the six months ended June 30, 2000 aggregated $14,761,240
and $121,917,802, respectively. Purchases and sales of Partnership Preference
Units aggregated $9,386,616 and $9,386,616, respectively, for the six months
ended June 30, 2001 and $101,895,368 and $12,733,012, respectively, for the six
months ended June 30, 2000. For the six months ended June 30, 2001, acquisitions
of other real property aggregated $41,261,497. For the six months ended June 30,
2000, acquisitions of other real property aggregated $33,988,289.
Purchases and sales of Partnership Preference Units during the six months ended
June 30, 2001 and June 30, 2000 include amounts purchased from and sold to other
funds sponsored by Eaton Vance Management (EVM).
4 Indirect Investment in Portfolio
Belvedere Capital's interest in the Portfolio at June 30, 2001 was
$9,970,047,835, representing 54.6% of the Portfolio's net assets and at June 30,
2000 was $8,894,702,269 representing 52.4% of the Portfolio's net assets. The
Fund's investment in Belvedere Capital at June 30, 2001 was $1,957,678,301
representing 19.6% of Belvedere Capital's net assets and at June 30, 2000 was
$2,234,901,756, representing 25.1% of Belvedere Capital's net assets. Investment
income allocated to Belvedere Capital from the Portfolio for the six months
ended June 30, 2001 totaled $50,467,696, of which $10,510,586 was allocated to
the Fund. Investment income allocated to Belvedere Capital from the Portfolio
for the six months ended June 30, 2000 totaled $43,951,952, of which $11,868,224
was allocated to the Fund. Expenses allocated to Belvedere Capital from the
Portfolio for the six months ended June 30, 2001 totaled $21,587,638, of which
$4,485,806 was allocated to the Fund. Expenses allocated to Belvedere Capital
from the Portfolio for the six months ended June 30, 2000 totaled $18,388,926,
of which $4,961,380 was allocated to the Fund. Belvedere Capital allocated
additional expenses to the Fund of $1,540,786 for the six months ended June 30,
2001, representing $35,411 of operating expenses and $1,505,375 of service fees.
Belvedere Capital allocated additional expenses to the Fund of $1,690,908 for
the six months ended June 30, 2000, representing $47,926 of operating expenses
and $1,642,982 of service fees (Note 8).
A summary of the Portfolio's Statement of Assets and Liabilities, at June 30,
2001, December 31, 2000 and June 30, 2000 and its operations for the six months
ended June 30, 2001, the year ended December 31, 2000 and the six months ended
June 30, 2000 follows:
10
June 30, December 31, June 30,
2001 2000 2000
-------------------- ------------------------ ---------------------
Investments, at value $18,239,311,489 $18,318,105,043 $16,968,560,668
Other Assets 19,932,030 251,324,504 129,856,981
- ----------------------------------- -------------------- ------------------------ ---------------------
Total Assets $18,259,243,519 $18,569,429,547 $17,098,417,649
Total Liabilities 463,366 184,360,662 122,641,585
- ----------------------------------- -------------------- ------------------------ ---------------------
Net Assets $18,258,780,153 $18,385,068,885 $16,975,776,064
=================================== ==================== ======================== =====================
Dividends and interest $93,075,546 $189,740,537 $85,182,083
- ----------------------------------- -------------------- ------------------------ ---------------------
Investment adviser fee $38,822,203 $73,317,616 $34,563,622
Other expenses 959,382 2,500,093 1,049,805
- ----------------------------------- -------------------- ------------------------ ---------------------
Total expenses $39,781,585 $75,817,709 $35,613,427
- ----------------------------------- -------------------- ------------------------ ---------------------
Net investment income $53,293,961 $113,922,828 $49,568,656
Net realized gains (losses) (12,705,834) 196,962,539 345,517,898
Net change in unrealized
gains (losses) (1,238,423,587) 141,360,943 429,187,549
- ----------------------------------- -------------------- ------------------------ ---------------------
