SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
Commission File No. 000-25767
Belair Capital Fund LLC (the "Fund")
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3404037
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(State of organization) (I.R.S. Employer Identification No.)
The Eaton Vance Building
255 State Street, Boston, Massachusetts 02109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 617-482-8260
Securities registered pursuant to Section 12(g) of the Act:
Limited Liability Company Interests in the Fund ("Shares")
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the Shares held by non-affiliates of Registrant,
based on the closing net asset value on February 28, 2003 was $1,185,274,209.59.
Calculation of holdings by non-affiliates is based upon the assumption, for
these purposes only, that the Registrant's manager, its executive officers and
directors and persons holding 5% or more of the Registrant's Shares are
affiliates.
Incorporation by Reference:
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The financial statements contained in Registrant's Form 10-K filed with the
Securities and Exchange Commission on March 27, 2002 (Accession No.
0000940394-02-000198) have been incorporated into the following Parts of this
report: Part II and Part III.
The Exhibit Index is located on page 96.
Belair Capital Fund LLC
Index to Form 10-K
Item Page
Part I
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1 Business...............................................................1
Fund Overview..................................................1
Structure of the Fund..................................1
Fund Management........................................1
The Fund's Offering....................................1
The Fund's Investment in Belvedere Capital Fund
Company LLC and Tax-Managed Growth Portfolio...................2
The Company............................................2
The Portfolio..........................................2
The Portfolio's Investment Objective and Policies......2
The Portfolio's Tax Management Strategies..............3
The Fund's Real Estate Investments through
Belair Real Estate Corporation.................................3
Real Estate Joint Venture Investments..................4
Partnership Preference Units...........................5
Organization of Belair Real Estate and the Real Estate
Joint Venture .........................................5
Fund Borrowings................................................6
Interest Rate Swap Agreements..........................6
The Eaton Vance Organization...................................6
2 Properties.............................................................7
3 Legal Proceedings......................................................7
4 Submission of Matters to a Vote of Security Holders....................7
Part II
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5 Determining Net Asset Value, Market for Fund Shares and Related
Shareholder Matters....................................................7
Market Information, Restrictions on Transfers and
Redemption of Shares...........................................7
Transfers of Fund Shares...............................7
Redemption of Fund Shares..............................8
Determining Net Asset Value............................9
Historic Net Asset Values.............................10
Record Holders of Shares of the Fund..........................10
Distributions ................................................10
Income and Capital Gain Distributions.................10
Special Distributions.................................11
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Recent Sales of Unregistered Securities.......................11
6 Selected Financial Data...............................................12
Table of Selected Financial Data..............................12
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................13
Results of Operations.........................................13
Performance of the Fund...............................13
Performance of the Portfolio..........................14
Performance of Real Estate Investments................15
Performance of Interest Rate Swaps....................15
Liquidity and Capital Resources...............................15
Outstanding Borrowings................................15
Liquidity.............................................16
Critical Accounting Policies..................................16
7A Quantitative and Qualitative Disclosures About Market Risk............17
Quantitative Information About Market Risk....................17
Interest Rate Risk....................................17
Qualitative Information About Market Risk.....................23
Risks Associated with Equity Investing................23
Risks of Investing in Foreign Securities..............23
Risks of Certain Investment Techniques................23
Risks of Real Estate Investments......................24
Risks of Leverage.....................................25
8 Financial Statements and Supplementary Data...........................26
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures..................................26
Part III
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10 Directors and Executive Officers......................................26
Directors and Executive Officers of Eaton Vance, Inc..........27
11 Executive Compensation................................................27
The Fund's Investment Advisory and Administrative Fee.........28
Belair Real Estate's Management Fee...........................28
The Portfolio's Investment Advisory Fee.......................28
12 Security Ownership of Certain Beneficial Owners and Management........28
Security Ownership of Certain Beneficial Owners...............28
Security Ownership of Management..............................28
Changes in Control............................................29
13 Certain Relationships and Related Transactions........................29
Servicing Fees Paid by the Company............................29
Servicing Fees Paid by the Fund...............................29
14 Controls and Procedures...............................................29
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Part IV
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15 Exhibits, Financial Statements and Reports on Form 8-K................30
FINANCIAL STATEMENTS..........................................................32
SIGNATURES....................................................................93
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002...................................................................94
EXHIBIT INDEX.................................................................96
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PART I
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Item 1. Business.
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FUND OVERVIEW. Belair Capital Fund LLC (the "Fund") is a private investment
company organized to provide diversification and tax-sensitive investment
management to investors holding large and concentrated positions in equity
securities of selected public companies. The Fund's investment objective is to
achieve long-term, after-tax returns for persons who have invested in the Fund
("Shareholders"). The Fund, a Massachusetts limited liability company, commenced
its investment operations on February 6, 1998. Limited liability company
interests of the Fund ("Shares") were issued to Shareholders at three closings
during 1998. At each Fund closing, the Fund accepted contributions of stock from
investors in exchange for Shares of the Fund (the "exchange transaction"). The
Fund discontinued offering Shares on June 25, 1998 and no future offering is
anticipated.
STRUCTURE OF THE FUND. The Fund is structured to provide tax-free
diversification and tax-sensitive investment management to Shareholders. To meet
the objective of tax-free diversification, the Fund must satisfy specific
requirements of the Internal Revenue Code of 1986, as amended (the "Code"). In
order for the contributions of appreciated stock to the Fund by Shareholders to
be nontaxable, not more than 80% of the Fund's assets (calculated in the manner
prescribed) may consist of "stocks and securities" as defined in the Code. To
meet this requirement, the Fund invests at least 20% of its assets as so
determined in certain real estate investments (see "The Fund's Real Estate
Investments through Belair Real Estate Corporation" below). The Fund invests up
to 80% of its assets in a diversified portfolio of common stocks (see "The
Fund's Investment in Belvedere Capital Fund Company LLC and Tax-Managed Growth
Portfolio" below). The Fund acquires its real estate investments with borrowed
funds, as described below under "Fund Borrowings".
There is no trading market for the Fund's Shares. As described further under
"Redemption of Fund Shares" in Item 5(a), Fund Shares may be redeemed on any
business day. The Fund plans to satisfy redemption requests principally by
distributing securities, but may also distribute cash. The value of securities
and cash distributed to satisfy a redemption will equal the net asset value of
the number of Shares being redeemed.
The Fund intends to distribute each year the amount of its net investment income
for such year, if any. The Fund also intends to make annual capital gain
distributions equal to approximately 22% of the amount of its net realized
capital gains, if any, other than precontribution gain. The Fund's income
distributions are not expected to be significant. The Fund intends to pay
distributions (if any) on the last business day of each fiscal year of the Fund
(which concludes on December 31) or shortly thereafter. See "Distributions" in
Item 5(c).
FUND MANAGEMENT. The manager of the Fund is Eaton Vance Management ("Eaton
Vance"), a Massachusetts business trust registered as an investment adviser.
Eaton Vance and its wholly-owned subsidiary, Boston Management and Research
("Boston Management"), provide management and advisory services to the Fund, its
real estate subsidiary and the investment portfolios in which the Fund invests.
Eaton Vance and Boston Management provide advisory, administration and/or
management services to over 170 investment companies, as well as individual and
institutional investors. As of December 31, 2002, Eaton Vance and its affiliates
managed approximately $55 billion on behalf of clients.
THE FUND'S OFFERING. Shares of the Fund were privately offered and sold only to
"accredited investors" as defined in Rule 501(a) under the Securities Act of
1933, as amended, (the "Securities Act") who were "qualified purchasers" (as
defined in Section 2(a)(51)(A) of the Investment Company Act of 1940, as amended
(the "1940 Act")). The offering was conducted by Eaton Vance Distributors, Inc.,
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a wholly-owned subsidiary of Eaton Vance, ("EV Distributors") as placement agent
and by certain subagents appointed by EV Distributors. The Shares were offered
and sold in reliance upon an exemption from registration provided by Rule 506
under the Securities Act. The Fund issued Shares to Shareholders at closings
taking place on February 6, 1998, April 20, 1998 and June 25, 1998. At the three
closings, an aggregate of 17,178,761 Shares were issued in exchange for
Shareholder contributions totaling $1.9 billion.
THE FUND'S INVESTMENT IN BELVEDERE CAPITAL FUND COMPANY LLC AND TAX-MANAGED
GROWTH PORTFOLIO. At each Fund closing, all of the securities accepted for
contribution to the Fund were contributed by the Fund to Belvedere Capital Fund
Company LLC (the "Company"), a Massachusetts limited liability company, in
exchange for shares of the Company. The Company then contributed the securities
received from the Fund to Tax-Managed Growth Portfolio (the "Portfolio") in
exchange for an interest in the Portfolio. The Portfolio is a diversified,
open-end management investment company registered under the 1940 Act with net
assets of approximately $14.6 billion as of December 31, 2002. As of December
31, 2002, the Fund's investment in the Portfolio through the Company had a value
of approximately $1.4 billion (equal to approximately 70.1% of the Fund's total
assets on a consolidated basis).
THE COMPANY. As of December 31, 2002, the investment assets of the Company
consisted exclusively of an interest in the Portfolio with a value of
approximately $8.8 billion. As of such date, the Fund owned approximately 15.6%
of the Company's outstanding shares. The other investors in the Company include
five other investment funds sponsored by the Eaton Vance organization, as well
as qualified individual investors who acquired shares of the Company in exchange
for portfolios of acceptable securities. Under the 1940 Act, the Fund is
permitted to invest through the Company in the Portfolio, but it does not
satisfy the conditions of the 1940 Act for investing directly in the Portfolio.
THE PORTFOLIO. The Portfolio was organized in 1995 as the successor to the
investment operations of Eaton Vance Tax-Managed Growth Fund 1.0 (formerly
Capital Exchange Fund), a mutual fund established in 1966 and managed from
inception for long-term, after-tax returns. As of December 31, 2002, investors
in the Portfolio included seven investors in addition to the Company, four of
which acquire interests in the Portfolio with cash on a continuous basis. All
investors in the Portfolio are sponsored by or affiliated with Eaton Vance. As
of December 31, 2002, the Company owned approximately 60.1% of the Portfolio.
The Fund invests in the Portfolio because it is a well-established investment
portfolio that has an investment objective and policies that are compatible to
those of the Fund. Investing in the Portfolio enables the Fund to participate in
a substantially larger and more diversified investment portfolio than it could
achieve by managing the contributed securities directly.
THE PORTFOLIO'S INVESTMENT OBJECTIVE AND POLICIES. The investment objective of
the Portfolio is to achieve long-term, after-tax returns for its investors by
investing in a diversified portfolio of equity securities. The Portfolio
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. The Portfolio seeks to invest in a broadly diversified
portfolio of stocks and to invest primarily in established companies with
characteristics of above-average growth, predictability and stability that are
acquired with the expectation of being held for a period of years. Under normal
market conditions, the Portfolio will invest primarily in common stocks. The
Portfolio acquires securities through contributions from the Company and by
purchasing securities with cash invested in the Portfolio by other investors.
Although the Portfolio may, in addition to investing in common stocks, invest in
investment-grade preferred stocks and debt securities, purchases of such
securities are normally limited to securities convertible into common stocks and
temporary investments in short-term notes and government obligations. During
periods in which the investment adviser to the Portfolio believes that returns
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on common stock investments may be unfavorable, the Portfolio may invest a
portion of its assets in U.S. government obligations and high quality short-term
notes. The Portfolio's holdings represent a number of different industries. Not
more than 25% of the Portfolio's assets may be invested in the securities of
issuers having their principal business activity in the same industry,
determined as of the time of acquisition of any such securities.
THE PORTFOLIO'S TAX MANAGEMENT STRATEGIES. In its operations, the Portfolio
seeks to achieve long-term, after-tax returns in part by minimizing the taxes
incurred by investors in the Portfolio in connection with the Portfolio's
investment income and realized capital gains. Taxes on investment income are
minimized by investing primarily in lower-yielding securities. Taxes on realized
capital gains are minimized by avoiding or minimizing the sale of securities
holdings with large accumulated capital gains. The Portfolio generally seeks to
avoid realizing short-term capital gains.
When a decision is made to sell a particular appreciated security, the Portfolio
will select for sale the share lots resulting in the most favorable tax
treatment, generally those with holding periods sufficient to qualify for
long-term capital gain treatment that have the highest cost basis. The Portfolio
may, when deemed prudent by its investment adviser, sell securities to realize
capital losses that can be used to offset realized gains. While the Portfolio
generally retains the securities contributed to the Portfolio by the Company,
the Portfolio has the flexibility to sell contributed securities. Securities
acquired by the Portfolio with cash may be sold in accordance with the
tax-management strategies described above. In lieu of selling a security, the
Portfolio may hedge its exposure to that security by using the techniques
described below. The Portfolio also disposes of contributed securities through
its practice of settling redemptions by a distribution of securities as
described in Item 5(a) under "Redemption of Fund Shares". As described in Item
5(a), settling redemptions with securities may result in certain tax benefits to
the Portfolio, the Company, the Fund and the redeeming Shareholder.
To protect against price declines in securities holdings with large accumulated
capital gains, the Portfolio may use various investment techniques, including,
but not limited to, the purchase of put options on securities held, equity
collars (combining the purchase of a put option and the sale of a call option),
equity swaps, covered short sales, forward sales of stocks held, and the
purchase and sale of futures contracts on stocks and stock indexes and options
thereon. By using these techniques rather than selling such securities, the
Portfolio can, within certain limits, reduce its exposure to price declines in
the securities without realizing substantial capital gains under current tax
law.
The Portfolio's ability to utilize covered short sales, certain equity swaps,
forward sales, futures, and certain equity collar strategies as a tax-efficient
management technique with respect to holdings of appreciated securities is
limited to circumstances in which the hedging transaction is closed out within
thirty days after the end of the taxable year of the Portfolio in which the
hedging transaction was initiated and the underlying appreciated securities
position is held unhedged for at least the next sixty days after such hedging
transaction is closed. The use of these investment techniques may require the
Portfolio to commit or make available cash and, therefore, may not be available
at such times as the Portfolio has limited holdings of cash. At December 31,
2002, the Portfolio held three short positions on a security with a combined
value equal to approximately 0.3% of the Portfolio's net assets. The Portfolio
paid commissions totaling approximately $30,000 in connection with these short
sales. The Portfolio did not otherwise employ any of the techniques described
above during the year ended December 31, 2002.
THE FUND'S REAL ESTATE INVESTMENTS THROUGH BELAIR REAL ESTATE CORPORATION.
Separate from its investment in the Portfolio through the Company, the Fund
invests in certain real estate investments through its subsidiary, Belair Real
Estate Corporation ("Belair Real Estate"). As referred to above under "Fund
Overview - Structure of the Fund", the Fund invests in real estate investments
to satisfy certain requirements of the Code for contributions of appreciated
stocks to the Fund by Shareholders to be nontaxable. As of December 31, 2002,
3
the consolidated real estate assets of Belair Real Estate totaled $548.7
million. The Fund's consolidated real estate investments represented 28.3% of
the Fund's assets on a consolidated basis at December 31, 2002. The Fund
acquired its real estate investments with borrowed funds, as described below
under "Fund Borrowings". The Fund seeks a return on its real estate investments
over the long-term that exceeds the cost of the borrowings incurred to acquire
such investments.
At December 31, 2002, Belair Real Estate invested in a real estate joint venture
(the "Real Estate Joint Venture") that is controlled by Belair Real Estate and
in a portfolio of income-producing preferred equity interests in real estate
operating partnerships that generally are affiliated with and controlled by real
estate investment trusts ("REITs") that are publicly traded ("Partnership
Preference Units"). As of December 31, 2002, approximately 28.7% of the
consolidated real estate investments of Belair Real Estate were Real Estate
Joint Venture assets and approximately 71.3% were investments in Partnership
Preference Units.
In the future, Belair Real Estate may invest in other types of real estate
investments, such as interests in real properties subject to long-term leases.
Belair Real Estate may purchase real estate investments from, and sell them to,
other investment funds sponsored by the Eaton Vance organization and REIT
subsidiaries of such investment funds that are similar to Belair Real Estate.
Certain of the Partnership Preference Units owned by Belair Real Estate at
December 31, 2002 were acquired from such REIT subsidiaries. During the fiscal
year ended December 31, 2002, Belair Real Estate sold its interest in one other
Real Estate Joint Venture, Katahdin Property Trust LLC ("Katahdin"), to the
subsidiary of another investment fund sponsored by Eaton Vance.
Boston Management serves as manager of Belair Real Estate. In that capacity,
Boston Management manages the investment and reinvestment of Belair Real
Estate's assets and administers its affairs.
REAL ESTATE JOINT VENTURE INVESTMENTS. At December 31, 2002, Belair Real Estate
owned a controlling interest in one Real Estate Joint Venture, Bel Residential
Properties Trust ("Bel Residential"). As noted above, during 2002 Belair Real
Estate sold its interest in Katahdin. As a result of the sale, Belair Real
Estate realized a total net loss of approximately $8.2 million. See Note 5 to
the Fund's Consolidated Financial Statements as of December 31, 2002
incorporated by reference into Item 8.
The day-to-day operating management of the Real Estate Joint Venture is provided
by the real estate operating company (the "Operating Partner") that is the
principal minority investor in the Real Estate Joint Venture. A board of
trustees controlled by Belair Real Estate oversees the performance of the
Operating Partner and controls the major decisions of the Real Estate Joint
Venture.
The assets of the Real Estate Joint Venture consist of eleven multifamily
residential properties acquired from or in conjunction with the Operating
Partner of the Real Estate Joint Venture. See Item 2. Distributable cash flows
from the Real Estate Joint Venture are allocated in a manner that provides
Belair Real Estate: 1) a priority position versus the Operating Partner with
respect to a fixed annual preferred return; and 2) participation on a pro rata
or reduced basis in distributable cash flows in excess of the annual preferred
return of Belair Real Estate and a subordinated preferred return of the
Operating Partner.
Financing for the Real Estate Joint Venture consists primarily of fixed-rate
secured mortgage debt obligations of the Real Estate Joint Venture that
generally are without recourse to Belair Real Estate and the Fund. Both Belair
Real Estate and the Operating Partner invested equity in the Real Estate Joint
Venture. Belair Real Estate's equity in the Real Estate Joint Venture was
acquired using the proceeds of Fund borrowings. At acquisition, Belair Real
Estate's equity investment in Bel Residential was approximately $36.3 million.
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The Operating Partner of Bel Residential is ERP Operating Limited Partnership
("ERP"), an affiliate of Equity Residential. Equity Residential is a publicly
owned, self-administered and self-managed REIT. Equity Residential is the
largest publicly traded apartment company in America. As of December 31, 2002,
Equity Residential owned or had investments in 1,039 properties in 36 states
consisting of 223,591 units. Equity Residential's corporate headquarters are
located in Chicago, Illinois. Equity Residential's common shares are traded on
the New York Stock Exchange under the symbol "EQR". ERP owns 25% of the issued
and outstanding shares of Bel Residential that are entitled to vote for election
of trustees of Bel Residential.
The Real Estate Joint Venture includes a buy/sell provision that can be
activated by either Belair Real Estate or the Operating Partner after a fixed
period of years. Pursuant to the buy/sell provision entered into at the time Bel
Residential was established, either Belair Real Estate or the Bel Residential
Operating Partner can give notice after July 31, 2009 either to buy the other's
equity interest in Bel Residential or to sell its own equity interest in Bel
Residential.
A purchase or sale pursuant to the buy/sell provision would be made at a
negotiated price. The agreement containing the buy/sell provision applicable to
the Real Estate Joint Venture continues indefinitely, but could be terminated
upon the receipt of the requisite approval of the owners of the voting interests
in the Real Estate Joint Venture. The sale to Belair Real Estate by the
Operating Partner of the Operating Partner's interest in Bel Residential would
not affect the REIT qualification of Bel Residential. If Belair Real Estate were
to dispose of its interest in the Real Estate Joint Venture pursuant to the
buy/sell provision, it may acquire a different real estate investment to replace
the investment sold.
PARTNERSHIP PREFERENCE UNITS. Belair Real Estate's investments in Partnership
Preference Units represent preferred equity interests in real estate operating
partnerships that are affiliated with publicly traded REITs. The assets of the
partnerships that issue the Partnership Preference Units owned by Belair Real
Estate consist of direct or indirect ownership interests in real properties,
including manufactured home communities, multi-family properties, office
buildings, self-storage facilities, golf course properties, regional malls and
community shopping centers. The Partnership Preference Units owned by Belair
Real Estate as of December 31, 2002 are described in Item 7A and in the
Consolidated Portfolio of Investments included in the Fund's Financial
Statements, which are incorporated by reference into Item 8.
Each issue of Partnership Preference Units held by Belair Real Estate pays
regular quarterly distributions at fixed rates from the net profits of the
issuing partnership and Belair Real Estate has preferred interest in such
distributions. Belair Real Estate acquired its Partnership Preference Units in
private transactions from the issuers of such units or from subsidiaries of
other investment funds sponsored by Eaton Vance. None of the issues of
Partnership Preference Units is or will be registered under the Securities Act
and each issue is thus subject to restrictions on transfer.
Belair Real Estate will acquire Partnership Preference Units issued by
partnerships that are not publicly-traded partnerships within the meaning of
Code Section 7704(b). When acquired, Partnership Preference Units will have a
remaining life of at least five years (subject to earlier call provisions) and
will not, by their terms, be readily convertible or exchangeable into cash or
securities of the affiliated public company. Partnership Preference Units are
not rated by a nationally-recognized rating agency, and such interests may not
be as high in quality as issues that are rated investment grade.
ORGANIZATION OF BELAIR REAL ESTATE AND THE REAL ESTATE JOINT VENTURE. Belair
Real Estate and the Real Estate Joint Venture operate in such a manner as to
qualify for taxation as a REIT under the Code. As REITs, Belair Real Estate and
the Real Estate Joint Venture generally are not subject to federal income tax on
that portion of their ordinary income or taxable gain that is distributed to
5
stockholders each year. The Fund owns 100% of the common stock issued by Belair
Real Estate, and intends to hold all of Belair Real Estate's common stock at all
times. Belair Real Estate and the Operating Partner own all of the common shares
or similar interests of the Real Estate Joint Venture.
Belair Real Estate and the Real Estate Joint Venture also have issued preferred
shares to satisfy certain requirements of the Code relating to qualification as
a REIT. The preferred shares of each such entity are owned by approximately 105
charitable organizations. As of December 31, 2002, the total value of the
preferred shares of Belair Real Estate and Bel Residential was $210,000 and
$220,000, respectively. Dividends on preferred shares are cumulative and payable
annually at a dividend rate of 8% per year. The dividends paid on preferred
shares have priority over payments on common shares. For the fiscal year ended
December 31, 2002, Belair Real Estate and Bel Residential paid distributions to
preferred shareholders of $16,800 and $17,600, respectively.
FUND BORROWINGS. The Fund's investments in Partnership Preference Units and its
equity in the Real Estate Joint Venture held through Belair Real Estate are
financed using borrowings under a seven-year revolving credit facility (the
"Credit Facility"), which includes the ability for the Fund to utilize letters
of credit, established with Merrill Lynch International Bank Limited of up to
$790 million.
Borrowings under the Credit Facility are at an annual rate of LIBOR plus 0.45%
based on interest periods of one month to five years as selected by the Fund,
and fees on letters of credit are charged at a rate of 0.80% per annum. Interest
on outstanding borrowings is payable at the end of each interest period, but not
less frequently than semi-annually. The Fund also pays a commitment fee of 0.10%
on the unused loan commitment amount.
The Fund's obligations under the Credit Facility are secured by a pledge of
substantially all of its assets. Obligations under the Credit Facility are
without recourse to Fund Shareholders. As described above, financing for the
Real Estate Joint Venture consists primarily of fixed-rate secured mortgage debt
obligations of the Real Estate Joint Venture that generally are without recourse
to Belair Real Estate and the Fund. For more information, see "Liquidity and
Capital Resources" in Item 7.
INTEREST RATE SWAP AGREEMENTS. The Fund has entered into cancelable interest
rate swap agreements (the "swap agreements") with Merrill Lynch Capital
Services, Inc. ("MLCS"), to fix the cost of borrowings under the Credit Facility
used to acquire Belair Real Estate's equity in its real estate investments. The
Fund has the right to terminate the swap agreements beginning in 2003, generally
at dates corresponding approximately to the initial call dates of the
Partnership Preference Units held by Belair Real Estate. MLCS is a secured party
under the Credit Facility. See Note 7 of the Fund's Consolidated Financial
Statements incorporated by reference into Item 8.
THE EATON VANCE ORGANIZATION. The Eaton Vance organization sponsors the Fund.
Eaton Vance serves as the Fund's manager. Boston Management serves as the Fund's
investment adviser and as manager of Belair Real Estate. EV Distributors served
as the Fund's placement agent. The Fund's business affairs are conducted by
Eaton Vance (as its manager) and its investment operations are conducted by
Boston Management (as its adviser). The Fund's officers are employees of Eaton
Vance. Eaton Vance, Boston Management and EV Distributors are indirect
wholly-owned subsidiaries of Eaton Vance Corp. ("EVC"), a publicly-held holding
company, which through its affiliates and subsidiaries engages primarily in
investment management, administration and marketing activities.
As noted above, the Fund pursues its objective primarily by investing in the
Company. The Company invests exclusively in the Portfolio. Boston Management
acts as investment adviser of the Portfolio and manager of the Company. EV
Distributors acts as placement agent for the Company and the Portfolio. As of
December 31, 2002, the assets of the Fund represented approximately 3.4% of
assets under management by Eaton Vance and its affiliates. The offices of the
Fund, Eaton Vance, Boston Management and EV Distributors are located at 255
State Street, Boston, Massachusetts 02109.
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Item 2. Properties.
