UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003
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Commission File No. 000-25767
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Belair Capital Fund LLC
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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
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None
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(Former Name, Former Address and Former Fiscal Year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
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BELAIR CAPITAL FUND LLC
Index to Form 10-Q
PART I FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Statements of Assets and Liabilities as of
June 30, 2003 (Unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three Months Ended June 30, 2003 and June 30, 2002 and
for the Six Months Ended June 30, 2003 and June 30, 2002 4
Condensed Consolidated Statements of Changes in Net Assets
(Unaudited) for the Six Months Ended June 30, 2003 and June 30, 2002 6
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 2003 and June 30, 2002 7
Financial Highlights (Unaudited) for the Six Months Ended
June 30, 2003 9
Notes to Condensed Consolidated Financial Statements
as of June 30, 2003 (Unaudited) 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
EXHIBIT INDEX 25
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
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BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Assets and Liabilities
June 30, 2003 December 31,
(Unaudited) 2002
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Assets:
Investment in Belvedere Capital Fund Company LLC
(Belvedere Capital) $1,436,699,926 $1,361,415,813
Investment in Partnership Preference Units 414,357,194 391,195,982
Investment in other real estate 162,764,564 157,492,935
Short-term investments - 3,426,881
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Total investments $2,013,821,684 $1,913,531,611
Cash 6,746,964 16,067,430
Escrow deposits - restricted 80,503 1,073,943
Receivable for investments sold - 4,952,435
Dividends and interest receivable 4,586,711 5,327,452
Other assets 1,191,716 1,285,939
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Total assets $2,026,427,578 $1,942,238,810
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Liabilities:
Loan payable - Credit Facility $ 532,769,000 $ 540,769,000
Mortgage payable 112,630,517 112,630,517
Open interest rate swap contracts, at value 10,911,798 21,367,938
Swap interest payable 1,376,146 5,029,500
Security deposits 405,333 403,844
Accrued expenses:
Interest expense 1,695,805 1,787,051
Property taxes 814,939 705,965
Other expenses and liabilities 384,601 706,227
Minority interests in controlled subsidiaries 13,505,282 13,031,112
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Total liabilities $ 674,493,421 $ 696,431,154
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Net assets $1,351,934,157 $1,245,807,656
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Shareholders' Capital $1,351,934,157 $1,245,807,656
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Shares Outstanding 13,135,313 13,485,660
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Net asset value and redemption price per Share $ 102.92 $ 92.38
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See notes to unaudited condensed consolidated financial statements
3
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Investment Income:
Dividends allocated from Belvedere Capital
(net of foreign taxes of $92,086, $94,275,
$152,043 and $119,279, respectively) $ 5,051,085 $ 5,276,280 $ 9,972,661 $ 9,920,640
Interest allocated from Belvedere Capital 158,005 124,003 249,852 279,142
Expenses allocated from Belvedere Capital (2,122,158) (2,576,957) (4,124,509) (5,263,169)
--------------- --------------- --------------- ---------------
Net investment income allocated from
Belvedere Capital $ 3,086,932 $ 2,823,326 $ 6,098,004 $ 4,936,613
Dividends from Partnership Preference Units 9,656,110 9,400,673 19,308,901 18,137,848
Rental income 5,483,433 7,626,858 11,067,605 19,134,774
Interest 63,229 32,686 109,448 66,832
--------------- --------------- --------------- ---------------
Total investment income $ 18,289,704 $ 19,883,543 $ 36,583,958 $ 42,276,067
--------------- --------------- --------------- ---------------
Expenses:
Investment advisory and administrative fees $ 1,352,111 $ 1,526,847 $ 2,637,073 $ 3,160,169
Property management fees 222,039 307,859 444,666 771,106
Servicing fees 131,906 148,286 247,720 316,379
Interest expense on mortgages 2,386,111 3,045,319 4,772,222 7,409,054
Interest expense on Credit Facility 2,422,481 3,324,638 4,971,353 6,715,232
Interest expense on swap contracts 4,875,697 7,526,723 11,984,376 14,887,050
Property and maintenance expenses 1,567,507 1,928,651 3,117,760 4,540,126
Property taxes and insurance 751,907 904,025 1,506,554 2,352,995
Amortization of deferred expenses - 27,365 9,099 54,429
Miscellaneous 183,543 132,364 310,141 404,510
--------------- --------------- --------------- ---------------
Total expenses $ 13,893,302 $ 18,872,077 $ 30,000,964 $ 40,611,050
--------------- --------------- --------------- ---------------
Net investment income before
minority interest in net income of
controlled subsidiary $ 4,396,402 $ 1,011,466 $ 6,582,994 $ 1,665,017
Minority interest in net income
of controlled subsidiary (149,592) (353,710) (321,751) (1,014,662)
--------------- --------------- --------------- ---------------
$ 4,246,810 $ 657,756 $ 6,261,243 $ 650,355
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See notes to unaudited condensed consolidated financial statements
4
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited) (Continued)
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions from Belvedere
Capital (identified cost basis) $ 3,705,353 $ (129,614,629) $ (2,191,186) $ (140,883,693)
Investment transactions in Partnership
Preference Units (identified cost basis) - - 92 (614,855)
Investment transactions in other real estate - (9,540,011) - (9,540,011)
--------------- --------------- --------------- ---------------
Net realized gain (loss) $ 3,705,353 $ (139,154,640) $ (2,191,094) $ (151,038,559)
--------------- --------------- --------------- ---------------
Change in unrealized appreciation
(depreciation) -
Investment in Belvedere Capital
(identified cost basis) $ 165,762,777 $ (83,763,480) $ 104,742,932 $ (61,358,538)
Investments in Partnership Preference Units
(identified cost basis) 3,001,536 11,429,104 27,138,712 9,393,932
Investments in other real estate
(net of minority interests in unrealized
gain (loss) of controlled subsidiaries of
$519,169, $(683,217), $170,020
and $(214,303), respectively) 670,139 (2,235,555) 236,994 (2,704,469)
Interest rate swap contracts 4,213,887 (5,388,714) 10,456,140 2,130,496
--------------- --------------- --------------- ---------------
Net change in unrealized appreciation
(depreciation) $ 173,648,339 $ (79,958,645) $ 142,574,778 $ (52,538,579)
--------------- --------------- --------------- ---------------
Net realized and unrealized gain (loss) $ 177,353,692 $ (219,113,285) $ 140,383,684 $ (203,577,138)
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets
from operations $ 181,600,502 $ (218,455,529) $ 146,644,927 $ (202,926,783)
=============== =============== =============== ===============
See notes to unaudited condensed consolidated financial statements
5
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Changes in Net Assets (Unaudited)
Six Months Six Months
Ended June 30, Ended June 30,
2003 2002
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Increase (Decrease) in Net Assets:
