UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2004
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[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________ to _____________
Commission File No. 000-25767
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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
--------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 617-482-8260
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None
----
(Former Name, Former Address and Former Fiscal Year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
YES X NO
--- ---
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, 2004 (Unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended June 30, 2004 and 2003 and for the
Six Months Ended June 30, 2004 and 2003 4
Condensed Consolidated Statements of Changes in Net Assets
for the Six Months Ended June 30, 2004 (Unaudited) and the
Year Ended December 31, 2003 6
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 2004 and 2003 7
Financial Highlights (Unaudited) for the Six Months Ended
June 30, 2004 9
Notes to Condensed Consolidated Financial Statements as of
June 30, 2004 (Unaudited) 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
EXHIBIT INDEX 28
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Assets and Liabilities
June 30, 2004 December 31,
(Unaudited) 2003
-------------- --------------
Assets:
Investment in Belvedere Capital Fund
Company LLC (Belvedere Company) $1,608,405,284 $1,588,195,284
Investment in Partnership Preference Units 305,783,310 318,042,995
Investment in other real estate 185,246,356 162,585,380
Short-term investments 16,000,000 11,765,330
-------------- --------------
Total investments $2,115,434,950 $2,080,588,989
Cash 2,564,853 8,687,577
Escrow deposits - restricted 80,839 80,839
Open interest rate swap agreements, at value 6,529,868 1,644,344
Distributions and interest receivable 127,031 694,054
Other assets 2,997,165 1,144,720
-------------- --------------
Total assets $2,127,734,706 $2,092,840,523
-------------- --------------
Liabilities:
Loan payable - Credit Facility $ 468,000,000 $ 447,000,000
Mortgage payable 112,630,517 112,630,517
Payable for Fund Shares redeemed 200,000 1,180,000
Distributions payable to minority shareholders - 16,800
Swap interest payable 210,383 243,920
Security deposits 443,809 372,900
Accrued expenses:
Interest expense 942,695 920,797
Property taxes 866,975 576,590
Other expenses and liabilities 421,592 669,458
Minority interests in controlled subsidiaries 13,637,454 6,947,692
-------------- --------------
Total liabilities $ 597,353,425 $ 570,558,674
-------------- --------------
Net assets $1,530,381,281 $1,522,281,849
-------------- --------------
Shareholders' Capital $1,530,381,281 $1,522,281,849
-------------- --------------
Shares outstanding 12,523,816 12,728,157
-------------- --------------
Net asset value and redemption price per Share $ 122.20 $ 119.60
-------------- --------------
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 Ended Ended Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Investment Income:
Dividends allocated from Belvedere Company
(net of foreign taxes of $133,243, $92,086,
$199,652 and $152,043, respectively) $ 6,114,372 $ 5,051,085 $11,671,799 $ 9,972,661
Interest allocated from Belvedere Company 18,865 158,005 45,403 249,852
Expenses allocated from Belvedere Company (2,376,174) (2,122,158) (4,786,308) (4,124,509)
----------- ----------- ----------- -----------
Net investment income allocated from
Belvedere Company $ 3,757,063 $ 3,086,932 $ 6,930,894 $ 6,098,004
Distributions from Partnership Preference Units 7,022,667 9,656,110 15,493,544 19,308,901
Rental income 5,602,237 5,483,433 11,113,455 11,067,605
Interest 137,621 63,229 242,769 109,448
----------- ----------- ----------- -----------
Total investment income $16,519,588 $18,289,704 $33,780,662 $36,583,958
----------- ----------- ----------- -----------
Expenses:
Investment advisory and administrative fees $ 1,390,558 $ 1,352,111 $ 2,791,673 $ 2,637,073
Property management fees 223,344 222,039 441,881 444,666
Servicing fees 154,895 131,906 322,438 247,720
Interest expense on mortgages 2,386,111 2,386,111 4,772,222 4,772,222
Interest expense on Credit Facility 1,696,182 2,422,481 3,367,062 4,971,353
Property and maintenance expenses 1,680,746 1,567,507 3,257,272 3,117,760
Property taxes and insurance 693,586 751,907 1,394,367 1,506,554
Amortization of deferred expenses - - - 9,099
Miscellaneous 191,034 183,543 327,420 310,141
----------- ----------- ----------- -----------
Total expenses $ 8,416,456 $ 9,017,605 $16,674,335 $18,016,588
----------- ----------- ----------- -----------
Net investment income before
minority interest in net income of
controlled subsidiaries $ 8,103,132 $ 9,272,099 $17,106,327 $18,567,370
Minority interest in net income
of controlled subsidiaries (115,744) (149,592) (225,980) (321,751)
----------- ----------- ----------- -----------
Net investment income $ 7,987,388 $ 9,122,507 $16,880,347 $18,245,619
----------- ----------- ----------- -----------
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 Ended Ended Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions and foreign
currency transactions allocated from
Belvedere Company (identified cost basis) $ 5,985,586 $ 3,705,353 $11,836,499 $ (2,191,186)
Investment transactions in Partnership
Preference Units (identified cost basis) - - 2,399,543 92
Interest rate swap agreements (1) (3,193,756) (4,875,697) (6,245,551) (11,984,376)
----------- ------------ ----------- ------------
Net realized gain (loss) $ 2,791,830 $ (1,170,344) $ 7,990,491 $(14,175,470)
----------- ------------ ----------- ------------
Change in unrealized appreciation
(depreciation)
Investments and foreign currency
allocated from Belvedere Company
(identifed cost basis) $10,427,667 $165,762,777 $34,441,442 $104,742,932
Investment in Partnership Preference Units
(identified cost basis) (5,653,884) 3,001,536 (12,611,935) 27,138,712
Investment in other real estate (net of
minority interests in unrealized gain
of controlled subsidiaries of $151,672,
$519,169, $2,059,804 and $170,020, respectively) (486,900) 670,139 (2,445,242) 236,994
Interest rate swap agreements 9,759,378 4,213,887 4,885,524 10,456,140
----------- ------------ ----------- ------------
Net change in unrealized appreciation
(depreciation) $14,046,261 $173,648,339 $24,269,789 $142,574,778
----------- ------------ ----------- ------------
Net realized and unrealized gain $16,838,091 $172,477,995 $32,260,280 $128,399,308
----------- ------------ ----------- ------------
Net increase in net assets from operations $24,825,479 $181,600,502 $49,140,627 $146,644,927
=========== ============ =========== ============
(1) Amounts represent periodic payments made in connection with interest rate
swap agreements. (Note 4)
See notes to unaudited condensed consolidated financial statements
5
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Changes in Net Assets
Six Months
Ended Year Ended
June 30, 2004 December 31,
(Unaudited) 2003
--------------- ---------------
Increase (Decrease) in Net Assets:
Net investment income $ 16,880,347 $ 34,029,533
Net realized gain (loss) from investment
transactions, foreign currency transactions
and interest rate swap agreements 7,990,491 (6,702,427)
Net change in unrealized appreciation
(depreciation) of investments, foreign
currency and interest rate swap agreements 24,269,789 335,001,122
-------------- --------------
Net increase in net assets from operations $ 49,140,627 $ 362,328,228
-------------- --------------
Transactions in Fund Shares -
Net asset value of Fund Shares issued to
Shareholders in payment of distributions
declared $ 7,259,756 $ 2,956,829
Net asset value of Fund Shares redeemed (32,021,472) (82,202,891)
-------------- --------------
Net decrease in net assets from Fund Share
transactions $ (24,761,716) $ (79,246,062)
-------------- --------------
Distributions -
Distributions to Shareholders $ (16,279,479) $ (6,607,973)
-------------- --------------
Total distributions $ (16,279,479) $ (6,607,973)
-------------- --------------
Net increase in net assets $ 8,099,432 $ 276,474,193
Net assets:
At beginning of period $1,522,281,849 $1,245,807,656
-------------- --------------
At end of period $1,530,381,281 $1,522,281,849
============== ==============
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 Ended
June 30, 2004 June 30, 2003
------------- -------------
Cash Flows From (For) Operating Activities -
Net increase in net assets from operations $ 49,140,627 $ 146,644,927
Adjustments to reconcile net increase in net assets from
operations to net cash flows (for) from operating activities -
Net investment income allocated from Belvedere Company (6,930,894) (6,098,004)
Decrease in escrow deposits - 993,440
Decrease in receivable for investments sold - 4,952,435
Increase in interest receivable from other real estate investments (87,281) (65,074)
(Increase) decrease in other assets (1,715,188) 94,223