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The Fund does not own any physical properties, other than indirectly through
Belair Real Estate's investments in Partnership Preference Units and the Real
Estate Joint Venture. At December 31, 2002, Belair Real Estate owned a majority
interest in one Real Estate Joint Venture, Bel Residential, whose assets are
reflected in the consolidated financial statements of the Fund. Bel Residential
owns eleven multifamily residential properties located in seven states
(Washington, Colorado, North Carolina, Arizona, Florida, Georgia and Texas). As
of December 31, 2002, Belair Real Estate held investments in Partnership
Preference Units of twelve issuers.
Item 3. Legal Proceedings.
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Although in the ordinary course of business, the Fund, Belair Real Estate and
the Real Estate Joint Venture may become involved in legal proceedings, the Fund
is not aware of any material pending legal proceedings to which any of them is
subject.
Item 4. Submission of Matters to a Vote of Security Holders.
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No items were submitted to a vote of security holders during the fiscal year
ended December 31, 2002.
PART II
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Item 5. Determining Net Asset Value, Market for Fund Shares and Related
Shareholder Matters.
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This Item and other Items in this report contain summaries of certain provisions
contained in the Amended and Restated Operating Agreement of the Fund (the "LLC
Agreement"), which is filed as an exhibit to the Fund's registration statement
on Form 10. All such summaries are qualified in their entirety by the actual
provisions of the LLC Agreement, which are incorporated by reference herein.
(a) Market Information, Restrictions on Transfers and Redemption of Shares.
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TRANSFERS OF FUND SHARES. There is no established public trading market for the
Shares of the Fund. Other than transfers to the Fund in a redemption, transfers
of Shares are expressly prohibited by the LLC Agreement of the Fund without the
consent of Eaton Vance. Eaton Vance's consent to a transfer may be withheld in
its sole discretion for any reason or for no reason.
The Shares have not been and will not be registered under the Securities Act,
and may not be resold unless an exemption from such registration is available.
Shareholders have no right to require registration of the Shares and the Fund
does not intend to register the Shares under the Securities Act or take any
action to cause an exemption (whether pursuant to Rule 144 of the Securities Act
or otherwise) to be available.
The Fund is not and will not be registered under the 1940 Act, and no transfer
of Shares may be made if, as determined by Eaton Vance or counsel to the Fund,
such transfer would result in the Fund being required to be registered under the
1940 Act. In addition, no transfer of Shares may be made unless, in the opinion
of counsel for the Fund, such transfer would not result in termination of the
Fund for purposes of Section 708 to the Code or result in the classification of
the Fund as an association or a publicly traded partnership taxable as a
corporation under the Code.
In no event shall all or any part of a Shareholder's Shares be assigned to a
minor or an incompetent, unless in trust for the benefit of such person. Shares
may be sold, transferred, assigned or otherwise disposed of by a Shareholder
7
only if it is determined by Eaton Vance or counsel to the Fund that such
transfer, assignment or disposition would not violate federal securities or
state securities or "blue sky" laws (including investor qualification
standards).
There are no outstanding options or warrants to purchase, or securities
convertible into, Shares of the Fund. Shares of the Fund cannot be sold pursuant
to Rule 144 under the Securities Act, and the Fund does not propose to publicly
offer any of its Shares at any time.
REDEMPTION OF FUND SHARES. Shares of the Fund may be redeemed on any business
day. The redemption price of Shares that are redeemed is based on the net asset
value next computed after receipt of the redemption request.
The Fund plans to satisfy redemption requests principally by distributing
securities drawn from the Portfolio, but may also distribute cash. If requested
by a redeeming Shareholder, the Fund will satisfy a redemption request by
distributing securities that were contributed by the redeeming Shareholder,
provided that such securities are held in the Portfolio at the time of
redemption. The securities contributed by a Shareholder will not be distributed
to any other Shareholder in the Fund (or to any other investor in the Company or
the Portfolio) during the first seven years following their contribution unless
the contributing Shareholder has withdrawn from the Fund.
Under most circumstances, a redemption from the Fund that is settled with
securities as described herein will not result in the recognition of capital
gains by the Fund or by the redeeming Shareholder. The redeeming Shareholder
would generally recognize capital gains upon the sale of the securities received
upon the redemption. If a redeeming Shareholder receives cash in addition to
securities to settle a redemption, the amount of cash received will be taxable
to the Shareholder to the extent it exceeds such Shareholder's tax basis in Fund
Shares. Shareholders should consult their tax advisors about the tax
consequences of redeeming Fund Shares.
A Shareholder redemption request within seven years of a contribution of
securities by such Shareholder will ordinarily be satisfied by distributing
securities that were contributed by such Shareholder, prior to distributing to
such Shareholder any other securities held in the Portfolio. Securities
contributed by a Shareholder may be distributed to other Shareholders in the
Fund (or to other investors in the Company or the Portfolio) after a holding
period of at least seven years and, if so distributed, would not be available to
meet subsequent redemption requests made by the contributing Shareholder.
If requested by a redeeming Shareholder making a redemption of at least $1
million occurring more than seven years after such Shareholder's admission to
the Fund, the Fund will generally distribute to the redeeming Shareholder a
diversified basket of securities representing a range of industry groups that is
drawn from the Portfolio, but the selection of individual securities would be
made by Boston Management in its sole discretion. No interests in Real Estate
Joint Ventures, Partnership Preference Units or other real estate investments
held by Belair Real Estate will be distributed to meet a redemption request, and
"restricted securities" will be distributed only to the Shareholder who
contributed such securities or such Shareholder's successor in interest.
Other than as set forth above, the allocation of each redemption between
securities and cash and the selection of securities to be distributed will be at
the sole discretion of Boston Management. Distributed securities may include
securities contributed by Shareholders as well as other readily marketable
securities held in the Portfolio. The value of securities and cash distributed
to meet a redemption will equal the net asset value of the number of Shares
being redeemed. The Fund's Credit Facility prohibits the Fund from honoring
redemption requests while there is an event of default outstanding under the
Credit Facility.
8
The Fund may compulsorily redeem all or a portion of the Shares of a Shareholder
if the Fund has determined that such redemption is necessary or appropriate to
avoid registration of the Fund or the Company under the 1940 Act, or to avoid
adverse tax or other consequences to the Portfolio, the Company, the Fund or
Fund Shareholders.
A capital account for each Shareholder is maintained on the books of the Fund.
The account reflects the value of such Shareholder's interest in the Fund, which
is adjusted for profits, liabilities and distributions allocable to such account
in accordance with Article 6 of the Fund's LLC Agreement.
DETERMINING NET ASSET VALUE. Boston Management, as investment adviser, is
responsible for determining the value of the Fund's assets. The Fund's
custodian, Investors Bank & Trust Company, calculates the value of the assets of
the Fund, the Company and the Portfolio each day that the New York Stock
Exchange ("NYSE") is open for trading, as of the close of regular trading on the
NYSE. The Fund's net asset value per Share is calculated by dividing the value
of the Fund's total assets, less its liabilities, by the number of Shares
outstanding.
The Fund's net assets are valued in accordance with the Fund's valuation
procedures and reflect the value of its directly-held assets and liabilities, as
well as the net asset value of the Fund's investment in the Portfolio held
through the Company and in real estate investments held through Belair Real
Estate. The Trustees of the Portfolio have established the following procedures
for the fair valuation of the Portfolio's assets under normal market conditions.
Marketable securities listed on foreign or U.S. securities exchanges or on the
NASDAQ National Market System generally are valued at closing sale prices or, if
there were no sales, at the mean between the closing bid and asked prices
therefor on the exchange where such securities are principally traded or on such
National Market System (such prices may not be used, however, where an active
over-the-counter market in an exchange listed security better reflects current
market value).
Unlisted or listed securities for which closing sale prices are not available
are valued at the mean between the latest bid and asked prices. An option is
valued at the last sale price as quoted on the principal exchange or board of
trade on which such option or contract is traded, or in the absence of a sale,
at the mean between the last bid and asked prices. Futures positions on
securities or currencies are generally valued at closing settlement prices.
Short-term debt securities with a remaining maturity of 60 days or less are
valued at amortized cost. If securities were acquired with a remaining maturity
of more than 60 days, their amortized cost value will be based on their value on
the sixty-first day prior to maturity. Other fixed income and debt securities,
including listed securities and securities for which price quotations are
available, will normally be valued on the basis of valuations furnished by a
pricing service. All other securities are valued at fair value as determined in
good faith by or at the direction of the Portfolio's Trustees.
Generally, trading in the foreign securities owned by the Portfolio is
substantially completed each day at various times prior to the close of the
NYSE. The values of these securities used in determining the net asset value of
the Portfolio generally are computed as of such times. Occasionally, events
affecting the value of foreign securities may occur between such times and the
close of the NYSE, which will not be reflected in the computation of the
Portfolio's net asset value (unless the Portfolio deems that such events would
materially affect its net asset value, in which case an adjustment would be made
and reflected in such computation). Foreign securities and currency held by the
Portfolio will be valued in U.S. dollars; the Portfolio's custodian will compute
such values based on foreign currency exchange rate quotations supplied by an
independent quotation service. The Fund's real estate investments will be valued
9
each day as determined in good faith by Boston Management, as investment adviser
to Belair Real Estate, after consideration of relevant factors, data and
information. The procedures for valuing Belair Real Estate's assets are
described in Item 7A(b) under "Risks of Real Estate Investments". Boston
Management values the Fund's interest rate swap agreements based upon dealer and
counterparty quotes and pricing models.
HISTORIC NET ASSET VALUES. Set forth below are the high and low net asset values
("NAVs") per Share of the Fund for each full quarter during the two fiscal years
ended December 31, 2002 and 2001, the closing NAV on the last business day of
each full quarter, and the percentage change in NAV during each such quarter.
Quarterly
NAV at % Change in
Quarter Ended High NAV Low NAV Quarter End NAV (1)
- ------------- -------- ------- ----------- ---------
12/31/02 $ 96.86 $ 81.98 $ 92.38 6.56%
9/30/02 $102.10 $ 81.50 $ 86.69 -15.83%
6/30/02 $118.36 $101.04 $103.00 -13.07%
3/31/02 $121.26 $110.66 $118.49 0.94%
12/31/01 $123.24 $103.65 $117.39 13.59%
9/30/01 $126.11 $ 94.94 $104.41 -16.63%
6/30/01 $133.78 $111.25 $125.23 6.32%
3/30/01 $136.58 $112.50 $117.79 -11.52%
(1) Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that Shares, if redeemed, may be worth
more or less than their original cost. Changes in NAV are historical. For
more information about the performance of the Fund, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
in Item 7.
(b) Record Holders of Shares of the Fund.
- ------------------------------------------
As of March 14, 2003, there were 573 record holders of Shares of the Fund.
(c) Distributions.
- -------------------
INCOME AND CAPITAL GAIN DISTRIBUTIONS. The Fund intends to distribute each year
the amount of its net investment income for such year, if any. The Fund also
intends to make annual capital gain distributions equal to approximately 22% of
the amount of its net realized capital gains, if any, other than precontribution
gain. The Fund's net investment income and net realized gains include the Fund's
allocated share of the net investment income and net realized gains of Belair
Real Estate, the Company and, indirectly, the Portfolio. Because the Portfolio
invests primarily in lower yielding securities, seeks to avoid short-term
capital gains and bears certain ongoing expenses, it is not expected that income
distributions will be significant. The Fund intends to pay distributions (if
any) on the last business day of each fiscal year of the Fund (which concludes
on December 31) or shortly thereafter.
Shareholder distributions with respect to net investment income and realized
post-contribution gains will be made pro rata in proportion to the number of
Shares held as of the record date of the distribution. All distributions
(including Special Distributions described below) are paid by the Fund in cash.
Distributions are generally not taxable to the recipient Shareholder unless the
distributions exceed the recipient Shareholder's tax basis in Fund Shares. The
Fund's Credit Facility prohibits the Fund from making any distribution to
Shareholders while there is an event of default outstanding under the Credit
Facility.
The Fund's distribution rates with respect to realized gains may be adjusted at
a future time to reflect changes in the effective maximum marginal individual
federal tax rate applicable to long-term capital gains. On January 17, 2003, the
Fund made a distribution of $0.49 per Share to Shareholders of record on January
10
16, 2003. The Fund made no distributions in 2002. On December 31, 2001, the Fund
made a distribution of $1.22 per Share to Shareholders of record on December 28,
2001.
SPECIAL DISTRIBUTIONS. In addition to the capital gain distributions described
above, the Fund also makes distributions whenever a Shareholder recognizes a
precontribution gain (other than precontribution gain allocated to a Shareholder
in connection with a tender offer or other extraordinary corporate event
involving a security contributed by such Shareholder) (a "Special
Distribution"). Special Distributions generally equal approximately 22% of the
amount of realized precontribution gains plus approximately 6% of the allocated
precontribution gain or such other percentage as deemed appropriate to
compensate Shareholders receiving such distributions for taxes that may be due
in connection with the precontribution gain and Special Distributions. Special
Distributions will be made solely to the Shareholders to whom the
precontribution gain is allocated. The Fund does not intend to make Special
Distributions to a Shareholder in respect of realized precontribution gain
allocated to a Shareholder in connection with a tender offer or other
extraordinary corporate event involving a security contributed by such
Shareholder. For the fiscal year ended December 31, 2002, the Fund made
aggregate Special Distributions of $850. The Fund made no Special Distributions
during 2001.
(d) Recent Sales of Unregistered Securities.
- --------------------------------------------
The Fund held its initial closing on February 6, 1998, at which time qualified
purchasers contributed equity securities with an aggregate exchange value of
$600.7 million in exchange for an aggregate of 5,981,693.481 Shares of the
Fund.* Shares of the Fund were issued in the initial closing at $100 per Share
(less any applicable selling commission).
The Fund held a second closing on April 20, 1998, at which time qualified
purchasers contributed equity securities with an aggregate exchange value of
$631.3 million in exchange for an aggregate of 5,609,299.634 Shares of the Fund.
The Fund held a third and final closing on June 25, 1998, at which time
qualified purchasers contributed equity securities with an aggregate exchange
value of $616.9 million in exchange for an aggregate of 5,587,767.498 Shares of
the Fund.
In connection with each of the closings, Shares of the Fund were privately
offered and sold only to accredited investors who were qualified purchasers in
the manner described in Item 1. Shares were issued at each of the foregoing
closings after the initial closing at a price per share based on the Fund's net
asset value per share determined as of the close of the NYSE on the business day
immediately preceding the closing.
11
Item 6. Selected Financial Data.
- ---------------------------------
TABLE OF SELECTED FINANCIAL DATA. The Fund commenced its investment operations
on February 6, 1998. The consolidated data referred to below reflects the Fund's
results for the fiscal years ended December 31, 2002, 2001, 2000 and 1999 and
the period from February 6, 1998 through December 31, 1998. The other
consolidated data referred to below is as of each year or period end.
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
December 31, December 31, December 31, December 31 December 31,
2002 2001(1) 2000(1) 1999(1) 1998(1)
---- ------- ------- ------- -------
Total investment income $ 78,233,872 $ 91,896,767 $ 86,023,141 $ 59,436,107 $ 34,740,028
Interest expense $ 55,767,247 $ 59,681,065 $ 57,304,272 $ 42,073,062 $ 27,064,842
Total expenses
(including interest expense) $ 75,548,099 $ 84,221,693 $ 75,194,663 $ 50,382,824 $ 32,933,527
Net investment income $ 1,268,410 $ 5,443,857 $ 9,901,787 $ 9,053,283 $ 1,806,501
Minority interest(s) in net income
of controlled subsidiaries $ (1,417,363) $ (2,231,217) $ (926,691) -0- -0-
Net realized gain (loss) $ (42,543,157) $ 17,059,547 $ 29,455,703 $ (38,647,548) $ (55,088,152)
Net change in unrealized
appreciation (depreciation) $ (310,435,564) $ (241,417,383) $ 16,818,313 $ 293,174,886 $ 213,360,195
Net increase (decrease) in net
assets from operations $ (351,710,311) $ (218,913,979) $ 56,175,803 $ 263,580,621 $ 160,078,544
Total assets $1,942,238,810 $2,545,136,580 $2,797,091,702 $2,759,005,507 $2,539,968,731
Loan payable $ 540,769,000 $ 558,769,000 $ 643,000,000 $ 655,000,000 $ 583,000,000
Mortgages payable $ 112,630,517 $ 228,480,517 $ 112,630,517 -0- -0-
Net assets $1,245,807,656 $1,687,637,826 $2,010,997,840 $2,094,369,753 $1,932,848,372
Shares outstanding 13,485,660 14,376,567 15,106,086 15,900,744 16,568,833
Net asset value and
redemption price per Share $ 92.38 $ 117.39 $ 133.13 $ 131.72 $ 116.66
Net increase (decrease) in net
assets from operations per Share $ (25.01) $ (14.52) $ 3.02 $ 16.33 $ 17.09
Distribution paid per Share $ 0(3)(4)$ 1.22 $ 1.61(2) $ 1.27 $ 0.43
(1) Certain amounts have been reclassified to conform with the current year
presentation.
(2) Special Distributions of $0.47 per Share were paid during the year ended
December 31, 2000. Special Distributions are not made on a pro rata basis.
See Item 5(c).
(3) On January 17, 2003, the Fund made a distribution of $0.49 per Share to
Shareholders of record on January 16, 2003.
(4) Special distributions made in 2002 amount to less than $0.001 per Share.
12
Item 7. 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 Fund's actual results could differ
materially from those contained in the forward-looking statements due to a
number of factors. The Fund undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events, or otherwise, except as required by applicable law. Factors that could
affect the Fund's performance include a decline in the U.S. stock markets or in
general economic conditions, adverse developments affecting the real estate
industry, or fluctuations in interest rates. See "Qualitative Information About
Market Risk" in Item 7A below.
The following discussion should be read in conjunction with the Fund's
consolidated financial statements and related notes incorporated by reference
into Item 8.
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, including security investments held
through the Fund's indirect interest (through the Company) in the Portfolio,
real estate investments held through Belair Real Estate and any direct
investments of the Fund. Expenses of the Fund include the expenses of Belair
Real Estate and the Real Estate Joint Venture, the Fund's proportionate share of
the expenses of the Company, and, indirectly, the Portfolio, as well as the
actual and accrued expenses of the Fund. The Fund's most significant expense is
interest incurred on Fund borrowings. Fund borrowings are used primarily to
finance the purchase of real estate investments through Belair Real Estate.
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 the
Company, and indirectly the Portfolio, as well as realized and unrealized gains
and losses on real estate investments held through Belair Real Estate and the
Fund's interest rate swap agreements. 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 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.
Through the impact of interest rates on the value of Partnership Preference
Units and, to a lesser degree, the Real Estate Joint Venture held through Belair
Real Estate and the Fund's positions in interest rate swap agreements, movements
in interest rates also affect the performance of the Fund. Because Partnership
Preference Units are fixed rate instruments, an increase in interest rates
generally will cause a decline in their value and a decrease in interest rates
generally will cause an increase in their value. The Fund's interest rate swaps
generally will increase in value when interest rates rise and decrease in value
when rates fall.
PERFORMANCE OF THE FUND(1). The Fund's total return for the year ended December
31, 2002 was -21.30%. This return reflected a decrease in the Fund's net asset
value per Share from $117.39 to $92.38. For comparison, the S&P 500 had a total
(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 original cost.
13
return of -22.09% over the same period.(2) The combined impact on performance of
the Fund's investment activities outside of the Portfolio was modestly negative
for the year ended December 31, 2002. The performance of the Fund trailed that
of the Portfolio by approximately 1.78% for the year.
The Fund achieved a total return of -10.92% for the fiscal year ended December
31, 2001. This return reflected a decrease in the Fund's net asset value per
Share from $133.13 to $117.39 during the year, and a distribution of $1.22 per
Share at the conclusion of the year. For comparison, the S&P 500 had a total
return of -11.88% over the same period.(2) For the year ended December 31, 2001,
the performance of the Fund trailed that of the Portfolio by approximately
1.25%.
PERFORMANCE OF THE PORTFOLIO. Like 2001, the past year was extremely turbulent
for equities, and for growth stocks in particular. While the Portfolio's
absolute performance for the year of -19.52% was disappointing, as in 2001, the
Portfolio outperformed the S&P 500, which had a return of -22.09%(2).
The Portfolio's relative outperformance versus the S&P 500 was a function of
allocation in the outperforming sectors and stock selection within those
sectors. The Portfolio's sector allocation remained relatively unaltered from
2001 in that the Portfolio continued to focus on investments in the industrial,
consumer staples and consumer discretionary sectors. Investments in the
airfreight and aerospace-defense industries were particularly beneficial to
performance, as were investments in household products and food and drug
retailing. Financial stocks, while not performing well on the whole, also
contributed modestly to relative performance in 2002, due to the Portfolio's
stock selections within that sector.
As in 2001, lack of earnings visibility, economic uncertainty and generally
unattractive valuations steered the Portfolio away from the information
technology and telecommunications sectors, the two worst performing sectors in
2002. While the Portfolio was underweighted in these sectors versus the S&P 500
in 2002, its performance was impacted by the weak performance of some wireless
communications stocks. The Portfolio's health care investments were also a drag
on performance, specifically stocks in health care equipment and
pharmaceuticals. In addition, an underweighting in the materials sector and
stock selections in metals, mining, paper and forest products had a slightly
negative impact on performance.
Volatility, by some measures, was at record levels last year. Boston Management,
the Portfolio's investment adviser, views portfolio diversification as a means
to help dampen the volatility of individual stocks or the market as a whole.
Although the Portfolio's investment risks are primarily managed through the
stock-by-stock fundamental research conducted by Boston Management's research
staff, exposure to each segment of the economy is also closely monitored. During
2002, the Portfolio's exposure to sector concentrations in the health care and
financial sectors was reduced as compared to 2001.
The volatility in the market this year provided the Portfolio with many
opportunities to employ tax-managed strategies. The market's downward bias
allowed the Portfolio to actively harvest tax losses. Having tax losses on hand
increases the Portfolio's management flexibility, allowing it to sell
appreciated stocks without generating net capital gains that would be taxable
for the Portfolio's investors. This loss-harvesting strategy also helped
preserve shareholder value, limiting the Portfolio's risk exposure to declining
stocks.
Looking forward, the near-term direction of the market or economy cannot be
accurately forecasted. Historically, success in the equity market comes from
having a long-term perspective and realistic expectations for return given the
(2) It is not possible to invest directly in an Index.
14
level of risk an investor is willing to tolerate. The longer-term success of the
Portfolio will be determined by the ability of Boston Management's research
staff to deliver superior stock selection versus the benchmark. Boston
Management's analysts have been observing stabilization in many areas of the
economy, so there is reason to be encouraged on the economic front, despite the
lack of robust growth.
It does not appear that the market will anytime soon consistently reach the
20%-plus annual returns seen in the late 1990s. Expectations for equity market
returns should be more modest. The Portfolio believes that its investment
approach, with broad diversification and active risk management and tax
management, is particularly well suited to the more difficult equity market
anticipated for the years ahead.
PERFORMANCE OF REAL ESTATE INVESTMENTS. For the year ended December 31, 2002,
the Fund's real estate operations (conducted through Real Estate Joint Ventures)
reflected weakening multifamily market fundamentals and the uncertain outlook
for the U.S. economy as a whole. Rental income decreased to $30.3 million for
the year from $37.9 million for 2001, a decrease of $7.6 million or 20%, while
property operating expenses (before debt service) decreased to $12.6 million for
the year from $15.0 million for 2001, a decrease of $2.4 million or 16%. The
decrease in rental income and property operating expenses was principally due to
a decrease in the number of Real Estate Joint Ventures held by the Fund in 2002.
Throughout 2002, Real Estate Joint Venture operations were affected by
deteriorating multifamily market fundamentals in most regions with falling
occupancy levels and rising rent concessions. Given the continued uncertain
outlook for the U.S. economy as a whole, expectations are that operating results
in 2003 will be modestly below the levels of 2002.
Because the number of Real Estate Joint Ventures held by the Fund was reduced
during 2002, the estimated fair value of the real properties held through Real
Estate Joint Ventures decreased by 52% during the year, from $327.9 million at
the end of 2001 to $157.5 million at December 31, 2002. The decrease was also
due, in part, to modest decreases in property values that resulted from declines
in near-term earnings expectations and the economic downturn. Despite weaker
market conditions, declines in asset values for multifamily properties have
generally been modest as decreases in capitalization rates have largely offset
declining income level expectations.
For the year ended December 31, 2002, the Fund'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. The estimated fair value of the Fund's Partnership
Preference Units totaled $391.2 million at December 31, 2002, compared to $376.5
million at the end of 2001, an increase of $14.7 million or 4%. Because the Fund
owned fewer Partnership Preference Units during 2002 as compared to 2001, the
dividends earned from the Partnership Preference Units for 2002 were lower than
2001, $36.9 million for 2002 compared to $44.1 million for 2001, a decrease of
$7.2 million or 16%.
PERFORMANCE OF INTEREST RATE SWAPS. As their initial optional termination dates
moved closer, the fair value of the Fund's interest rate swap agreements
increased by approximately $8.5 million for the year ended December 31, 2002.
For comparison, the fair value of the Fund's interest rate swap agreements
declined by approximately $25.0 million for the year ended December 31, 2001.
Liquidity and Capital Resources.
- --------------------------------
OUTSTANDING BORROWINGS. As of December 31, 2002, the Fund had outstanding
borrowings of $540.8 million and unused loan commitments of $247.8 million under
the Credit Facility. As of December 31, 2002, a letter of credit in the amount
of approximately $1.4 million was outstanding and was issued as a substitute for
funding mortgage escrow accounts required by the lender of the Real Estate Joint
Venture. The Credit Facility is used primarily to finance the Fund's equity in
15
its real estate investments and will continue to be used for such purpose in the
future. The Credit Facility will also provide for 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 for these purposes.