Net investment income $ 6,261,243 $ 650,355
Net realized loss from investment transactions (2,191,094) (151,038,559)
Net change in unrealized appreciation (depreciation)
of investments 142,574,778 (52,538,579)
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Net increase (decrease) in net assets from operations $ 146,644,927 $ (202,926,783)
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Transactions in Fund Shares -
Net asset value of Fund Shares issued to Shareholders in
payment of distributions declared $ 2,956,829 $ -
Net asset value of Fund Shares redeemed (36,867,282) (45,221,183)
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Net decrease in net assets from Fund Share transactions $ (33,910,453) $ (45,221,183)
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Distributions -
Distributions to Shareholders $ (6,607,973) $ -
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Total distributions $ (6,607,973) $ -
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Net increase (decrease) in net assets $ 106,126,501 $ (248,147,966)
Net assets:
At beginning of period $ 1,245,807,656 $ 1,687,637,826
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At end of period $ 1,351,934,157 $ 1,439,489,860
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See notes to unaudited condensed consolidated financial statements
6
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Six Months
Ended June 30, Ended June 30,
2003 2002
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Cash Flows From (For) Operating Activities -
Net increase (decrease) in net assets from operations $ 146,644,927 $(202,926,783)
Adjustments to reconcile net increase (decrease) in net assets from
operations to net cash flows from operating activities -
Amortization of debt issuance costs 81,161 105,576
Amortization of deferred expenses 9,099 54,429
Net investment income allocated from Belvedere Capital (6,098,004) (4,936,613)
Decrease (increase) in escrow deposits 993,440 (5,390)
Decrease in receivable for investments sold 4,952,435 -
Increase in interest receivable from other real estate (65,074) -
Decrease (increase) in other assets 3,963 (237,693)
Decrease (increase) in dividends and interest receivable 740,741 (5,172,141)
(Decrease) increase in interest payable for open swap contracts (3,653,354) 230,105
Decrease in security deposits, accrued interest and accrued
other expenses and liabilities (411,383) (33,954)
Decrease in cash in connection with sale of majority
interest in controlled subsidiary - (2,429,734)
Increase (decrease) in accrued property taxes 108,974 (532,664)
Purchases of Partnership Preference Units - (30,488,829)
Proceeds from sale of investments in other real estate - 32,965,765
Proceeds from sale of Partnership Preference Units - 18,708,345
Improvements to rental property (821,949) (747,548)
Net (increase) decrease in investment in Belvedere Capital (3,500,000) 1,864,615
Decrease in minority interest - (52,500)
Decrease in short-term investments 3,426,881 4,559,775
Minority interest in net income of controlled subsidiary 321,751 1,014,662
Net realized loss from investment transactions 2,191,094 151,038,559
Net change in unrealized (appreciation) depreciation of
investments (142,574,778) 52,538,579
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Net cash flows from operating activities $ 2,349,924 $ 15,516,561
Cash Flows From (For) Financing Activities -
Repayment of Credit Facility $ (8,000,000) $ (15,000,000)
Payments for Fund Shares redeemed (1,646) (3,290,609)
Distributions paid to Shareholders (3,651,144) -
Distributions paid to minority shareholders (17,600) (1,098,369)
---------------- ----------------
Net cash flows for financing activities $ (11,670,390) $ (19,388,978)
Net decrease in cash $ (9,320,466) $ (3,872,417)
Cash at beginning of period $ 16,067,430 $ 6,540,394
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Cash at end of period $ 6,746,964 $ 2,667,977
================ ================
See notes to unaudited condensed consolidated financial statements
7
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
Six Months Six Months
Ended June 30, Ended June 30,
2003 2002
---------------- ----------------
Supplemental Disclosure and Non-cash Investing and
Financing Activities -
Interest paid on loan - Credit Facility $ 4,933,537 $ 6,957,413
Interest paid on swap contracts $ 15,637,730 $ 14,656,945
Interest paid on mortgages $ 4,691,061 $ 7,956,582
Market value of securities distributed in payment of
redemptions $ 36,865,637 $ 41,930,574
Partnership Preference Units exchanged for a real estate equity
investment and an investment in note receivable $ (3,977,592) $ -
Market value of real estate equity investment $ 1,907,012 $ -
Investment in note receivable $ 2,070,580 $ -
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
Mortgage disposed of in conjunction with sale of
real estate investment in Katahdin $ - $ 115,850,000
See notes to unaudited condensed consolidated financial statements
8
BELAIR CAPITAL FUND LLC as of June 30, 2003
Condensed Consolidated Financial Statements (Continued)
Financial Highlights (Unaudited)
For the Six Months Ended June 30, 2003
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Net asset value - Beginning of period $ 92.380
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Income (loss) from operations
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Net investment income (6) $ 0.468
Net realized and unrealized gain 10.562
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Total income from operations $ 11.030
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Distributions
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Distributions to Shareholders $ (0.490)
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Total distributions $ (0.490)
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Net asset value - End of period $ 102.920
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Total Return (1) 11.99%
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As a Percentage As a Percentage
of Average Net of Average Gross
Ratios Assets (5) Assets (2)(5)
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Expenses of Consolidated Real Property Subsidiaries
Interest and other borrowing costs (7) 0.56% (8) 0.37% (8)
Operating expenses (7) 0.60% (8) 0.40% (8)
Belair Capital Fund LLC Expenses
Interest and other borrowing costs (4) 2.71% (8) 1.82% (8)
Investment advisory and administrative fees,
servicing fees and other Fund operating expenses (3)(4) 1.16% (8) 0.78% (8)
------------------------------------------
Total expenses 5.03% (8) 3.37% (8)
Net investment income 1.00% (8) 0.67% (8)
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Supplemental Data
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Net assets, end of period (000's omitted) $ 1,351,934
Portfolio Turnover of Tax-Managed Growth Portfolio (the Portfolio) 11%
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(1) Returns are calculated by determining the percentage change in net asset value with all distributions reinvested. Total
return is not computed on an annualized basis.
(2) Average Gross Assets is defined as the average daily amount of all assets of 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 of Belair Real
Estate's controlled subsidiary are reduced by the proportionate interests therein of investors other than Belair Real Estate.
(3) Includes Belair Capital's share of Belvedere Capital Fund Company LLC's allocated expenses, including those expenses
allocated from the Portfolio.
(4) Includes the expenses of Belair Capital and Belair Real Estate. Does not include expenses of the real estate subsidiary
majority-owned by Belair Real Estate.