Decrease in distributions and interest receivable 567,023 740,741
Decrease in interest payable for open swap agreements (33,537) (3,653,354)
Decrease in security deposits, accrued interest and accrued
other expenses and liabilities (200,959) (411,383)
Increase in accrued property taxes 199,029 108,974
Purchases of Partnership Preference Units (48,668,050) -
Proceeds from sales of Partnership Preference Units 50,715,343 -
Payment for investments in other real estate (17,686,317) -
Improvements to rental property (851,239) (821,949)
Net increase in investment in Belvedere Company - (3,500,000)
Interest incurred on interest rate swap agreements (6,245,551) (11,984,376)
(Increase) decrease in short-term investments (4,234,670) 3,426,881
Minority interest in net income of controlled subsidiaries 225,980 321,751
Net realized (gain) loss from investment transactions (7,990,491) 14,175,470
Net change in unrealized (appreciation) depreciation of investments (24,269,789) (142,574,778)
------------ -------------
Net cash flows (for) from operating activities $(18,065,964) $ 2,349,924
------------ -------------
Cash Flows From (For) Financing Activities -
Proceeds from (repayment of) Credit Facility $ 21,000,000 $ (8,000,000)
Payments for Fund Shares redeemed (2,637) (1,646)
Distributions paid to Shareholders (9,019,723) (3,651,144)
Distributions paid to minority shareholders (34,400) (17,600)
------------ -------------
Net cash flows from (for) financing activities $ 11,943,240 $ (11,670,390)
------------ -------------
Net decrease in cash $ (6,122,724) $ (9,320,466)
Cash at beginning of period $ 8,687,577 $ 16,067,430
------------ -------------
Cash at end of period $ 2,564,853 $ 6,746,964
============ =============
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 Ended
June 30, 2004 June 30, 2003
------------- -------------
Supplemental Disclosure and Non-cash Investing and
Financing Activities -
Interest paid on loan - Credit Facility $ 3,297,247 $ 4,933,537
Interest paid on swap agreements $ 6,279,088 $ 15,637,730
Interest paid on mortgage $ 4,691,061 $ 4,691,061
Market value of securities distributed in payment of redemptions $ 32,998,835 $ 36,865,637
Market value of real property and other assets, net of current
liabilities, assumed in conjunction with the acquisition of
other real estate $ 22,107,896 $ -
Partnership Preference Units exchanged for an equity investment
in real estate companies and an investment in note receivable $ - $ (3,977,592)
Market value of an equity investment in real estate companies $ - $ 1,907,012
Investment in note receivable $ - $ 2,070,580
See notes to unaudited condensed consolidated financial statements
8
BELAIR CAPITAL FUND LLC as of June 30, 2004
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FINANCIAL HIGHLIGHTS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
- --------------------------------------------------------------------------------
Net asset value - Beginning of period $119.600
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
- --------------------------------------------------------------------------------
Net investment income (6) $ 1.333
Net realized and unrealized gain 2.547
- --------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS $ 3.880
- --------------------------------------------------------------------------------
DISTRIBUTIONS
- --------------------------------------------------------------------------------
Distributions to Shareholders $ (1.280)
- --------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS $ (1.280)
- --------------------------------------------------------------------------------
NET ASSET VALUE - END OF PERIOD $122.200
- --------------------------------------------------------------------------------
TOTAL RETURN(1) 3.28%
- --------------------------------------------------------------------------------
As a Percentage As a Percentage
of Average Net of Average Gross
RATIOS Assets(5) Assets(2)(5)
- --------------------------------------------------------------------------------
Expenses of Consolidated Real Property
Subsidiaries
Interest and other borrowing costs(7) 0.52%(9) 0.38%(9)
Operating expenses(7) 0.55%(9) 0.40%(9)
Belair Capital Fund LLC Expenses
Interest and other borrowing costs(4)(8) 0.44%(9) 0.32%(9)
Investment advisory and administrative fees,
servicing fees and other Fund operating
expenses(3)(4) 1.08%(9) 0.79%(9)
----------------------------------
Total expenses 2.59%(9) 1.89%(9)
Net investment income 2.22%(9) 1.63%(9)
- --------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $1,530,381
Portfolio turnover of Tax-Managed Growth Portfolio (the Portfolio) 1.73%
- --------------------------------------------------------------------------------
(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 subsidiaries 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 subsidiaries majority-owned by Belair
Real Estate.
(5) 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.
(6) Calculated using average shares outstanding.
(7) Includes Belair Real Estate's proportional share of expenses incurred by
its majority-owned subsidiaries.
(8) Ratios do not include interest incurred in connection with the interest
rate swap agreements. Had such amounts been included, ratios would be
higher.
(9) Annualized.
See notes to unaudited condensed consolidated financial statements
9
BELAIR CAPITAL FUND LLC as of June 30, 2004
Notes To Condensed Consolidated Financial Statements (Unaudited)
1 Organization and 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, 2003 and the statement of changes in net
assets for the year then ended have been derived from the December 31, 2003
audited financial statements but do 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 periods' condensed consolidated financial
statements have been reclassified to conform with the current period
presentation.
During the quarter ended June 30, 2004, Belair Real Estate Corporation (Belair
Real Estate) made an indirect investment in real property through a newly
established controlled subsidiary, Elkhorn Property Trust (Elkhorn), as
described below. The consolidated financial statements include the accounts of
Elkhorn and all material intercompany accounts and transactions have been
eliminated.
Subsidiary-
Elkhorn- On May 3, 2004, Belair Real Estate entered into an agreement to
establish and acquire a majority interest in a controlled subsidiary, Elkhorn.
On June 30, 2004, Elkhorn acquired a majority interest in five industrial
properties located in four states (Texas, Tennessee, Ohio and Georgia). On
August 4, 2004, Elkhorn acquired an additional seventeen industrial properties
located in five states (Florida, New Jersey, Ohio, Pennsylvania and South
Carolina). Belair Real Estate owns 100% of the Class A Units of Elkhorn,
representing 60% of the voting interests in Elkhorn and a minority shareholder
(the Elkhorn Minority Shareholder) owns 100% of the Class B units, representing
40% of the voting interests in Elkhorn. The Class B equity interest is recorded
as a minority interest on the Consolidated Statements 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 the Class B units. From and after
August 4, 2014, either Belair Real Estate or the Elkhorn Minority Shareholder
may cause a liquidation of Elkhorn and, if Belair Real Estate makes that
election, the Elkhorn Minority Shareholder has the right either to purchase the
shares of Elkhorn owned by Belair Real Estate or to acquire the assets of
Elkhorn, in either case at a price determined through an appraisal of the assets
of Elkhorn.
10
2 Investment Transactions
The following table summarizes the Fund's investment transactions for the six
months ended June 30, 2004 and June 30, 2003:
Six Months Ended Six Months Ended
Investment Transaction June 30, 2004 June 30, 2003
- --------------------------------------------------------------------------------
Increases in investment in Belvedere Company $ - $ 4,000,000
Decreases in investment in Belvedere Company $ 32,998,835 $ 37,365,637
Acquisition of other real property(1) $ 17,686,317 $ -
Purchases of Partnership Preference Units(2) $ 48,668,050 $ -
Sales of Partnership Preference Units(3) $ 50,715,343 $ -
- --------------------------------------------------------------------------------
(1) On June 30, 2004, Belair Real Estate purchased an indirect investment in
real property through a controlled subsidiary, Elkhorn, as described below.
At the date of the transaction, the value of Belair Real Estate's interest
in its real property investment in Elkhorn was $17,690,553.
(2) Purchases of Partnership Preference Units during the six months ended June
30, 2004 include Partnership Preference Units purchased from another
investment fund advised by Boston Management and Research (Boston
Management).
(3) Sales of Partnership Preference Units for the six months ended June 30,
2004 include Partnership Preference Units sold to another investment fund
advised by Boston Management for which a loss of $997,698 was recognized.