As of December 31, 2002, Bel Residential had outstanding borrowings consisting
of fixed-rate secured mortgage debt obligations of $112.6 million.
LIQUIDITY. The Fund may redeem shares of the Company at any time. Both the
Company and the Portfolio normally follow the practice of satisfying redemptions
by distributing securities drawn from the Portfolio. The Company and the
Portfolio may also satisfy redemptions by distributing cash. As of December 31,
2002, the Portfolio had cash and short-term investments totaling $132.9 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 at December 31, 2002.
To ensure liquidity for investors in the Portfolio, the Portfolio may not invest
more than 15% of its net assets in illiquid assets. As of December 31, 2002,
illiquid assets (consisting of restricted securities not available for current
public sale) constituted 0.4% of the net assets of the Portfolio.
The liquidity of Belair Real Estate's Real Estate Joint Venture investment is
extremely limited, and relies principally upon buy/sell arrangements with the
Operating Partner that may be exercised after a specified period (up to ten
years) after the formation of the Real Estate Joint Venture. Transfers of Belair
Real Estate's interest in the Real Estate Joint Venture to parties other than
the Operating Partner are restricted by terms of the operating management
agreement, the buy/sell arrangement with the Operating Partner, and lender
consent requirements. The Partnership Preference Units held by Belair Real
Estate are not registered under the Securities Act and are subject to
substantial restrictions on transfer. As such, they are illiquid.
CRITICAL ACCOUNTING POLICIES. The Fund's discussion and analysis of its
financial condition and results of operations are based upon the Fund's
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the Fund to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. The Fund bases these estimates, judgments
and assumptions on historical experience and on other various factors that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
The Fund's critical accounting policies affect the Fund's more significant
estimates and assumptions used in valuing the Fund's real estate investments and
interest rate swap agreements. Prices are not readily available for these types
of investments and therefore are valued on an ongoing basis by Boston
Management, in its capacity as manager of Belair Real Estate, in the case of the
real estate investments, and in its capacity as the Fund's investment adviser,
in the case of the interest rate swap agreements.
In estimating the value of the Fund's investments in real estate, Boston
Management takes into account relevant factors, data and information, including
with respect to investments in Partnership Preference Units, information from
dealers and similar firms with knowledge of such issues and the prices of
comparable preferred equity securities and other fixed or adjustable rate
instruments having similar investment characteristics. Real estate investments
other than Partnership Preference Units are generally stated at estimated fair
values based upon independent valuations assuming an orderly disposition of
assets. Detailed investment valuations are performed at least annually and
reviewed periodically. Interim valuations reflect results of operations and
distributions, and may be adjusted if there has been a significant change in
16
economic circumstances since the most recent independent valuation. Given that
such valuations include many assumptions, including but not limited to an
orderly disposition of assets, values may differ from amounts ultimately
realized. Boston Management, as the Fund's investment adviser, determines the
value of interest rate swaps, and, in doing so, may consider among other things,
dealer and counter-party quotes and pricing models.
The policies for valuing real estate investments involve significant judgments
that are based upon, without limitation, general economic conditions, the supply
and demand for different types of real properties, the financial health of
tenants, the timing of lease expirations and terminations, fluctuations in
rental rates and operating costs, exposure to adverse environmental conditions
and losses from casualty or condemnation, interest rates, availability of
financing, managerial performance and government rules and regulations. The
valuations of Partnership Preference Units held by the Fund through its
investment in Belair Real Estate fluctuate over time to reflect, among other
factors, changes in interest rates, changes in perceived riskiness of such units
(including call risk), changes in the perceived riskiness of comparable or
similar securities trading in the public market and the relationship between
supply and demand for comparable or similar securities trading in the public
market.
The value of interest rate swaps may be subject to wide swings in valuation
caused by changes in interest rates and in the prices of the underlying
instrument. Interest rate swaps may be difficult to value since such instruments
may be considered illiquid. Fluctuations in the value of Partnership Preference
Units derived from changes in general interest rates can be expected to be
offset in part (but not entirely) by changes in the value of interest rate swap
agreements or other interest rate hedges entered into by the Fund with respect
to its borrowings. Fluctuations in the value of real estate investments derived
from other factors besides general interest rate movements (including
issuer-specific and sector-specific credit concerns, property-specific concerns
and changes in interest rate spread relationships) will not be offset by changes
in the value of interest rate swap agreements or other interest rate hedges
entered into by the Fund. Changes in the valuation of Partnership Preference
Units not offset by changes in the valuation of interest rate swap agreements or
other interest rate hedges entered into by the Fund and changes in the value of
other real estate investments will cause the performance of the Fund to deviate
from the performance of the Portfolio.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- --------------------------------------------------------------------
(a) Quantitative Information About Market Risk.
- -----------------------------------------------
INTEREST RATE RISK. The Fund's primary exposure to interest rate risk arises
from its real estate investments that are financed by the Fund with floating
rate borrowings under the Credit Facility and by fixed-rate secured mortgage
debt obligations of the Real Estate Joint Venture. 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 under the Credit Facility and to mitigate the impact of
interest rate changes on the Fund's net asset value. Under the terms of the
interest rate swap agreements, the Fund makes cash payments at fixed rates in
exchange for floating rate payments that fluctuate with three-month LIBOR. In
the future, the Fund may use other interest rate hedging arrangements (such as
caps, floors and collars) to fix or limit borrowing costs. The use of interest
rate hedging arrangements is a specialized activity that may be considered
speculative and which can expose the Fund to significant loss.
The value of Partnership Preference Units and, to a lesser degree, Real Estate
Joint Venture mortgages is sensitive to interest rate risk. Increases in
interest rates generally will have an adverse affect on the value of Partnership
Preference Units and the Real Estate Joint Venture.
17
The following table summarizes the contractual maturities and weighted-average
interest rates associated with the Fund's significant non-trading financial
instruments. The Fund has no market risk sensitive instruments held for trading
purposes. This information should be read in conjunction with Notes 7 and 8 to
the Fund's Consolidated Financial Statements incorporated by reference into Item
8.
18
Interest Rate Sensitivity
Cost, Principal (Notional) Amount by Contractual Maturity
For the Twelve Months Ended December 31,
Estimated
2003-2004 2005 2006-2007 Thereafter Total Fair Value
----------------------------------------------------------------------------------
Rate sensitive
Liabilities:
- -----------------------------------------
Long-term debt:
- -----------------------------------------
Fixed-rate mortgages $112,630,517 $112,630,517 $132,000,000
Average interest rate 8.33% 8.33%
- -----------------------------------------
Variable-rate Credit Facility $540,769,000 $540,769,000 $540,769,000
Average interest rate 1.83% 1.83%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative financial
instruments:
- -----------------------------------------
Pay fixed/
Receive variable interest rate swap
contracts $674,373,000 $674,373,000 $(21,367,938)
Average pay rate 6.86% 6.86%
Average receive rate 1.83% 1.83%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive investments:
- -----------------------------------------
Fixed-rate Partnership Preference
Units:
- -----------------------------------------
Bradley Operating Limited
Partnership, 8.875% Series B
Cumulative Redeemable Perpetual
Preferred Units, Callable 2/23/04,
Current Yield: 10.28% $22,521,852 $22,521,852 $22,087,870
- -----------------------------------------
19
Interest Rate Sensitivity
Cost, Principal (Notional) Amount by Contractual Maturity
For the Twelve Months Ended December 31,
Estimated
2003-2004 2005 2006-2007 Thereafter Total Fair Value
----------------------------------------------------------------------------------
Camden Operating Limited
Partnership, 8.50% Series B
Cumulative Redeemable Perpetual
Preferred Units, Callable 2/23/04,
Current Yield: 8.28% $27,384,494 $27,384,494 $28,230,400
- -----------------------------------------
Colonial Realty Limited Partnership,
8.875% Series B Cumulative
Redeemable Perpetual Preferred
Units, Callable 2/23/04, Current
Yield: 9.48% $44,807,072 $44,807,072 $45,404,730
- -----------------------------------------
Kilroy Realty, L.P., 8.075% Series A
Cumulative Redeemable Preferred
Units, Callable 2/06/03, Current
Yield: 9.95% $28,800,000 $28,800,000 $23,362,387
- -----------------------------------------
Liberty Property L.P., 9.25% Series
B Cumulative Redeemable Preferred
Units, Callable 7/28/04, Current
Yield: 8.78% $30,875,000 $30,875,000 $32,527,430
- -----------------------------------------
MHC Operating Limited Partnership,
9% Series D Cumulative Redeemable
Perpetual Preference Units, Callable
9/29/04, Current Yield: 9.58% $50,000,000 $50,000,000 $46,972,000
- -----------------------------------------
20
Interest Rate Sensitivity
Cost, Principal (Notional) Amount by Contractual Maturity
For the Twelve Months Ended December 31,
Estimated
2003-2004 2005 2006-2007 Thereafter Total Fair Value
----------------------------------------------------------------------------------
National Golf Operating Partnership,
L.P., 8% Series A Cumulative
Redeemable Preferred Units,
Callable 3/4/03, Current Yield:
10.53% $35,431,684 $35,431,684 $28,120,000
- -----------------------------------------
National Golf Operating Partnership,
L.P., 9.30% Series B Cumulative
Redeemable Preferred Units,
Callable 7/28/04, Current Yield:
12.21% $5,000,000 $5,000,000 $3,808,120
- -----------------------------------------
PSA Institutional Partners, L.P.,
9.50% Series N Cumulative
Redeemable Perpetual Preferred
Units, Callable 3/17/05, Current
Yield: 8.73% $48,250,000 $48,250,000 $52,505,650
- -----------------------------------------
Price Development Company, L.P.,
8.95% Series B Cumulative
Redeemable Preferred Partnership
Interests, Callable 7/28/04, Current
Yield: 10.63% $30,625,000 $30,625,000 $25,785,025
- -----------------------------------------
Regency Centers, L.P., 8.125%
Series A Cumulative Redeemable
Preferred Units, Callable 6/25/05,
Current Yield: 8.28% $30,000,000 $30,000,000 $29,438,400
- -----------------------------------------
21
Interest Rate Sensitivity
Cost, Principal (Notional) Amount by Contractual Maturity
For the Twelve Months Ended December 31,
Estimated
2003-2004 2005 2006-2007 Thereafter Total Fair Value
----------------------------------------------------------------------------------
Summit Properties
Partnership L.P., 8.95%
Series B Cumulative
Redeemable Perpetual
Preferred Units, Callable
4/29/04, Current Yield:
9.83% $29,625,000 $29,625,000 $26,972,970
- ------------------------------
Urban Shopping Centers,
L.P., 9.45% Series D
Cumulative Redeemable
Perpetual Preferred Units,
Callable 10/01/04,
Current Yield: 9.09% $25,000,000 $25,000,000 $25,981,000
- ------------------------------------------------------------------------------------------------------------------------------------
22
(b) Qualitative Information About Market Risk.
- ----------------------------------------------
RISKS ASSOCIATED WITH EQUITY INVESTING. The value of Fund Shares may not
increase and may decline. The performance of the Fund fluctuates. There can be
no assurance that the performance of the Fund will match that of the U.S. stock
market or that of other equity funds. In managing the Portfolio for long-term,
after-tax returns, 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 funds that do not follow a general policy of avoiding sales of
highly-appreciated securities.
RISKS OF INVESTING IN FOREIGN SECURITIES. The Portfolio invests in securities
issued by foreign companies and the Fund may acquire foreign investments.
Foreign investments involve considerations and possible risks not typically
associated with investing in the United States. The value of foreign investments
to U.S. investors may be adversely affected by changes in currency rates.
Foreign brokerage commissions, custody fees and other costs of investing are
generally higher than in the United States, and foreign investments may be less
liquid, more volatile and subject to more government regulation than in the
United States. Foreign investments could be adversely affected by other factors
not present in the United States, including expropriation, confiscatory
taxation, lack of uniform accounting and auditing standards, armed conflict, and
potential difficulty in enforcing contractual obligations.
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, indexes, 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 futures contracts on stocks and stock indexes and options
thereon; the purchase of put options and the sale of call options on securities
held; equity swaps; forward sales of stocks; and the purchase and sale of
forward currency exchange contracts and currency futures. The Portfolio may make
short sales of securities provided that it holds an equal amount of the security
sold short (or securities convertible into or exchangeable for an equal amount
of the securities sold short without payment of additional consideration) or
cash or other liquid securities in an amount equal to the current market value
of the securities sold short. The Portfolio may also lend portfolio securities.
The use of these investment techniques is a specialized activity that may be
considered speculative and which can expose the Fund and the Portfolio to
significant risk of loss. Successful use of these investment techniques is
subject to the ability and performance of the investment adviser. The Fund's and
the Portfolio's ability to achieve their investment objectives may be adversely
affected by the use of these techniques. The writer of an option or a party to
an equity swap may incur losses that substantially exceed the payments, if any,
received from a counterparty. Forward sales, swaps, caps, floors, collars and
over-the-counter options are private contracts in which there is also a risk of
loss in the event of a default on an obligation to pay by the counterparty. Such
instruments may be difficult to value, may be illiquid and may be subject to
wide swings in valuation caused by changes in the price of the underlying
security, index, instrument or currency. In addition, if the Fund or the
Portfolio has insufficient cash to meet margin, collateral or settlement
requirements, it may have to sell assets to meet such requirements.
Alternatively, should the Fund or the Portfolio fail to meet these requirements,
the counterparty or broker may liquidate positions of the Fund or the Portfolio.
The Portfolio may also have to sell or deliver securities holdings in the event
that it is not able to purchase securities on the open market to cover its short
positions or to close out or satisfy an exercise notice with respect to options
positions it has sold. In any of these cases, such sales may be made at prices
or in circumstances that the investment adviser considers unfavorable.
23
The Portfolio's ability to utilize covered short sales, certain equity swaps,
forward sales, futures and certain equity collar strategies (combining the
purchase of a put option and the sale of a call option) as a tax-efficient
management technique with respect to holdings of appreciated securities is
limited to circumstances in which the hedging transaction is closed out within
thirty days of the end of the taxable year of the Portfolio in which the hedging
transaction was initiated 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, forward sales of stocks, interest
rate hedges, equity swaps and other derivative instrument transactions on terms
satisfactory to the Fund or the Portfolio. The Fund's and the Portfolio's
ability to enter into such transactions may also be limited by covenants under
the Fund's Credit Facility, the federal margin regulations and other laws and
regulations. The Portfolio's use of certain investment techniques may be
constrained because the Portfolio is a diversified, open-end management
investment company registered under the 1940 Act and because other investors in
the Portfolio are regulated investment companies under Subchapter M of the Code.
Moreover, the Fund and the Portfolio are subject to restrictions under the
federal securities laws on their ability to enter into transactions in respect
of securities that are subject to restrictions on transfer pursuant to the
Securities Act.
RISKS OF REAL ESTATE INVESTMENTS. The success of Belair Real Estate'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, fluctuations
in interest rates, availability of financing, managerial performance, government
rules and regulations, and acts of God (whether or not insured against).
The performance of the Real Estate Joint Venture is substantially influenced by
the property management capabilities of the Operating Partner and conditions in
the specific real estate sub-markets in which the properties owned by the Real
Estate Joint Venture are located. The Operating Partner will be subject to
substantial conflicts of interest in structuring, operating and winding up the
Real Estate Joint Venture. The Operating Partner will have an economic incentive
to maximize the prices at which it sells properties to the Real Estate Joint
Venture and to minimize the prices at which it acquires properties from the Real
Estate Joint Venture. The Operating Partner may devote greater attention or more
resources to managing its wholly-owned properties than properties held by the
Real Estate Joint Venture. Future investment opportunities identified by the
Operating Partner will more likely be pursued independently, rather than
through, the Real Estate Joint Venture. Financial difficulties encountered by
the Operating Partner in its other businesses may interfere with the operations
of the Real Estate Joint Venture.
The debt of the Real Estate Joint Venture is fixed-rate, secured by the
underlying properties and with limited recourse to Belair Real Estate. However,
the availability of financing and other financial conditions can have a material
impact on property values and therefore on the value of Real Estate Joint
Venture assets. There can be no assurance that Belair Real Estate's ownership of
real estate investments will be an economic success.
The success of investments in Partnership Preference Units depends upon factors
relating to the issuing partnerships that may affect such partnerships'
profitability and their ability to make distributions to holders of Partnership
Preference Units. Belair Real Estate's interests in the Real Estate Joint
Venture and Partnership Preference Units are not registered under the federal
securities laws and are subject to restrictions on transfer. Due to their
illiquidity, they may be difficult to value and the ongoing value of the
investments is uncertain. Because the Partnership Preference Units are not rated
by a nationally-recognized rating agency, they may be subject to more credit
risk than securities that are rated investment grade.
24
The ongoing value of Belair Real Estate's investment in the Real Estate Joint
Venture will be substantially uncertain. The real properties held through Belair
Real Estate's Real Estate Joint Venture generally will be stated at estimated
fair value based on independent valuations, assuming an orderly disposition of
assets. Independent valuations include property appraisals performed by numerous
appraisers that are licensed in their respective states and not affiliated with
Eaton Vance or the Real Estate Joint Venture's Operating Partner. Such
appraisals are performed in accordance with the Uniform Standards of
professional Appraisal Practice of the Appraisal Standards Board, as well as the
Code of Professional Ethics and Standards of Professional Appraisal Practice of
the Appraisal Institute (and other relevant standards). Detailed investment
valuations will be performed at least 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 valuation. Given that such valuations include many
assumptions, including, but not limited to, an orderly disposition of assets,
values may differ from amounts ultimately realized.
Investments in Partnership Preference Units will be valued primarily by
referencing market trading prices for comparable preferred equity securities or
other fixed-rate instruments having similar investment characteristics. The
valuations of Partnership Preference Units fluctuate over time to reflect, among
other factors, changes in interest rates, changes in the perceived riskiness of
such units (including call risk), changes in the perceived riskiness of
comparable or similar securities trading in the public market and the
relationship between supply and demand for comparable or similar securities
trading in the public market. 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. Fluctuations
in the value of Partnership Preference Units derived from changes in general
interest rates can be expected to be offset in part (but not entirely) by
changes in the value of interest rate swap agreements or other interest rate
hedges entered into by the Fund with respect to its borrowings under the Credit
Facility.
Fluctuations in the value of Partnership Preference Units and Real Estate Joint
Venture equity that are 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 value 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.
RISKS OF LEVERAGE. Although intended to add to returns, the borrowing of funds
to purchase real estate investments exposes the Fund to the risk that the
returns achieved on the real estate investments will be lower than the cost of
borrowing to purchase such assets and that the leveraging of the Fund to buy
such assets will therefore diminish the returns achieved by the Fund as a whole.
In addition, there is a risk that the availability of financing will be
interrupted at some future time, requiring the Fund to sell assets to repay
outstanding borrowings or a portion thereof. It may be necessary to make such
sales at unfavorable prices. The Fund's obligations under the Credit Facility
are secured by a pledge of its assets. In the event of default, the lender could
elect to sell assets of the Fund without regard to consequences of such action
for Shareholders. The rights of the lender to receive payments of interest on
and repayments of principal of borrowings under the Credit Facility are senior
to the rights of the Shareholders.
Under the terms of the Credit Facility, the Fund is not permitted to make
distributions of cash or securities while there is an event of default
outstanding under the Credit Facility. During such periods, the Fund would not
be able to honor redemption requests or make cash distributions. In addition,
the rights of lenders under the mortgages used to finance Real Estate Joint
Venture properties are senior to Belair Real Estate's right to receive
distributions from the Real Estate Joint Venture.
25
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------
The Fund's financial statements for the year ended December 31, 2002, together
with the auditors' report thereon, appearing on pages 32 through 92 hereof, are
incorporated herein by reference. The Fund's financial statements and auditors'
report thereon for the fiscal year ended December 31, 2001, appearing on pages
18 through 48 of the Fund's Form 10-K filed with the Securities and Exchange
Commission on March 27, 2002, are also incorporated herein by reference.
The following is a summary of unaudited quarterly results of operations of the
Fund for 2002 and 2001.
2002
----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------------
Investment income $22,392,524 $19,883,543 $17,709,051 $18,248,754
Minority interest in net income of controlled subsidiaries $(660,952) $(353,710) $(171,959) $(230,742)
Net investment income (loss) $(7,401) $657,756 $(106,170) $724,225
Net increase (decrease) in net assets from operations $15,528,746 $(218,455,529) $(226,276,390) $77,492,862
Per share data:(1)
Investment income $1.56 $1.41 $1.28 $1.35
Net investment income (loss) $0.00 $0.05 $(0.01) $0.05
Net increase (decrease) in net assets from operations $1.08 $(15.44) $(16.33) $5.71
2001
------------------------------------------------------------
First Second Third Fourth
Quarter(2) Quarter(2) Quarter(2) Quarter(2)
------------------------------------------------------------
Investment income $19,805,073 $14,355,407 $25,329,596 $32,406,691
Minority interest in net income of controlled subsidiaries $(334,714) $(492,625) $(777,054) $(626,824)
Net investment income (loss) $1,356,804 $(6,561,247) $1,776,503 $8,871,797
Net increase (decrease) in net assets from operations $(230,507,749) $111,248,918 $(305,596,578) $205,941,430
Per share data:(1)
Investment income $1.32 $0.97 $1.73 $2.24
Net investment income (loss) $0.09 $(0.44) $0.12 $0.61
Net increase (decrease) in net assets from operations $(15.32) $7.49 $(20.83) $14.20
(1) Based on average Shares outstanding.
(2) Certain amounts have been reclassified to conform with the current year
presentation.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
- --------------------------------------------------------------------------------
There have been no changes in, or disagreements with, accountants on accounting
and financial disclosures.
PART III
--------
Item 10. Directors and Executive Officers.
- ------------------------------------------
The Fund is managed by Eaton Vance. Thomas E. Faust Jr. and Michelle A.
Alexander serve as the Fund's Chief Executive Officer and Chief Financial
Officer, respectively. Information about Mr. Faust appears below under
"Directors and Officers of Eaton Vance, Inc." Ms. Alexander (33) is a Vice
President of Eaton Vance and Boston Management. She also serves as an officer of
various investment companies managed by Eaton Vance or Boston Management and has
been an employee of Eaton Vance since 1997. As members of the Eaton Vance
organization, Mr. Faust and Ms. Alexander receive no compensation from the Fund
for serving as Fund officers.
26
Boston Management is investment adviser to the Fund and the Portfolio and
manager of Belair Real Estate. The portfolio manager of the Fund and the
Portfolio is Duncan W. Richardson, Senior Vice President and Chief Equity
Investment Officer of Eaton Vance and Boston Management. Mr. Richardson has been
employed by the Eaton Vance organization since 1987 and has served as portfolio
manager of the Fund since its inception and of the Portfolio and its predecessor
since 1990. Boston Management has an experienced team of analysts that provides
Mr. Richardson with research and recommendations on investments, including
William R. Cross who is primarily responsible for providing research and
analysis relating to the Fund's real estate investments held through Belair Real
Estate. A majority of Mr. Richardson's time is spent managing the Portfolio and
related entities.
As disclosed under "The Eaton Vance Organization" in Item 1, Eaton Vance and
Boston Management are indirect wholly-owned subsidiaries of EVC. The non-voting
common stock of EVC is listed and traded on the NYSE. All shares of the voting
common stock of EVC are held in a voting trust, the voting trustees of which are
senior officers of the Eaton Vance organization. Eaton Vance, Inc. ("EV"), a
wholly-owned subsidiary of EVC, is the sole trustee of Eaton Vance and of Boston
Management, each of which is a Massachusetts business trust. The names of the
executive officers and the directors of EV and their ages and principal
occupations are set forth below.
Directors and Executive Officers of Eaton Vance, Inc.
- -----------------------------------------------------
James B. Hawkes (61) is Chairman, President and Chief Executive Officer of Eaton
Vance, Boston Management, EVC and EV and a Director of EVC and EV. He is also
Vice President and Director of EV Distributors. He is also a Trustee and an
officer of various investment companies managed by Eaton Vance or Boston
Management and has been employed by Eaton Vance since 1970.
Thomas E. Faust Jr. (44) is Executive Vice President and Chief Investment
Officer of Eaton Vance, Boston Management, EVC and EV, and a Director of EVC. He
is also an officer of various investment companies managed by Eaton Vance or
Boston Management and has been employed by Eaton Vance since 1985.
Alan R. Dynner (62) is Vice President, Chief Legal Officer and Secretary of
Eaton Vance, Boston Management, EVC, EV Distributors and EV. He is also an
officer of various investment companies managed by Eaton Vance or Boston
Management and has been employed by Eaton Vance since 1996.
William M. Steul (60) is Vice President and Chief Financial Officer of Eaton
Vance, Boston Management, EVC and EV. He is also Vice President of EV
Distributors. He has been employed by Eaton Vance since 1994.
Item 11. Executive Compensation.
- --------------------------------
As noted in Item 10, the officers of the Fund receive no compensation from the
Fund. The Fund's manager, Eaton Vance, and its affiliates receive compensation
from the Fund for services provided to the Fund. Set forth below are the
investment advisory and administrative fees and servicing fees paid or payable
by, or allocable to, the Fund and the management fees paid or payable by Belair
Real Estate for the fiscal years ended December 31, 2002 and 2001. Information
about advisory and management fees is provided below. Information about
servicing fees appears in Item 13.