(5) For the purpose of calculating ratios, the income and expenses of Belair Real Estate's controlled subsidiary are reduced by
the proportionate interests therein of investors other than Belair Real Estate.
(6) Calculated using average shares outstanding.
(7) Includes Belair Real Estate's proportional share of expenses incurred by its majority-owned subsidiary.
(8) Annualized.
See notes to unaudited condensed consolidated financial statements
9
BELAIR CAPITAL FUND LLC as of June 30, 2003
Notes To Condensed Consolidated Financial Statements (Unaudited)
1 Basis of Presentation
The condensed consolidated interim financial statements of Belair Capital Fund
LLC (Belair Capital) and its subsidiaries (collectively, the Fund) have been
prepared by the Fund, without audit, in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted as permitted by such rules and regulations. All adjustments, consisting
of normal recurring adjustments, have been included. Management believes that
the disclosures are adequate to present fairly the financial position, results
of operations, cash flows and financial highlights at the dates and for the
periods presented. It is suggested that these interim financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Fund's latest annual report on Form 10-K. Results for interim periods are
not necessarily indicative of those to be expected for the full fiscal year.
The balance sheet at December 31, 2002 has been derived from the December 31,
2002 audited financial statements but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements as permitted by the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Certain amounts in the prior period's condensed consolidated financial
statements have been reclassified to conform with the current period
presentation.
2 Investment Transactions
The following table summarizes the Fund's investment transactions for the six
months ended June 30, 2003 and June 30, 2002:
SIX MONTHS ENDED SIX MONTHS ENDED
INVESTMENT TRANSACTION JUNE 30, 2003 JUNE 30, 2002
- ------------------------------------------------------------------------------------------------------------
Increases in investment in Belvedere Capital $ 4,000,000 $ 69,951,562
Decreases in investment in Belvedere Capital $ 37,365,637 $ 113,746,750
Purchases of Partnership Preference Units $ - $ 30,488,829
Sales of Partnership Preference Units (1) $ - $ 18,708,345
Sales of other real estate (2) $ - $ 32,965,765
- ------------------------------------------------------------------------------------------------------------
(1) Sales of Partnership Preference Units during the six months ended June 30,
2002 include Partnership Preference Units sold to other funds sponsored by
Eaton Vance Management (Eaton Vance) for which a loss of $775,295 was
recognized.
(2) During the six months ended June 30, 2002, Belair Real Estate Corporation
(Belair Real Estate) sold its majority interest in Katahdin Property Trust
LLC (Katahdin) to another fund sponsored by Eaton Vance. A loss of
$9,540,011 was recognized on the transaction.
During the six months ended June 30, 2003, the Fund exchanged Partnership
Preference Units in the amount of $3,977,592 for an equity investment in two
private real estate companies affiliated with the issuer of such formerly held
Partnership Preference Units and a note receivable in the amounts of $1,907,012
and $2,070,580, respectively. The secured note receivable earns interest of 8%
per annum and matures in February 2013 or on demand.
10
3 Indirect Investment in Portfolio
The following table summarizes the Fund's investment in Tax-Managed Growth
Portfolio (the Portfolio) through Belvedere Capital Fund Company LLC (Belvedere
Capital), for the six months ended June 30, 2003 and June 30, 2002, including
allocations of income and expenses for the respective periods then ended:
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
- ---------------------------------------------------------------------------------------------------------------
Belvedere Capital's interest in the Portfolio (1) $9,599,217,401 $9,414,074,868
The Fund's investment in Belvedere Capital (2) $1,436,699,926 $1,578,920,235
Income allocated to Belvedere Capital from the Portfolio $ 66,798,353 $ 59,178,086
Income allocated to the Fund from Belvedere Capital $ 10,222,513 $ 10,199,782
Expenses allocated to Belvedere Capital from the Portfolio $ 20,113,419 $ 22,716,704
Expenses allocated to the Fund from Belvedere Capital $ 4,124,509 $ 5,263,169
- ---------------------------------------------------------------------------------------------------------------
(1) As of June 30, 2003 and 2002, the value of Belvedere Capital's interest in
the Portfolio represents 61.7% and 57.0% of the Portfolio's net assets,
respectively.
(2) As of June 30, 2003 and 2002, the Fund's investment in Belvedere Capital
represents 15.0% and 16.8% of Belvedere Capital's net assets, respectively.
A summary of the Portfolio's Statement of Assets and Liabilities at June 30,
2003, December 31, 2002 and June 30, 2002 and its operations for the six months
ended June 30, 2003, for the year ended December 31, 2002 and for the six months
ended June 30, 2002 follows:
June 30, December 31, June 30,
2003 2002 2002
------------------------------------------------------------------
Investments, at value $ 15,616,951,272 $ 14,544,149,182 $ 16,438,266,069
Other assets 26,660,614 70,073,039 258,245,026
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Total assets $ 15,643,611,886 $ 14,614,222,221 $ 16,696,511,095
Total liabilities 93,843,137 42,700,633 171,302,142
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Net assets $ 15,549,768,749 $ 14,571,521,588 $ 16,525,208,953
=======================================================================================================
Dividends and interest $ 109,393,140 $ 213,292,082 $ 104,789,317
- -------------------------------------------------------------------------------------------------------
Investment adviser fee $ 31,979,032 $ 71,564,552 $ 38,983,369
Other expenses 985,298 2,577,489 1,249,484
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Total expenses $ 32,964,330 $ 74,142,041 $ 40,232,853
- -------------------------------------------------------------------------------------------------------
Net investment income $ 76,428,810 $ 139,150,041 $ 64,556,464
Net realized losses (29,306,399) (459,996,840) (198,388,599)
Net change in unrealized
appreciation (depreciation) 1,126,151,279 (3,312,547,564) (1,921,047,828)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $ 1,173,273,690 $ (3,633,394,363) $ (2,054,879,963)
- -------------------------------------------------------------------------------------------------------
4 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 June 30, 2003 and December 31, 2002,
Belair Capital has entered into cancelable interest rate swap agreements with
Merrill Lynch Capital Services, Inc. as listed below.
11
Initial Unrealized
Notional Amount Optional Unrealized Depreciation
(000's Fixed Floating Termination Maturity Depreciation At December 31,
omitted) Rate Rate Date Date At June 30, 2003 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 2/05 258,737 553,844
34,951 6.34% LIBOR+0.45% 2/04 2/05 1,049,507 1,729,610
5,191 6.49% LIBOR+0.45% 2/04 2/05 165,072 269,419
24,902 7.077% LIBOR+0.45% 7/04 2/05 1,431,871 1,906,989
10,471 7.37% LIBOR+0.45% 9/04 2/05 727,188 922,144
19,149 7.89% LIBOR+0.45% 2/04 2/05 763,652 1,284,855
70,000 7.71% LIBOR+0.45% 2/05 2/05 6,515,771 7,625,973
- ----------------------------------------------------------------------------------------------------------------------
$ 10,911,798 $ 21,367,938
- ----------------------------------------------------------------------------------------------------------------------
* Agreement was terminated on the Initial Optional Termination Date.