Net increase (decrease) in net
assets from operations $(1,197,835,460) $452,246,310 $824,274,103
- ----------------------------------- -------------------- ------------------------ ---------------------
5 Rental Property
The average occupancy rate for real property held by Bel Residential, consisting
of 2,681 residential units, was approximately 96% at June 30, 2001 and
approximately 95% at December 31, 2000. The fair value of real property owned by
the Fund through Bel Residential at June 30, 2001 and December 31, 2000 is as
follows:
June 30, 2001 December 31, 2000
------------- -----------------
Land $ 23,565,000 $ 23,565,000
Buildings, improvements and other assets 135,370,000 134,247,925
-------------------- ------------------------
Fair value $ 158,935,000 $ 157,812,925
-------------------- ------------------------
The average occupancy rate for real property held by Katahdin, consisting of
2,476 residential units, was approximately 95% at June 30, 2001. The fair value
of real property owned by the Fund through Katahdin at June 30, 2001 is as
follows:
June 30, 2001
---------------------
Land $ 26,441,627
Buildings, improvements and other assets 141,016,269
--------------------
Fair value $ 167,457,896
--------------------
6 Cancelable Interest Rate Swap Agreements
The Fund has entered into cancelable interest rate swap agreements in connection
with its real estate investments and the associated borrowings. Under such
agreements, the Fund 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, 2001 and December 31, 2000, the Fund
has entered into cancelable interest rate swap agreements with Merrill Lynch
Capital Services, Inc.
11
Unrealized Unrealized
Notional Initial Appreciation/ Appreciation/
Amount Optional (Depreciation) (Depreciation)
Effective (000's Fixed Floating Termination Maturity At June 30, 2001 At December 31,
Date omitted) Rate Rate Date Date (Unaudited) 2000
- ----------------------------------------------------------------------------------------------------------------------------------
2/98 120,000 6.715% Libor+.45% 2/03 2/05 $ (1,735,720) $158,467
4/98 50,000 6.84% Libor+.45% 2/03 2/05 (875,367) (105,708)
4/98 150,000 6.835% Libor+.45% 4/03 4/05 (2,507,260) (413,833)
6/98 20,000 6.67% Libor+.45% 6/03 2/05 (311,870) 1,994
6/98 75,000 6.68% Libor+.45% 6/03 2/05 (1,189,020) (14,230)
6/98 80,000 6.595% Libor+.45% 6/03 2/05 (1,090,686) 181,644
11/98 14,709 6.13% Libor+.45% 11/03 2/05 (34,526) 210,991
2/99 34,951 6.34% Libor+.45% 2/04 2/05 (326,566) 221,768
4/99 5,191 6.49% Libor+.45% 2/04 2/05 (70,489) 6,770
7/99 24,902 7.077% Libor+.45% 7/04 2/05 (840,246) (524,587)
9/99 10,471 7.37% Libor+.45% 9/04 2/05 (461,379) (341,770)
3/00 19,149 7.89% Libor+.45% 2/04 2/05 (1,018,033) (809,750)
3/00 70,000 7.71% Libor+.45% - 2/05 (4,079,759) (3,406,409)
- ----------------------------------------------------------------------------------------------------------------------------------
Total $(14,540,921) $(4,834,653)
- ----------------------------------------------------------------------------------------------------------------------------------
7 Debt
A Mortgages - Rental property held by the Fund is financed through various
mortgages issued to real estate subsidiaries. Mortgages payable are reported on
the Condensed Consolidated Statement of Assets and Liabilities net of
unamortized debt issuance costs. A description of the mortgages issued to each
of the real estate subsidiaries, excluding debt issuance costs, is as follows:
Real property held by Bel Residential is financed through a loan secured by
cross-collateralized first mortgage liens on such real property. The balances at
June 30, 2001 and December 31, 2000, excluding unamortized debt issuance costs,
are as follows:
Monthly
Annual Interest Balance at Balance at
Maturity Date Interest Rate Payment* June 30, 2001 December 31, 2000
- ------------- ------------- -------- ------------- -----------------
May 1, 2010 8.33% $781,844 $112,630,517 $112,630,517
*Mortgage provides for monthly payments of interest only through May 1, 2010,
with the entire principal balance due on May 1, 2010.