On May 3, 2004, Belair Real Estate entered into an agreement to establish and
acquire a majority interest in a controlled subsidiary, Elkhorn. On June 30,
2004, Elkhorn acquired a majority interest in five separate industrial
properties. The seller retained a minority interest in the properties and an
affiliate of the Elkhorn Minority Shareholder manages the properties. When
Elkhorn acquired the real estate investment, a portion of the real estate's
purchase price was allocated to the estimated fair value of in-place leases in
accordance with Statement of Financial Accounting Standards 141. At June 30,
2004, the real estate investment balance includes the estimated fair value of
net unfavorable in-place leases totaling $231,735 at acquisition. The properties
are leased under fixed-term operating leases on a long-term basis. At June 30,
2004, the minimum lease payments expected to be received by Elkhorn on leases
with lease periods greater than one year are as follows:
Twelve Months Ending June 30, Amount
- -----------------------------------------
2005 $ 1,962,494
2006 1,857,478
2007 1,515,106
2008 1,028,257
2009 737,755
Thereafter 157,655
-----------
$ 7,258,745
===========
On August 4, 2004, the Fund made an additional investment in Elkhorn of
$161,644,755. Elkhorn concurrently acquired a majority interest in an additional
seventeen industrial properties. An affiliate of the Elkhorn Minority
Shareholder manages the properties. All of the Elkhorn properties are leased
under fixed-term operating leases on a long-term basis.
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 (valued at $2,306,993
as of June 30, 2004 and $2,135,654 as of June 30, 2003) earns interest of 8% per
annum and matures in February 2013 or on demand.
11
3 Indirect Investment in the Portfolio
The following table summarizes the Fund's investment in Tax-Managed Growth
Portfolio (the Portfolio) through Belvedere Capital Fund Company LLC (Belvedere
Company), for the six months ended June 30, 2004 and June 30, 2003, including
allocations of income, expenses and net realized and unrealized gains (losses)
for the respective periods then ended:
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
- ------------------------------------------------------------------------------------------------------------------------
Belvedere Company's interest in the Portfolio(1) $ 11,762,239,521 $ 9,599,217,401
The Fund's investment in Belvedere Company(2) $ 1,608,405,284 $ 1,436,699,926
Income allocated to Belvedere Company from the Portfolio $ 83,686,364 $ 66,798,353
Income allocated to the Fund from Belvedere Company $ 11,717,202 $ 10,222,513
Expenses allocated to Belvedere Company from the Portfolio $ 25,387,359 $ 20,113,419
Expenses allocated to the Fund from Belvedere Company $ 4,786,308 $ 4,124,509
Net realized gain (loss) from investment transactions and foreign currency
transactions allocated to Belvedere Company from the Portfolio $ 72,573,660 $ (17,889,099)
Net realized gain (loss) from investment transactions and foreign currency
transactions allocated to the Fund from Belvedere Company $ 11,836,499 $ (2,191,186)
Net change in unrealized appreciation (depreciation) of investments and
foreign currency allocated to Belvedere Company from the Portfolio $ 255,505,090 $ (698,962,649)
Net change in unrealized appreciation (depreciation) of investments and
foreign currency allocated to the Fund from Belvedere Company $ 34,441,442 $ 104,742,932
- ----------------------------------------------------------------------------- ------------------------------------------
(1) As of June 30, 2004 and 2003, the value of Belvedere Company's interest in
the Portfolio represents 64.7% and 61.7% of the Portfolio's net assets,
respectively.
(2) As of June 30, 2004 and 2003, the Fund's investment in Belvedere Company
represents 13.7% and 15.0% of Belvedere Company's net assets, respectively.
A summary of the Portfolio's Statement of Assets and Liabilities at June 30,
2004, December 31, 2003 and June 30, 2003 and its operations for the six months
ended June 30, 2004, for the year ended December 31, 2003 and for the six months
ended June 30, 2003 follows:
June 30, 2004 December 31, 2003 June 30, 2003
-------------------------------------------------------------
Investments, at value $ 18,156,546,589 $ 17,584,390,762 $ 15,616,951,272
Other assets 30,174,170 25,462,745 26,660,614
- --------------------------------------------------------------------------------------------------------------
Total assets $ 18,186,720,759 $ 17,609,853,507 $ 15,643,611,886
Total liabilities 138,607 264,502 93,843,137
- --------------------------------------------------------------------------------------------------------------
Net assets $ 18,186,582,152 $ 17,609,589,005 $ 15,549,768,749
==============================================================================================================
Dividends and interest $ 131,109,908 $ 232,925,912 $ 109,393,140
- --------------------------------------------------------------------------------------------------------------
Investment adviser fee $ 38,780,667 $ 67,584,543 $ 31,979,032
Other expenses 1,025,267 2,295,653 985,298
- --------------------------------------------------------------------------------------------------------------
Total expenses $ 39,805,934 $ 69,880,196 $ 32,964,330
- --------------------------------------------------------------------------------------------------------------
Net investment income $ 91,303,974 $ 163,045,716 $ 76,428,810
Net realized gain (loss) from investment
transactions and foreign currency transactions 118,166,339 70,909,770 (29,306,399)
Net change in unrealized appreciation
(depreciation) of investments and foreign
currency 397,547,485 3,174,709,110 1,126,151,279
- --------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations $ 607,017,798 $ 3,408,664,596 $ 1,173,273,690
- --------------------------------------------------------------------------------------------------------------
4 Interest Rate Swap Agreements
Belair Capital has entered into interest rate swap agreements with Merrill Lynch
Capital Services, Inc. in connection with its real estate investments and the
associated borrowings. Under such agreements, Belair Capital has agreed to make
periodic payments at fixed rates in exchange for payments at floating rates. The
12
notional or contractual amounts of these instruments may not necessarily
represent the amounts potentially subject to risk. The measurement of the risks
associated with these investments is meaningful only when considered in
conjunction with all related assets, liabilities and agreements. Interest rate
swap agreements open at June 30, 2004 and December 31, 2003, are listed below.
Notional Initial
Amount Optional Final Unrealized Unrealized
Effective (000's Fixed Floating Termination Termination Appreciation at Appreciation at
Date omitted) Rate Rate Date Date June 30, 2004 December 31, 2003
- ---------------------------------------------------------------------------------------------------------------
10/03 $20,000 4.045% LIBOR + 0.30% - 6/10 $ 716,021 $ 230,597
02/04 95,952 5.00% LIBOR + 0.30% 08/04 6/10 799,431 -
10/03 95,952 5.05% LIBOR + 0.30% 02/04 6/10 - * 218,976
10/03 61,500 4.865% LIBOR + 0.30% 07/04 6/10 740,135 212,857
10/03 75,000 4.795% LIBOR + 0.30% 09/04 6/10 1,067,095 304,067
10/03 42,000 4.69% LIBOR + 0.30% 02/05 6/10 725,432 201,570
10/03 49,000 4.665% LIBOR + 0.30% 03/05 6/10 879,202 240,892
10/03 35,330 4.18% LIBOR + 0.30% 07/09 6/10 1,066,054 235,385
06/04 104,176 4.875% LIBOR + 0.00% - 6/12 536,498** -
- ---------------------------------------------------------------------------------------------------------------
$ 6,529,868 $ 1,644,344
- ---------------------------------------------------------------------------------------------------------------
* Agreement was terminated on the Initial Optional Termination Date.
** On May 3, 2004, Belair Capital entered into a forward interest rate swap
agreement with Merrill Lynch Capital Services, Inc. in anticipation of its
future investment in a controlled subsidiary, Elkhorn, for the purpose of
hedging the interest rate of substantially all of the expected fixed-rate
mortgage financing of the real property over the expected 8-year term. Such
agreement was terminated in July 2004 and the Fund realized a gain of
$536,498 upon termination.
5 Debt
Credit Facility- In August 2004, additional borrowings under the Credit Facility
in the amount of $100,000,000 were used to purchase an additional interest in
the real estate investment Elkhorn, a real estate subsidiary of Belair Real
Estate. This borrowing accrues interest at a rate of one-month LIBOR plus 0.38%
per annum.
On August 4, 2004, Elkhorn acquired a majority interest in seventeen industrial
properties (See Note 2). To finance the Fund's investment in the properties
acquired by Elkhorn, Belair Capital increased the amount available under its
credit arrangement with Merrill Lynch Mortgage Capital, Inc. (Merrill Lynch) by
$13,000,000 under a temporary arrangement (the Temporary Arrangement) and
borrowed that amount. The borrowing under the Temporary Arrangement accrues
interest at a rate of one-month LIBOR plus 0.90% and is for a term of sixty
days, subject to a thirty-day extension. Any unused amount of the increase
pertaining to the Temporary Arrangement is subject to a commitment fee of 0.10%
per annum. The assets of Belair Capital, excluding the assets of Bel Residential
Properties Trust (Bel Residential) and Elkhorn, secure all borrowings under the
credit arrangement with Merrill Lynch.