5 Debt
Credit Facility - Effective on July 15, 2003, Belair Capital refinanced the
existing Credit Facility with Merrill Lynch International Bank Limited with two
new credit arrangements (collectively, the New Credit Facility) totaling
$615,000,000. The New Credit Facility has a seven-year maturity and will expire
on June 25, 2010. Belair Capital's obligations under the New Credit Facility are
secured by a pledge of its assets, excluding the assets of Bel Residential
Properties Trust (Bel Residential).
The credit arrangement with DrKW Holdings, Inc. is for $515,000,000. This credit
arrangement accrues interest at a rate of one-month LIBOR + 0.30% per annum. As
of July 15, 2003, outstanding borrowings under this credit arrangement totaled
$515,000,000.
The credit arrangement with Merrill Lynch Mortgage Capital is for $100,000,000
and includes the ability to issue letters of credit up to $10,000,000. This
credit arrangement accrues interest at a rate of one-month LIBOR + 0.38% per
annum. A commitment fee of 0.10% per annum is paid on the unused commitment
amount. Belair Capital pays all fees associated with issuing the letters of
credit. As of July 15, 2003, outstanding borrowings under this credit
arrangement totaled $17,769,000, as well as one letter of credit outstanding for
$1,354,068. The letter of credit was issued as a substitute for funding certain
mortgage escrow accounts required by the lender of Bel Residential. The letter
of credit expires in 2004 and automatically extends for one-year periods, not to
extend beyond June 15, 2010. Fees paid or accrued under the terms of the letter
of credit issued under the existing Credit Facility totaled $5,372, for the six
months ended June 30, 2003.
6 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 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 debt and equity investments in private real
estate companies, and indirectly in real property through a controlled
subsidiary, Bel Residential. At June 30, 2002, Belair Real Estate's controlled
subsidiaries also included Katahdin (for the period from January 1, 2002 through
May 21, 2002).
12
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 (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. No reportable
segments have been aggregated. Reportable information by segment is as follows:
FOR THE THREE MONTHS ENDED TAX-MANAGED GROWTH REAL
JUNE 30, 2003 PORTFOLIO* ESTATE TOTAL
- ---------------------------------------------------------------------------------------------------------------------
Revenue $ 3,086,932 $ 15,191,521 $ 18,278,453
Interest expense on mortgages - (2,386,111) (2,386,111)
Interest expense on Credit Facility - (2,324,317) (2,324,317)
Interest expense on swap contracts - (4,875,697) (4,875,697)
Operating expenses (543,486) (3,455,002) (3,998,488)
Minority interest in net income of controlled
subsidiaries - (149,592) (149,592)
- ---------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 2,543,446 $ 2,000,802 $ 4,544,248
Net realized gain 3,705,353 - 3,705,353
Change in unrealized gain (loss) 165,762,777 7,885,562 173,648,339
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS OF
REPORTABLE SEGMENTS $ 172,011,576 $ 9,866,364 $ 181,897,940
- ---------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED TAX-MANAGED GROWTH REAL
JUNE 30, 2002 PORTFOLIO* ESTATE TOTAL
- ---------------------------------------------------------------------------------------------------------------------
Revenue $ 2,823,326 $ 17,042,453 $ 19,865,779
Interest expense on mortgages - (3,045,319) (3,045,319)
Interest expense on Credit Facility - (3,292,051) (3,292,051)
Interest expense on swap contracts - (7,526,723) (7,526,723)
Operating expenses (671,138) (4,037,741) (4,708,879)
Minority interest in net income of controlled
subsidiaries - (353,710) (353,710)
- ---------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) $ 2,152,188 $ (1,213,091) $ 939,097
Net realized loss (129,614,629) (9,540,011) (139,154,640)
Change in unrealized gain (loss) (83,763,480) 3,804,835 (79,958,645)
- ---------------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS FROM OPERATIONS OF
REPORTABLE SEGMENTS $ (211,225,921) $ (6,948,267) $ (218,174,188)
- ---------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED TAX-MANAGED GROWTH REAL
JUNE 30, 2003 PORTFOLIO* ESTATE TOTAL
- ---------------------------------------------------------------------------------------------------------------------
Revenue $ 6,098,004 $ 30,456,141 $ 36,554,145
Interest expense on mortgages - (4,772,222) (4,772,222)
Interest expense on Credit Facility - (4,822,212) (4,822,212)
Interest expense on swap contracts - (11,984,376) (11,984,376)
Operating expenses (1,047,225) (6,825,261) (7,872,486)
Minority interest in net income of controlled
subsidiaries - (321,751) (321,751)
- ---------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 5,050,779 $ 1,730,319 $ 6,781,098
Net realized (loss) gain (2,191,186) 92 (2,191,094)
Change in unrealized gain (loss) 104,742,932 37,831,846 142,574,778
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS OF
REPORTABLE SEGMENTS $ 107,602,525 $ 39,562,257 $ 147,164,782
- ---------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED TAX-MANAGED GROWTH REAL
JUNE 30, 2002 PORTFOLIO* ESTATE TOTAL
- ---------------------------------------------------------------------------------------------------------------------
Revenue $ 4,936,613 $ 37,314,464 $ 42,251,077
Interest expense on mortgages - (7,409,054) (7,409,054)
Interest expense on Credit Facility - (6,580,927) (6,580,927)
Interest expense on swap contracts - (14,887,050) (14,887,050)
Operating expenses (1,368,890) (9,722,145) (11,091,035)
Minority interest in net income of controlled
13
subsidiaries - (1,014,662) (1,014,662)
- ---------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) $ 3,567,723 $ (2,299,374) $ 1,268,349
Net realized loss (140,883,693) (10,154,866) (151,038,559)
Change in unrealized gain (loss) (61,358,538) 8,819,959 (52,538,579)
- ---------------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS FROM OPERATIONS OF
REPORTABLE SEGMENTS $ (198,674,508) $ (3,634,281) $ (202,308,789)
- ---------------------------------------------------------------------------------------------------------------------
TAX-MANAGED GROWTH REAL
AT JUNE 30, 2003 PORTFOLIO* ESTATE TOTAL
- ---------------------------------------------------------------------------------------------------------------------
Segment assets $1,436,699,926 $ 586,131,417 $ 2,022,831,343
Segment liabilities - 658,365,805 658,365,805
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS OF REPORTABLE SEGMENTS $1,436,699,926 $ (72,234,388) $ 1,364,465,538
- ---------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2002
- ---------------------------------------------------------------------------------------------------------------------
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 invests indirectly in Tax-Managed Growth Portfolio through Belvedere Capital.