Real property held by Katahdin is financed through a mortgage loan secured by
the six real properties. The balance at June 30, 2001, excluding unamortized
debt issuance costs, is as follows:
12
Monthly
Annual Interest Balance at
Maturity Date Interest Rate Payment* June 30, 2001
- ------------- ------------- -------- -------------
June 1, 2011 6.765% $653,104 $115,850,000
*Mortgage provides for monthly payments of interest only through June 1, 2010,
with the entire principal balance due on June 1, 2011.
B Credit Facility -- Belair Capital has obtained a $790,000,000 credit facility
(the Credit Facility) with a term of seven years from Merrill Lynch
International Bank Limited. Belair Capital's obligations under the Credit
Facility are secured by a pledge of its assets, excluding the assets of Bel
Residential and Katahdin. Interest on borrowed funds is based on the prevailing
LIBOR rate for the respective interest period plus a spread of 0.45% per annum.
Belair Capital may borrow for interest periods of one month to five years. In
addition, Belair Capital pays a commitment fee at a rate of 0.10% per annum on
the unused amount of the loan commitment. Borrowings under the Credit Facility
have been used to purchase qualifying assets, pay selling commissions and
organizational expenses, and to provide for the short-term liquidity needs of
the Fund. Additional borrowings under the Credit Facility may be made in the
future for these purposes. At June 30, 2001 and December 31, 2000, amounts
outstanding under the Credit Facility totaled $663,000,000 and $643,000,000,
respectively.
8 Management Fee and Other Transactions with Affiliates
The Fund and the Portfolio have engaged Boston Management and Research (BMR), a
wholly-owned subsidiary of EVM, as investment adviser. Under the terms of the
advisory agreement with the Portfolio, BMR receives a monthly fee of 5/96 of 1%
(0.625% annually) of the average daily net assets of the Portfolio up to
$500,000,000 and at reduced rates as daily net assets exceed that level. For the
six months ended June 30, 2001 and June 30, 2000 the advisory fee applicable to
the Portfolio was 0.44% (annualized) of average daily net assets. Belvedere
Capital's allocated portion of the advisory fee was $21,066,909 of which
$4,384,988 was allocated to the Fund for the six months ended June 30, 2001, and
$17,845,464 of which $4,806,934 was allocated to the Fund, for the six months
ended June 30, 2000. In addition, Belair Capital pays BMR a monthly advisory and
administrative fee of 1/20 of 1% (0.60% annually) of the average daily gross
investment assets of Belair Capital (including the value of all assets of Belair
Capital other than Belair Capital's investment in BREC, minus the sum of Belair
Capital's liabilities other than the principal amount of money borrowed) and
BREC pays BMR a monthly management fee at a rate of 1/20th of 1% (equivalent to
0.60% annually) of the average daily gross investment assets of BREC (which
consist of all assets of BREC minus the sum of BREC's liabilities other than the
principal amount of money borrowed. For this purpose, the assets and liabilities
of BREC's controlled subsidiaries are reduced by the proportionate interests
therein of investors other than BREC). The advisory fee payable by the Portfolio
with respect to Belair Capital's indirect investment in the Portfolio is
credited toward Belair Capital's advisory and administrative fee payment. For
the six months ended June 30, 2001 and June 30, 2000, the advisory fee paid or
accrued to BMR by the Fund, less the Fund's allocated share of the Portfolio's
advisory fee, totaled $3,513,958 and $3,527,449, respectively.