Elkhorn expects to obtain first mortgage financing for its investment in the
third and fourth quarters of 2004. The proceeds from such first mortgage
financing will be used to repay Belair Capital, and accordingly, Belair Capital
will repay its borrowings under the Temporary Arrangement and a portion of other
borrowings under the Credit Facility.
6 Segment Information
Belair Capital pursues its investment objective primarily by investing
indirectly in the Portfolio through Belvedere Company. The Portfolio is a
diversified investment company that emphasizes investments in common stocks of
domestic and foreign growth companies that are considered to be high in quality
and attractive in their long-term investment prospects. Separate from its
investment in Belvedere Company, Belair Capital invests in real estate assets
through its subsidiary Belair Real Estate. Belair Real Estate invests directly
and indirectly in Partnership Preference Units, debt and equity investments in
private real estate companies and in real property through controlled
subsidiaries Bel Residential and Elkhorn (See Note 1).
13
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 appreciation (depreciation). 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:
Tax-Managed
For the Three Months Ended Growth Real
June 30, 2004 Portfolio* Estate Total
- ------------------------------------------------------------------------------------------------------------------
Revenue $ 3,757,063 $ 12,677,866 $ 16,434,929
Interest expense on mortgages - (2,386,111) (2,386,111)
Interest expense on credit facilities - (1,527,070) (1,527,070)
Operating expenses (723,818) (3,370,438) (4,094,256)
Minority interest in net income of controlled
subsidiaries - (115,744) (115,744)
- ------------------------------------------------------------------------------------------------------------------
Net investment income $ 3,033,245 $ 5,278,503 $ 8,311,748
Net realized gain (loss) 5,985,586 (3,193,756) 2,791,830
Net change in unrealized appreciation (depreciation) 10,427,667 3,618,594 14,046,261
- ------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations of
reportable segments $ 19,446,498 $ 5,703,341 $ 25,149,839
- ------------------------------------------------------------------------------------------------------------------
Tax-Managed
For the Three Months Ended 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 - (2,349,806) (2,349,806)
Operating expenses (543,486) (3,455,002) (3,998,488)
Minority interest in net income of controlled
subsidiary - (149,592) (149,592)
- ------------------------------------------------------------------------------------------------------------------
Net investment income $ 2,543,446 $ 6,851,010 $ 9,394,456
Net realized gain (loss) 3,705,353 (4,875,697) (1,170,344)
Net change in unrealized appreciation (depreciation) 165,762,777 7,885,562 173,648,339
- ------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations of
reportable segments $ 172,011,576 $ 9,860,875 $ 181,872,451
- ------------------------------------------------------------------------------------------------------------------
Tax-Managed
For the Six Months Ended Growth Real
June 30, 2004 Portfolio* Estate Total
- ------------------------------------------------------------------------------------------------------------------
Revenue $ 6,930,894 $ 26,712,415 $ 33,643,309
Interest expense on mortgages - (4,772,222) (4,772,222)
Interest expense on Credit Facility - (3,097,697) (3,097,697)
Operating expenses (1,423,482) (6,646,271) (8,069,753)
Minority interest in net income of controlled
subsidiary - (225,980) (225,980)
- ------------------------------------------------------------------------------------------------------------------
Net investment income $ 5,507,412 $ 11,970,245 $ 17,477,657
Net realized gain (loss) 11,836,499 (3,846,008) 7,990,491
Net change in unrealized appreciation (depreciation) 34,441,442 (10,171,653) 24,269,789
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations
of reportable segments $ 51,785,353 $ (2,047,416) $ 49,737,937
- ------------------------------------------------------------------------------------------------------------------
14
Tax-Managed
For the Six Months Ended 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)
Operating expenses (1,047,225) (6,825,261) (7,872,486)
Minority interest in net income of controlled
subsidiary - (321,751) (321,751)
- ------------------------------------------------------------------------------------------------------------------
Net investment income $ 5,050,779 $ 13,714,695 $ 18,765,474
Net realized loss (2,191,186) (11,984,284) (14,175,470)
Net change in unrealized appreciation (depreciation) 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
- ------------------------------------------------------------------------------------------------------------------
Tax-Managed Real
At June 30, 2004 Growth Portfolio* Estate Total
- ------------------------------------------------------------------------------------------------------------------
Segment assets $ 1,608,405,284 $ 503,583,475 $ 2,111,988,759
Segment liabilities 200,000 567,314,243 567,514,243
- ------------------------------------------------------------------------------------------------------------------
Net assets (liabilities) of reportable segments $ 1,608,205,284 $ (63,730,768) $ 1,544,474,516
- ------------------------------------------------------------------------------------------------------------------
At December 31, 2003
- ------------------------------------------------------------------------------------------------------------------
Segment assets $ 1,588,195,284 $ 487,471,604 $ 2,075,666,888
Segment liabilities 1,180,000 544,629,124 545,809,124
- ------------------------------------------------------------------------------------------------------------------
Net assets (liabilities) of reportable segments $ 1,587,015,284 $(57,157,520) $ 1,529,857,764
- ------------------------------------------------------------------------------------------------------------------
* Belair Capital invests indirectly in Tax-Managed Growth Portfolio through
Belvedere Company.
The following tables reconcile the reported segment information to the condensed
consolidated financial statements for the periods indicated:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
--------------------------------------------------------------------
Revenue:
Revenue from reportable segments $ 16,434,929 $ 18,278,453 $ 33,643,309 $ 36,554,145
Unallocated amounts:
Interest earned on cash not invested in
the Portfolio or in subsidiaries 84,659 11,251 137,353 29,813
--------------------------------------------------------------------
Total revenue $ 16,519,588 $ 18,289,704 $ 33,780,662 $ 36,583,958
--------------------------------------------------------------------
Net increase (decrease) in net assets from operations:
Net increase in net assets from operations of
reportable segments $ 25,149,839 $ 181,872,451 $ 49,737,937 $ 147,164,782
Unallocated amounts:
Interest earned on cash not invested in
the Portfolio or in subsidiaries 84,659 11,251 137,353 29,813
Unallocated amounts(1):
Servicing fees (154,895) (131,906) (322,438) (247,720)
Interest expense on Credit Facility (169,112) (72,675) (269,365) (149,141)
Audit, tax and legal fees (53,924) (42,358) (99,025) (90,289)
Other operating expenses (31,088) (36,261) (43,835) (62,518)
--------------------------------------------------------------------
Total net increase in net assets from operations $ 24,825,479 $ 181,600,502 $ 49,140,627 $ 146,644,927
--------------------------------------------------------------------
15
June 30, 2004 December 31, 2003
-----------------------------------------
Net assets:
Net assets of reportable segments $ 1,544,474,516 $ 1,529,857,764
Unallocated cash 5,074 5,408,305
Short-term investments(2) 16,000,000 11,765,330
Loan payable - Credit Facility(3) (29,940,457) (24,579,481)
Other liabilities (157,852) (170,069)
-----------------------------------------
Total net assets $ 1,530,381,281 $ 1,522,281,849
-----------------------------------------
(1) Unallocated amounts represent expenses incurred that pertain to the overall
operation of Belair Capital, and do not pertain to either operating
segment.
(2) Short-term investments represent temporary investments of cash. Such
amounts may be used to finance the Fund's equity in real estate
investments, to reduce outstanding borrowings under the Credit Facility or
for the short-term liquidity needs of the Fund.
(3) Unallocated amount of loan payable - Credit Facility represents borrowings
not specifically used to fund real estate investments. Such borrowings are
generally used to pay selling commissions, organization expenses and other
liquidity needs of the Fund.
16
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, 2004 COMPARED TO THE
QUARTER ENDED JUNE 30, 2003
(a) RESULTS OF OPERATIONS.
Increases and decreases from operations in the Fund's net asset value per share
are derived from net investment income (or loss) and realized and unrealized
gains and losses on investments. The Fund's net investment income (or loss) is
determined by subtracting the Fund's total expenses from its investment income
and then deducting the minority interest in net income (or loss) of the
controlled subsidiaries of Belair Real Estate Corporation (Belair Real Estate).