The following tables reconcile the reported segment information to the condensed consolidated financial statements for the periods
indicated:
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
----------------- ------------------ ------------------ -------------------
Revenue:
Revenue from reportable segments $ 18,278,453 $ 19,865,779 $ 36,554,145 $ 42,251,077
Unallocated revenue 11,251 17,764 29,813 24,990
----------------- ------------------ ------------------ -------------------
TOTAL REVENUE $ 18,289,704 $ 19,883,543 $ 36,583,958 $ 42,276,067
----------------- ------------------ ------------------ -------------------
Net increase (decrease) in net assets from
operations:
Net increase (decrease) in net assets
from operations of reportable segments $181,897,940 $ (218,174,188) $ 147,164,782 $ (202,308,789)
Unallocated revenue 11,251 17,764 29,813 24,990
Unallocated expenses ** (308,689) (299,105) (549,668) (642,984)
----------------- ------------------ ------------------ -------------------
TOTAL NET INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $181,600,502 $ (218,455,529) $ 146,644,927 $ (202,926,783)
----------------- ------------------ ------------------ -------------------
** Unallocated expenses include Belair Capital's cost to operate the Fund such
as servicing fees, as well as other miscellaneous administrative costs of Belair
Capital.
DECEMBER 31,
JUNE 30, 2003 2002
------------------ -------------------
Net assets:
Net assets of reportable segments $ 1,364,465,538 $ 1,239,200,716
Unallocated cash 3,596,235 14,074,693
Short-term investments - 3,426,881
Other assets - 9,100
Loan payable - Credit Facility (15,983,070) (10,815,380)
Other liabilities (144,546) (88,354)
------------------ -------------------
TOTAL NET ASSETS $ 1,351,934,157 $ 1,245,807,656
------------------ -------------------
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information in this report contains forward-looking statements within the
meaning of the federal securities laws. Forward-looking statements typically are
identified by use of terms such as "may," "will," "should," "might," "expect,"
"anticipate," "estimate," and similar words, although some forward-looking
statements are expressed differently. The actual results of Belair Capital Fund
LLC (the Fund) could differ materially from those contained in the
forward-looking statements due to a number of factors. The Fund undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events, or otherwise, except as required by
applicable law. Factors that could affect the Fund's performance include a
decline in the U.S. stock markets or in general economic conditions, adverse
developments affecting the real estate industry, or fluctuations in interest
rates.
The following discussion should be read in conjunction with the Fund's unaudited
condensed consolidated financial statements and related notes in Item 1 above.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2003 COMPARED TO THE
QUARTER ENDED JUNE 30, 2002
PERFORMANCE OF THE FUND.1 The Fund's total return was 15.23% for the quarter
ended June 30, 2003. This return reflects an increase in the Fund's net asset
value per share from $89.32 to $102.92 during the period. For comparison, the
Standard & Poor's 500 Index (the S&P 500), an unmanaged index of large
capitalization stocks commonly used as a benchmark for the U.S. equity market,
had a total return of 15.39% over the same period. The performance of the Fund
exceeded that of Tax-Managed Growth Portfolio (the Portfolio) by approximately
1.69% during the period. Last year, the Fund had a total return performance of
- -13.07% for the quarter ended June 30, 2002. This return reflected a decrease in
the Fund's net asset value per share from $118.49 to $103.00 during the period.
For comparison, the S&P 500 had a total return of -13.39% over the same period.
The performance of the Fund trailed that of the Portfolio by approximately 1.43%
during that period.
PERFORMANCE OF THE PORTFOLIO. The total return of the Portfolio for the quarter
ended June 30, 2003 was 13.54% compared to the 15.39% return achieved by the S&P
500 over the same period. The S&P 500 enjoyed a strong rally in the quarter,
posting its best quarterly return since the fourth quarter of 1998. Encouraging
fiscal and monetary policies, resilient consumer spending and positive earnings
momentum contributed to the market's strength during the period. In general,
small capitalization stocks outperformed large capitalization holdings during
the quarter and value investing outperformed growth, a continuing theme from the
same period last year. The total return of the Portfolio for the quarter ended
June 30, 2002 was -11.64%.
The performance of the Portfolio trailed the performance of the S&P 500 during
the quarter ended June 30, 2003 primarily due to the Portfolio's relatively more
defensive tilt and its de-emphasis of stocks considered by the Portfolio's
investment adviser, Boston Management and Research (Boston Management), to be of
lower quality. Higher volatility, lower quality stocks exhibited strong momentum
across most industry groups during the period.
The Portfolio's sector allocation during the quarter remained very similar to
its positioning relative to the S&P 500 during the year ended December 31, 2002,
with no major sector or industry shifts. The Portfolio's exposure to
pharmaceuticals in the health care sector and media investments in the consumer
discretionary sector was particularly beneficial to the Portfolio's performance
during the quarter.
Boston Management remained cautious in the technology and telecommunications
sectors during the quarter, maintaining an underweight allocation comparable to
the same period a year ago. The Portfolio continued its de-emphasis of stocks in
the semiconductor equipment, peripherals, and wireless telecommunication
industries. This posture has added to performance over longer time periods and
during the same period a year ago, but hindered the Portfolio's performance
during the second quarter of 2003.
The Portfolio's overweight of the industrials sector in the areas of airfreight
logistics and aerospace and defense, another continuing theme from last year,
detracted from quarterly results, but has positively contributed to the
Portfolio's longer-term returns. The Portfolio's continued de-emphasis of the
utilities and materials sectors and the quality of its stock selection in those
sectors was beneficial to performance during the quarter.
1 Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that Shares, when redeemed, may be worth more
or less than their original cost. Comparison to the S&P 500 is for reference
only. It is not possible to invest directly in an index.
15
PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate investments
include Partnership Preference Units and an interest in a Real Estate Joint
Venture. For the quarter ended June 30, 2003, the Fund's investments in
Partnership Preference Units continued to benefit from declining interest rates
and tightening spreads in income-oriented securities, particularly in real
estate-related securities. At June 30, 2003, the estimated fair value of the
Fund's Partnership Preference Units totaled $414.4 million compared to $397.0
million at June 30, 2002, an increase of $17.4 million or 4%. The Fund saw
unrealized appreciation of the estimated fair value in its Partnership
Preference Units of approximately $3.0 million during the quarter ended June 30,
2003 compared to approximately $11.4 million for the quarter ended June 30,
2002. Dividends received from Partnership Preference Units for the quarter ended
June 30, 2003 totaled $9.7 million compared to $9.4 million for the quarter
ended June 30, 2002, an increase of $0.3 million or 3%.