EVM serves as manager of Belair Capital and receives no separate compensation
for services provided in such capacity.
13
Pursuant to a servicing agreement between Belvedere Capital and Eaton Vance
Distributors, Inc. (EVD), Belvedere Capital pays a servicing fee to EVD for
providing certain services and information to Shareholders. The servicing fee is
paid on a quarterly basis at an annual rate of 0.15% of Belvedere Capital's
average daily net assets and totaled $7,248,420 and $6,089,747 for the six
months ended June 30, 2001 and June 30, 2000, respectively, of which $1,505,375
and $1,642,982, respectively, was allocated to Belair Capital. Pursuant to a
servicing agreement between Belair Capital and EVD, Belair Capital pays a
servicing fee to EVD on a quarterly basis at an annual rate of 0.20% of Belair
Capital's average daily net assets, less Belair Capital's allocated share of the
servicing fee payable by Belvedere Capital. For the six months ended June 30,
2001 and June 30, 2000, the servicing fee paid directly by Belair Capital
totaled $389,063 and $427,406, respectively. Of the amounts allocated to and
incurred by the Fund, for the three months ended June 30, 2001 and June 30,
2000, $1,894,438 and $2,066,178, respectively, were paid to subagents.
An affiliate of the Bel Residential minority shareholder, provides day-to-day
management of Bel Residential pursuant to a management agreement. The management
agreement provides for a management fee and allows for reimbursement of payroll
expenses incurred by the manager for managing the properties owned by Bel
Residential. For the six months ended June 30, 2001, Bel Residential paid or
accrued management fees amounting to $480,578. There were no management fees
paid or accrued by Bel Residential for the six months ended June 30, 2000.
An affiliate of the Katahdin minority shareholder, provides day-to-day
management of Katahdin pursuant to a management agreement. The management
agreement provides for a management fee and allows for reimbursement of payroll
expenses incurred by the manager for managing the properties owned by Katahdin.
For the period from inception, May 23, 2001 to June 30, 2001, Katahdin paid or
accrued management fees amounting to $96,564.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Increases and decreases in Belair Capital Fund LLC's (the Fund) net asset value
per share are derived from net investment income and realized and unrealized
gains and losses on the Fund's interest through Belvedere Capital Fund Company
LLC (Belvedere Capital) in Tax-Managed Growth Portfolio (the Portfolio), real
estate investments held through its subsidiary, Belair Real Estate Corporation
(BREC) and any direct investments of the Fund. Expenses of the Fund include its
pro-rata share of the expenses of Belvedere Capital, and indirectly the
Portfolio, as well as the actual and accrued expenses of the Fund and BREC,
including its subsidiaries Bel Residential Properties Trust (Bel Residential)
and Katahdin Property Trust, LLC (Katahdin). The Fund's most significant expense
is interest incurred on borrowings incurred in connection with its real estate
investments. The Fund's realized and unrealized gains and losses on investments
are based on its allocated share of the realized and unrealized gains and losses
of Belvedere Capital, and indirectly, the Portfolio, as well as realized and
unrealized gains and losses on investments in real estate through BREC. The
realized and unrealized gains and losses on investments have the most
significant impact on the Fund's net asset value per share and result 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 holding 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 United States stock market, as well as by the
14
relative performance versus the overall market of specific stocks and classes of
stocks in which the Portfolio maintains large positions. Through the impact of
interest rates on the valuation of the Fund's investments in income-producing
preferred equity interests in real estate operating partnerships (Partnership
Preference Units) through BREC and its positions in interest rate swap
agreements, the performance of the Fund is also affected by movements in
interest rates, and particularly, changes in credit spread relationships. On a
combined basis, the Fund's Partnership Preference Units and interest rate swaps
generally decline in value when credit spreads widen (as fixed income markets
grow more risk-averse) and generally increase in value when credit spreads
tighten.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2001 AND THE SIX MONTHS
ENDED JUNE 30, 2001
The Fund achieved total return performance of 6.3% for the quarter ended June
30, 2001. This return reflects an increase in the Fund's net asset value per
share from $117.79 to $125.23. For comparison, 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 5.9% over the same period.