The Fund's investment income includes the net investment income allocated to the
Fund from Belvedere Capital Fund Company LLC (Belvedere Company), rental income
from the properties owned by Belair Real Estate's controlled subsidiaries,
partnership income allocated to the income-producing preferred equity interests
in real estate operating partnerships (Partnership Preference Units) owned by
Belair Real Estate and interest earned on the Fund's short-term investments (if
any). The net investment income of Belvedere Company allocated to the Fund
includes dividends, interest and expenses allocated to Belvedere Company by
Tax-Managed Growth Portfolio (the Portfolio) less the expenses of Belvedere
Company allocated to the Fund. The Fund's total expenses include the Fund's
investment advisory and administrative fees, servicing fees, interest expense
from mortgages on properties owned by Belair Real Estate's controlled
subsidiaries, interest expense on the Fund's Credit Facility (described in Item
2(b) below), property management fees, property taxes, insurance, maintenance
and other expenses relating to the properties owned by Belair Real Estate's
controlled subsidiaries, and other miscellaneous expenses. The Fund's realized
and unrealized gains and losses are the result of transactions in, or changes in
value of, security investments held through the Fund's indirect interest
(through Belvedere Company) in the Portfolio, real estate investments held
through Belair Real Estate, the Fund's interest rate swap agreements and any
other direct investments of the Fund, as well as periodic payments made by the
Fund pursuant to interest rate swap agreements.
Realized and unrealized gains and losses on investments have the most
significant impact on the Fund's net asset value per share and result primarily
from sales of such investments and changes in their underlying value. The
investments of the Portfolio consist primarily of common stocks of domestic and
foreign growth companies that are considered to be high in quality and
attractive in their long-term investment prospects. Because the securities
holdings of the Portfolio are broadly diversified, the performance of the
Portfolio cannot be attributed to one particular stock or one particular
industry or market sector. The performance of the Portfolio and the Fund are
substantially influenced by the overall performance of the U.S. stock market, as
well as by the relative performance versus the overall market of specific stocks
and classes of stocks in which the Portfolio maintains large positions.
PERFORMANCE OF THE FUND.(1) The Fund's investment objective is to achieve
long-term, after-tax returns for Shareholders. Eaton Vance Management (Eaton
Vance), as the Fund's manager, measures the Fund's success in achieving its
objective based on the investment returns of the Fund, using the Standard &
Poor's 500 Composite Index (the S&P 500) as the Fund's primary performance
benchmark. The S&P 500 is a broad-based unmanaged index of common stocks widely
used as a measure of U.S. stock market performance. Eaton Vance's primary focus
in pursuing total return is on the Fund's common stock portfolio, which consists
- -------------
(1) Total returns are historical and are calculated by determining the
percentage change in net asset value with all distributions reinvested.
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. The Portfolio's total return for the
period reflects the total return of another fund that invests in the
Portfolio, adjusted for certain fund expenses. Performance is for the
stated time period only and is not annualized; due to market volatility,
the Fund's current performance may be lower or higher. The performance of
the Fund and the Portfolio is compared to that of their benchmark, the S&P
500. It is not possible to invest directly in an Index.
17
of its indirect interest in the Portfolio. In measuring the performance of the
Fund's real estate investments held through Belair Real Estate, Eaton Vance
considers whether, through current returns and changes in valuation, the real
estate investments achieve returns that over the long-term exceed the cost of
the borrowing incurred to acquire such investments and thereby add to Fund
returns. The Fund has entered into interest rate swap agreements to fix the cost
of borrowings under the Credit Facility used to acquire Belair Real Estate's
equity in its real estate investments and to mitigate in part the impact of
interest rate changes on the Fund's net asset value.
The Fund's total return was 1.65% for the quarter ended June 30, 2004. This
return reflects an increase in the Fund's net asset value per share from $120.22
to $122.20 during the period. For comparison, the S&P 500 had a total return of
1.72% over the same period. The performance of the Fund exceeded that of the
Portfolio by approximately 0.34% during the period. Last year, the Fund had a
total return performance of 15.23% for the quarter ended June 30, 2003. This
return reflected an increase in the Fund's net asset value per share from $89.32
to $102.92 during the period. For comparison, the S&P 500 had a total return of
15.39% over the same period. The performance of the Fund exceeded that of the
Portfolio by approximately 1.69% during that period.
PERFORMANCE OF THE PORTFOLIO. For the quarter ended June 30, 2004, the
Portfolio's total return was 1.31%. This compares to a total return of 1.72% for
the S&P 500. In the second quarter, U.S. equity returns were supported by
strengthening employment trends, robust manufacturing activity and rising
corporate profits. At the same time, uncertainty over the situation in Iraq and
the prospect of rising interest rates and inflation weighed on investors and
held back returns. During the quarter, growth stocks outperformed value stocks,
and small-caps performed better than large-caps and mid-caps.
The Portfolio's modest underperformance during the quarter was attributable in
part to a relative overweighting of certain weaker performing industry groups,
specifically specialty retail and media. In addition, the Portfolio was
underweight internet software and communications equipment stocks, which rallied
during the period. Concerns about future trends in consumer spending caused the
Portfolio to trim its relative overweighting of the discretionary and staples
sectors during the quarter. The Portfolio also reduced healthcare and technology
investments during the quarter, mainly in the lagging biotech and semi-conductor
groups. During the quarter, the Portfolio continued to overweight airfreight and
machinery holdings, which contributed positively to the Portfolio's performance.
The Portfolio benefited from the strong performance of stocks in the food,
staples retailing and commercial bank industries during the quarter, as well as
from increased exposure to energy stocks. Material stocks were also solid
performers during the quarter and, despite the Portfolio's underweight of the
sector versus the S&P 500, the performance of the Portfolio's holdings in the
metals and mining group was noteworthy. Valuation and regulatory concern
prompted a continued de-emphasis of multi-line utilities and diversified telecom
companies.
For the quarter ended June 30, 2003, the Portfolio's total return was 13.54%
compared to the 15.39% total return for the S&P 500. During the quarter, the S&P
500 posted its best quarterly return in five years, with favorable fiscal and
monetary policy developments, progress in Iraq and signs of an improving economy
contributing to a stronger market. The Portfolio's relative underperformance was
attributable primarily to its lower exposure to higher-volatility, lower-quality
stocks that were the strongest performers in the sharp market rally.
PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate investments are
held through Belair Real Estate. As of June 30, 2004, real estate investments
consisted primarily of a portfolio of Partnership Preference Units issued by
partnerships affiliated with publicly traded and private real estate investment
trusts (REITs) and two real estate joint ventures, Bel Residential Properties
Trust (Bel Residential) and Elkhorn Property Trust (Elkhorn). Bel Residential
and Elkhorn are real estate joint ventures that operate multifamily and
industrial properties, respectively (Real Estate Joint Ventures). As of June 30,
2004, the estimated fair value of the Fund's real estate investments represented
23.1% of the Fund's total assets on a consolidated basis. Adjusting for the
minority interests in Bel Residential and Elkhorn, the Fund's real estate
investments represented 29.9% of the Fund's net assets as of June 30, 2004.
At June 30, 2004, the estimated fair value of the Fund's Partnership Preference
Units was approximately $305.8 million. This compares to investments in
Partnership Preference Units of approximately $414.4 million at June 30, 2003, a
net decrease of $108.6 million or 26%. While the net decrease was principally
due to fewer Partnership Preference Units held at June 30, 2004, the net
decrease also reflects the lower per unit values of Partnership Preference Units
held at June 30, 2004 due to their lower average coupon rates. In the current
low interest rate environment, issuers have been redeeming Partnership
Preference Units as call protections expire or restructuring the terms of
outstanding Partnership Preference Units in advance of their call dates. As a
result, many of the higher-yielding Partnership Preference Units held by Belair
Real Estate during the quarter ended June 30, 2003 were no longer held at June
30, 2004. Boston Management expects this trend to continue through 2004.
18
The Fund saw unrealized depreciation in the estimated fair value in its
Partnership Preference Units of approximately $5.7 million during the quarter
ended June 30, 2004 compared to approximately $3.0 million of unrealized
appreciation for the quarter ended June 30, 2003. During the quarter ended June
30, 2004, Partnership Preference Units values were negatively affected by the
rising trend in U.S. interest rates, partly offset by tighter spreads for
credit-sensitive income securities, including real estate-related securities. In
a rising interest rate environment, values of Partnership Preference Units
generally can be expected to decline. During the quarter ended June 30, 2003,
Belair Real Estate's investments in Partnership Preference Units generally
benefited from declining interest rate levels and tightening spreads in
credit-sensitive income securities, particularly in real estate-related
securities.