27
- ------------------------------------------------------------------------------------------------
Year Ended Year ended
December 31, December 31,
2002 2001
- ------------------------------------------------------------------------------------------------
Advisory and Administrative Fees Paid or Payable by the Fund $2,402,565 $3,045,469
- ------------------------------------------------------------------------------------------------
Management Fees Paid or Payable by Belair Real Estate $3,351,450 $3,991,422
- ------------------------------------------------------------------------------------------------
Fund's Allocable Portion of the Portfolio's Advisory Fees* $6,885,848 $8,355,528
- ------------------------------------------------------------------------------------------------
Servicing Fees Paid or Payable by the Fund $524,356 $681,075
- ------------------------------------------------------------------------------------------------
Fund's Allocable Portion of the Company's Servicing Fees $2,368,875 $2,890,297
- ------------------------------------------------------------------------------------------------
* For its fiscal years ended December 31, 2002 and 2001, advisory fees paid
or payable by the Portfolio totaled $71,564,552 and $76,812,367,
respectively. For 2002, the Company's allocable portion of that fee was
$41,180,870, of which $6,885,848 was allocable to the Fund. For 2001, the
Company's allocable portion of that fee was $42,233,575, of which
$8,355,528 was allocable to the Fund.
THE FUND'S INVESTMENT ADVISORY AND ADMINISTRATIVE FEE. Under the terms of the
Fund's investment advisory and administrative agreement, Boston Management is
entitled to receive a monthly advisory and administrative fee at the rate of
1/20th of 1% (equivalent to 0.60% annually) of the average daily gross
investment assets of the Fund, reduced by the amount of that portion of the
monthly advisory fee paid by the Portfolio which is attributable to the value of
the Fund's investment in the Company. The term "gross investment assets of the
Fund" means the value of all Fund assets other than the Fund's investment in
Belair Real Estate minus the sum of the Fund's liabilities other than the
principal amount of money borrowed.
BELAIR REAL ESTATE'S MANAGEMENT FEE. Under the terms of Belair Real Estate's
management agreement with Boston Management, Boston Management receives a
monthly management fee at the rate of 1/20th of 1% (equivalent to 0.60%
annually) of the average daily gross investment assets of Belair Real Estate.
The term "gross investment assets of Belair Real Estate" means the value of all
assets of Belair Real Estate, minus the sum of Belair Real Estate's liabilities
other than the principal amount of money borrowed. For this purpose, the assets
and liabilities of Belair Real Estate's controlled subsidiaries are reduced by
the proportionate interests therein of investors other than Belair Real Estate.
THE PORTFOLIO'S INVESTMENT ADVISORY FEE. Under the terms of the Portfolio's
investment advisory agreement with Boston Management, Boston Management receives
a monthly advisory fee as follows:
Annual Fee Rate
Average Daily Net Assets for the Month (for each level)
- --------------------------------------------------------------------
Up to $500 million 0.6250%
$500 million but less than $1 billion 0.5625%
$1 billion but less than $1.5 billion 0.5000%
$1.5 billion but less than $7 billion 0.4375%
$7 billion but less than $10 billion 0.4250%
$10 billion but less than $15 billion 0.4125%
$15 billion and over 0.4000%
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. To the knowledge of the Fund,
no person beneficially owns more than five percent of the Shares of the Fund.
SECURITY OWNERSHIP OF MANAGEMENT. As of March 14, 2003, Eaton Vance, the manager
of the Fund, beneficially owned 1,146.272 Shares of the Fund. The Shares owned
by Eaton Vance represent less than 1% of the outstanding Shares of the Fund as
of March 14, 2003. None of the other entities or individuals named in response
to Item 10 above beneficially owned Shares of the Fund as of such date.
28
CHANGES IN CONTROL. Not applicable.
Item 13. Certain Relationships and Related Transactions.
- --------------------------------------------------------
See the information set forth under Item 11 above.
SERVICING FEES PAID BY THE COMPANY. Pursuant to a servicing agreement between
the Company and EV Distributors, the Company pays a servicing fee to EV
Distributors for providing certain services and information to direct and
indirect investors in the Company. The servicing fee is paid on a quarterly
basis, at an annual rate of 0.15% of the Company's average daily net assets.
With respect to investors in the Company and Shareholders of the Fund who
subscribed through a subagent, EV Distributors has assigned servicing
responsibilities and fees to the applicable subagent, beginning twelve months
after the issuance of shares of the Company or Shares of the Fund to such
persons. The Fund will assume its allocated share of the Company's servicing
fee. The servicing fee payable in respect of the Fund's investment in the
Company is credited toward the Fund servicing fee described below. See the table
in Item 11 for the servicing fees attributable to the Fund during the fiscal
years ended December 31, 2002 and 2001.
SERVICING FEES PAID BY THE FUND. Pursuant to a servicing agreement between the
Fund and EV Distributors, the Fund pays a servicing fee to EV Distributors for
providing certain services and information to the Shareholders of the Fund. The
servicing fee is paid on a quarterly basis at an annual rate of 0.20% of the
Fund's average daily net assets. With respect to Shareholders who subscribed
through a subagent, EV Distributors has assigned servicing responsibilities and
fees to the applicable subagent, beginning twelve months after the issuance of
Shares of the Fund to such persons. The Fund's allocated share of the servicing
fee paid by the Company is credited toward the Fund's servicing fee payment,
thereby reducing the amount of the servicing fee payable by the Fund. See the
table in Item 11 for the servicing fees paid or payable by the Fund during the
fiscal years ended December 31, 2002 and 2001.
Item 14. Controls and Procedures.
- ---------------------------------
Within the 90-day period prior to the filing of this report, Eaton Vance and the
Fund's Chief Executive Officer and Chief Financial Officer have conducted an
evaluation of the effectiveness of disclosure controls and procedures pursuant
to Rule 13a-14 under the Securities Exchange Act of 1934, as amended. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are, to the best of their
knowledge, effective in ensuring that all material information required to be
filed in this annual report has been made known to them in a timely fashion.
There have been no significant changes in internal controls, or in factors that
could significantly affect internal controls, subsequent to the date the Chief
Executive Officer and Chief Financial Officer completed their evaluation.
The complete and entire management, control and operation of the Fund are vested
in the Fund's manager, Eaton Vance. The Fund's organizational structure does not
provide for a board of directors or a board audit committee. As such, the Fund's
Chief Executive Officer and Chief Financial Officer intend to report any
significant deficiency in the design or operation of internal controls 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
controls, to Eaton Vance.
29
Part IV
-------
Item 15. Exhibits, Financial Statements and Reports on Form 8-K.
- ----------------------------------------------------------------
(a) The following is a list of all financial statements incorporated by
reference into this report from the Fund's Form 10-K filed March 27,
2002:
(1) (i) Consolidated Portfolio of Investments as of December 31, 2001
Consolidated Statement of Assets and Liabilities as of December
31, 2001
Consolidated Statement of Operations for the fiscal year ended
December 31, 2001
Consolidated Statements of Changes in Net Assets for the fiscal
years ended December 31, 2001 and December 31, 2000
Consolidated Statement of Cash Flows for the fiscal year ended
December 31, 2001
Financial Highlights for the fiscal year ended December 31, 2001
Notes to Consolidated Financial Statements
Independent Auditors' Report dated March 1, 2002
Portfolio of Investments of Tax-Managed Growth Portfolio as of
December 31, 2001
Statement of Assets and Liabilities of Tax-Managed Growth
Portfolio as of December 31, 2001
Statement of Operations of Tax-Managed Growth Portfolio for the
fiscal year ended December 31, 2001
Statements of Changes in Net Assets of Tax-Managed Growth
Portfolio for the fiscal years ended December 31, 2001 and
December 31, 2000
Supplementary Data of Tax-Managed Growth Portfolio for the
fiscal years ended December 31, 2001, December 31, 2000,
December 31, 1999, the two month period ended December 31, 1998,
the fiscal years ended October 31, 1998 and October 31, 1997
Notes to Financial Statements
Independent Auditors' Report dated February 15, 2002
(ii) The following is a list of all financial statements filed as a
part of this report:
Consolidated Portfolio of Investments as of December 31, 2002
Consolidated Statement of Assets and Liabilities as of December
31, 2002
Consolidated Statement of Operations for the fiscal year ended
December 31, 2002
30
Consolidated Statements of Changes in Net Assets for the fiscal
years ended December 31, 2002 and December 31, 2001
Consolidated Statement of Cash Flows for the fiscal year ended
December 31, 2002
Financial Highlights for the fiscal year ended December 31, 2002
Notes to Consolidated Financial Statements
Independent Auditors' Report dated February 28, 2003
Portfolio of Investments of Tax-Managed Growth Portfolio as of
December 31, 2002
Statement of Assets and Liabilities of Tax-Managed Growth
Portfolio as of December 31, 2002
Statement of Operations of Tax-Managed Growth Portfolio for the
fiscal year ended December 31, 2002
Statements of Changes in Net Assets of Tax-Managed Growth
Portfolio for the fiscal years ended December 31, 2002 and
December 31, 2001
Supplementary Data of Tax-Managed Growth Portfolio for the
fiscal years ended December 31, 2002, December 31, 2001,
December 31, 2000, December 31, 1999, the two month period ended
December 31, 1998, and the fiscal year ended October 31, 1998
Notes to Financial Statements
Independent Auditors' Report dated February 14, 2003
(b) Reports on Form 8-K:
None.
(c) A list of the exhibits filed as a part of this Form 10-K is included
in the Exhibit Index appearing on page 96 hereof.
31
BELAIR CAPITAL FUND LLC AS OF DECEMBER 31, 2002
CONSOLIDATED PORTFOLIO OF INVESTMENTS
INVESTMENT IN BELVEDERE CAPITAL FUND
COMPANY LLC -- 71.2 %
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Investment in Belvedere Capital Fund
Company LLC (Belvedere Capital) 10,657,137 $1,361,415,813
- --------------------------------------------------------------------------------
Total Investment in Belvedere Capital
(identified cost, $1,347,698,323) $1,361,415,813
- --------------------------------------------------------------------------------
PARTNERSHIP PREFERENCE UNITS -- 20.4%
SECURITY UNITS VALUE
- --------------------------------------------------------------------------------
Bradley Operating Limited Partnership
(Delaware Limited Partnership affiliate
of Bradley Real Estate, Inc.), 8.875%
Series B Cumulative Redeemable Perpetual
Preferred Units, Callable
from 2/23/04+(1) 1,023,392 $ 22,087,870
Camden Operating, L.P. (Delaware Limited
Partnership affiliate of Camden Property
Trust), 8.50% Series B Cumulative
Redeemable Perpetual Preferred Units,
Callable from 2/23/04+(1) 1,100,000 28,230,400
Colonial Realty Limited Partnership
(Delaware Limited Partnership affiliate
of Colonial Properties Trust), 8.875%
Series B Cumulative Redeemable Perpetual
Preferred Units, Callable from
2/23/04+(1) 970,000 45,404,730
Kilroy Realty, L.P. (Delaware Limited
Partnership affiliate of Kilroy Realty
Corporation), 8.075% Series A Cumulative
Redeemable Preferred Units, Callable
from 2/6/03+(1) 576,000 23,362,387
Liberty Property L.P. (Pennsylvania
Limited Partnership affiliate of Liberty
Property Trust), 9.25% Series B
Cumulative Redeemable Preferred Units,
Callable from 7/28/04+(1) 1,235,000 32,527,430
32
MHC Operating Limited Partnership
(Illinois Limited Partnership affiliate
of Manufactured Home
Communities, Inc.), 9% Series D
Cumulative Redeemable Perpetual
Preference Units, Callable from
9/29/04+(1) 2,000,000 46,972,000
National Golf Operating Partnership,
L.P. (Delaware Limited Partnership
affiliate of National Golf
Properties, Inc.), 8% Series A
Cumulative Redeemable Preferred Units,
Callable from 3/4/03+(1) 740,000 28,120,000
National Golf Operating Partnership,
L.P. (Delaware Limited Partnership
affiliate of National Golf
Properties, Inc.), 9.30% Series B
Cumulative Redeemable Preferred Units,
Callable from 7/28/04+(1) 200,000 3,808,120
PSA Institutional Partners, L.P.
(California Limited Partnership
affiliate of Public Storage, Inc.),
9.50% Series N Cumulative Redeemable
Perpetual Preferred Units, Callable from
3/17/05+(1) 1,930,000 52,505,650
Price Development Company, L.P.
(Maryland Limited Partnership affiliate
of J.P. Realty, Inc.), 8.95% Series B
Cumulative Redeemable Preferred
Partnership Interests, Callable from
7/28/04+(1) 1,225,000 25,785,025
SECURITY UNITS VALUE
- --------------------------------------------------------------------------------
Regency Centers, L.P. (Delaware Limited
Partnership affiliate of Regency Realty
Corporation), 8.125% Series A Cumulative
Redeemable Preferred Units, Callable
from 6/25/03+(1) 600,000 $ 29,438,400
Summit Properties Partnership, L.P.
(Delaware Limited Partnership affiliate
of Summit Properties, Inc.), 8.95%
Series B Cumulative Redeemable Perpetual
Preferred Units, Callable
from 4/29/04+(1) 1,185,000 26,972,970
Urban Shopping Centers, L.P. (Illinois
Limited Partnership affiliate of Urban
Shopping Centers, Inc.), 9.45% Series D
Cumulative Redeemable Perpetual
Preferred Units, Callable
from 10/1/04+(1) 1,000,000 25,981,000
- --------------------------------------------------------------------------------
Total Partnership Preference Units
(identified cost, $408,320,102) $ 391,195,982
- --------------------------------------------------------------------------------
OTHER REAL ESTATE INVESTMENTS -- 8.2%
33
DESCRIPTION VALUE
- --------------------------------------------------------------------------------
Rental Property(1)(2) $ 157,492,935
- --------------------------------------------------------------------------------
Total Other Real Estate Investments
(identified cost, $161,780,255) $ 157,492,935
- --------------------------------------------------------------------------------
COMMERCIAL PAPER -- 0.2%
PRINCIPAL
AMOUNT
SECURITY (000'S OMITTED) VALUE
- --------------------------------------------------------------------------------
General Electric Capital Corp.,
1.25%, 1/2/03 $ 3,427 $ 3,426,881
- --------------------------------------------------------------------------------
Total Commercial Paper
(at amortized cost, $3,426,881) $ 3,426,881
- --------------------------------------------------------------------------------
Total Investments -- 100.0%
(identified cost, $1,921,225,561) $1,913,531,611
- --------------------------------------------------------------------------------
+ Security exempt from registration under the Securities Act of 1933. At
December 31, 2002, the value of these securities totaled $391,195,982, or
31.4% of net assets.
(1) Investment valued at estimated fair value using methods determined in good
faith by or at the direction of the Manager of Belair Real Estate
Corporation.
(2) Rental property represents eleven multi-family residential properties
located in seven states. None of the individual properties represent more
than 5% percent of net assets.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
34
BELAIR CAPITAL FUND LLC AS OF DECEMBER 31, 2002
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF ASSETS
AND LIABILITIES
AS OF DECEMBER 31, 2002
Assets
- --------------------------------------------------------
Total Investments at value (identified
cost, $1,921,225,561) $1,913,531,611
Cash 16,067,430
Escrow deposits -- restricted 1,073,943
Receivable for investments sold 4,952,435
Dividends and interest receivable 5,327,452
Other assets 1,285,939
- --------------------------------------------------------
TOTAL ASSETS $1,942,238,810
- --------------------------------------------------------
Liabilities
- --------------------------------------------------------
Loan payable -- Credit Facility $ 540,769,000
Mortgage payable 112,630,517
Open interest rate swap contracts, at
value 21,367,938
Swap interest payable 5,029,500
Security deposits 403,844
Accrued expenses:
Interest expense 1,787,051
Property taxes 705,965
Other expenses and liabilities 706,227
Minority interests in controlled
subsidiaries 13,031,112
- --------------------------------------------------------
TOTAL LIABILITIES $ 696,431,154
- --------------------------------------------------------
NET ASSETS FOR 13,485,660 FUND SHARES
OUTSTANDING $1,245,807,656
- --------------------------------------------------------
Shareholders' Capital
- --------------------------------------------------------
SHAREHOLDERS' CAPITAL $1,245,807,656
- --------------------------------------------------------
Net Asset Value and Redemption
Price Per Share
- --------------------------------------------------------
($1,245,807,656 DIVIDED BY 13,485,660
FUND SHARES OUTSTANDING) $ 92.38
- --------------------------------------------------------
35
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31, 2002
Investment Income
- -------------------------------------------------------
Dividends allocated from Belvedere
Capital (net of foreign taxes,
$194,904) $ 19,888,322
Interest allocated from Belvedere
Capital 576,172
Expenses allocated from Belvedere
Capital (9,562,739)
- -------------------------------------------------------
Net investment income allocated from
Belvedere Capital $ 10,901,755
Dividends from Partnership Preference
Units 36,939,192
Rental income 30,279,955
Interest 112,970
- -------------------------------------------------------
TOTAL INVESTMENT INCOME $ 78,233,872
- -------------------------------------------------------
Expenses
- -------------------------------------------------------
Investment advisory and administrative
fees $ 5,754,015
Property management fees 1,219,350
Servicing fees 524,356
Interest expense on Credit Facility 12,934,770
Interest expense on mortgages 12,181,277
Interest expense on swap contracts 30,651,200
Property and maintenance expenses 7,659,874
Property taxes and insurance 3,764,231
Amortization of deferred expenses 109,759
Miscellaneous 749,267
- -------------------------------------------------------
TOTAL EXPENSES $ 75,548,099
- -------------------------------------------------------
Net investment income before minority
interests in net income of controlled
subsidiaries $ 2,685,773
Minority interests in net income of
controlled subsidiaries (1,417,363)
- -------------------------------------------------------
NET INVESTMENT INCOME $ 1,268,410
- -------------------------------------------------------
Realized and Unrealized Gain (Loss)
- -------------------------------------------------------
Net realized loss --
Investment transactions from
Belvedere Capital (identified cost
basis) $ (31,519,744)
Investment transactions (identified
cost basis) (39,965)
Investment transactions in
Partnership Preference Units
(identified cost basis) (2,750,237)
Investment transactions in other real
estate investments (8,233,211)
- -------------------------------------------------------
36
NET REALIZED LOSS $ (42,543,157)
- -------------------------------------------------------
Change in unrealized appreciation
(depreciation) --
Investment in Belvedere Capital
(identified cost basis) $(330,192,151)
Investments in Partnership Preference
Units
(identified cost basis) 13,554,433
Investment in other real estate
investments (net of
minority interests in unrealized
loss of controlled subsidiaries of
$293,724) (2,297,611)
Interest rate swap contracts 8,499,765
- -------------------------------------------------------
NET CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) $(310,435,564)
- -------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS $(352,978,721)
- -------------------------------------------------------
NET DECREASE IN NET ASSETS FROM
OPERATIONS $(351,710,311)
- -------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
37
BELAIR CAPITAL FUND LLC AS OF DECEMBER 31, 2002
CONSOLIDATED FINANCIAL STATEMENTS CONT'D
CONSOLIDATED STATEMENTS OF CHANGES
IN NET ASSETS
INCREASE (DECREASE) YEAR ENDED YEAR ENDED
IN NET ASSETS DECEMBER 31, 2002 DECEMBER 31, 2001
- --------------------------------------------------------------------------------
Net investment income $ 1,268,410 $ 5,443,857
Net realized gain (loss) from
investment transactions (42,543,157) 17,059,547
Net change in unrealized appreciation
(depreciation) of investments (310,435,564) (241,417,383)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
FROM OPERATIONS $ (351,710,311) $ (218,913,979)
- --------------------------------------------------------------------------------
Transactions in Fund Shares --
Net asset value of Fund Shares issued
to Shareholders in payment of
distributions declared $ -- $ 7,760,160
Net asset value of Fund
Shares redeemed (90,119,009) (94,749,468)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS FROM FUND
SHARE TRANSACTIONS $ (90,119,009) $ (86,989,308)
- --------------------------------------------------------------------------------
Distributions --
Distributions to Shareholders $ -- $ (17,456,727)
Special Distributions to Shareholders (850) --
- --------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS $ (850) $ (17,456,727)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS $ (441,830,170) $ (323,360,014)
- --------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------
At beginning of year $1,687,637,826 $2,010,997,840
- --------------------------------------------------------------------------------
AT END OF YEAR $1,245,807,656 $1,687,637,826
- --------------------------------------------------------------------------------
38
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED
INCREASE (DECREASE) IN CASH DECEMBER 31, 2002
- ------------------------------------------------------------
Cash Flows From (For) Operating
Activities --
Net decrease in net assets from
operations $ (351,710,311)
Adjustments to reconcile net decrease in
net assets from operations to net
cash flows from operating activities --
Amortization of debt issuance costs 186,738
Amortization of deferred expenses 109,760
Net investment income allocated from
Belvedere Capital (10,901,755)
Increase in dividends and interest
receivable (2,780,383)
Decrease in escrow deposits 363,459
Increase in other assets (218,072)
Increase in interest payable for open
swap contracts 635,352
Decrease in accrued property taxes (706,368)
Decrease in security deposits,
accrued interest and accrued other
expenses and liabilities (1,107,060)
Decrease in cash due to sale of
majority interest in
controlled subsidiary (2,429,734)
Improvements to rental property (1,573,044)
Purchases of Partnership Preference
Units (30,488,829)
Proceeds from sale of investments in
other real estate 34,272,565
Proceeds from sale of Partnership
Preference Units 26,572,965
Net decrease in investment in
Belvedere Capital 17,214,589
Decrease in minority interest (52,500)
Decrease in short-term investments 1,132,894
Minority interests in net income of
controlled subsidiaries 1,417,363
Net realized loss on investment
transactions 42,543,157
Net change in unrealized depreciation
(appreciation) of investments 310,435,564
- ------------------------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 32,916,350
- ------------------------------------------------------------
Cash Flows For Financing Activities --
Repayment of Credit Facility $ (18,000,000)
Payments for Fund Shares redeemed (4,530,910)
Special Distributions (850)
Distributions paid to minority
shareholders (857,554)
- ------------------------------------------------------------
NET CASH FLOWS FOR FINANCING ACTIVITIES $ (23,389,314)
- ------------------------------------------------------------
NET INCREASE IN CASH $ 9,527,036
- ------------------------------------------------------------
39
CASH AT BEGINNING OF YEAR $ 6,540,394
- ------------------------------------------------------------
CASH AT END OF YEAR $ 16,067,430
- ------------------------------------------------------------
Supplemental Disclosure and Non-cash
Investing and Financing Activities
- ------------------------------------------------------------
Interest paid for loan -- Credit
Facility $ 14,020,740
Interest paid for mortgages $ 11,994,539
Interest paid for swap contracts $ 30,015,848
Market value of securities distributed
in payment of redemptions $ 85,588,099
Market value of real property and other
assets, net of current liabilities,
disposed of in conjunction with sale
of real estate investment in Katahdin $ 169,610,451
Mortgages disposed of in conjunction
with sale of real estate investment
in Katahdin $ 115,850,000
- ------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
40
BELAIR CAPITAL FUND LLC AS OF DECEMBER 31, 2002
CONSOLIDATED FINANCIAL STATEMENTS CONT'D
FINANCIAL HIGHLIGHTS
FOR THE YEAR ENDED DECEMBER 31, 2002
- --------------------------------------------------------------------------------
Net asset value -- Beginning of year $ 117.390
- --------------------------------------------------------------------------------
Income (loss) from operations
- --------------------------------------------------------------------------------
Net investment income(5) $ 0.091
Net realized and unrealized loss (25.101)
- --------------------------------------------------------------------------------
TOTAL LOSS FROM OPERATIONS $ (25.010)
- --------------------------------------------------------------------------------
Distributions
- --------------------------------------------------------------------------------
Special Distributions to Belair Capital
Fund LLC Shareholders $(0.000)(8)
- --------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS $ (0.000)
- --------------------------------------------------------------------------------
NET ASSET VALUE -- END OF YEAR $ 92.380
- --------------------------------------------------------------------------------
TOTAL RETURN(1) (21.30)%
- --------------------------------------------------------------------------------
AS A PERCENTAGE OF AS A PERCENTAGE OF
RATIOS AVERAGE NET ASSETS(4) AVERAGE GROSS ASSETS(2)(4)
- --------------------------------------------------------------------------------
Expenses of Consolidated Real
Property Subsidiaries
Interest and other borrowing
costs(3) 0.62% 0.42%
Operating expenses(3) 0.65% 0.45%
Belair Capital Fund LLC Expenses
Interest and other borrowing
costs(6) 3.02% 2.07%
Investment advisory and
administrative fees, servicing
fees and other Fund operating
expenses(6)(7) 1.15% 0.79%
- --------------------------------------------------------------------------------
Total expenses 5.44% 3.73%
Net investment income 0.09% 0.06%
- --------------------------------------------------------------------------------
41
Supplemental Data
- --------------------------------------------------------------------------------
Net assets, end of year (000's omitted) $1,245,808
Portfolio Turnover of Tax-Managed Growth Portfolio 23%
- --------------------------------------------------------------------------------
(1) Returns are calculated by determining the percentage change in net asset
value with all distributions reinvested.
(2) Average Gross Assets is defined as the average daily amount of all assets
of Belair Capital Fund LLC (Belair Capital) (not including its investment
in Belair Real Estate Corporation (Belair Real Estate)) plus all assets of
Belair Real Estate minus the sum of their liabilities other than the
principal amount of money borrowed. For this purpose, the assets and
liabilities of Belair Real Estate's controlled subsidiaries are reduced by
the proportionate interests therein of investors other than Belair Real
Estate.
(3) Includes Belair Real Estate's proportional share of expenses incurred by
its majority-owned subsidiaries (Note 1).
(4) For the purpose of calculating ratios, the income and expenses of Belair
Real Estate's controlled subsidiaries are reduced by the proportionate
interests therein of investors other than Belair Real Estate.
(5) Calculated using average shares outstanding.
(6) Includes the expenses of Belair Capital and Belair Real Estate. Does not
include expenses of other real estate subsidiaries majority-owned by Belair
Real Estate.