During the second quarter of 2001, the U.S. equity market rallied from the lows
reached in March. The recovery was uneven, and tailed off toward the end of the
quarter. The best performing market sector in the quarter was technology,
followed by basic materials and financials. The bounce in technology stocks was
driven by aggressive investors making the bet that the bottom in industry
fundamentals must be near, though few signs of such a bottoming have emerged.
Financial and other interest-sensitive stocks benefited from the continuing
activity of the Federal Reserve to lower short-term interest rates. In the first
six months of 2001, the benchmark federal funds rate was lowered six times, by a
total of 2.75%. Market sentiment also benefited from the June enactment of the
Bush Administration's tax relief program. But worries about weakness in the
economy and a collapse in corporate profits continued to weigh upon the market.
In this environment of halting recovery, the performance of the Portfolio fell
modestly below that of the overall market. The Fund was able to outperform both
the Portfolio and the S&P 500 due to the incremental returns derived from the
Fund's real estate investments. The U.S. real estate market remains in good
balance despite widespread weakness in the general economy.
The Fund achieved total return performance of -5.9% for the six months ended
June 30, 2001. This return reflects a decrease in the Fund's net asset value per
share from $133.13 to $125.23. For comparison, 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 -6.7% over the same period.
During the first half of 2001, the U.S. equity market continued the weak
performance pattern prevalent since early 2000. After bottoming in March, the
market rallied strongly before tailing off again toward the end of the second
quarter. The best performing market sector in the six-month period was consumer
cyclicals, and especially retail stocks, which recovered strongly from depressed
levels at year-end 2000. The weakest performing market sectors were technology
15
and healthcare. The market suffered from a weakening economic outlook, a
collapse in corporate profits and valuation levels that remain high by
historical standards. These negative effects were partly mitigated by the
continuing activity of the Federal Reserve to lower short-term interest rates.
In the first half of 2001, the benchmark federal funds rate was lowered six
times, by a total of 2.75%. Market sentiment also benefited from the June
enactment of the Bush Administration's tax relief program.
In this period of market weakness and halting recovery, the performance of the
Portfolio fell modestly below that of the overall market. The Fund was able to
outperform both the Portfolio and the S&P 500 due to the incremental returns
derived from the Fund's real estate investments. The U.S. real estate market
remains in good balance despite widespread weakness in the general economy.
Liquidity and Capital Resources
As of June 30, 2001, the Fund had outstanding borrowings of $663.0 million under
the credit facility (the Credit Facility) established with Merrill Lynch
International Bank Limited, the term of which extends until February 6, 2005.
The Fund has available under the Credit Facility $127.0 million to meet
short-term liquidity needs and for other purposes.
The Fund may redeem shares of Belvedere Capital at any time. Both Belvedere
Capital and the Portfolio follow the practice of normally meeting redemptions by
distributing securities drawn from the Portfolio. Belvedere Capital and the
Portfolio may also meet redemptions by distributing cash. As of June 30, 2001,
the Portfolio had cash and short-term investments totaling $181.8 million. The
Portfolio participates in a $150 million multi-fund unsecured line of credit
agreement with a group of banks. The Portfolio may temporarily borrow from the
line of credit to satisfy redemption requests in cash or to settle investment
transactions. The Portfolio had no outstanding borrowings under the $150 million
line of credit at June 30, 2001, and, as of that date, the net assets of the
Portfolio totaled $18,258.8 million. To ensure liquidity for investors in the
Portfolio, the Portfolio may not invest more than 15% of its net assets in
illiquid assets. As of June, 2001, restricted securities, which are considered
illiquid, constituted 2.0% of the net assets of the Portfolio.