Distributions from Partnership Preference Units for the quarter ended June 30,
2004 totaled $7.0 million compared to $9.7 million for the quarter ended June
30, 2003, a decrease of $2.7 million or 28%. The decrease was principally due to
fewer Partnership Preference Units held on average, as well as to lower average
distribution rates for the Partnership Preference Units held during the quarter
ended June 30, 2004.
On June 30, 2004, Belair Real Estate's newly formed subsidiary Elkhorn acquired
a majority interest in certain industrial properties from ProLogis, a
publicly-traded REIT, for approximately $17.7 million. ProLogis retained a
minority interest in the properties. In May 2004, Belair Real Estate entered
into agreements with ProLogis to form ProLogis Six Rivers Limited Partnership
(Six Rivers) (in association with subsidiaries of other investment funds advised
by Boston Management) and to merge Six Rivers with Keystone Property Trust, a
publicly-traded REIT (Keystone). The transactions contemplated by these
agreements were consummated on August 4, 2004. As a result of the transactions,
Elkhorn acquired a partnership interest in Six Rivers. In addition, ProLogis
acquired a minority interest in Elkhorn. Through its interest in Six Rivers,
Elkhorn owns 100% of the economic interest in certain industrial properties
acquired through the merger of Six Rivers and Keystone for approximately $202.1
million. It is anticipated that in the third and fourth quarters of 2004 Elkhorn
will obtain first mortgage financing secured by the properties equal to
approximately 60-65% of the property value. The Fund has provided interim
financing for Elkhorn, as described below in "Liquidity and Capital Resources."
Bel Residential's rental income increased to approximately $5.6 million for the
quarter ended June 30, 2004 from approximately $5.5 million for the quarter
ended June 30, 2003, an increase of $0.1 million or 2%. This increase in rental
income was due to modest increases in apartment rental rates net of concessions.
Bel Residential's property operating expenses were approximately $2.6 million
for the quarter ended June 30, 2004 compared to $2.5 million for the quarter
ended June 30, 2004, an increase of 4% (property operating expenses are before
certain operating expenses of Belair Real Estate of approximately $0.8 million
for the quarter ended June 30, 2004 and $0.9 million for the quarter ended June
30, 2003). The near-term outlook for multifamily property operations continues
to be weak. While the recent pick-up in economic and employment growth is
expected to lead to improved supply-demand balance in the apartment industry,
oversupply conditions continue to exist in most major markets. As a result,
Boston Management expects that multifamily real estate operating results in 2004
will continue to be similar to 2003.
Because Elkhorn held no investments in property until June 30, 2004, it had no
significant impact on real estate operations during the quarter then ended. As
of August 4, 2004, Elkhorn owns an interest in 22 industrial properties, which
consist of industrial distribution properties located in eight states. ProLogis,
currently the largest REIT specializing in industrial distribution properties,
provides day-to-day operating management of these properties. The terms of the
Elkhorn joint venture are similar to those of the Bel Residential joint venture.
Belair Real Estate's investment in Elkhorn will be valued in substantially the
same manner as its investment in Bel Residential and it is subject to similar
risks, as well as risks specifically associated with industrial distribution
properties (such as changing transportation and logistics patterns and tenant
credit). The mortgage financing to be obtained by Elkhorn will be secured by the
properties it owns and is expected to be without recourse to Belair Real Estate,
the Fund or its Shareholders. Pursuant to an agreement between Belair Real
Estate and ProLogis, Belair Real Estate is obligated to make capital
contributions to Elkhorn if required to fund certain items such as debt service,
insurance or property taxes. In 2004, industrial properties in the United States
have experienced increased demand for space after three years of occupancy and
rental rate declines in most markets. However, reduced rent levels may continue
over the near term as above-market leases mature and space is released at
current market rates. As a result, Boston Management expects that improvements
in industrial property operating performance will occur over the longer term.
At June 30, 2004, the estimated fair value of the real properties indirectly
held through Belair Real Estate was approximately $181.0 million compared to
approximately $158.7 million at June 30, 2003, a net increase of $22.3 million
or 14%. The net increase in estimated real property values at June 30, 2004
resulted principally from the properties acquired by Elkhorn and the impact of
lower capitalization rates on the estimated fair value of Bel Residential's
properties, which more than offset the negative impact of lower near-term
19
earnings expectations on property values. The capitalization rate, a term
commonly used in the real estate industry, is the rate of return percentage
applied to actual or projected income levels to estimate the value of a real
estate investment.
The Fund saw net unrealized depreciation of the estimated fair value of its
other real estate investments (which includes Bel Residential and Elkhorn) of
approximately $0.5 million during the quarter ended June 30, 2004 compared to
unrealized appreciation of approximately $0.7 million for the quarter ended June
30, 2003. During the quarter ended June 30, 2004, Belair Real Estate experienced
modest declines in estimated property values due to declines in near-term
earnings expectations. During the quarter ended June 30, 2003, Belair Real
Estate experienced modest increases in estimated property values as decreases in
capitalization rates largely offset declines in near-term earnings expectations.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the quarter ended June 30,
2004, net realized and unrealized gains on the Fund's interest rate swap
agreements totaled approximately $6.6 million, compared to net realized and
unrealized losses of approximately $0.7 million for the quarter ended June 30,
2003. Net realized and unrealized gains on swap agreements for the quarter ended
June 30, 2004 consisted of $9.8 million of unrealized appreciation due to
changes in swap agreement valuations offset by $3.2 million of periodic payments
made pursuant to outstanding swap agreements (and classified as net realized
losses on interest rate swap agreements). For the quarter ended June 30, 2003,
unrealized appreciation of $4.2 million on swap agreement valuation changes was
offset by $4.9 million of swap agreement periodic payments. The positive
contribution to Fund performance for the quarter ended June 30, 2004 from
changes in swap agreement valuations was attributable to an increase in swap
rates during the quarter. The positive contribution for the quarter ended June
30, 2003 from changes in swap valuations was due primarily to the exercise of
early termination options on a number of swap agreements and remaining swaps
approaching their initial optional termination dates. The appreciation was
offset in part by a slight decline in swap rates.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 2003
PERFORMANCE OF THE FUND. The Fund's total return was 3.28% for the six months
ended June 30, 2004. This return reflects an increase in the Fund's net asset
value per share from $119.60 to $122.20 and a distribution of $1.28 per share
during the period. For comparison, the S&P 500 had a total return of 3.44% over
the same period. The performance of the Fund trailed that of the Portfolio by
approximately 0.17% during the period. Last year, the Fund had a total return
performance of 11.99% for the six months ended June 30, 2003. This return
reflected 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. 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 3.80% during that period.
PERFORMANCE OF THE PORTFOLIO. For the six months ended June 30, 2004, the
Portfolio's total return was 3.45%, in line with the 3.44% total return of the
S&P 500. In the period, U.S. equity returns were supported by a strengthening
economy and rising corporate profits. Geopolitical concerns, higher interest
rates and rising inflation were negative factors that held back returns. In the
period, small-cap stocks sharply outperformed large-caps and mid-caps, and value
stocks performed modestly better than growth stocks.
The Portfolio's performance during the first six months of 2004 was driven
primarily by its diversified industry exposure and positive stock selection.
Concerns about future trends in consumer spending caused the Portfolio to trim
its relative overweighting of the discretionary and staples sectors during the
period. The Portfolio also decreased positions in healthcare and technology
stocks during the period. The underweighting of semiconductor equipment and
software industries added to performance. The Portfolio maintained an
overweighting of industrials stocks, and benefited from advances in airfreight,
machinery and building stocks. While the consumer staples and financials sectors
generally did not perform well during the period, the Portfolio's holdings in
those sectors were positive contributors to performance. Another positive
contributor was the Portfolio's growing exposure to the energy sector. The
Portfolio's oil exploration and gas investments benefited from the current
supply-demand imbalances and associated energy price increases. The strong
performance of the Portfolio's holdings in the cyclical metals and mining
industries during the period was also noteworthy. The Portfolio continued to
underweight the utilities and telecom sectors.