(7) Includes Belair Capital's share of Belvedere Capital's allocated expenses,
including those expenses allocated from the Portfolio.
(8) Special distributions amount to less than $0.001 per share.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
42
BELAIR CAPITAL FUND LLC AS OF DECEMBER 31, 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Organization
- -------------------------------------------
A Investment Objective -- 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 Belair Capital shareholders
(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 is 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 real
properties held through joint ventures that are controlled subsidiaries of
Belair Real Estate Corporation (Belair Real Estate).
B Subsidiaries -- Belair Capital invests in real estate through its
subsidiary Belair Real Estate. At December 31, 2002, Belair Real Estate
invested directly in Partnership Preference Units and indirectly in real
property through controlled subsidiaries.
Belair Real Estate -- Belair Real Estate invests directly in Partnership
Preference Units and also holds a majority interest in Bel Residential
Properties Trust (Bel Residential). At December 31, 2002, Belair Capital
owned 100% of the common stock issued by Belair Real Estate and intends to
hold all of Belair Real Estate's common stock at all times. Additionally,
2,100 shares of preferred stock of Belair Real Estate are outstanding at
December 31, 2002. The preferred stock has a par value of $0.01 per share
and is redeemable by Belair Real Estate at a redemption price of $100 per
share after the occurrence of certain tax events or after December 31,
2004. Dividends on the preferred stock are cumulative and payable annually
equal to $8 per share. The interest in preferred stock is recorded as
minority interest on the Consolidated Statement of Assets and Liabilities.
Bel Residential -- Bel Residential, a majority-owned subsidiary of Belair
Real Estate, owns eleven multi-family residential properties consisting of
2,681 units (collectively, the Bel Residential Properties) located in seven
states (Texas, Arizona, Georgia, North Carolina, Washington, Colorado and
Florida). The average occupancy rate was approximately 94% at December 31,
2002. Belair Real Estate owns Class A units of Bel Residential,
representing 75% of the voting interests in Bel Residential, and a minority
shareholder (the Bel Residential Minority Shareholder) owns Class B units,
representing 25% of the voting interests in Bel Residential. The Class B
equity interest is recorded as minority interest on the Consolidated
Statement of Assets and Liabilities. The primary distinctions between the
two classes of shares are the distribution priority and voting rights.
Belair Real Estate has priority in distributions and has greater voting
rights than the holder of Class B units. Pursuant to a buy/ sell agreement
entered into at the time Bel Residential was established, either Belair
Real Estate or the Bel Residential Minority Shareholder can give notice
43
after July 31, 2009, either to buy the other's equity interest in Bel
Residential or to sell its own equity interest in Bel Residential.
Katahdin -- Katahdin Property Trust, LLC (Katahdin) was a majority-owned
subsidiary of Belair Real Estate during the year ended December 31, 2002
but was sold prior to year end. Katahdin owned six multi-family residential
properties consisting of 2,476 units (collectively, the Katahdin
Properties) located in five states (Florida, North Carolina, New Mexico,
Texas and Washington). Belair Real Estate owned 100% of the Class A units
of Katahdin and a minority shareholder (the Katahdin Minority Shareholder)
owned 100% of the Class B units. The units of Katahdin entitled to board of
managers representation were owned 75% by Belair Real Estate and 25% by the
Katahdin Minority Shareholder. The primary distinctions between the two
classes of shares are the distribution priority and voting rights. Belair
Real Estate had priority in distributions and had greater voting rights
than the holder of Class B units. Belair Real Estate does not own an
interest in Katahdin at December 31, 2002.
The accompanying consolidated financial statements include the accounts of
Belair Capital, Belair Real Estate, Bel Residential, and Katahdin (for the
period during which Belair Real Estate maintained an interest in Katahdin)
(collectively, the Fund). All material intercompany accounts and
transactions have been eliminated.
44
BELAIR CAPITAL FUND LLC AS OF DECEMBER 31, 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT'D
The audited financial statements of the Portfolio, including the Portfolio
Investments, are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
2 Significant Accounting Policies
- -------------------------------------------
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its consolidated financial
statements. The policies are in conformity with accounting principles
generally accepted in the United States of America.
A Investment Costs -- The Fund's investment assets were acquired through
contributions of common stock by Shareholders in exchange for Shares of the
Fund, through private purchases of Partnership Preference Units and other
real estate investments, and through contributions of real estate
investments in exchange for cash and minority interests in controlled
subsidiaries. Upon receipt of common stock from Shareholders, Belair
Capital immediately exchanged the contributed securities into Belvedere
Capital for shares thereof, and Belvedere Capital, in turn, immediately
thereafter exchanged the contributed securities into the Portfolio for an
interest in the Portfolio. The cost at which the Fund's investments of
contributed securities is carried in the consolidated financial statements
is the value of the contributed common stock as of the close of business on
the day prior to their contribution to the Fund. The initial tax basis of
the Fund's investment in the Portfolio through Belvedere Capital is the
same as the contributing Shareholders' basis in securities and cash
contributed to the Fund. The initial tax and financial reporting basis of
the Fund's investment in Partnership Preference Units and other real estate
investments purchased by the Fund is the purchase cost. The initial cost at
which the Fund's investment in real estate contributed to the Fund is
carried in the consolidated financial statements is the market value on
contribution date. The initial tax basis of real estate investments
contributed to the Fund is the contributor's tax basis at the time of
contribution or the fair value on the date of contribution, depending on
the taxability of the contribution.
B Investment Valuations -- The Fund's investments may consist of Partnership
Preference Units, other real property investments, shares of Belvedere
Capital and short-term debt securities. Belvedere Capital's only investment
is an interest in the Portfolio, the value of which is derived from a
proportional interest therein. Additionally, the Fund has entered into
interest rate swap agreements (Note 7). The valuation policy followed by
the Fund, Belvedere Capital and the Portfolio is as follows:
Marketable securities, including options, that are listed on foreign or
U.S. securities exchanges or in the NASDAQ National Market System are
valued at closing sale prices on the exchange where such securities are
principally traded. Futures positions on securities or currencies are
generally valued at closing settlement prices. Unlisted or listed
securities for which closing sale prices are not available are valued at
the mean between the latest bid and asked prices. Short-term debt
securities with a remaining maturity of 60 days or less are valued at
amortized cost, which approximates fair value. Other fixed income and debt
securities, including listed securities and securities for which price
quotations are available, are normally valued on the basis of valuations
45
furnished by a pricing service. Investments held by the Portfolio for which
valuations or market quotations are unavailable are valued at fair value
using methods determined in good faith by or at the direction of the
Trustees. Investments held by the Fund for which valuations or market
quotations are unavailable are valued at fair value using methods
determined in good faith by Boston Management and Research (Boston
Management), a wholly-owned subsidiary of Eaton Vance Management (Eaton
Vance), as Investment Adviser of Belair Capital and as Manager of Belair
Real Estate. Interest rate swap contracts for which prices are unavailable
are valued as determined in good faith by Boston Management.
The value of the Fund's real estate investments is determined in good faith
by Boston Management, as Manager of Belair Real Estate, taking into account
all relevant factors, data and information, including, with respect to
investments in Partnership Preference Units, information from dealers and
similar firms with knowledge of such issues and the prices of comparable
preferred equity securities and other fixed or adjustable rate instruments
having similar investment characteristics. Real estate investments, other
than Partnership Preference Units, are generally stated at estimated fair
values based upon independent valuations assuming an orderly disposition of
assets. Detailed investment valuations are performed at least annually and
reviewed periodically. Interim valuations reflect results of operations and
distributions, and may be adjusted if there has been a significant change
in economic circumstances since the most recent independent valuation.
Given that such valuations include many assumptions, including, but not
limited to an orderly disposition of assets, values may differ from amounts
ultimately realized.
46
BELAIR CAPITAL FUND LLC AS OF DECEMBER 31, 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT'D
C Interest Rate Swaps -- Belair Capital has entered into interest rate swap
agreements with respect to its borrowings and real estate investments.
Pursuant to these agreements, Belair Capital makes quarterly payments to
the counterparty at predetermined fixed rates, in exchange for
floating-rate payments from the counterparty at a predetermined spread to
three-month LIBOR. During the terms of the outstanding swap agreements,
changes in the underlying values of the swaps are recorded as unrealized
gains or losses. Belair Capital is exposed to credit loss in the event of
non-performance by the swap counterparty. Risks may also rise from the
unanticipated movements in the value of interest rates.
D Written Options -- The Portfolio and the Fund may write listed and
over-the-counter call options on individual securities, on baskets of
securities and on stock market indices. Upon the writing of a call option,
an amount equal to the premium received by the Portfolio or Fund is
included in the Statement of Assets and Liabilities of the respective
entity as a liability. The amount of the liability is subsequently
marked-to-market to reflect the current value of the option written in
accordance with the investment valuation policies discussed above. Premiums
received from writing options that expire are treated as realized gains.
Premiums received from writing options that are exercised or are closed are
added to or offset against the proceeds or amount paid on the transaction
to determine the realized gain or loss. The Portfolio or Fund, as a writer
of an option, may have no control over whether the underlying securities
may be sold and as a result bears the market risk of an unfavorable change
in the price of the securities underlying the written option.
E Purchased Options -- Upon the purchase of a put option, the premium paid by
the Portfolio or Fund is included in the Statement of Assets and
Liabilities of the respective entity as an investment. The amount of the
investment is subsequently marked-to-market to reflect the current market
value of the option purchased, in accordance with the investment valuation
policies discussed above. If an option which the Portfolio or Fund has
purchased expires on the stipulated expiration date, the Portfolio or Fund
will realize a loss in the amount of the cost of the option. If the
Portfolio or Fund enters into a closing sale transaction, the Portfolio or
Fund will realize a gain or loss, depending on whether the sales proceeds
from the closing sale transaction are greater or less than the cost of the
option. If the Portfolio or Fund exercises a put option, it will realize a
gain or loss from the sale of the underlying security and the proceeds from
such sale will be decreased by the premium originally paid.
F Rental Operations -- The apartment units held by Bel Residential are leased
to residents generally for a term of one year renewable upon consent of
both parties on a year-to-year or month-to-month basis. The apartment units
held by Katahdin were leased to residents generally for a term of one year
or less.
The mortgage escrow accounts consist of deposits for reserves for
replacements and capital repairs that are required under the mortgage
agreements. The mortgage escrow accounts are held by the financial
institution and controlled by the lender (Note 8).
Costs incurred in connection with acquisitions of properties have been
capitalized. Significant betterments and improvements are capitalized as
part of real property.
G Income -- Dividend income is recorded on the ex-dividend date and interest
income is recorded on the accrual basis. Rental income is recorded on the
accrual basis based on the terms of the lease agreements.
47
Belvedere Capital's net investment income or loss consists of Belvedere
Capital's pro rata share of the net investment income of the Portfolio,
less all actual or accrued expenses of Belvedere Capital, determined in
accordance with accounting principles generally accepted in the United
States of America. The Fund's net investment income or loss consists of the
Fund's pro rata share of the net investment income of Belvedere Capital,
plus all income earned on the Fund's direct and indirect investments
(including Partnership Preference Units and other real property), less all
actual and accrued expenses of the Fund determined in accordance with
accounting principles generally accepted in the United States of America.
H Organization Costs and Deferred Expenses -- Costs incurred by Belair
Capital in connection with its organization are being amortized over five
years. Deferred mortgage origination expenses incurred in connection with
the financing of Bel Residential are amortized over the term of the loan.
Deferred loan costs are included in other assets in the accompanying
consolidated financial statements.
I Income Taxes -- Belair Capital, Belvedere Capital and the Portfolio are
treated as partnerships for federal income tax purposes. As a result,
Belair Capital, Belvedere Capital and the Portfolio do not incur federal
income tax liability, and the shareholders and partners thereof are
individually responsible for taxes on items of partnership income, gain,
loss and deduction. The policy of Belair Real Estate and Bel Residential is
48
BELAIR CAPITAL FUND LLC AS OF DECEMBER 31, 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT'D
to comply with the Internal Revenue Code of 1986, as amended, applicable to
REITs. Belair Real Estate and Bel Residential will generally not be subject
to federal income tax to the extent that they each distribute their
earnings to their stockholders each year and maintain their qualification
as a REIT.
J Other -- Investment transactions are accounted for on a trade-date basis.
K Use of Estimates -- The preparation of the financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of income and expense
during the reporting period. Actual results could differ from those
estimates.
3 Distributions to Shareholders
- -------------------------------------------
Belair Capital intends to distribute each year the amount of its net
investment income for the year, if any, and 22% of the amount of its net
realized capital gains for such year, if any, other than precontribution
gains allocated to a Shareholder in connection with a tender offer or other
extraordinary event with respect to a security contributed by that
Shareholder or such Shareholder's predecessor in interest. In addition,
whenever a distribution in respect of a precontribution gain is made,
Belair Capital intends to make a supplemental distribution to compensate
Shareholders receiving such distributions for taxes that may be due on
income specially allocated in connection with the precontribution gain and
supplemental distributions. Capital gain distributions that are made with
respect to realized precontribution gains and the supplemental
distributions (collectively, Special Distributions) will be made solely to
the Shareholders to whom such realized precontribution gain is allocated.
Special Distributions paid or accrued during the year ended December 31,
2002 totaled $850.
In addition, Belair Real Estate and Bel Residential intend to distribute
substantially all of their taxable income earned by the respective entities
during the year.
4 Shareholder Transactions
- -------------------------------------------
Belair Capital may issue an unlimited number of full and fractional Fund
Shares. Transactions in Fund Shares were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
- --------------------------------------------------------------------------------
Issued to Shareholders electing to
receive payment of distributions in
Fund Shares $ -- $ 65,705
Redemptions (890,907) (795,224)
- --------------------------------------------------------------------------------
NET DECREASE (890,907) (729,519)
- --------------------------------------------------------------------------------
49
5 Investment Transactions
- -------------------------------------------
For the year ended December 31, 2002, increases and decreases of Belair
Capital's investment in Belvedere Capital aggregated $84,181,267 and
$191,976,355, respectively. Included in the decrease in the investment in
Belvedere Capital is the receipt of common stock through a
redemption-in-kind that was subsequently sold for $4,952,435. Purchases and
sales of Partnership Preference Units aggregated $30,488,829 and
$26,572,965, respectively, and sales of other real estate investments
aggregated $34,272,565. There were no acquisitions of other real estate
investments for the year ended December 31, 2002.
Purchases and sales of Partnership Preference Units during the year ended
December 31, 2002 include amounts purchased from and sold to other funds
sponsored by Eaton Vance, for which a loss of $2,910,675 was recognized.
During 2002, Belair Real Estate sold its majority interest in Katahdin to
another fund sponsored by Eaton Vance and recognized a loss of $8,233,211.
6 Indirect Investment in Portfolio
- -------------------------------------------
Belvedere Capital's interest in the Portfolio at December 31, 2002 was
$8,753,268,522, representing 60.1% of the Portfolio's net assets. The
Fund's investment in Belvedere Capital at December 31, 2002 was
$1,361,415,813, representing 15.6% of Belvedere Capital's net assets.
Investment income allocated to Belvedere Capital from the Portfolio for the
year ended December 31, 2002 totaled $123,096,851, of which $20,464,494 was
allocated to the Fund. Expenses allocated to Belvedere Capital from the
Portfolio for the year ended December 31, 2002 totaled $42,648,896, of
which $7,133,814 was allocated to the Fund. Belvedere Capital allocated
50
BELAIR CAPITAL FUND LLC AS OF DECEMBER 31, 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT'D
additional expenses to the Fund of $2,428,925 for the year ended December
31, 2002, representing $60,050 of operating expenses and $2,368,875 of
service fees (Note 9).
7 Cancelable Interest Rate Swap Agreements
- -------------------------------------------
Belair Capital has entered into cancelable interest rate swap agreements in
connection with its real estate investments and the associated borrowings.
Under such agreements, Belair Capital has agreed to make periodic payments
at fixed rates in exchange for payments at floating rates. The notional or
contractual amounts of these instruments may not necessarily represent the
amounts potentially subject to risk. The measurement of the risks
associated with these investments is meaningful only when considered in
conjunction with all related assets, liabilities and agreements. As of
December 31, 2002, Belair Capital has entered into cancelable interest rate
swap agreements with Merrill Lynch Capital Services, Inc., as listed below.
NOTIONAL INITIAL UNREALIZED
AMOUNT OPTIONAL FINAL DEPRECIATION AT
(000'S FIXED FLOATING TERMINATION TERMINATION DECEMBER 31,
OMITTED) RATE RATE DATE DATE 2002
- ------------------------------------------------------------------------------
$120,000 6.715% LIBOR + 0.45% 2/03 2/05 $ 592,865
50,000 6.84% LIBOR + 0.45% 2/03 2/05 253,428
150,000 6.835% LIBOR + 0.45% 4/03 4/05 2,209,596
20,000 6.67% LIBOR + 0.45% 6/03 2/05 462,191
75,000 6.68% LIBOR + 0.45% 6/03 2/05 1,736,787
80,000 6.595% LIBOR + 0.45% 6/03 2/05 1,820,237
14,709 6.13% LIBOR + 0.45% 11/03 2/05 553,844
34,951 6.34% LIBOR + 0.45% 2/04 2/05 1,729,610
5,191 6.49% LIBOR + 0.45% 2/04 2/05 269,419
24,902 7.077% LIBOR + 0.45% 7/04 2/05 1,906,989
10,471 7.37% LIBOR + 0.45% 9/04 2/05 922,144
19,149 7.89% LIBOR + 0.45% 2/04 2/05 1,284,855
70,000 7.71% LIBOR + 0.45% -- 2/05 7,625,973
- ------------------------------------------------------------------------------
TOTAL $ 21,367,938
- ------------------------------------------------------------------------------
8 Debt
- -------------------------------------------
A Mortgage -- Rental property held by Belair Real Estate's controlled
subsidiary is financed through a mortgage issued to the controlled
subsidiary. The mortgage is secured by the rental property and is generally
without recourse to the other assets of Belair Capital and Belair Real
Estate. The estimated fair value of the rental property securing the loan
is $157,492,935 at December 31, 2002. The balance outstanding at December
31, 2002, is as follows:
51
ANNUAL MONTHLY
INTEREST INTEREST BALANCE AT
MATURITY DATE RATE PAYMENT* DECEMBER 31, 2002
- ---------------------------------------------------------------
May 1, 2010 8.33% $781,844 $ 112,630,517
- ---------------------------------------------------------------
$781,844 $ 112,630,517
- ---------------------------------------------------------------
* Mortgage provides for monthly payments of interest only through the
maturity date with the entire principal balance due on the maturity date.
The estimated market value of the mortgage note payable is approximately
$132,000,000 at December 31, 2002. The mortgage note payable cannot be
prepaid or otherwise disposed of without incurring a substantial prepayment
penalty or without the sale of the rental property financed by the mortgage
note payable. Management has no current plans to prepay or otherwise
dispose of the mortgage note payable or sell the related rental property
prior to the maturity date. The market value of the mortgage is based on
estimates using discounted cash flow analysis and currently prevailing
rates. Considerable judgment is necessary in interpreting market data to
develop estimates at market value. The use of different assumptions or
estimation methodologies may have a material effect on the estimated market
value.
B Credit Facility -- Belair Capital has obtained a $790,000,000 credit
facility (the Credit Facility), which includes the ability of Belair
Capital to utilize letters of credit, with an initial term of seven years
from Merrill Lynch International Bank Limited (MLIB). Belair Capital's
obligations under the Credit Facility are secured by a pledge of its
assets, excluding the assets of Bel Residential and Katahdin (for the
period during which Belair Capital maintained an indirect interest in
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 and
fees on letters of credit are charged at a rate of 0.80% 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
52
BELAIR CAPITAL FUND LLC AS OF DECEMBER 31, 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT'D
December 31, 2002, borrowings outstanding under the Credit Facility totaled
$540,769,000. At December 31, 2002 a letter of credit in the amount of
$1,354,068 is outstanding and was issued as a substitute for funding
certain mortgage escrow accounts required by the lender of Bel Residential.
The letter of credit expires on April 8, 2003 and automatically extends for
one-year periods, not to extend beyond January 27, 2005.
9 Management Fee and Other Transactions with Affiliates
- -------------------------------------------
Belair Capital and the Portfolio have engaged Boston Management as
Investment Adviser. Under the terms of the advisory agreement with the
Portfolio, Boston Management receives a monthly 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 year ended December 31, 2002, the advisory fee applicable to the
Portfolio was 0.44% of average daily net assets. Belvedere Capital's
allocated portion of the advisory fee was $41,180,780 of which $6,885,848
was allocated to Belair Capital for the year ended December 31, 2002.
In addition, Belair Capital pays Boston Management a monthly advisory and
administrative fee of 1/20 of 1% (0.60% annually) of the average daily
gross assets of Belair Capital. The term "gross assets" is defined to
include the value of all assets of Belair Capital, other than Belair
Capital's investment in Belair Real Estate, minus the sum of Belair
Capital's liabilities other than the principal amount of money borrowed.
Belair Real Estate pays Boston Management a monthly management fee at a
rate of 1/20th of 1% (equivalent to 0.60% annually) of the average daily
gross assets of Belair Real Estate. The term "gross assets" is defined to
include all assets of Belair Real Estate minus the sum of Belair Real
Estate's liabilities other than the principal amount of money borrowed. For
this purpose, the assets and liabilities of Belair Real Estate's controlled
subsidiaries are reduced by the proportionate interests therein of
investors other than Belair Real Estate. For the year ended December 31,
2002, the advisory and administrative fee accrued or paid to Boston
Management by Belair Capital plus the management fee paid or accrued to
Boston Management by Belair Real Estate, totaled $5,754,015.
Eaton Vance and Boston Management do not receive separate compensation for
serving as Manager of Belair Capital and Manager of Belvedere Capital,
respectively.
Pursuant to a servicing agreement between Belvedere Capital and Eaton Vance
Distributors, Inc. (EV Distributors), Belvedere Capital pays a servicing
fee to EV Distributors 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
$14,167,556 for the year ended December 31, 2002 of which $2,368,875 was
allocated to Belair Capital. Pursuant to a servicing agreement between
Belair Capital and EV Distributors, Belair Capital pays a servicing fee to
EV Distributors 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 year ended
December 31,2002, the servicing fee paid directly by Belair Capital totaled
$524,356. Of the amounts allocated to and incurred by Belair Capital, for
the year ended December 31, 2002, $2,887,542 was paid or accrued to
subagents.
Management services for the real property held by Bel Residential and
Katahdin are provided by an affiliate of each respective entity's Minority
Shareholder (Note 1B). Each management agreement provides for a management
53
fee and allows for reimbursement of payroll expenses incurred by the
managers in conjunction with managing each respective entity's properties.
For the year ended December 31, 2002, Belair Real Estate's controlled
subsidiaries paid or accrued property management fees of $1,219,350.
10 Segment Information
- -------------------------------------------
Belair Capital pursues its investment objective primarily by investing
indirectly in the Portfolio through Belvedere Capital. The Portfolio is a
diversified investment company of equity securities that emphasizes
investments in common stocks of domestic and foreign growth companies that
are considered to be high in quality and attractive in their long-term
investment prospects. Separate from its investment in Belvedere Capital,
Belair Capital invests in real estate assets through its subsidiary Belair
Real Estate. Belair Real Estate invests directly in Partnership Preference
Units and indirectly in real property through controlled subsidiaries, Bel
Residential and Katahdin (Note 1).
Belair 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 or loss, net realized gain
(loss), and unrealized gain (loss). The accounting policies of the
reportable segments are the same as those for Belair Capital on a
consolidated basis (Note 2). No reportable segments have been aggregated.
Reportable information by segment is as follows:
54
BELAIR CAPITAL FUND LLC AS OF DECEMBER 31, 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT'D
TAX-MANAGED
FOR THE YEAR ENDED GROWTH REAL
DECEMBER 31, 2002 PORTFOLIO* ESTATE TOTAL
- ------------------------------------------------------------------------------
Revenues $ 10,901,755 $ 67,294,016 $ 78,195,771
Interest expense on mortgages -- (12,181,277) (12,181,277)
Interest expense on Credit
Facility -- (12,676,075) (12,676,075)
Interest expense on swap
contracts -- (30,651,200) (30,651,200)
Operating expenses (2,402,565) (16,449,616) (18,852,181)
Minority interest in net
income of controlled
subsidiaries -- (1,417,363) (1,417,363)
- ------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) $ 8,499,190 $ (6,081,515) $ 2,417,675
Net realized loss (31,559,709) (10,983,448) (42,543,157)
Change in unrealized gain
(loss) (330,192,151) 19,756,587 (310,435,564)
- -----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS OF
REPORTABLE SEGMENTS $ (353,252,670) $ 2,691,624 $ (350,561,046)
- ------------------------------------------------------------------------------
Segment assets $1,366,368,248 $ 558,359,888 $1,924,728,136
Segment liabilities -- 685,527,420 685,527,420
- ------------------------------------------------------------------------------
NET ASSETS OF
REPORTABLE SEGMENTS $1,366,368,248 $(127,167,532) $1,239,200,716
- ------------------------------------------------------------------------------
* Belair Capital indirectly invests in Tax-Managed Growth Portfolio through
its investment in Belvedere Capital.