The Partnership Preference Units held by BREC are not registered under the
Securities Act of 1933 (the Securities Act) and are subject to substantial
restrictions on transfer. As such, they are considered illiquid.
BREC's investments in real estate apart from Partnership Preference Units are
also considered illiquid. Bel Residential and Katahdin have been structured as
investments of at least ten years, at which time a buy/sell mechanism may offer
a measure of liquidity to both BREC and its minority shareholders.
Redemptions of Fund shares are met primarily by distributing securities drawn
from the Portfolio, although cash may also be distributed. Shareholders
generally do not have the right to receive the proceeds of Fund redemptions in
cash.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The value of Fund Shares may not increase or may decline. The performance of the
Fund fluctuates. There can be no assurance that the performance of the Fund will
match that of the United States stock market or that of other equity funds. In
16
managing the Portfolio for long-term, after-tax returns, the Portfolio's
investment adviser generally seeks to avoid or minimize sales of securities with
large accumulated capital gains, including contributed securities. Such
securities constitute a substantial portion of the assets of the Portfolio.
Although the Portfolio may utilize certain management strategies in lieu of
selling appreciated securities, the Portfolio's, and hence the Fund's, exposure
to losses during stock market declines may nonetheless be higher than that of
funds that do not follow a general policy of avoiding sales of
highly-appreciated securities.
The Portfolio invests in securities issued by foreign companies and the Fund may
acquire foreign investments. Foreign investments involve considerations and
possible risks not typically associated with investing in the United States. The
value of foreign investments to U.S. investors may be adversely affected by
changes in currency rates. Foreign brokerage commissions, custody fees and other
costs of investing are generally higher than in the United States, and foreign
investments may be less liquid, more volatile and more subject to government
regulation than in the United States. Foreign investments could be adversely
affected by other factors not present in the United States, including
expropriation, confiscatory taxation, lack of uniform accounting and auditing
standards, armed conflict, and potential difficulty in enforcing contractual
obligations.
Risks of Certain Investment Techniques
- --------------------------------------
In managing the Portfolio, the investment adviser may purchase or sell
derivative instruments (which derive their value by reference to other
securities, indices, instruments, or currencies) to hedge against securities
price declines and currency movements and to enhance returns. Such transactions
may include, without limitation, the purchase and sale of stock index futures
contracts and options on stock index futures; the purchase of put options and
the sale of call options on securities held; equity swaps; and the purchase and
sale of forward currency exchange contracts and currency futures. The Portfolio
may make short sales of securities provided that an equal amount is held of the
security sold short (a covered short sale) and may also lend portfolio
securities. The use of these investment techniques is a specialized activity
that may be considered speculative and which can expose the Fund and the
Portfolio to significant risk of loss. Successful use of these investment
techniques is subject to the ability and performance of the investment adviser.
The Fund's and the Portfolio's ability to meet their investment objectives may
be adversely affected by the use of these techniques. The writer of an option or
a party to an equity swap may incur losses that substantially exceed the
payments, if any, received from a counterparty. Swaps, caps, floors, collars and
over-the-counter options are private contracts in which there is also a risk of
loss in the event of a default on an obligation to pay by the counterparty. Such
instruments may be difficult to value, may be illiquid and may be subject to
wide swings in valuation caused by changes in the price of the underlying
security, index, instrument or currency. In addition, if the Fund or the
Portfolio has insufficient cash to meet margin, collateral or settlement
requirements, it may have to sell assets to meet such requirements.
Alternatively, should the Fund or the Portfolio fail to meet these requirements,
the counterparty or broker may liquidate positions of the Fund or the Portfolio.
The Portfolio may also have to sell or deliver securities holdings in the event
that it is not able to purchase securities on the open market to cover its short
positions or to close out or satisfy an exercise notice with respect to options
positions it has sold. In any of these cases, such sales may be made at prices
or in circumstances that the investment adviser considers unfavorable.