The Fund conducts its real estate operations through a Real Estate Joint Venture
that is majority-owned by Belair Real Estate Corporation (Belair Real Estate), a
controlled subsidiary of the Fund. During the quarter ended June 30, 2003, the
Fund's real estate operations continued to be impacted by weaker multifamily
market fundamentals, as well as the uncertain outlook for the U.S. economy. The
Fund's sale of its interest in Katahdin Property Trust LLC (Katahdin) in May
2002 reduced the scope of the Fund's real estate activities for the quarter
ended June 30, 2003 as compared to the quarter ended June 30, 2002.
Rental income from real estate operations decreased to $5.5 million for the
quarter ended June 30, 2003 from $7.6 million for the quarter ended June 30,
2002, a decrease of $2.1 million or 28%. While this decrease in rental income
principally resulted from the sale of the Fund's interest in Katahdin in 2002,
rental income was also affected by increased rent concessions or reduced
apartment rental rates and lower occupancy levels at properties owned by the
Fund's remaining Real Estate Joint Venture, a trend that continued from 2002.
Property operating expenses decreased to $2.5 million for the quarter ended June
30, 2003 from $3.1 million for the quarter ended June 30, 2002, a decrease of
$0.6 million or 19% (property operating expenses are before debt service and
certain operating expenses of Belair Real Estate of approximately $1.0 million
for the quarter ended June 30, 2003 and approximately $0.9 million for the
quarter ended June 30, 2002). The decrease in operating expenses was principally
due to the sale of the Fund's interest in Katahdin. The decrease was partially
offset by modest increases in property and maintenance, taxes and insurance
expenses of the Fund's remaining Real Estate Joint Venture. Given the continued
uncertain outlook for the U.S. economy as a whole, Boston Management, Belair
Real Estate's manager, expects that real estate operating results for the Fund's
remaining Real Estate Joint Venture in 2003 will continue to be modestly below
the levels of 2002.
At June 30, 2003, the estimated fair value of the real properties held through
Belair Real Estate was $158.7 million compared to $156.3 million at June 30,
2002, an increase of $2.4 million or 2% (because the Fund sold its interest in
Katahdin in May 2002, estimated property values at June 30, 2002 do not include
the Katahdin properties). The modest increase in estimated real property values
at June 30, 2003 resulted from declines in capitalization rates in a
lower-return environment. Declines in capitalization rates more than offset the
impact on property values of lower income level expectations. The Fund saw
unrealized appreciation of the estimated fair value in its other real estate
investments (which includes Belair Real Estate's interest in a Real Estate Joint
Venture) of approximately $0.7 million during the quarter ended June 30, 2003
compared to approximately $2.2 million of unrealized depreciation for the
quarter ended June 30, 2002. During the quarter ended June 30, 2002, the Fund
sold its interest in Katahdin to another fund advised by Boston Management and
recognized a loss of $9.5 million on the transaction.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the quarter ended June 30,
2003, interest rate swap agreement values appreciated by $4.2 million due to the
exercise of early termination options on a number of swap agreements and the
remaining agreements approaching their initial optional termination dates. The
appreciation was offset by a slight decline in swap rates. For the quarter ended
June 30, 2002, the value of interest rate swap agreements decreased by $5.4
million due to a decline in swap rates. Approximately 61% of the notional amount
of the Fund's existing interest rate swap agreements will reach their initial
optional termination dates over the next five quarters and all remaining
agreements will expire on February 10, 2005.
16
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 2002
PERFORMANCE OF THE FUND. The Fund's total return was 11.99% for the six months
ended June 30, 2003. This return reflects an increase in the Fund's net asset
value per share from $92.38 to $102.92 and a distribution of $0.49 per share
during the period. For comparison, the S&P 500 had a total return of 11.75% over
the same period. The performance of the Fund exceeded that of the Portfolio by
approximately 3.80% during the period. Last year, the Fund had a total return
performance of -12.26% for the six months ended June 30, 2002. This return
reflected a decrease in the Fund's net asset value per share from $117.39 to
$103.00. For comparison, the S&P 500 had a total return of -13.15% over the same
period. The performance of the Fund trailed that of the Portfolio by
approximately 1.32% for the six months ended June 30, 2002.
PERFORMANCE OF THE PORTFOLIO. The total return of the Portfolio for the six
months ended June 30, 2003 was 8.19% compared to the 11.75% return achieved by
the S&P 500 over the same period. Market performance during the first six months
of 2003 remained volatile, but markets proved resilient, achieving impressive
returns and positively concluding the first half of the year. War angst,
questionable economic recovery, and the SARS outbreak were just a few of the
factors contributing to increased volatility and unsettled investor sentiment
during the period. During the second quarter of 2003, an easing of geopolitical
concerns, positive consumer data, a strong housing market, and a low interest
rate environment provided significant support and a boost to the equity markets.
The Portfolio's total return for the quarter ended June 30, 2002 was -10.94%.
The Portfolio's performance trailed the S&P 500 in the first six months of 2003,
mostly due to its lower exposure to higher volatility, lower quality stocks,
which were the strongest price performers during the first six months of 2003.
Despite this short-term performance, the Portfolio is committed to its
investment strategy of seeking quality stocks that are reasonably priced in
relation to their fundamental value.
Boston Management continued to de-emphasize health care investments during the
period, a directional move initiated last year that has been positive for the
Portfolio's relative returns. Boston Management continued to emphasize
industrial company investments, especially in the airfreight logistics and
aerospace and defense areas, which has helped the Portfolio's longer-term
record, but detracted from first half results. The Portfolio also maintained an
overweight stance in the consumer discretionary and consumer staples sectors
during the period, as it did in the first half of 2002.
Lack of earning visibility during the period reinforced the Portfolio's cautious
weighting in the telecommunications and information technology sectors. Both of
the aforementioned sectors were de-emphasized last year as well. The Portfolio's
underweight of diversified telecommunication service and software holdings
relative to the S&P 500 was particularly beneficial to relative performance in
the first half of 2003. Boston Management also continued to underweight the
Portfolio's exposure to the materials and utilities sectors, a similar stance to
last year's allocation.
PERFORMANCE OF REAL ESTATE INVESTMENTS. For the six months ended June 30, 2003,
the Fund's investments in Partnership Preference Units 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 $414.4 million at June 30, 2003
compared to $397.0 million at June 30, 2002, an increase of $17.4 million or 4%.