For the six months ended June 30, 2003, the Portfolio's total return was 8.19%
compared to an 11.75% total return for the S&P 500. Market performance during
the first six months of 2003 was volatile, with war angst, a questionable
economic recovery and the SARS outbreak among the concerns weighing on investors
toward the beginning of the year. From mid-March through the end of the period,
the U.S. markets rallied sharply, with favorable fiscal and monetary policy
developments, progress in Iraq and signs of an improving economy contributing to
the strength. The Portfolio's relative underperformance during the period was
attributable primarily to its lower exposure to higher-volatility, lower-quality
stocks that were the strongest performers in the market rally.
20
PERFORMANCE OF REAL ESTATE INVESTMENTS. During the six months ended June 30,
2004, Belair Real Estate sold (or experienced scheduled redemptions of) certain
of its Partnership Preference Units for approximately $50.7 million (including
sales to another investment fund advised by Boston Management), recognizing
gains of $2.4 million on the transactions. During the six months ended June 30,
2004, Belair Real Estate also acquired interests in additional Partnership
Preference Units from another investment fund advised by Boston Management for
approximately $48.7 million.
At June 30, 2004, the estimated fair value of the Fund's Partnership Preference
Units was approximately $305.8 million. This compares to investments in
Partnership Preference Units of approximately $414.4 million at June 30, 2003, a
net decrease of $108.6 million or 26%. While the net decrease was principally
due to fewer Partnership Preference Units held at June 30, 2004, the net
decrease also reflects the lower per unit values of Partnership Preference Units
held at June 30, 2004 due to their lower average coupon rates. In the current
low interest rate environment, issuers have been redeeming Partnership
Preference Units as call protections expire or restructuring the terms of
outstanding Partnership Preference Units in advance of their call dates. As a
result, many of the higher-yielding Partnership Preference Units held by Belair
Real Estate on June 30, 2003 were no longer held at June 30, 2004. Boston
Management expects this trend to continue through 2004.
The Fund saw net unrealized depreciation in the estimated fair value in its
Partnership Preference Units of approximately $12.6 million during the six
months ended June 30, 2004 compared to approximately $27.1 million of unrealized
appreciation for the six months ended June 30, 2003. The net unrealized
depreciation of $12.6 million in the first six months of 2004 consisted of
approximately $9.0 million of unrealized depreciation resulting from decreases
in per unit values of the Partnership Preference Units held by Belair Real
Estate at June 30, 2004 and approximately $3.6 million of unrealized
depreciation resulting from the recharacterization of previously recorded
unrealized appreciation to realized gains due to sales of Partnership Preference
Units during the six months ended June 30, 2004. During the six months ended
June 30, 2004, Partnership Preference Unit values were negatively affected by
the rising trend in U.S. interest rates, partly offset by tighter spreads for
credit-sensitive income securities, including real estate-related securities. In
a rising interest rate environment, values of oustanding Partnership Preference
Unit generally can be expected to decline. During the six months ended June 30,
2003, Belair Real Estate's investments in Partnership Preference Units generally
benefited from declining interest rate levels and tightening spreads in
credit-sensitive income securities, particularly in real estate-related
securities.
Distributions from Partnership Preference Units for the six months ended June
30, 2004 totaled $15.5 million compared to $19.3 million for the six months
ended June 30, 2003, a decrease of $3.8 million or 20%. The decrease was
principally due to fewer Partnership Preference Units held on average and to
lower average distribution rates for the Partnership Preference Units held
during the six months ended June 30, 2004, partially offset by a one-time
special distribution from one issuer made in connection with a restructuring of
its Partnership Preference Units.
Bel Residential's rental income was approximately $11.1 million for each of the
six month periods ended June 30, 2004 and June 30, 2003. Bel Residential's
property operating expenses were approximately $5.1 million for each of the six
month periods ended June 30, 2004 and June 30, 2003 (property operating expenses
are before certain operating expenses of Belair Real Estate of approximately
$1.6 million for the six months ended June 30, 2004 and $1.8 million for the six
months ended June 30, 2003). The near-term outlook for multifamily property
operations continues to be weak. As discussed above, while the recent pick-up in
economic and employment growth is expected to lead to improved supply-demand
balance in the apartment industry, oversupply conditions continue to exist in
most major markets. As a result, Boston Management expects that multifamily real
estate operating results in 2004 will continue to be similar to 2003.
As noted above, in a series of transaction on and after June 30, 2004, Belair
Real Estate's newly formed subsidiary Elkhorn acquired investments in a
portfolio of industrial properties. Elkhorn had no significant impact on real
estate operations during the six months ended June 30, 2004.
At June 30, 2004, the estimated fair value of the real properties indirectly
held through Belair Real Estate was approximately $181.0 million compared to
approximately $158.7 million at June 30, 2003, a net increase of $22.3 million
or 14%. The net increase in estimated real property values at June 30, 2004
resulted principally from the formation of Elkhorn noted above and the impact of
lower capitalization rates on the estimated fair value of Bel Residential's
properties, which more than offset the negative impact of lower near-term
earnings expectations on property values.
21
The Fund saw unrealized depreciation in the estimated fair value of its other
real estate investments (which includes Bel Residential and Elkhorn) of
approximately $2.4 million during the six months ended June 30, 2004 compared to
approximately $0.2 million of unrealized appreciation for the six months ended
June 30, 2003. During the six months ended June 30, 2004, Belair Real Estate
experienced modest decreases in estimated property values due to declines in
near-term earnings expectation. During the six months ended June 30, 2003,
Belair Real Estate experienced modest increases in estimated property values as
decreases in capitalization rates largely offset declines in near-term earnings
expectations.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the six months ended June 30,
2004, net realized and unrealized losses on the Fund's interest rate swap
agreements totaled approximately $1.4 million, compared to net realized and
unrealized losses of approximately $1.5 million for the six months ended June
30, 2003. Net realized and unrealized losses on swap agreements for the six
months ended June 30, 2004 consisted of $4.9 million of unrealized appreciation
due to changes in swap agreement valuations offset by $6.3 million of periodic
payments made pursuant to outstanding swap agreements (and classified as net
realized losses on interest rate swap agreements). For the six months ended June
30, 2003, unrealized appreciation of $10.5 million on swap agreement valuation
changes were offset by $12.0 million of swap agreement periodic payments. The
positive contribution to Fund performance for the six months ended June 30, 2004
from changes in swap agreement valuations was attributable to an increase in
swap rates during the period. The positive contribution to Fund performance for
the six months ended June 30, 2003 from changes in swap valuations was due to
the exercise of early termination options on a number of swap agreements and the
remaining swaps approaching their initial optional termination dates. Swap rates
declined during the six months ended June 30, 2003, offsetting some of the
appreciation from approaching early termination dates.
(b) LIQUIDITY AND CAPITAL RESOURCES.
OUTSTANDING BORROWINGS. The Fund has entered into credit arrangements with DrKW
Holdings, Inc. and Merrill Lynch Mortgage Capital, Inc. (collectively, the
Credit Facility) primarily to finance the Fund's equity in its real estate
investments and will continue to use the Credit Facility for such purpose in the
future. The Credit Facility may also be used for other purposes, including any
short-term liquidity needs of the Fund. In the future, the Fund may increase the
size of the Credit Facility (subject to lender consent) and the amount of
outstanding borrowings thereunder. As of June 30, 2004, the Fund had outstanding
borrowings of $468.0 million and unused loan commitments of $98.5 million under
the Credit Facility.
In August 2004, the Fund made borrowings under its credit arrangement with
Merrill Lynch Mortgage Capital, Inc. (MLMC) in the amount of $100.0 million. At
that time, the Fund also temporarily increased the amount available under its
credit arrangement with MLMC by $13.0 million and borrowed that amount. The Fund
used the total proceeds from these borrowings to finance the acquisitions by
Elkhorn of interests in certain industrial properties. The additional $13.0
million of borrowings is at a rate of LIBOR plus 0.90% and is for a period of up
to sixty-days (subject to a 30-day extension, if needed). Elkhorn expects to
obtain first mortgage financing for its properties in the third and fourth
quarters of 2004, the proceeds from which will be used to repay borrowings
obtained by the Fund in August 2004 to facilitate the Elkhorn acquisitions.