17
The Portfolio's ability to utilize covered short sales, certain equity swaps and
certain equity collar strategies (combining the purchase of a put option and the
sale of a call option) as a tax-efficient management technique with respect to
holdings of appreciated securities is limited to circumstances in which the
hedging transaction is closed out within thirty days of the end of the
Portfolio's taxable year and the underlying appreciated securities position is
held unhedged for at least the next sixty days after such hedging transaction is
closed. There can be no assurance that counterparties will at all times be
willing to enter into covered short sales, interest rate hedges, equity swaps
and other derivative instrument transactions on terms satisfactory to the Fund
or the Portfolio. The Fund's and the Portfolio's ability to enter into such
transactions may also be limited by covenants under the Fund's revolving
securitization facility, the federal margin regulations and other laws and
regulations. The Portfolio's use of certain investment techniques may be
constrained because the Portfolio is a diversified, open-end management
investment company registered under the Investment Company Act of 1940 and
because other investors in the Portfolio are regulated investment companies
under Subchapter M of the Internal Revenue Code. Moreover, the Fund and the
Portfolio are subject to restrictions under the federal securities laws on their
ability to enter into transactions in respect of securities that are subject to
restrictions on transfer pursuant to the Securities Act.
Interest Rate Risk
- ------------------
The Fund's primary exposure to interest rate risk arises from investments in
real estate that are financed with floating rate bank borrowings. The interest
rate on borrowings under the Fund's Credit Facility is 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 over the term of 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 three-month LIBOR. The interest rate swap agreements are valued on an
ongoing basis by the investment adviser. 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 may be considered speculative and which can expose the
Fund to significant loss.
The following table summarizes the contractual maturities and weighted-average
interest rates associated with the Fund's significant non-trading financial
instruments. The Fund has no market risk sensitive instruments held for trading
purposes. This information should be read in conjunction with Notes 6 and 7 to
the condensed consolidated financial statements.
Interest Rate Sensitivity
Principal (Notional) Amount by Contractual Maturity
For the Twelve Months Ended June 30,
2002 2003 2004 2005 2006 Thereafter Total Fair Value
-------- -------- -------- -------------- -------- -------------- --------------- --------------
Rate sensitive
liabilities:
- ---------------------
Long term debt-
variable rate $663,000,000 $663,000,000 $663,000,000
Credit Facility
Average
interest rate 4.29% 4.29%
Rate sensitive
derivative financial
instruments:
- ---------------------
Pay fixed/
Receive variable
interest rate swap
contracts $674,373,000 $674,373,000 $(14,540,921)
Average
pay rate 6.86% 6.86%
Average
receive rate 4.29% 4.29%
18
Risks of Investing in Qualifying Assets and Leverage
- ----------------------------------------------------
The success of BREC's real estate investments depends in part on many factors
related to the real estate market. These factors include, without limitation,
general economic conditions, the supply and demand for different types of real
properties, the financial health of tenants, 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, government
rules and regulations, and acts of God (whether or not insured against).
Partnership Preference Units also depend upon factors relating to the issuing
partnerships that may affect such partnerships' profitability and their ability
to make distributions to holders of Partnership Preference Units. BREC's
investments in interests in real estate joint ventures (Real Estate Joint
Ventures) may be influenced by decisions which the principal minority investor
in each Real Estate Joint Venture (the Operating Partner) may make on behalf of
the property owned thereby and potential changes in the specific real estate
sub-markets in which the properties are located. The debt of each Real Estate
Joint Venture is fixed-rate, secured by the underlying properties and with
limited recourse to BREC. However, changes in interest rates, the availability
of financing and other financial conditions can have a material impact on
property values and therefore on the value of BREC's equity interest. There can
be no assurance that BREC's ownership of real estate investments will be an
economic success. Moreover, the success of any Real Estate Joint Venture
investment depends in large part upon the performance of the Operating Partner.