The following tables reconcile the reported segment information to the
consolidated financial statements for the year ended December 31, 2002:
--------------------------------------------------------
Revenue:
Revenues from reportable segments $ 78,195,771
Unallocated revenue 38,101
--------------------------------------------------------
TOTAL REVENUE $ 78,233,872
--------------------------------------------------------
Net increase (decrease) in net assets
from operations:
Net decrease in net assets from
operations of reportable segments $ (350,561,046)
Unallocated revenue 38,101
Unallocated expenses (1,187,366)
--------------------------------------------------------
TOTAL NET DECREASE IN NET ASSETS FROM
OPERATIONS $ (351,710,311)
--------------------------------------------------------
55
Net assets:
Net assets of reportable segments $1,239,200,716
Unallocated cash 14,074,693
Short-term investments 3,426,881
Other assets 9,100
Loan payable -- Credit Facility (10,815,380)
Other liabilities (88,354)
--------------------------------------------------------
TOTAL NET ASSETS $1,245,807,656
--------------------------------------------------------
56
BELAIR CAPITAL FUND LLC AS OF DECEMBER 31, 2002
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS
OF BELAIR CAPITAL FUND LLC AND SUBSIDIARIES:
- ---------------------------------------------
We have audited the accompanying consolidated statement of assets and
liabilities, including the consolidated portfolio of investments, of Belair
Capital Fund LLC and Subsidiaries (collectively, the Fund), as of December 31,
2002, and the related consolidated statements of operations and cash flows for
the year then ended, the consolidated statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
the year then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 2002 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of the Fund as of December 31, 2002 and the results of its operations,
the changes in its net assets, its cash flows, and the financial highlights for
the respective stated periods in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 28, 2003
57
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
PORTFOLIO OF INVESTMENTS
COMMON STOCKS -- 98.9%
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Aerospace and Defense -- 3.0%
- --------------------------------------------------------------------------------
Boeing Company (The) 785,510 $ 25,913,975
General Dynamics 2,655,000 210,727,350
Honeywell International, Inc. 292,998 7,031,952
Northrop Grumman Corp. 1,084,235 105,170,795
Raytheon Company 313,599 9,643,169
Rockwell Collins, Inc. 203,032 4,722,524
United Technologies Corp. 1,205,679 74,679,757
- --------------------------------------------------------------------------------
$ 437,889,522
- --------------------------------------------------------------------------------
Air Freight and Logistics -- 2.7%
- --------------------------------------------------------------------------------
FedEx Corporation 2,306,578 $ 125,062,659
Robinson (C.H.) Worldwide, Inc. 1,203,674 37,554,629
United Parcel Service, Inc. Class B 3,640,273 229,628,421
- --------------------------------------------------------------------------------
$ 392,245,709
- --------------------------------------------------------------------------------
Airlines -- 0.0%
- --------------------------------------------------------------------------------
Southwest Airlines, Inc. 17,221 $ 239,372
- --------------------------------------------------------------------------------
$ 239,372
- --------------------------------------------------------------------------------
Auto Components -- 0.2%
- --------------------------------------------------------------------------------
ArvinMeritor, Inc. 33,635 $ 560,695
Borg-Warner Automotive, Inc. 203,981 10,284,722
Dana Corp. 46,137 542,571
Delphi Automotive Systems Corp. 6,338 51,021
Federal Signal Corp. 283,471 5,505,007
Johnson Controls, Inc. 128,040 10,264,967
Visteon Corp. 15,135 105,340
- --------------------------------------------------------------------------------
$ 27,314,323
- --------------------------------------------------------------------------------
Automobiles -- 0.3%
- --------------------------------------------------------------------------------
DaimlerChrysler AG 7,000 $ 214,550
Ford Motor Co. 146,202 1,359,679
General Motors Corp. 13,896 512,207
Harley-Davidson, Inc. 714,700 33,019,140
Honda Motor Co. Ltd. ADR 20,000 361,200
- --------------------------------------------------------------------------------
$ 35,466,776
- --------------------------------------------------------------------------------
Banks -- 8.8%
- --------------------------------------------------------------------------------
AmSouth Bancorporation 832,318 $ 15,980,506
58
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Banks (continued)
- --------------------------------------------------------------------------------
Associated Banc-Corp. 749,148 $ 25,426,083
Bank of America Corporation 1,996,299 138,882,521
Bank of Hawaii Corp. 49,425 1,502,026
Bank of Montreal 271,403 7,197,608
Bank of New York Co., Inc. (The) 454,051 10,879,062
Bank One Corp. 1,526,487 55,793,100
Banknorth Group, Inc. 65,720 1,485,272
BB&T Corp. 1,169,217 43,249,337
Charter One Financial, Inc. 251,896 7,236,972
City National Corp. 273,260 12,020,707
Colonial Bancgroup, Inc. (The) 396,090 4,725,354
Comerica, Inc. 222,464 9,619,343
Commerce Bancshares, Inc. 179,374 7,047,604
Community First Bancshares, Inc. 360,184 9,530,469
Compass Bancshares, Inc. 359,763 11,249,789
Credit Suisse Group(1) 155,136 3,364,598
Fifth Third Bancorp 1,047,527 61,332,706
First Citizens BancShares, Inc. 48,696 4,704,034
First Financial Bancorp. 48,948 802,307
First Midwest Bancorp, Inc. 815,329 21,777,438
First Tennessee National Corporation 70,143 2,520,939
FleetBoston Financial Corporation 708,165 17,208,409
Golden West Financial Corporation 121,800 8,746,458
GreenPoint Financial Corp. 620,983 28,056,012
GreenPoint Financial Corp.(2)(3) 100,000 4,516,306
Hibernia Corp. Class A 187,345 3,608,265
Huntington Bancshares, Inc. 578,423 10,822,294
Investors Financial Services Corp. 475,402 13,021,261
Keycorp 651,954 16,390,124
M&T Bank Corp. 39,116 3,103,855
Marshall & Ilsley Corp. 683,798 18,722,389
Mellon Financial Corporation 221,912 5,794,122
National City Corp. 1,288,252 35,195,045
National Commerce Financial Corp. 1,113,055 26,546,362
North Fork Bancorporation, Inc. 53,534 1,806,237
Northern Trust Corp. 221,188 7,752,639
PNC Bank Corp. 150,003 6,285,126
Popular, Inc. 716 24,201
Regions Financial Corp. 1,624,786 54,202,861
Royal Bank of Canada 438,749 16,119,638
Royal Bank of Scotland Group PLC 52,322 1,253,156
SEE NOTES TO FINANCIAL STATEMENTS
59
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
PORTFOLIO OF INVESTMENTS CONT'D
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Banks (continued)
- --------------------------------------------------------------------------------
Royal Bank of Scotland Group PLC
(A.V.S.) 50,837 $ 44,800
S&T Bancorp, Inc. 100,000 2,505,100
Societe Generale 809,647 47,117,023
SouthTrust Corp. 331,989 8,249,927
Southwest Bancorporation of Texas,
Inc.(1) 815,601 23,497,465
Sovereign Bancorporation, Inc. 26,692 375,023
SunTrust Banks, Inc. 404,246 23,009,682
Synovus Financial Corp. 1,303,564 25,289,142
TCF Financial Corporation 28,000 1,223,320
U.S. Bancorp 4,363,624 92,596,101
UBS AG(1) 32,525 1,565,103
Union Planters Corp. 725,968 20,428,740
Valley National Bancorp 382,725 10,092,458
Wachovia Corp. 1,704,138 62,098,789
Washington Mutual, Inc. 2,083,493 71,943,013
Wells Fargo & Company 2,670,930 125,186,489
Westamerica Bancorporation 266,506 10,708,211
Whitney Holding Corp. 359,920 11,996,134
Zions Bancorporation 227,671 8,958,626
- --------------------------------------------------------------------------------
$ 1,282,387,681
- --------------------------------------------------------------------------------
Beverages -- 4.3%
- --------------------------------------------------------------------------------
Anheuser-Busch Companies, Inc. 3,192,296 $ 154,507,126
Coca-Cola Company (The) 3,873,680 169,744,658
Coca-Cola Enterprises, Inc. 1,729,424 37,563,089
Panamerican Beverages, Inc. 80,000 1,662,400
PepsiCo., Inc. 6,158,804 260,024,705
- --------------------------------------------------------------------------------
$ 623,501,978
- --------------------------------------------------------------------------------
Biotechnology -- 1.5%
- --------------------------------------------------------------------------------
Amgen, Inc.(1) 3,354,935 $ 162,177,558
Applera Corp. - Celera Genomics Group(1) 26,000 248,300
Genzyme Corp. - General Division(1) 1,325,812 39,204,261
Gilead Sciences, Inc.(1) 77,490 2,634,660
Incyte Pharmaceuticals, Inc.(1) 1,118,525 5,100,474
Invitrogen Corp.(1) 179,449 5,614,959
Vertex Pharmaceuticals, Inc.(1) 13,000 206,050
- --------------------------------------------------------------------------------
$ 215,186,262
- --------------------------------------------------------------------------------
60
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Building Products -- 0.7%
- --------------------------------------------------------------------------------
American Standard Companies, Inc.(1) 331,609 $ 23,590,664
Masco Corporation 3,895,436 81,998,928
- --------------------------------------------------------------------------------
$ 105,589,592
- --------------------------------------------------------------------------------
Chemicals -- 1.1%
- --------------------------------------------------------------------------------
Airgas, Inc.(1) 469,801 $ 8,104,067
Arch Chemicals, Inc. 4,950 90,337
Bayer AG ADR 40,000 866,000
Dow Chemical Co. (The) 251,078 7,457,017
DuPont (E.I.) de Nemours & Co. 1,252,589 53,109,774
Eastman Chemical Co. 148 5,442
Ecolab, Inc. 300,326 14,866,137
International Flavors & Fragrances, Inc. 50,247 1,763,670
MacDermid, Inc. 61,937 1,415,260
Monsanto Company 94,435 1,817,874
Olin Corp. 9,900 153,945
PPG Industries, Inc. 23,742 1,190,661
Rohm and Haas, Co. 2,380 77,302
RPM, Inc. 470,138 7,183,709
Sigma-Aldrich Corp. 630,897 30,724,684
Solutia Inc. 99,629 361,653
Syngenta AG(1) 10,030 115,546
Valspar Corp. 818,316 36,153,201
- --------------------------------------------------------------------------------
$ 165,456,279
- --------------------------------------------------------------------------------
Commercial Services and Supplies -- 5.0%
- --------------------------------------------------------------------------------
Allied Waste Industries, Inc.(1) 1,675,000 $ 16,750,000
Apollo Group, Inc. Class A(1) 7,599 334,356
Arbitron, Inc.(1) 30,885 1,034,647
Automatic Data Processing, Inc. 4,747,523 186,340,278
Avery Dennison Corp. 1,332,004 81,358,804
Banta Corp. 42,341 1,324,003
BISYS Group, Inc. (The)(1) 280,492 4,459,823
Block (H&R), Inc. 732,354 29,440,631
Bowne & Company 172,640 2,063,048
Cendant Corp.(1) 549,359 5,757,282
Century Business Services, Inc.(1) 400,000 1,060,000
Ceridian Corp.(1) 166,750 2,404,535
Certegy, Inc.(1) 42,862 1,052,262
Cintas Corp. 1,020,305 46,678,954
Concord EFS, Inc.(1) 531,454 8,365,086
SEE NOTES TO FINANCIAL STATEMENTS
61
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
PORTFOLIO OF INVESTMENTS CONT'D
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Commercial Services and Supplies (continued)
- --------------------------------------------------------------------------------
Consolidated Graphics, Inc.(1) 70,215 $ 1,562,284
CSG Systems International, Inc.(1) 41,116 561,233
Deluxe Corporation 80,675 3,396,417
Donnelley (R.R.) & Sons Co. 200,521 4,365,342
DST Systems, Inc.(1) 391,034 13,901,259
eFunds Corp.(1) 44,484 405,249
Equifax, Inc. 85,724 1,983,653
First Data Corp. 4,150,162 146,957,236
Gevity HR, Inc. 78,125 316,406
Harland (John H.) Co. 51,540 1,140,580
HON Industries, Inc. 1,561,853 44,169,203
Imagistics International Inc.(1) 2,482 49,640
Manpower, Inc. 112,000 3,572,800
Miller (Herman) Inc. 577,903 10,633,415
Navigant Consulting, Inc.(1) 496,795 2,931,090
Navigant International, Inc.(1) 44,278 545,948
Paychex, Inc. 1,548,895 43,214,170
Pitney Bowes, Inc. 89,799 2,932,835
Proquest Company(1) 115,000 2,254,000
ServiceMaster Co. 938,668 10,419,215
Spherion Corp.(1) 90,000 603,000
Steelcase Inc. 123,000 1,348,080
Sylvan Learning Systems, Inc.(1) 815,396 13,372,494
Waste Management, Inc. 1,310,285 30,031,732
- --------------------------------------------------------------------------------
$ 729,090,990
- --------------------------------------------------------------------------------
Communications Equipment -- 1.2%
- --------------------------------------------------------------------------------
3Com Corp.(1) 873,949 $ 4,046,384
ADC Telecommunications, Inc.(1) 370,286 773,899
Advanced Fibre Communication, Inc.(1) 15,000 250,200
Alcatel S.A. ADR 43,728 194,152
Avaya, Inc.(1) 65,196 159,730
Ciena Corp.(1) 380,378 1,955,143
Cisco Systems, Inc.(1) 3,718,338 48,710,228
Comverse Technology, Inc.(1) 386,378 3,871,508
Corning, Inc.(1) 705,943 2,336,671
Enterasys Networks, Inc.(1) 61,088 95,297
JDS Uniphase Corp.(1) 266,080 657,218
Lucent Technologies, Inc.(1) 654,299 824,417
McData Corp., Class A(1) 22,604 160,488
Motorola, Inc. 604,394 5,228,008
Nokia Corp., Class A, ADR 6,050,307 93,779,758
62
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Communications Equipment (continued)
- --------------------------------------------------------------------------------
Nortel Networks Corp.(1) 1,663,151 $ 2,677,673
Qualcomm, Inc.(1) 344,112 12,522,236
Riverstone Networks, Inc.(1) 31,344 66,449
Tellabs, Inc.(1) 118,404 860,797
- --------------------------------------------------------------------------------
$ 179,170,256
- --------------------------------------------------------------------------------
Computers and Peripherals -- 3.2%
- --------------------------------------------------------------------------------
Dell Computer Corp.(1) 3,963,089 $ 105,973,000
EMC Corp.(1) 1,014,343 6,228,066
Gateway, Inc.(1) 99,407 312,138
Hewlett-Packard Co. 2,235,064 38,800,711
International Business Machines Corp. 1,442,028 111,757,170
Lexmark International Group, Inc.(1) 3,269,528 197,806,444
Network Appliance, Inc.(1) 488,000 4,880,000
Palm, Inc.(1) 65,230 1,024,111
Sun Microsystems, Inc.(1) 537,670 1,672,154
- --------------------------------------------------------------------------------
$ 468,453,794
- --------------------------------------------------------------------------------
Construction and Engineering -- 0.1%
- --------------------------------------------------------------------------------
Dycom Industries, Inc.(1) 160,464 $ 2,126,148
Jacobs Engineering Group, Inc.(1) 325,090 11,573,204
Salient 3 Communications, Inc., Class A 78,125 54,687
- --------------------------------------------------------------------------------
$ 13,754,039
- --------------------------------------------------------------------------------
Construction Materials -- 0.1%
- --------------------------------------------------------------------------------
CRH plc 329,450 $ 4,076,249
Vulcan Materials Company 184,512 6,919,200
- --------------------------------------------------------------------------------
$ 10,995,449
- --------------------------------------------------------------------------------
Containers and Packaging -- 0.1%
- --------------------------------------------------------------------------------
Bemis Co. 141,000 $ 6,997,830
Caraustar Industries, Inc.(1) 264,862 2,510,892
Sealed Air Corp.(1) 174,914 6,524,292
Sonoco Products Co. 160,690 3,684,622
Temple-Inland, Inc. 12,632 566,040
- --------------------------------------------------------------------------------
$ 20,283,676
- --------------------------------------------------------------------------------
Distillers and Vintners -- 0.0%
- --------------------------------------------------------------------------------
Brown-Forman Corp. Class A 15,296 $ 1,024,832
- --------------------------------------------------------------------------------
$ 1,024,832
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
63
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
PORTFOLIO OF INVESTMENTS CONT'D
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Distributors -- 0.0%
- --------------------------------------------------------------------------------
Genuine Parts Company 188,609 $ 5,809,157
- --------------------------------------------------------------------------------
$ 5,809,157
- --------------------------------------------------------------------------------
Diversified Financials -- 5.8%
- --------------------------------------------------------------------------------
Affiliated Managers Group(1) 13,680 $ 688,104
American Express Co. 925,031 32,699,846
Bear Stearns Companies, Inc. 16,237 964,478
Capital One Financial Corp. 1,270,025 37,745,143
Citigroup Inc. 4,258,531 149,857,706
E*Trade Group, Inc.(1) 288,290 1,401,089
Fannie Mae 1,187,100 76,366,143
Federated Investors, Inc. 1,634,947 41,478,605
Finova Group, Inc.(1) 175,587 28,094
Franklin Resources, Inc. 1,903,317 64,865,043
Freddie Mac 180,047 10,631,775
Goldman Sachs Group, Inc. 9,627 655,599
Household International, Inc. 1,102,873 30,670,898
ING groep, N.V. ADR 210,570 3,545,999
Knight Trading Group, Inc.(1) 1,750,000 8,382,500
Legg Mason, Inc. 17,641 856,294
Lehman Brothers Holdings, Inc. 55,756 2,971,237
MBNA Corporation 391,431 7,445,018
Merrill Lynch & Co., Inc. 1,869,290 70,939,555
Moody's Corp. 20,004 825,965
Morgan (J.P.) Chase & Co. 432,106 10,370,544
Morgan Stanley Dean Witter & Co. 4,625,985 184,669,321
Morgan Stanley Dean Witter & Co.(2)(3) 150,000 5,982,760
Nuveen (John) Co. 150,000 3,802,500
Price (T. Rowe) Group, Inc. 171,926 4,690,141
Providian Financial Corp.(1) 597,678 3,878,930
Raymond James Financial, Inc. 98,225 2,905,495
Schwab (Charles) & Co. 998,190 10,830,361
SLM Corp. 601,833 62,506,375
State Street Corp. 328,000 12,792,000
Stilwell Financial, Inc.(1) 95,458 1,247,636
Waddell & Reed Financial, Inc., Class A 150,751 2,965,272
- --------------------------------------------------------------------------------
$ 849,660,426
- --------------------------------------------------------------------------------
Diversified Telecommunication Services -- 2.5%
- --------------------------------------------------------------------------------
Alltel Corp. 1,663,732 $ 84,850,332
At Home Corporation Series A(1)(2) 371,895 744
64
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Diversified Telecommunication Services (continued)
- --------------------------------------------------------------------------------
AT&T Corp. 473,339 $ 12,358,881
BCE, Inc. 4,000,000 72,040,000
BellSouth Corp. 1,460,642 37,786,809
Broadwing, Inc.(1) 324,311 1,141,575
Citizens Communications Co.(1) 59,563 628,390
Deutsche Telekom AG 1,684,272 21,390,254
ITC DeltaCom, Inc.(1) 6,373 14,849
McLeodUSA(1) 35,538 29,852
NTL, Inc.(1) 400,390 6,406
PTEK Holdings, Inc.(1) 28,000 123,200
Qwest Communications International,
Inc.(1) 59,924 299,620
RSL Communications Ltd.(1) 747,161 97
SBC Communications, Inc. 2,622,841 71,105,219
Sprint Corp. - FON Group 150,796 2,183,526
Talk America Holdings, Inc.(1) 82,458 461,765
Verizon Communications 1,345,782 52,149,053
WorldCom, Inc.(1) 232,818 32,129
WorldCom, Inc. - MCI Group 46,372 8,347
- --------------------------------------------------------------------------------
$ 356,611,048
- --------------------------------------------------------------------------------
Electric Utilities -- 0.2%
- --------------------------------------------------------------------------------
Ameren Corp. 5,000 $ 207,850
American Electric Power, Inc. 960 26,237
Dominion Resources, Inc. 10,464 574,474
Exelon Corp. 500,000 26,385,000
PG&E Corp.(1) 47,705 663,100
TECO Energy, Inc. 40,000 618,800
TXU Corp. 250,196 4,673,661
Wisconsin Energy Corp. 9,576 241,315
- --------------------------------------------------------------------------------
$ 33,390,437
- --------------------------------------------------------------------------------
Electrical Equipment -- 0.5%
- --------------------------------------------------------------------------------
American Power Conversion Corp.(1) 36,671 $ 555,566
Baldor Electric Co. 149,060 2,943,935
Emerson Electric Co. 1,048,511 53,316,784
Energizer Holdings(1) 141,981 3,961,270
Rockwell International Corp. 179,520 3,717,859
Thomas & Betts Corp.(1) 114,600 1,936,740
- --------------------------------------------------------------------------------
$ 66,432,154
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
65
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
PORTFOLIO OF INVESTMENTS CONT'D
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Electronic Equipment and Instruments -- 0.5%
- --------------------------------------------------------------------------------
Agilent Technologies, Inc.(1) 218,644 $ 3,926,846
Arrow Electronics, Inc.(1) 8,750 111,913
Flextronics International Ltd.(1) 182,816 1,497,263
Jabil Circuit, Inc.(1) 2,127,971 38,133,240
Millipore Corporation(1) 101,440 3,448,960
Molex, Inc., Class A 112,582 2,239,256
PerkinElmer, Inc. 300,081 2,475,668
Plexus Corp.(1) 209,946 1,843,326
Roper Industries, Inc. 23,122 846,265
Sanmina Corp.(1) 1,186,972 5,329,504
Solectron Corporation(1) 1,818,848 6,456,910
Teledyne Technologies Incorporated(1) 6,117 95,915
Waters Corp.(1) 198,320 4,319,410
X-Rite Incorporated 361,707 2,528,332
- --------------------------------------------------------------------------------
$ 73,252,808
- --------------------------------------------------------------------------------
Energy Equipment and Services -- 1.2%
- --------------------------------------------------------------------------------
Baker Hughes, Inc. 520,182 $ 16,744,659
Core Laboratories N.V.(1) 205,000 2,326,750
Grant Prideco, Inc.(1) 160,681 1,870,327
Halliburton Company 502,602 9,403,683
Nabors Industries, Ltd.(1) 223,291 7,875,474
National-Oilwell, Inc.(1) 686,929 15,002,529
Schlumberger Ltd. 2,370,713 99,783,310
Smith International, Inc.(1) 140,000 4,566,800
Transocean Sedco Forex, Inc. 71,442 1,657,454
Weatherford International Ltd.(1) 188,681 7,534,032
- --------------------------------------------------------------------------------
$ 166,765,018
- --------------------------------------------------------------------------------
Food and Drug Retailing -- 2.0%
- --------------------------------------------------------------------------------
Albertson's, Inc. 820,296 $ 18,259,789
Casey's General Stores, Inc. 91,201 1,113,564
CVS Corp. 193,763 4,838,262
Kroger Co. (The)(1) 1,113,221 17,199,264
Safeway, Inc.(1) 1,210,097 28,267,866
Sysco Corp. 6,819,724 203,159,578
Walgreen Co. 631,784 18,441,775
Winn-Dixie Stores, Inc. 271,444 4,147,664
- --------------------------------------------------------------------------------
$ 295,427,762
- --------------------------------------------------------------------------------
66
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Food Products -- 3.5%
- --------------------------------------------------------------------------------
Archer-Daniels-Midland Co. 316,652 $ 3,926,485
Campbell Soup Co. 1,243,047 29,174,313
Conagra Inc. 1,654,583 41,381,121
Dean Foods Co.(1) 336,144 12,470,942
Del Monte Foods, Co.(1) 103,109 793,939
General Mills, Inc. 253,123 11,884,125
Heinz (H.J.) Co. 230,876 7,588,894
Hershey Foods Corp. 243,006 16,388,325
JM Smucker Co. 19,342 770,005
Kellogg Co. 80,407 2,755,548
Kraft Foods, Inc. 387,000 15,065,910
McCormick & Co., Inc. 482,002 11,182,446
Nestle SA 200,000 42,363,998
Riviana Foods, Inc. 250,000 6,755,250
Sara Lee Corp. 5,587,965 125,785,092
Smithfield Foods, Inc.(1) 4,207,530 83,477,395
Tyson Foods, Inc. 405,548 4,550,249
Unilever ADR 1,100,000 67,881,000
Wrigley (Wm.) Jr. Company Class A 444,868 24,414,356
- --------------------------------------------------------------------------------
$ 508,609,393
- --------------------------------------------------------------------------------
Gas Utilities -- 0.5%
- --------------------------------------------------------------------------------
Kinder Morgan, Inc. 1,788,072 $ 75,581,803
- --------------------------------------------------------------------------------
$ 75,581,803
- --------------------------------------------------------------------------------
Health Care Equipment and Supplies -- 1.7%
- --------------------------------------------------------------------------------
Advanced Medical Optics 7,631 $ 91,343
Bausch & Lomb, Inc. 145,054 5,221,944
Baxter International, Inc. 3,059,912 85,677,536
Becton & Dickinson and Co. 89,913 2,759,430
Biomet, Inc. 411,340 11,789,004
Boston Scientific Corporation(1) 540,985 23,002,682
Dentsply International, Inc. 11,325 421,290
Edwards Lifesciences Corp.(1) 29,878 760,993
Guidant Corp.(1) 54,616 1,684,904
Hillenbrand Industries, Inc. 647,179 31,265,217
Lumenis Ltd.(1) 112,000 224,000
Medtronic, Inc. 1,692,376 77,172,346
St. Jude Medical, Inc.(1) 10,014 397,756
Steris Corp.(1) 36,246 878,966
VISX, Inc.(1) 50,000 479,000
SEE NOTES TO FINANCIAL STATEMENTS
67
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
PORTFOLIO OF INVESTMENTS CONT'D
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Health Care Equipment and Supplies (continued)
- --------------------------------------------------------------------------------
Zimmer Holdings, Inc.(1) 244,725 $ 10,160,982
- --------------------------------------------------------------------------------
$ 251,987,393
- --------------------------------------------------------------------------------
Health Care Providers and Services -- 2.2%
- --------------------------------------------------------------------------------
AmerisourceBergen Corp. 30,800 $ 1,672,748
Andrx Group(1) 393,772 5,776,635
Beverly Enterprises, Inc.(1) 357,143 1,017,858
Cardinal Health, Inc. 1,883,537 111,486,555
Caremark Rx, Inc.(1) 17,696 287,560
Cigna Corp. 11,836 486,696
HCA Inc. 253,484 10,519,586
Health Management Associates, Inc.,
Class A 1,536,833 27,509,311
HealthSouth Corp.(1) 319,506 1,341,925
IDX Systems Corp.(1) 60,000 1,021,800
IMS Health, Inc. 498,012 7,968,192
McKesson HBOC, Inc. 49,513 1,338,336
Parexel International Corp.(1) 35,000 384,650
Quest Diagnostics, Inc.(1) 231,250 13,158,125
Quintiles Transnational Corp.(1) 343,408 4,155,237
Renal Care Group, Inc.(1) 371,007 11,738,661
Schein (Henry), Corp.(1) 1,272,548 57,264,660
Service Corp. International(1) 145,389 482,691
Stewart Enterprises, Inc.(1) 114,000 635,094
Sunrise Assisted Living, Inc.(1) 144,000 3,584,160
Tenet Healthcare Corp.(1) 3,961 64,960
UnitedHealth Group, Inc. 305,124 25,477,854
Ventiv Health, Inc.(1) 160,833 326,652
Wellpoint Health Networks(1) 504,000 35,864,640
- --------------------------------------------------------------------------------
$ 323,564,586
- --------------------------------------------------------------------------------
Hotels, Restaurants and Leisure -- 1.5%
- --------------------------------------------------------------------------------
Brinker International, Inc.(1) 582,237 $ 18,777,143
Carnival Corporation 554,748 13,840,963
CBRL Group, Inc. 62,047 1,869,476