The Fund saw unrealized appreciation in the estimated fair value of its
Partnership Preference Units of approximately $27.1 million during the six
months ended June 30, 2003, compared to approximately $9.4 million during the
six months ended June 30, 2002. Dividends received from Partnership Preference
Units for the six months ended June 30, 2003 totaled $19.3 million compared to
$18.1 million for the six months ended June 30, 2002, an increase of $1.2
million or 7%.
Rental income from real estate operations decreased to $11.1 million for the six
months ended June 30, 2003 from $19.1 million for the six months ended June 30,
2002, a decrease of $8.0 million or 42%. Property operating expenses decreased
to $5.1 million for the six months ended June 30, 2003 from $7.7 million for the
six months ended June 30, 2002, a decrease of $2.6 million or 34% (property
operating expenses are before debt service and certain operating expenses of
Belair Real Estate of approximately $1.7 million for the six months ended June
30, 2003 and approximately $2.0 million for the six months ended June 30, 2002).
While these decreases were principally due to the May 2002 sale of the Fund's
17
interest in Katahdin, weaker multifamily market fundamentals in most regions
combined with lower occupancy levels and increased rent concessions also
impacted results during the period, as did modest increases in operating
expenses.
At June 30, 2003, the estimated fair value of the real properties held through
Belair Real Estate was $158.7 million compared to $156.3 million at June 30,
2002, an increase of $2.4 million or 2%. The increase was due to modest
increases in estimated property values that resulted from declines in
capitalization rates in a lower-return environment. The Fund saw unrealized
appreciation of the estimated fair value in its other real estate investments of
approximately $0.2 million during the six months ended June 30, 2003, compared
to approximately $2.7 million of unrealized depreciation during the six months
ended June 30, 2002. During the six months ended June 30, 2002, the Fund sold
its interest in Katahdin to another fund advised by Boston Management and
recognized a loss of $9.5 million on the transaction.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the six months ended June 30,
2003, interest rate swap agreement values appreciated by approximately $10.5
million compared to appreciation of approximately $2.1 million for the six
months ended June 30, 2002. The appreciation is primarily due to the exercise of
early termination options during the first half of 2003 on a number of swap
agreements and the remaining agreements approaching their initial optional
termination dates. Swap rates declined during the periods, offsetting some of
the appreciation from approaching terminations.
LIQUIDITY AND CAPITAL RESOURCES
Effective July 15, 2003, the Fund refinanced its Credit Facility with Merrill
Lynch International Bank by entering into new credit arrangements with DrKW
Holdings, Inc. (DrKW) and Merrill Lynch Mortgage Capital, Inc. (MLMC)
(collectively, the New Credit Facility), which together total $615 million. The
New Credit Facility is secured by a pledge of the Fund's assets, excluding the
assets of Bel Residential Properties Trust, and has a seven-year maturity. The
New Credit Facility will expire in June 2010.
The New Credit Facility is primarily used to fund the Fund's equity in real
estate investments and will continue to be used for such purpose in the future.
The New Credit Facility also provides for selling commissions, organizational
expenses and any short-term liquidity needs of the Fund. Under certain
circumstances, the Fund may increase the size of the New Credit Facility and the
amount of outstanding borrowings thereunder for these purposes.
The Fund has a $515 million credit arrangement with DrKW. Borrowings under the
DrKW credit arrangement accrue interest at a rate of one-month LIBOR plus 0.30%
per annum. As of July 15, 2003, outstanding borrowings under the DrKW credit
arrangement totaled $515 million.
The Fund has a $100 million credit arrangement with MLMC, including up to $10
million under letters of credit. Borrowings under the MLMC credit arrangement
accrue interest at a rate of one-month LIBOR plus 0.38% per annum. As of July
15, 2003, outstanding borrowings under the MLMC credit arrangement totaled $17.8
million, with an additional $1.4 million outstanding under a letter of credit.
The unused loan commitment amount totaled approximately $80.8 million. A
commitment fee of 0.10% per annum is paid on the unused commitment amount. The
Fund pays all fees associated with issuing the letters of credit.
The Fund has entered into interest rate swap agreements with respect to its
borrowings and real estate investments. Pursuant to these agreements, the Fund
makes quarterly payments to the counterparty at predetermined fixed rates, in
exchange for floating-rate payments 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.
As of June 30, 2003 and June 30, 2002, the unrealized depreciation related to
the interest rate swap agreements was $10.9 million and $27.7 million,
respectively.
18
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Fund's discussion and analysis of its financial condition and results of
operations are based upon its unaudited condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Fund to make estimates, judgments and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. The Fund bases these estimates, judgments and assumptions on
historical experience and on other various factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
The Fund's critical accounting policies affect the Fund's more significant
estimates and assumptions used in valuing the Fund's real estate investments and
interest rate swap agreements. Prices are not readily available for these types
of investments and therefore they are valued on an ongoing basis by Boston
Management, in its capacity as manager of 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, which represent the amount at which the investments could be sold in a
current transaction between willing parties, that is, other than in a forced or
liquidation sale. Detailed investment valuations are performed at least annually
and reviewed periodically. Interim valuations reflect results of operations and
distributions, and may be adjusted if there has been a significant change in
economic circumstances since the most recent independent valuation. Given that
such valuations include many assumptions, including but not limited to the
assumption that the investment could be sold in a transaction between willing
parties, values may differ from amounts ultimately realized. Boston Management,
as the Fund's investment adviser, determines the value of interest rate swaps,
and, in doing so, may consider among other things, dealer and counter-party
quotes and pricing models.
The policies for valuing real estate investments involve significant judgments
that are based upon, without limitation, general economic conditions, the supply
and demand for different types of real properties, the financial health of
tenants, the timing of lease expirations and terminations, fluctuations in
rental rates and operating costs, exposure to adverse environmental conditions
and losses from casualty or condemnation, interest rates, availability of
financing, managerial performance and government rules and regulations. The
valuations of Partnership Preference Units held by the Fund through its
investment in 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 principally by changes in interest rates. Interest rate swaps may be
difficult to value since such instruments may be considered illiquid.
Fluctuations in the value of Partnership Preference Units derived from changes
in general interest rates can be expected to be offset in part (but not
entirely) by changes in the value of interest rate swap agreements or other
interest rate hedges entered into by the Fund with respect to its borrowings.