Operating Partners will be subject to substantial conflicts of interest in
structuring, operating and winding up the Real Estate Joint Ventures. Operating
Partners will have an economic incentive to maximize the prices at which they
sell properties to Real Estate Joint Ventures and to minimize the prices at
which they acquire properties from Real Estate Joint Ventures. Operating
Partners may devote greater attention or more resources to managing their
wholly-owned properties than properties held by Real Estate Joint Ventures.
Future investment opportunities identified by Operating Partners will more
likely be pursued independently, rather than through, the Real Estate Joint
Ventures. Financial difficulties encountered by Operating Partners in their
other businesses may interfere with the operations of Real Estate Joint
Ventures.
Although intended to add to returns, the borrowing of funds to purchase real
estate investments exposes the Fund to the risk that the returns achieved on the
real estate investments will be lower than the cost of borrowing to purchase
such assets and that the leveraging of the Fund to buy such assets will
therefore diminish the returns to be achieved by the Fund as a whole. In
addition, there is a risk that the availability of financing will be interrupted
at some future time, requiring the Fund to sell assets to repay outstanding
19
borrowings or a portion thereof. It may be necessary to make such sales at
unfavorable prices. The Fund's obligations under the Credit Facility are secured
by a pledge of its assets. In the event of default, the lender could elect to
sell assets of the Fund without regard to consequences of such action for
Shareholders. The rights of the lender to receive payments of interest on and
repayments of principal of borrowings is senior to the rights of the
Shareholders. Under the terms of the Credit Facility, the Fund is not permitted
to make distributions of cash or securities while there is outstanding an event
of default under the Credit Facility. During such periods, the Fund would not be
able to honor redemption requests or make cash distributions.
The valuations of Partnership Preference Units held by the Fund through its
investment in BREC fluctuate over time to reflect, among other factors, changes
in interest rates, changes in the perceived riskiness of such units (including
call risk), changes in the perceived riskiness of comparable or similar
securities trading in the public market and the relationship between supply and
demand for comparable or similar securities trading in the public market.
Increases in interest rates and increases in the perceived riskiness of such
units or comparable or similar securities will adversely affect the valuation of
the Partnership Preference Units. The ongoing value of BREC's investments in
Real Estate Joint Ventures will be substantially uncertain. BREC's investments
in Real Estate Joint Ventures generally will be stated at estimated market value
based on independent valuations, assuming an orderly disposition of assets.
Detailed investment evaluations will be performed annually and reviewed
periodically. Interim valuations will reflect results of operations and
distributions, and may be adjusted to reflect significant changes in economic
circumstances since the most recent independent evaluation. Fluctuations in the
value of real estate investments derived from changes in general interest rates
can be expected to be offset in part (but not entirely) by changes in the value
of interest rate swap agreements or other interest rate hedges entered into by
the Fund with respect to its borrowings under the Credit Facility. Fluctuations
in the value of 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 real estate investments not offset by changes in the valuation
of interest rate swap agreements or other interest rate hedges entered into by
the Fund will cause the performance of the Fund to deviate from the performance
of the Portfolio. Over time, the performance of the Fund can be expected to be
more volatile than the performance of the Portfolio.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Fund is not aware of any pending legal proceedings to which the Fund is a
party or to which their assets are 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.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. THE FOLLOWING IS A LIST OF ALL EXHIBITS FILED AS PART OF THIS FORM 10Q:
(a) Exhibits
21 List of subsidiaries
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned officer of its Manager, Eaton Vance Management thereunto duly
authorized on August 14, 2001.
BELAIR CAPITAL FUND LLC
(Registrant)
By: EATON VANCE MANAGEMENT,
its Manager
By: /s/ James L. O'Connor
---------------------------------
James L. O'Connor
Vice President
By: /s/ William M. Steul
---------------------------------
William M. Steul
Chief Financial Officer
22
EXHIBIT INDEX
21 List of subsidiaries
23