Evans (Bob) Farms, Inc. 51,662 1,206,308
Gaylord Entertainment Co.(1) 428,482 8,826,729
International Game Technology(1) 100,000 7,592,000
International Speedway Corporation 118,344 4,413,048
Jack in the Box, Inc.(1) 500,000 8,645,000
Lone Star Steakhouse & Saloon, Inc. 145,981 2,823,273
68
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Hotels, Restaurants and Leisure (continued)
- --------------------------------------------------------------------------------
Marriott International, Inc. 332,517 $ 10,929,834
McDonald's Corp. 1,373,682 22,088,807
MGM Grand, Inc.(1) 94,445 3,113,852
Outback Steakhouse, Inc. 1,610,923 55,480,188
Outback Steakhouse, Inc.(2)(3) 31,784 1,093,683
Papa John's International, Inc.(1) 199,760 5,569,309
Royal Caribbean Cruises Ltd. 500,000 8,350,000
Sonic Corp.(1) 106,510 2,182,390
Starbucks Corp.(1) 1,330,334 27,112,207
Yum! Brands, Inc.(1) 436,380 10,569,124
- --------------------------------------------------------------------------------
$ 214,483,334
- --------------------------------------------------------------------------------
Household Durables -- 0.6%
- --------------------------------------------------------------------------------
Blyth Industries, Inc. 1,042,766 $ 27,904,418
Department 56, Inc.(1) 255,162 3,291,590
Fortune Brands Inc. 142,143 6,611,071
Helen of Troy Ltd.(1) 20,000 232,800
Interface, Inc. Class B(2) 171,613 526,852
Interface, Inc. Class A 19,538 59,982
Leggett & Platt, Inc. 1,432,606 32,147,679
Maytag Corp. 27,073 771,581
Newell Rubbermaid, Inc. 402,694 12,213,709
Snap-On, Inc. 51,429 1,445,669
- --------------------------------------------------------------------------------
$ 85,205,351
- --------------------------------------------------------------------------------
Household Products -- 1.8%
- --------------------------------------------------------------------------------
Clorox Co. (The) 53,688 $ 2,214,630
Colgate-Palmolive Co. 563,176 29,527,318
Kimberly-Clark Corp. 1,920,274 91,155,407
Procter & Gamble Co. 1,680,808 144,448,640
- --------------------------------------------------------------------------------
$ 267,345,995
- --------------------------------------------------------------------------------
Industrial Conglomerates -- 1.5%
- --------------------------------------------------------------------------------
3M Co. 223,875 $ 27,603,788
General Electric Co. 6,597,241 160,642,818
Teleflex, Inc. 47,559 2,039,806
Tyco International Ltd. 1,191,481 20,350,495
- --------------------------------------------------------------------------------
$ 210,636,907
- --------------------------------------------------------------------------------
Insurance -- 6.9%
- --------------------------------------------------------------------------------
21st Century Insurance Group 70,700 $ 885,164
SEE NOTES TO FINANCIAL STATEMENTS
69
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
PORTFOLIO OF INVESTMENTS CONT'D
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Insurance (continued)
- --------------------------------------------------------------------------------
Aegon N.V. ADR 5,048,336 $ 64,770,151
AFLAC Corp. 1,292,702 38,936,184
Allmerica Financial Corp.(1) 1,500 15,150
Allstate Corp. (The) 79,875 2,954,576
American International Group, Inc. 5,394,313 312,061,007
AON Corp. 908,574 17,162,963
Berkshire Hathaway, Inc., Class A(1) 386 28,081,500
Berkshire Hathaway, Inc., Class B(1) 39,680 96,144,640
Chubb Corporation 104,951 5,478,442
Commerce Group, Inc. 120,000 4,498,800
Delphi Financial Group Inc. 6,448 244,766
Gallagher (Arthur J.) and Co. 1,028,843 30,227,407
Hartford Financial Services Group, Inc. 36,048 1,637,661
Jefferson-Pilot Corp. 190,173 7,247,493
Kansas City Life Insurance Co. 70,800 2,683,320
Lincoln National Corp. 52,903 1,670,677
Manulife Financial Corp.(1) 74,958 1,627,338
Marsh & McLennan Cos., Inc. 4,128,592 190,782,236
Mercury General Corp. 2,000 75,160
MetLife, Inc. 1,969,700 53,260,688
MGIC Investment Corp. 85,000 3,510,500
Old Republic International Corp. 72,603 2,032,884
Progressive Corp. 1,905,100 94,550,113
Radian Group, Inc. 30,800 1,144,220
Safeco Corp. 17,439 604,610
St. Paul Companies, Inc. (The) 323,841 11,026,786
Torchmark Corp. 289,585 10,578,540
Travelers Property Casualty - Class A(1) 173,919 2,547,913
Travelers Property Casualty - Class B(1) 357,326 5,234,826
UICI(1) 75,030 1,166,717
UnumProvident Corp. 52,000 912,080
XL Capital Ltd., Class A 79,232 6,120,672
- --------------------------------------------------------------------------------
$ 999,875,184
- --------------------------------------------------------------------------------
Internet and Catalog Retail -- 0.0%
- --------------------------------------------------------------------------------
eBay, Inc.(1) 34,268 $ 2,324,056
School Specialty Corp.(1) 49,197 982,956
- --------------------------------------------------------------------------------
$ 3,307,012
- --------------------------------------------------------------------------------
70
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Internet Software and Services -- 0.0%
- --------------------------------------------------------------------------------
Retek, Inc.(1) 465,615 $ 1,266,473
- --------------------------------------------------------------------------------
$ 1,266,473
- --------------------------------------------------------------------------------
IT Consulting and Services -- 0.9%
- --------------------------------------------------------------------------------
Accenture Ltd.(1) 3,638,000 $ 65,447,620
Acxiom Corp.(1) 579,019 8,905,312
Acxiom Corp.(1)(2)(3) 68,785 1,056,326
Affiliated Computer Services(1) 200,654 10,564,433
Computer Sciences Corp.(1) 390,302 13,445,904
Electronic Data Systems Corp. 157,712 2,906,632
Gartner Group, Inc., Class A(1) 4,811 44,261
Gartner Group, Inc., Class B(1) 92,416 873,331
Keane, Inc.(1) 119,224 1,071,824
Perot Systems Corp.(1) 747,730 8,015,666
Safeguard Scientifics, Inc.(1) 26,579 36,147
SunGard Data Systems, Inc.(1) 867,786 20,445,038
Synavant, Inc.(1) 13,700 12,741
- --------------------------------------------------------------------------------
$ 132,825,235
- --------------------------------------------------------------------------------
Leisure Equipment and Products -- 0.1%
- --------------------------------------------------------------------------------
Eastman Kodak Co. 156,267 $ 5,475,596
Mattel, Inc. 19,627 375,857
- --------------------------------------------------------------------------------
$ 5,851,453
- --------------------------------------------------------------------------------
Machinery -- 2.9%
- --------------------------------------------------------------------------------
Caterpillar, Inc. 23,255 $ 1,063,219
Danaher Corporation 1,915,985 125,880,215
Deere & Co. 3,450,000 158,182,500
Dionex Corp.(1) 501,890 14,891,076
Donaldson Company, Inc. 40,220 1,447,920
Dover Corp. 610,289 17,796,027
Illinois Tool Works, Inc. 1,138,513 73,843,953
ITT Industries, Inc. 4,214 255,748
Nordson Corporation 163,978 4,071,574
Parker-Hannifin Corporation 125,359 5,782,811
SPX Corp.(1) 95,724 3,584,864
Tecumseh Products Co., Class A 156,420 6,902,815
Wabtec 232,061 3,258,136
- --------------------------------------------------------------------------------
$ 416,960,858
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
71
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
PORTFOLIO OF INVESTMENTS CONT'D
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Media -- 6.9%
- --------------------------------------------------------------------------------
ADVO, Inc.(1) 580,339 $ 19,052,529
AOL Time Warner, Inc.(1) 1,400,796 18,350,428
Belo (A.H.) Corp. 542,924 11,575,140
Cablevision Systems Corp.(1) 207,410 3,472,043
Catalina Marketing Corp.(1) 89,203 1,650,256
Clear Channel Communications, Inc.(1) 448,274 16,716,137
Comcast Corp. Class A(1) 1,965,628 46,329,852
Comcast Corp. Class A Special(1) 1,042,262 23,544,699
Cox Communications, Inc., Class A(1) 352,265 10,004,326
Disney (Walt) Company 5,039,433 82,193,152
EchoStar Communications, Class A(1) 35,150 782,439
Entercom Communications Corp.(1) 20,000 938,400
Entercom Communications Corp.(1)(2)(3) 200,000 9,378,526
Gannett Co., Inc. 1,208,627 86,779,419
General Motors Corp., H Class(1) 275,262 2,945,303
Havas Advertising, S.A. ADR 3,142,938 12,477,464
Interpublic Group of Companies., Inc. 2,495,261 35,133,275
Interpublic Group of Companies.,
Inc.(2)(3) 100,000 1,405,888
KnightRidder, Inc. 18,123 1,146,280
Lamar Advertising Co.(1) 845,318 28,444,951
Liberty Media Corp. Class A(1) 1,225,175 10,953,065
Liberty Media Corp. Class B(1) 32,876 302,459
MacClatchy Co. (The) 48,066 2,726,784
McGraw-Hill Companies, Inc. (The) 2,028,164 122,582,232
Meredith Corp. 190,000 7,810,900
New York Times Co. (The), Class A 317,259 14,508,254
News Corporation Ltd. 93,965 2,128,307
Omnicom Group, Inc. 3,546,255 229,088,073
Publicis Groupe SA 368,212 7,798,992
Reuters Holdings plc ADR 270,131 4,646,253
Scripps (The E.W) Company 25,533 1,964,764
TMP Worldwide, Inc.(1) 154,426 1,746,558
Tribune Co. 654,327 29,745,705
Univision Communications, Inc.(1) 963,184 23,598,008
Viacom, Inc., Class A(1) 29,774 1,215,077
Viacom, Inc., Class B(1) 2,637,818 107,517,462
Vivendi Universal S.A. ADR 490,725 7,885,951
Washington Post Co. (The) 11,352 8,377,776
Westwood One, Inc.(1) 122,400 4,572,864
WPP Group plc 139,450 1,065,057
72
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Media (continued)
- --------------------------------------------------------------------------------
WPP Group plc ADR 188,507 $ 7,140,645
- --------------------------------------------------------------------------------
$ 1,009,695,693
- --------------------------------------------------------------------------------
Metals and Mining -- 0.3%
- --------------------------------------------------------------------------------
Alcoa, Inc. 1,406,287 $ 32,035,218
Allegheny Technologies, Inc. 21,408 133,372
Nucor Corp. 239,966 9,910,596
Phelps Dodge Corp.(1) 18,854 596,729
Steel Dynamics, Inc.(1) 311,800 3,750,954
Worthington Industries, Inc. 147,466 2,247,382
- --------------------------------------------------------------------------------
$ 48,674,251
- --------------------------------------------------------------------------------
Multiline Retail -- 3.0%
- --------------------------------------------------------------------------------
99 Cents Only Stores(1) 1,142,232 $ 30,680,352
Costco Wholesale Corp.(1) 77,258 2,167,859
Dollar General Corp. 249,983 2,987,297
Dollar Tree Stores, Inc.(1) 1,024,932 25,182,579
Dollar Tree Stores, Inc.(1)(2)(3) 30,000 736,824
Dollar Tree Stores, Inc.(1)(2)(3) 5,000 122,778
Family Dollar Stores, Inc. 2,618,411 81,720,607
Kohls Corp.(1) 49,500 2,769,525
May Department Stores Co. (The) 596,760 13,713,545
Neiman Marcus Group, Inc. (The)(1) 27,117 741,108
Nordstrom, Inc. 65,692 1,246,177
Penney (J.C.) Company, Inc. 539,766 12,420,016
Sears, Roebuck & Co. 15,750 377,213
Target Corp. 2,824,259 84,727,770
Wal-Mart Stores, Inc. 3,579,444 180,797,716
- --------------------------------------------------------------------------------
$ 440,391,366
- --------------------------------------------------------------------------------
Multi-Utilities and Unregulated Power -- 0.0%
- --------------------------------------------------------------------------------
AES Corporation(1) 49,542 $ 149,617
Duke Energy Corp. 45,234 883,872
Dynegy, Inc. 63,525 74,960
El Paso Corp. 175,909 1,224,327
Enron Corp.(1)(2) 17,000 1,054
National Fuel Gas Co. 4,000 82,920
Williams Companies. Inc. (The) 222,833 601,649
- --------------------------------------------------------------------------------
$ 3,018,399
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
73
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
PORTFOLIO OF INVESTMENTS CONT'D
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Office Electronics -- 0.0%
- --------------------------------------------------------------------------------
Ikon Office Solutions, Inc. 99,415 $ 710,817
Xerox Corp.(1) 20,000 161,000
Zebra Technologies Corp., Class A(1) 6,000 343,800
- --------------------------------------------------------------------------------
$ 1,215,617
- --------------------------------------------------------------------------------
Oil and Gas -- 4.4%
- --------------------------------------------------------------------------------
Anadarko Petroleum Corp. 2,591,941 $ 124,153,974
Apache Corporation 986,372 56,213,340
Ashland, Inc. 115,544 3,296,470
BP plc ADR 3,190,393 129,689,475
Burlington Resources, Inc. 930,802 39,698,705
ChevronTexaco Corporation 805,697 53,562,737
ConocoPhillips 386,960 18,724,994
Devon Energy Corp. 724,853 33,270,753
Exxon Mobil Corp. 4,388,503 153,334,295
Kerr - McGee Corp. 267,327 11,842,586
Marathon Oil Corp. 350,450 7,461,081
Murphy Oil Corporation 59,400 2,545,290
Newfield Exploration Company(1) 60,000 2,163,000
Ocean Energy Inc. 200,000 3,994,000
Royal Dutch Petroleum Co. 84,624 3,725,148
Syntroleum Corp.(1) 2,735 4,732
Valero Energy Corp. 51,510 1,902,779
- --------------------------------------------------------------------------------
$ 645,583,359
- --------------------------------------------------------------------------------
Paper and Forest Products -- 0.2%
- --------------------------------------------------------------------------------
Georgia-Pacific Corp. 647,827 $ 10,468,884
International Paper Co. 219,061 7,660,563
Louisiana-Pacific Corp.(1) 70,750 570,245
MeadWestvaco Corp. 84,358 2,084,486
Weyerhaeuser Co. 119,608 5,885,910
- --------------------------------------------------------------------------------
$ 26,670,088
- --------------------------------------------------------------------------------
Personal Products -- 1.1%
- --------------------------------------------------------------------------------
Avon Products, Inc. 134,700 $ 7,256,289
Gillette Company 2,998,197 91,025,261
Lauder (Estee) Companies, Inc. 2,092,312 55,237,037
Water Pik Technologies(1) 2,141 15,736
- --------------------------------------------------------------------------------
$ 153,534,323
- --------------------------------------------------------------------------------
74
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Pharmaceuticals -- 6.6%
- --------------------------------------------------------------------------------
Abbott Laboratories 2,268,381 $ 90,735,240
Allergan, Inc. 52,340 3,015,831
Bristol-Myers Squibb Company 2,879,723 66,665,587
Elan Corp., PLC ADR(1) 31,838 78,321
Forest Laboratories, Inc.(1) 328,400 32,255,448
GlaxoSmithKline plc 503,923 18,876,956
Johnson & Johnson 2,920,807 156,876,544
King Pharmaceuticals, Inc.(1) 2,085,117 35,843,161
Lilly (Eli) & Co. 2,130,682 135,298,307
Merck & Co., Inc. 1,585,166 89,736,247
Mylan Laboratories, Inc. 3,037 105,991
Novo Nordisk ADR 292,277 8,446,805
Pfizer, Inc. 5,629,045 172,079,906
Pharmacia Corp. 540,149 22,578,228
Schering AG ADR 25,000 1,072,500
Schering-Plough Corp. 1,855,738 41,197,384
Sepracor, Inc.(1) 4,000 38,680
Teva Pharmaceutical Industries Ltd. ADR 600,000 23,166,000
Watson Pharmaceuticals, Inc.(1) 1,190,893 33,666,545
Wyeth Corp. 718,378 26,867,337
- --------------------------------------------------------------------------------
$ 958,601,018
- --------------------------------------------------------------------------------
Real Estate -- 0.2%
- --------------------------------------------------------------------------------
AvalonBay Communities, Inc. 55,000 $ 2,152,700
Catellus Development Corp.(1) 415,722 8,252,082
Equity Office Properties Trust 2,812 70,244
Jones Lang Lasalle, Inc.(1) 154,567 2,377,240
Plum Creek Timber Co., Inc. 415,793 9,812,715
Trammell Crow Co.(1) 861,878 7,756,902
- --------------------------------------------------------------------------------
$ 30,421,883
- --------------------------------------------------------------------------------
Road and Rail -- 0.2%
- --------------------------------------------------------------------------------
ANC Rental Corporation(1) 497,025 $ 24,851
Burlington Northern Santa Fe Corp. 214,841 5,588,014
CSX Corporation 46,652 1,320,718
Florida East Coast Industries, Inc. 122,888 2,851,002
Heartland Express, Inc.(1) 283,930 6,505,120
Heartland Express, Inc.(1)(2)(3) 435,436 9,961,310
Kansas City Southern Industries, Inc.(1) 15,215 182,580
Norfolk Southern Corp. 3,090 61,769
SEE NOTES TO FINANCIAL STATEMENTS
75
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
PORTFOLIO OF INVESTMENTS CONT'D
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Road and Rail (continued)
- --------------------------------------------------------------------------------
Union Pacific Corp. 92,156 $ 5,517,380
- --------------------------------------------------------------------------------
$ 32,012,744
- --------------------------------------------------------------------------------
Semiconductor Equipment and Products -- 1.4%
- --------------------------------------------------------------------------------
Agere Systems, Inc.(1) 7,560 $ 10,886
Agere Systems, Inc., Class B(1) 188,938 264,513
Altera Corp.(1) 80,516 992,762
Analog Devices, Inc.(1) 740,630 17,678,838
Applied Materials, Inc.(1) 196,824 2,564,617
Applied Materials, Inc.(1)(2)(3) 215,968 2,809,842
Broadcom Corp.(1) 234,000 3,524,040
Conexant Systems, Inc.(1) 134,174 216,020
Cypress Semiconductor Corporation(1) 152,742 873,684
Intel Corp. 5,993,950 93,325,802
Intel Corp.(2)(3) 250,000 3,891,040
Intel Corp.(2)(3) 250,000 3,889,094
Intel Corp.(2)(3) 500,000 7,775,269
Intel Corp.(2)(3) 375,000 5,829,992
KLA-Tencor Corp.(1) 94,066 3,327,114
KLA-Tencor Corp.(1)(2)(3) 35,000 1,237,228
Lam Research Corp.(1) 44,051 475,751
Linear Technologies Corp. 87,760 2,257,187
LSI Logic Corporation(1) 132,810 766,314
Maxim Integrated Products Co. 274,351 9,064,557
Mykrolis Corp.(1) 68,655 501,182
Skyworks Solutions, Inc.(1) 98,686 850,673
Teradyne, Inc.(1) 27,996 364,228
Texas Instruments, Inc. 2,589,577 38,869,551
Xilinx, Inc.(1) 68,518 1,411,471
- --------------------------------------------------------------------------------
$ 202,771,655
- --------------------------------------------------------------------------------
Software -- 2.4%
- --------------------------------------------------------------------------------
Adobe Systems, Inc. 231,936 $ 5,752,245
Ascential Software Corp.(1) 6,127 14,705
BMC Software, Inc.(1) 27,000 461,970
Cadence Design Systems, Inc.(1) 900,000 10,611,000
Check Point Software Technologies
Ltd.(1) 143,568 1,862,077
Cognos, Inc.(1) 77,000 1,805,650
Computer Associates International, Inc. 32,395 437,333
Compuware Corp.(1) 153,744 737,971
Edwards (J.D.) & Co.(1) 891,844 10,060,000
76
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Software (continued)
- --------------------------------------------------------------------------------
Fair, Isaac and Co., Inc. 744,545 $ 31,792,072
Henry (Jack) & Associates 201,006 2,420,112
I2 Technologies, Inc.(1) 233,752 268,815
Intuit, Inc.(1) 956,635 44,885,314
Microsoft Corp.(1) 3,703,047 191,447,530
National Instruments Corp.(1) 466,603 15,159,931
Oracle Corp.(1) 737,178 7,961,522
Parametric Technology Corp.(1) 94,600 238,392
PeopleSoft, Inc.(1) 384,478 7,035,947
Reynolds & Reynolds, Co. 451,043 11,488,065
Siebel Systems, Inc.(1) 1,216,472 9,001,893
VERITAS Software Corp.(1) 43,942 686,374
Wind River Systems, Inc.(1) 111,410 456,781
- --------------------------------------------------------------------------------
$ 354,585,699
- --------------------------------------------------------------------------------
Specialty Retail -- 2.8%
- --------------------------------------------------------------------------------
Abercrombie & Fitch Co.(1) 10,900 $ 223,014
AutoNation, Inc.(1) 3,829,750 48,101,660
Best Buy Co., Inc.(1) 113,610 2,743,682
Burlington Coat Factory Warehouse Corp. 628,228 11,276,693
Carmax, Inc.(1) 67,797 1,212,210
Circuit City Stores, Inc. 216,000 1,602,720
Gap, Inc. (The) 21,812 338,522
Home Depot, Inc. (The) 6,702,847 160,600,214
Limited Brands, Inc. 847,878 11,810,941
Lowe's Companies 2,379,050 89,214,375
Office Depot, Inc.(1) 245,021 3,616,510
OfficeMax, Inc.(1) 912,117 4,560,585
Payless Shoesource, Inc.(1) 7,700 396,319
Pep Boys - Manny, Moe & Jack (The) 83,415 967,614
Pier 1 Imports, Inc. 300,000 5,679,000
RadioShack Corp. 677,904 12,703,921
Sherwin-Williams Co. (The) 80,069 2,261,949
Staples, Inc.(1) 92,500 1,692,750
Tiffany & Co. 88,000 2,104,080
TJX Companies, Inc. (The) 2,000,000 39,040,000
Too, Inc.(1) 38,284 900,440
United Rentals, Inc.(1) 401,179 4,316,686
- --------------------------------------------------------------------------------
$ 405,363,885
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
77
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
PORTFOLIO OF INVESTMENTS CONT'D
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Textiles, Apparel and Luxury Goods -- 0.1%
- --------------------------------------------------------------------------------
Coach, Inc.(1) 182,860 $ 6,019,751
Nike Inc., Class B 78,316 3,482,713
Unifi, Inc.(1) 42,921 225,335
- --------------------------------------------------------------------------------
$ 9,727,799
- --------------------------------------------------------------------------------
Tobacco -- 0.1%
- --------------------------------------------------------------------------------
Philip Morris Companies, Inc. 495,730 $ 20,091,937
UST, Inc. 439 14,676
- --------------------------------------------------------------------------------
$ 20,106,613
- --------------------------------------------------------------------------------
Trading Companies and Distributors -- 0.0%
- --------------------------------------------------------------------------------
MSC Industrial Direct Co.(1) 5,000 $ 88,750
- --------------------------------------------------------------------------------
$ 88,750
- --------------------------------------------------------------------------------
Water Utilities -- 0.0%
- --------------------------------------------------------------------------------
American Waterworks Co. 76,039 $ 3,458,254
- --------------------------------------------------------------------------------
$ 3,458,254
- --------------------------------------------------------------------------------
Wireless Telecommunication Services -- 0.1%
- --------------------------------------------------------------------------------
AT&T Wireless Services, Inc.(1) 1,502,536 $ 8,489,328
Nextel Communications, Inc., Class A(1) 73,122 844,559
Sprint Corp. - PCS Group(1) 19,754 86,523
Telephone and Data Systems, Inc. 46,394 2,181,446
Vodafone Group plc ADR 50,617 917,180
- --------------------------------------------------------------------------------
$ 12,519,036
- --------------------------------------------------------------------------------
Total Common Stocks
(identified cost $14,682,605,092) $14,411,340,749
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS -- 0.0%
78
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Multi-Utilities and Unregulated Power -- 0.0%
- --------------------------------------------------------------------------------
Enron Corp.(1)(2) 11,050 $ 18,706
- --------------------------------------------------------------------------------
$ 18,706
- --------------------------------------------------------------------------------
Total Convertible Preferred Stocks
(identified cost $4,500,777) $ 18,706
- --------------------------------------------------------------------------------
PREFERRED STOCKS -- 0.0%
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Banks -- 0.0%
- --------------------------------------------------------------------------------
Wachovia Corp. (Dividend Equalization
Preferred Shares)(1)(2) 166,518 $ 20,815
- --------------------------------------------------------------------------------
$ 20,815
- --------------------------------------------------------------------------------
Total Preferred Stocks
(identified cost $39,407) $ 20,815
- --------------------------------------------------------------------------------
RIGHTS -- 0.0%
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Banks -- 0.0%
- --------------------------------------------------------------------------------
Bank United Corp. (Litigation Contingent
Payment Rights)(1) 102,072 $ 10,207
- --------------------------------------------------------------------------------
$ 10,207
- --------------------------------------------------------------------------------
Computers and Business Equipment -- 0.0%
- --------------------------------------------------------------------------------
Seagate Technology, Inc. (Tax
Refund Rights)(1)(2) 197,392 $ 0
- --------------------------------------------------------------------------------
$ 0
- --------------------------------------------------------------------------------
Diversified Telecommunication Services -- 0.0%
- --------------------------------------------------------------------------------
McLeodUSA (Escrow Rights)(1)(2) 1,592,200 $ 0
- --------------------------------------------------------------------------------
$ 0
- --------------------------------------------------------------------------------
Total Rights
(identified cost $50,596) $ 10,207
- --------------------------------------------------------------------------------
COMMERCIAL PAPER -- 0.9%
79
PRINCIPAL
AMOUNT
SECURITY (000'S OMITTED) VALUE
- --------------------------------------------------------------------------------
American Express Credit Corp., 1.28%,
1/6/03 $ 20,000 $ 19,996,444
Cortez Capital Corp., 1.36%, 1/15/03 29,000 28,984,662
G. E. Capital Corp., 1.25%, 1/2/03 12,276 12,275,574
Old Line Funding Corp., 1.36%, 1/17/03 27,603 27,586,316
Transamerica Finance Corp., 1.35%,
1/8/03 25,000 24,993,438
SEE NOTES TO FINANCIAL STATEMENTS
80
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
PORTFOLIO OF INVESTMENTS CONT'D
PRINCIPAL
AMOUNT
SECURITY (000'S OMITTED) VALUE
- --------------------------------------------------------------------------------
Trident Cptl Fnce Inc., 1.36%, 1/16/03 18,933 $ 18,922,271
- --------------------------------------------------------------------------------
Total Commercial Paper
(at amortized cost, $132,758,705) $ 132,758,705
- --------------------------------------------------------------------------------
Total Investments -- 99.8%
(identified cost $14,819,954,577) $14,544,149,182
- --------------------------------------------------------------------------------
SECURITIES SOLD SHORT -- -0.3%
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
Kinder Morgan, Inc. 1,000,000 $ (42,270,000)
- --------------------------------------------------------------------------------
Total Securities Sold Short
(proceeds $42,473,701) $ (42,270,000)
- --------------------------------------------------------------------------------
Other Assets, Less Liabilities
excluding securities sold short -- 0.5% $ 69,642,406
- --------------------------------------------------------------------------------
Net Assets -- 100.0% $14,571,521,588
- --------------------------------------------------------------------------------
ADR - American Depositary Receipt
(1) Non-income producing security.