Fluctuations in the value of real estate investments derived from other factors
besides general interest rate movements (including issuer-specific and
sector-specific credit concerns, property-specific concerns and changes in
interest rate spread relationships) will not be offset by changes in the value
of interest rate swap agreements or other interest rate hedges entered into by
the Fund. Changes in the valuation of Partnership Preference Units not offset by
changes in the valuation of interest rate swap agreements or other interest rate
hedges entered into by the Fund and changes in the value of other real estate
investments will cause the performance of the Fund to deviate from the
performance of the Portfolio.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Fund's primary exposure to interest rate risk arises from its real estate
investments that are financed by the Fund with floating rate borrowings under
the Fund's Credit Facility and by fixed-rate secured mortgage debt obligations
of the Real Estate Joint Venture. The interest rates on borrowings under the
19
Fund's Credit Facility are reset at regular intervals based on fixed and
predetermined premiums 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 can expose the Fund to significant loss.
The value of Partnership Preference Units and, to a lesser degree, other real
estate investments is sensitive to interest rate risk. Increases in interest
rates generally will have an adverse affect on the value of Partnership
Preference Units and other real estate investments.
The following table summarizes the contractual maturities and weighted-average
interest rates associated with the Fund's significant non-trading financial
instruments. The Fund has no market risk sensitive instruments held for trading
purposes. This information should be read in conjunction with Note 4 to the
Fund's unaudited condensed consolidated financial statements in Item 1 above.
Interest Rate Sensitivity
Cost, Principal (Notional) Amount by Contractual Maturity
For the Twelve Months Ended June 30,
Estimated
2004 2005 2006-2008 Thereafter Total Fair Value
- -------------------------------------------------------------------------------------------------------
Rate sensitive
liabilities:
- ------------------------
Long-term debt:
- ------------------------
Fixed-rate mortgages $112,630,517 $112,630,517 $ 131,000,000
Average interest rate 8.33% 8.33%
- ------------------------
Variable-rate Credit
Facility $532,769,000 $532,769,000 $ 532,769,000
Average interest rate 1.57% 1.57%
- ------------------------------------------------------------------------------------------------------
Rate sensitive
derivative financial
instruments:
- ------------------------
Pay fixed/
receive variable
interest rate
swap contracts $179,373,000 $179,373,000 $(10,911,798)
Average pay rate 7.19% 7.19%
Average receive rate 1.57% 1.57%
- ------------------------------------------------------------------------------------------------------
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: 8.82% $ 22,521,852 $ 22,521,852 $ 25,748,543
20
Camden Operating,
L.P., 8.50% Series B
Cumulative Redeemable
Perpetual Preferred
Units, Callable
2/23/04, Current
Yield: 8.34% $ 27,384,494 $ 27,384,494 $ 28,039,000
Colonial Realty
Limited Partnership,
8.875% Series B
Cumulative Redeemable
Perpetual Preferred
Units, Callable
2/23/04, Current
Yield: 8.71% $ 44,807,072 $ 44,807,072 $ 49,411,800
Kilroy Realty, L.P.,
8.075% Series A
Cumulative Redeemable
Preferred Units,
Callable 2/06/03,
Current Yield: 8.79% $ 28,800,000 $ 28,800,000 $ 26,464,147
Liberty Property L.P.,
9.25% Series B
Cumulative Redeemable
Preferred Units,
Callable 7/28/04,
Current Yield: 8.91% $ 30,875,000 $ 30,875,000 $ 32,060,600
MHC Operating Limited
Partnership, 9% Series
D Cumulative
Redeemable Perpetual
Preference Units,
Callable 9/29/04,
Current Yield: 8.95% $ 50,000,000 $ 50,000,000 $ 50,260,000
National Golf
Operating Partnership,
L.P., 9.30% Series A
Cumulative Redeemable
Preferred Units,
Callable 3/4/03,
Current Yield: 9.89% $ 31,454,184 $ 31,454,184 $ 31,047,754
National Golf
Operating Partnership,
L.P., 9.30% Series B
Cumulative Redeemable
Preferred Units,
Callable 7/28/04,
Current Yield: 9.89% $ 5,000,000 $ 5,000,000 $ 4,700,000
PSA Institutional
Partners, L.P., 9.50%
Series N Cumulative
Redeemable Perpetual
Preferred Units,
Callable 3/17/05,
Current Yield: 8.99% $ 48,250,000 $ 48,250,000 $ 50,990,600
Price Development
Company, L.P., 8.95%
Series B Cumulative
Redeemable Preferred
Partnership Interests,
Callable 7/28/04,
Current Yield: 9.27% $ 30,625,000 $ 30,625,000 $ 29,571,500
Regency Centers, L.P.,
8.125% Series A
Cumulative Redeemable
Preferred Units,
Callable 6/25/03,
Current Yield: 8.09% $ 30,000,000 $ 30,000,000 $ 30,132,000
21
Summit Properties
Partnership, L.P.,
8.95% Series B
Cumulative Redeemable
Perpetual Preferred
Units, Callable
4/29/04, Current
Yield: 8.85% $ 29,625,000 $ 29,625,000 $ 29,944,950
Urban Shopping
Centers, L.P., 9.45%
Series D Cumulative
Redeemable Perpetual
Preferred Units,
Callable 10/01/04, $ 25,000,000 $ 25,000,000 $ 25,986,300
Current Yield: 9.09%
- ------------------------
Note Receivable:
- ------------------------
Fixed-rate note
receivable, 8%
$ 2,135,654 $ 2,135,654 $ 2,135,654
ITEM 4. CONTROLS AND PROCEDURES.
Eaton Vance Management (Eaton Vance), as the Fund's manager, with the
participation of the Fund's Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of the Fund's disclosure controls
and procedures (as defined by Rule 13a-15(e) of the Securities Exchange Act of
1934, as amended) as of the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Fund's disclosure controls and procedures were effective.
There were no changes in the Fund's internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, the Fund's internal
control over financial reporting.
As the Fund's manager, the complete and entire management, control and operation
of the Fund are vested in Eaton Vance. The Fund's organizational structure does
not provide for a board of directors or a board audit committee. As such, the
Fund's Chief Executive Officer and Chief Financial Officer intend to report to
Eaton Vance any significant deficiency in the design or operation of internal
control over financial reporting which could adversely affect the Fund's ability
to record, process, summarize and report financial data, and any fraud, whether
or not material, that involves management or other employees who have a
significant role in the Fund's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Although in the ordinary course of business, the Fund, Belair Real Estate and
Belair Real Estate's controlled subsidiary may become involved in legal
proceedings, the Fund is not aware of any material pending legal proceedings to
which any of them is subject.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the three months
ended June 30, 2003.
ITEM 5. OTHER INFORMATION.
None.
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) The following is a list of all exhibits filed as part of this Form 10-Q:
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
None.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer on August 14, 2003.
BELAIR CAPITAL FUND LLC
/s/ Michelle A. Alexander
--------------------------------
Michelle A. Alexander
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
24
EXHIBIT INDEX
-------------
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
25