(2) Security valued at fair value using methods determined in good faith by or
at the direction of the Trustees.
(3) Security restricted from resale for a period not exceeding two years. At
December 31, 2002, the value of these securities totaled $59,686,866 or
0.4% of net assets.
SEE NOTES TO FINANCIAL STATEMENTS
81
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 2002
Assets
- ---------------------------------------------------------
Investments, at value
(identified cost, $14,819,954,577) $14,544,149,182
Cash 93,887
Deposits with brokers for securities
sold short 42,473,701
Receivable for investments sold 4,812,234
Dividends and interest receivable 22,219,628
Tax reclaim receivable 426,060
Other assets 47,529
- ---------------------------------------------------------
TOTAL ASSETS $14,614,222,221
- ---------------------------------------------------------
Liabilities
- ---------------------------------------------------------
Securities sold short, at value
(proceeds received $42,473,701) $ 42,270,000
Payable for dividends on securities sold
short 250,000
Payable to affiliate for Trustees' fees 7,500
Accrued expenses 173,133
- ---------------------------------------------------------
TOTAL LIABILITIES $ 42,700,633
- ---------------------------------------------------------
NET ASSETS APPLICABLE TO INVESTORS'
INTEREST IN PORTFOLIO $14,571,521,588
- ---------------------------------------------------------
Sources of Net Assets
- ---------------------------------------------------------
Net proceeds from capital contributions
and withdrawals $14,847,095,575
Net unrealized depreciation (computed on
the basis of identified cost) (275,573,987)
- ---------------------------------------------------------
TOTAL $14,571,521,588
- ---------------------------------------------------------
82
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31, 2002
Investment Income
- ---------------------------------------------------------
Dividends (net of foreign taxes,
$2,032,262) $ 207,295,027
Interest 5,997,055
- ---------------------------------------------------------
TOTAL INVESTMENT INCOME $ 213,292,082
- ---------------------------------------------------------
Expenses
- ---------------------------------------------------------
Investment adviser fee $ 71,564,552
Trustees' fees and expenses 29,796
Custodian fee 1,992,078
Dividends on securities sold short 250,000
Legal and accounting services 95,485
Miscellaneous 210,130
- ---------------------------------------------------------
TOTAL EXPENSES $ 74,142,041
- ---------------------------------------------------------
NET INVESTMENT INCOME $ 139,150,041
- ---------------------------------------------------------
Realized and Unrealized Gain (Loss)
- ---------------------------------------------------------
Net realized gain (loss) --
Investment transactions (identified
cost basis) $ (459,951,418)
Foreign currency transactions (45,422)
- ---------------------------------------------------------
NET REALIZED LOSS $ (459,996,840)
- ---------------------------------------------------------
Change in unrealized appreciation
(depreciation) --
Investments (identified cost basis) $(3,312,778,452)
Securities sold short 203,701
Foreign currency 27,187
- ---------------------------------------------------------
NET CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) $(3,312,547,564)
- ---------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS $(3,772,544,404)
- ---------------------------------------------------------
NET DECREASE IN NET ASSETS FROM
OPERATIONS $(3,633,394,363)
- ---------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
83
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
FINANCIAL STATEMENTS CONT'D
STATEMENTS OF CHANGES IN NET ASSETS
INCREASE (DECREASE) YEAR ENDED YEAR ENDED
IN NET ASSETS DECEMBER 31, 2002 DECEMBER 31, 2001
- --------------------------------------------------------------------------------
From operations --
Net investment income $ 139,150,041 $ 113,393,699
Net realized loss (459,996,840) (360,120,300)
Net change in unrealized appreciation
(depreciation) (3,312,547,564) (1,605,211,090)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS FROM
OPERATIONS $ (3,633,394,363) $ (1,851,937,691)
- --------------------------------------------------------------------------------
Capital transactions --
Contributions $ 2,786,165,872 $ 3,921,075,957
Withdrawals (2,917,114,901) (2,118,342,171)
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
FROM CAPITAL TRANSACTIONS $ (130,949,029) $ 1,802,733,786
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS $ (3,764,343,392) $ (49,203,905)
- --------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------
At beginning of year $ 18,335,864,980 $ 18,385,068,885
- --------------------------------------------------------------------------------
AT END OF YEAR $ 14,571,521,588 $ 18,335,864,980
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
84
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
FINANCIAL STATEMENTS CONT'D
SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31,
2002 2001 2000 1999
- --------------------------------------------------------------------------------
Ratios/Supplemental Data
- --------------------------------------------------------------------------------
Ratios (As a percentage
of average daily net
assets):
Expenses 0.45% 0.45% 0.45% 0.46%
Net investment income 0.85% 0.64% 0.67% 0.72%
Portfolio Turnover 23% 18% 13% 11%
- --------------------------------------------------------------------------------
TOTAL RETURN(3) (19.52)% (9.67)% -- --
- --------------------------------------------------------------------------------
NET ASSETS, END OF
YEAR (000'S
OMITTED) $14,571,522 $18,335,865 $18,385,069 $15,114,649
- --------------------------------------------------------------------------------
PERIOD ENDED DECEMBER 31, YEAR ENDED OCTOBER 31,
1998(1) 1998
- --------------------------------------------------------------------------------
Ratios/Supplemental Data
- --------------------------------------------------------------------------------
Ratios (As a percentage
of average daily net
assets):
Expenses 0.48%(2) 0.50%
Net investment income 0.72%(2) 0.78%
Portfolio Turnover 3% 12%
- --------------------------------------------------------------------------------
TOTAL RETURN(3) -- --
- --------------------------------------------------------------------------------
NET ASSETS, END OF
YEAR (000'S
OMITTED) $8,704,859 $6,985,678
- --------------------------------------------------------------------------------
(1) For the two-month period ended December 31, 1998.
(2) Annualized.
(3) Total return is required to be disclosed for fiscal years beginning after
December 15, 2000
SEE NOTES TO FINANCIAL STATEMENTS
85
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
NOTES TO FINANCIAL STATEMENTS
1 Significant Accounting Policies
- -------------------------------------------
Tax-Managed Growth Portfolio (the Portfolio) is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Portfolio, which was organized as a
trust under the laws of the State of New York on December 1, 1995, seeks to
provide long-term after-tax returns by investing in a diversified portfolio
of equity securities. The Declaration of Trust permits the Trustees to
issue interests in the Portfolio. The following is a summary of significant
accounting policies consistently followed by the Portfolio in the
preparation of its financial statements. The policies are in conformity
with accounting principles generally accepted in the United States of
America.
A Investment Valuations -- Marketable securities, including options, that are
listed on foreign or U.S. securities exchanges or in the NASDAQ National
Market System are valued at closing sale prices on the exchange where such
securities are principally traded. Futures positions on securities or
currencies are generally valued at closing settlement prices. Unlisted or
listed securities for which closing sale prices are not available are
generally valued at the mean between the latest bid and asked prices.
Short-term debt securities with a remaining maturity of 60 days or less are
valued at amortized cost, which approximates fair value. Other fixed income
and debt securities, including listed securities and securities for which
price quotations are available, will normally be valued on the basis of
valuations furnished by a pricing service. Over-the-counter options are
normally valued at the mean between the latest bid and asked price.
Investments for which valuations or market quotations are unavailable are
valued at fair value using methods determined in good faith by or at the
direction of the Trustees.
B Income Taxes -- The Portfolio is treated as a partnership for federal tax
purposes. No provision is made by the Portfolio for federal or state taxes
on any taxable income of the Portfolio because each investor in the
Portfolio is ultimately responsible for the payment of any taxes on its
share of such taxable income. Since some of the Portfolio's investors are
regulated investment companies that invest all or substantially all of
their assets in the Portfolio, the Portfolio normally must satisfy the
applicable source of income and diversification requirements (under the
Internal Revenue Code) in order for its investors to satisfy them. The
Portfolio will allocate, at least annually among its investors, each
investor's distributive share of the Portfolio's net investment income, net
realized capital gains or losses, and any other items of income, gain,
loss, deduction or credit.
C Futures Contracts -- Upon the entering of a financial futures contract, the
Portfolio is required to deposit either in cash or securities an amount
(initial margin) equal to a certain percentage of the purchase price
indicated in the financial futures contract. Subsequent payments are made
or received by the Portfolio (margin maintenance) each day, dependent on
daily fluctuations in the value of the underlying security, and are
recorded for book purposes as unrealized gains or losses by the Portfolio.
The Portfolio's investment in financial futures contracts is designed to
hedge against anticipated future changes in the price of current or
anticipated portfolio positions. Should prices move unexpectedly, the
Portfolio may not achieve the anticipated benefits of the financial futures
contracts and may realize a loss.
D Put Options -- Upon the purchase of a put option by the Portfolio, the
premium paid is recorded as an investment, the value of which is
86
marked-to-market daily. When a purchased option expires, the Portfolio will
realize a loss in the amount of the cost of the option. When the Portfolio
enters into a closing sale transaction, the Portfolio will realize a gain
or loss depending on whether the sales proceeds from the closing sale
transaction are greater or less than the cost of the option. When the
Portfolio exercises a put option, settlement is made in cash. The risk
associated with purchasing options is limited to the premium originally
paid.
E Securities Sold Short -- The Portfolio may sell a security short if it owns
at least an equal amount of the security sold short or another security
exchangeable for an equal amount of the security sold short in anticipation
of a decline in the market price of the securities or in order to hedge
portfolio positions. The Portfolio will generally borrow the security sold
in order to make delivery to the buyer. Upon executing the transaction, the
Portfolio records the proceeds as deposits with brokers in the Statement of
Assets and Liabilities and establishes an offsetting payable for securities
sold short for the securities due on settlement. The proceeds are retained
by the broker as collateral for the short position. The liability is
marked-to-market and the Portfolio is required to pay the lending broker
any dividend or interest income earned while the short position is open. A
gain or loss is recorded when the security is delivered to the broker. The
Portfolio may recognize a loss on the transaction if the market value of
the securities sold increases before the securities are delivered.
87
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
NOTES TO FINANCIAL STATEMENTS CONT'D
F Foreign Currency Translation -- Investment valuations, other assets and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investment securities and income and expenses are
converted into U.S. dollars based upon currency exchange rates prevailing
on the respective dates of such transactions. Recognized gains or losses on
investment transactions attributable to foreign currency exchange rates are
recorded for financial statement purposes as net realized gains and losses
on investments. That portion of unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
G Other -- Investment transactions are accounted for on a trade-date basis.
Dividend income is recorded on the ex-dividend date. However, if the
ex-dividend date has passed, certain dividends from foreign securities are
recorded as the Portfolio is informed of the ex-dividend date. Interest
income is recorded on the accrual basis.
H Use of Estimates -- The preparation of the financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of income and expense
during the reporting period. Actual results could differ from those
estimates.
2 Investment Adviser Fee and Other Transactions with Affiliates
- -------------------------------------------
The investment adviser fee is earned by Boston Management and Research
(Boston Management), a wholly-owned subsidiary of Eaton Vance Management
(Eaton Vance), as compensation for management and investment advisory
services rendered to the Portfolio. Under the advisory agreement, Boston
Management receives a monthly advisory fee of 5/96 of 1% (0.625% annually)
of the average daily net assets of the Portfolio up to $500,000,000, and at
reduced rates as daily net assets exceed that level. For the year ended
December 31, 2002, the adviser fee was 0.44% of the Portfolio's average
daily net assets. Except for Trustees of the Portfolio who are not members
of Eaton Vance's or Boston Management's organization, officers and Trustees
receive remuneration for their services to the Portfolio out of such
investment adviser fee. Trustees of the Portfolio who are not affiliated
with the Investment Adviser may elect to defer receipt of all or a
percentage of their annual fees in accordance with the terms of the
Trustees' Deferred Compensation Plan. For the year ended December 31, 2002,
no significant amounts have been deferred.
Certain officers and Trustees of the Portfolio are officers of the above
organizations.
3 Investment Transactions
- -------------------------------------------
For the year ended December 31, 2002, purchases and sales of investments,
other than short-term obligations, aggregated $3,708,519,991 and
$3,826,197,983, respectively. In addition, investments having an aggregate
market value of $969,441,055 at dates of withdrawal were distributed in
payment for capital withdrawals. During the year ended December 31, 2002,
investors contributed securities with a value of $1,378,394,239.
88
4 Federal Income Tax Basis of Unrealized Appreciation (Depreciation)
- -------------------------------------------
The cost and unrealized appreciation (depreciation) in value of the
investments owned at December 31, 2002 as computed on a federal income tax
basis, were as follows:
AGGREGATE COST $5,279,824,520
--------------------------------------------------------
Gross unrealized appreciation $9,292,814,140
Gross unrealized depreciation (28,489,478)
--------------------------------------------------------
NET UNREALIZED APPRECIATION $9,264,324,662
--------------------------------------------------------
5 Financial Instruments
- -------------------------------------------
The Portfolio may trade in financial instruments with off-balance sheet
risk in the normal course of its investing activities to assist in managing
exposure to various market risks. These financial instruments include
written options, forward foreign currency exchange contracts and financial
futures contracts and may involve, to a varying degree, elements of risk in
excess of the amounts recognized for financial statement purposes.
The notional or contractual amounts of these instruments represent the
investment the Portfolio has in particular classes of financial instruments
and does not necessarily represent the amounts potentially subject to risk.
The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are
considered. The Portfolio did not have any open obligations under these
financial instruments at December 31, 2002.
89
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
NOTES TO FINANCIAL STATEMENTS CONT'D
6 Line of Credit
- -------------------------------------------
The Portfolio participates with other portfolios and funds managed by
Boston Management and Eaton Vance and its affiliates in a $150 million
unsecured line of credit agreement with a group of banks. Borrowings will
be made by the Portfolio solely to facilitate the handling of unusual
and/or unanticipated short-term cash requirements. Interest is charged to
each participating portfolio or fund based on its borrowings at an amount
above either the Eurodollar rate or Federal Funds rate. In addition, a fee
computed at an annual rate of 0.10% on the daily unused portion of the line
of credit is allocated among the participating portfolios and funds at the
end of each quarter. The Portfolio did not have any significant borrowings
or allocated fees during the year ended December 31, 2002.
7 Restricted Securities
- -------------------------------------------
At December 31, 2002, the Portfolio owned the following securities
(representing 0.4% of net assets) which were restricted as to public resale
and not registered under the Securities Act of 1933. The securities are
valued at fair value using methods determined in good faith by or at the
direction of the Trustees.
DATE OF
DESCRIPTION ACQUISITION SHARES COST FAIR VALUE
- --------------------------------------------------------------------------------
Acxiom Corp. 12/18/02 68,785 $ 1,000,007 $ 1,056,326
Applied Materials, Inc. 12/18/02 215,968 2,988,826 2,809,842
Dollar Tree Stores, Inc. 3/19/02 30,000 1,001,995 736,824
Dollar Tree Stores, Inc. 5/22/02 5,000 192,081 122,778
Entercom Communications Corp. 5/22/02 200,000 10,415,398 9,378,526
GreenPoint Financial Corp. 3/19/02 100,000 4,536,185 4,516,306
Heartland Express, Inc. 12/18/02 435,436 10,000,005 9,961,310
Intel Corp. 12/18/02 375,000 6,698,687 5,829,992
Intel Corp. 10/9/02 500,000 6,600,085 7,775,269
Intel Corp. 3/19/02 250,000 7,893,143 3,891,040
Intel Corp. 7/30/02 250,000 4,715,416 3,889,094
Interpublic Group of
Companies., Inc. 12/18/02 100,000 1,354,965 1,405,888
KLA-Tencor Corp. 5/22/02 35,000 2,046,381 1,237,228
Morgan Stanley Dean Witter & Co. 7/30/02 150,000 5,926,597 5,982,760
Outback Steakhouse, Inc. 7/30/02 31,784 1,000,011 1,093,683
- --------------------------------------------------------------------------------
$66,369,782 $59,686,866
- --------------------------------------------------------------------------------
90
TAX-MANAGED GROWTH PORTFOLIO AS OF DECEMBER 31, 2002
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND INVESTORS
OF TAX-MANAGED GROWTH PORTFOLIO:
- ---------------------------------------------
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Tax-Managed Growth Portfolio (the Portfolio) as
of December 31, 2002, and the related statement of operations for the year then
ended, the statements of changes in net assets for the two years then ended and
the supplementary data for the four years ended December 31, 2002, the two-month
period ended December 31, 1998 and for the year ended October 31, 1998. These
financial statements and supplementary data are the responsibility of the
Portfolio's management. Our responsibility is to express an opinion on these
financial statements and supplementary data based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and supplementary data are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2002 by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and supplementary data referred to
above present fairly, in all material respects, the financial position of the
Portfolio as of December 31, 2002, and the results of its operations, the
changes in its net assets and its supplementary data for the respective stated
periods in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 14, 2003
91
BELAIR CAPITAL FUND LLC AS OF DECEMBER 31, 2002
Investment Adviser of
Tax-Managed Growth Portfolio
and Belair Capital Fund LLC
Boston Management and Research
The Eaton Vance Building
255 State Street
Boston, MA 02109
Manager of Belair
Capital Fund LLC
Eaton Vance Management
The Eaton Vance Building
255 State Street
Boston, MA 02109
Manager of Belair
Real Estate Corporation
Boston Management and Research
The Eaton Vance Building
255 State Street
Boston, MA 02109
Custodian and Transfer Agent
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116
Independent Auditors
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116
92
SIGNATURES
Pursuant to the requirements of Section 13 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, thereunto duly authorized on the 26th day of March,
2003.
BELAIR CAPITAL FUND LLC
(Registrant)
By: /s/ Michelle A. Alexander
------------------------------------
Michelle A. Alexander
Duly Authorized Officer and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 26, 2003 By: /s/ Thomas E. Faust Jr.
------------------------------------
Thomas E. Faust Jr.
Chief Executive Officer
Date: March 26, 2003 By: /s/ Michelle A. Alexander
------------------------------------
Michelle A. Alexander
Chief Financial Officer
93
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Thomas E. Faust Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Belair Capital Fund LLC;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and c) presented in this annual report our
conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 /s/ Thomas E. Faust Jr.
-------------------------------
Thomas E. Faust Jr.
Chief Executive Officer
94
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Michelle A. Alexander, certify that:
1. I have reviewed this annual report on Form 10-K of Belair Capital Fund LLC;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 /s/ Michelle A. Alexander
-------------------------------
Michelle A. Alexander
Chief Financial Officer
95
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3 Copy of Amended and Restated Operating Agreement of the Fund
dated February 6, 1998 and First Amendment thereto dated November
24, 1998 filed as Exhibit 3 to the Fund's Initial Registration
Statement on Form 10 and incorporated herein by reference. (Note:
the Operating Agreement also defines the rights of the holders of
Shares of the Fund)
4 Copy of Loan and Security Agreement dated as of February 5, 1998,
First Amendment thereto dated as of April 30, 1998; Second
Amendment thereto dated as of June 25, 1998; Third Amendment
thereto dated as of December 18, 1998; and Fourth Amendment
thereto dated as of February 23, 1999 filed as Exhibit 4 to the
Fund's Initial Registration Statement on Form 10 and incorporated
herein by reference.
4(1) Copy of Fifth Amendment to Loan and Security Agreement dated July
28, 1999 and Sixth Amendment thereto dated March 17, 2000 filed
as Exhibit 4(1) to the Fund's Form 10-K on March 30, 2000 and
incorporated herein by reference.
4(2) Copy of Seventh Amendment to Loan and Security Agreement dated
June 29, 2000 and Eighth Amendment thereto dated November 27,
2000 filed as Exhibit 4(2) to the Fund's Form 10-K on March 30,
2001 and incorporated herein by reference.
9 Not applicable and not filed.
10(1) Copy of Investment Advisory and Administration Agreement between
the Fund and Boston Management and Research dated November 24,
1998 filed as Exhibit 10(1) to the Fund's Initial Registration
Statement on Form 10 and incorporated herein by reference.
10(1)(a) Copy of Amendment to Investment Advisory and Administration
Agreement between the Fund and Boston Management and Research
dated as of January 2, 2001 filed as Exhibit 10(1)(a) to the
Fund's Form 10-Q filed for the period ended September 30, 2001
and incorporated herein by reference.
10(2) Copy of Management Agreement between Belair Real Estate
Corporation and Boston Management and Research dated November 23,
1998 filed as Exhibit 10(2) to the Fund's Initial Registration
Statement on Form 10 and incorporated herein by reference.
10(2)(a) Copy of Amendment No. 1 to Management Agreement between Belair
Real Estate Corporation and Boston Management and Research dated
as of December 28, 1999 filed as Exhibit 10(2)(a) to the Fund's
Form 10-K on March 30, 2001 and incorporated herein by reference.
96
Exhibit No. Description
- ----------- -----------
10(3) Copy of Investor Servicing Agreement between the Fund and Eaton
Vance Distributors, Inc. dated October 28, 1997 filed as Exhibit
10(3) to the Fund's Initial Registration Statement on Form 10 and
incorporated herein by reference.
10(4) Copy of Custody and Transfer Agency Agreement between the Fund
and Investors Bank & Trust Company dated October 28, 1997 filed
as Exhibit 10(4) to the Fund's Initial Registration Statement on
Form 10 and incorporated herein by reference.
11 Not applicable and not filed.
12 Not applicable and not filed.
13 Not applicable and not filed.
16 Not applicable and not filed.
18 Not applicable and not filed.
21 List of Subsidiaries of the Fund filed herewith.
22 Not applicable and not filed.
23 Not applicable and not filed.
24 Not applicable and not filed.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Form N-SAR of Eaton Vance Tax-Managed Growth Portfolio (File No.
811-7409) for its fiscal year ended December 31, 2002 filed
electronically with the Securities and Exchange Commission under
the Investment Company Act of 1940 on March 3, 2003 (Accession
No. 0000940394-03-000125) (incorporated herein by reference
pursuant to Rule 12b-32).
97