The Fund has entered into interest rate swap agreements with respect to its real
estate investments and associated borrowings. Pursuant to these agreements, the
Fund makes periodic payments to the counterparty at predetermined fixed rates,
in exchange for floating-rate payments at a predetermined spread plus one-month
LIBOR. During the terms of the outstanding interest rate swap agreements,
changes in the underlying values of the agreements are recorded as unrealized
appreciation or depreciation. As of June 30, 2004, the unrealized appreciation
related to the interest rate swap agreements was approximately $6.5 million. As
of June 30, 2003, the unrealized depreciation related to the interest rate swap
agreements was approximately $10.9 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK. The Fund's primary exposure to interest rate risk arises
from its real estate investments that are financed by the Fund with floating
rate borrowings under the Fund's Credit Facility and by fixed-rate secured
mortgage debt obligations of the Real Estate Joint Ventures. Partnership
Preference Units are fixed rate instruments whose values will generally decrease
when interest rates rise and increase when interest rates fall. The interest
rates on borrowings under the Fund's Credit Facility are reset at regular
intervals based on one-month LIBOR. The Fund has entered into interest rate swap
agreements to fix the cost of its borrowings under the Credit Facility used to
acquire Belair Real Estate's equity in its real estate investments and to
mitigate in part the impact of interest rate changes on the Fund's net asset
value. Under the terms of the interest rate swap agreements, the Fund makes cash
payments at fixed rates in exchange for floating rate payments that fluctuate
with one and three month LIBOR. The Fund's interest rate swap agreements will
generally increase in value when interest rates rise and decrease in value when
22
interest rates fall. 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 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 and Note 5
to the Fund's unaudited condensed consolidated financial statements in Item 1
above.
Interest Rate Sensitivity
Cost, Principal (Notional) Amount
by Contractual Maturity and Callable Date
for the Twelve Months Ended June 30,*
Estimated
Fair Value as of
June 30,
2005 2006-2008 2009 Thereafter Total 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
- ----------------------------------
Long-term debt:
- ----------------------------------
Fixed-rate mortgages $112,630,517 $112,630,517
Average interest rate 8.33% 8.33%
- ----------------------------------
Variable-rate Credit Facility $468,000,000 $468,000,000 $468,000,000
Average interest rate 1.67% 1.67%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative financial
instruments:
- ----------------------------------
Pay fixed/ receive variable
interest rate swap
agreements(**) $482,958,000 $482,958,000 $ 6,529,868
Average pay rate(**) 4.76% 4.76%
Average receive rate(**) 1.66% 1.66%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive investments:
- ----------------------------------
Fixed-rate Partnership Preference
Units:
- ----------------------------------
Cabot Industrial Properties, L.P.,
8.625% Series B Cumulative
Redeemable Preferred Units,
Callable 4/29/04, Current Yield:
8.55% $28,455,170 $ 28,455,170 $ 26,727,900
Colonial Realty Limited
Partnership, 7.25% Series B
Cumulative Redeemable Perpetual
Preferred Units, Callable 2/24/09,
Current
Yield: 7.68% $19,013,123 $ 19,013,123 $ 21,249,000
23
Estimated
Fair Value as of
June 30,
2005 2006-2008 2009 Thereafter Total 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Essex Portfolio, L.P., 9.3% Series
D Cumulative Redeemable Preferred
Units, Callable 7/28/10, Current
Yield: 9.16%(1) $ 20,212,880 $ 20,212,880 $ 20,304,480
Kilroy Realty, L.P., 7.45% Series A
Cumulative Redeemable Preferred
Units, Callable 9/30/09,
Current Yield: 7.88% $ 20,000,000 $ 20,000,000 $ 18,898,240
Liberty Property L.P., 9.25% Series
B Cumulative Redeemable Preferred
Units, Callable 7/28/04, Current
Yield: 9.18% $30,875,000 $ 30,875,000 $ 31,109,650
MHC Operating Limited Partnership,
9% Series D Cumulative Redeemable
Perpetual Preference Units,
Callable 9/29/04, Current
Yield: 8.96% $50,000,000 $ 50,000,000 $ 50,220,000
National Golf Operating
Partnership, L.P., 9.30% Series A
Cumulative Redeemable Preferred
Units, Callable 2/6/03, Current
Yield: 9.45% $31,454,184 $ 31,454,184 $ 32,494,140
National Golf Operating
Partnership, L.P., 9.30% Series B
Cumulative Redeemable Preferred
Units, Callable 2/6/03, Current
Yield: 9.45% $ 5,000,000 $ 5,000,000 $ 4,920,000
PSA Institutional Partners, L.P.,
6.4% Series NN Cumulative
Redeemable Perpetual Preferred
Units, Callable 3/17/10, Current
Yield: 7.04% $ 48,250,000 $ 48,250,000 $ 43,849,600
Price Development Company, L.P.,
8.95% Series B Cumulative
Redeemable Preferred Partnership
Units, Callable
7/28/04, Current Yield: 8.94% $30,625,000 $ 30,625,000 $ 30,674,000
Urban Shopping Centers, L.P.,
9.45% Series D Cumulative
Redeemable Perpetual Preferred
Units, Callable 10/1/04, Current $25,000,000 $ 25,000,000 $ 25,336,300
Yield: 9.32%
- ----------------------------------
Note Receivable:
- ----------------------------------
Fixed-rate note receivable, 8%
$ 2,070,580 $ 2,070,580 $ 2,306,993
* The amounts listed reflect the Fund's positions as of June 30, 2004. The
Fund's current positions may differ.
24
** The terms disclosed are those of the interest rate swap agreements that are
in effect as of June 30, 2004. As discussed in Note 4 to the Fund's
unaudited condensed consolidated financial statements in Item 1 above,
during July 2004 certain interest rate swap agreements were terminated,
resulting in a change of the average pay rate and average receive rate to
4.73% and 1.67%, respectively.
1 On July 28, 2004, the coupon rate reset to 7.875%.
ITEM 4. CONTROLS AND PROCEDURES.
Eaton Vance, as the Fund's manager, conducted an evaluation of the effectiveness
of the Fund's disclosure controls and procedures (as defined by Rule 13a-15(e)
of the 1934 Act) as of the end of the period covered by this report, with the
participation of the Fund's Chief Executive Officer and Chief Financial Officer.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Fund's disclosure controls and procedures were
effective. There were no changes in the Fund's internal control over financial
reporting that occurred during the quarter ended June 30, 2004 that have
materially affected, or are reasonably likely to materially affect, the Fund's
internal control over financial reporting.
As the Fund's manager, the complete and entire management, control and operation
of the Fund are vested in Eaton Vance. The Fund's Chief Executive Officer and
Chief Financial Officer intend to report to the Board of Directors of Eaton
Vance, Inc. (the sole trustee of Eaton Vance) any significant deficiency in the
design or operation of internal control over financial reporting which could
adversely affect the Fund's ability to record, process, summarize and report
financial data, and any fraud, whether or not material, that involves management
or other employees who have a significant role in the Fund's internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Although in the ordinary course of business, the Fund, Belair Real Estate and
Belair Real Estate's controlled subsidiaries may become involved in legal
proceedings, the Fund is not aware of any material pending legal proceedings to
which any of them is subject.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
As described in the Fund's Annual Report on Form 10-K for the year ended
December 31, 2003, shares of the Fund may be redeemed by Fund shareholders on
any business day. Redemptions are met at the net asset value per share of the
Fund. The right to redeem is available to all shareholders and all outstanding
Fund shares are eligible. During each month in the quarter ended June 30, 2004,
the total number of shares redeemed and the average price paid per share were as
follows:
Total No. of Shares Average Price Paid
Month Ended Redeemed(1) Per Share
- -------------------------------------------------------------------
April 30, 2004 39,361.68 $120.68
- -------------------------------------------------------------------
May 31, 2004 41,150.73 $117.79
- -------------------------------------------------------------------
June 30, 2004 49,939.70 $122.60
- -------------------------------------------------------------------
Total 130,452.11 $121.75
- -------------------------------------------------------------------
(1) All shares redeemed during the periods were redeemed at the option of
shareholders pursuant to the Fund's redemption policy. The Fund has not
announced any plans or programs to repurchase shares other than at the
option of shareholders.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the three months
ended June 30, 2004.
25
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) The following is a list of all exhibits filed as part of this Form 10-Q:
4.2(b) Form of Amendment No. 2 dated August 3, 2004 to Loan and Security
Agreement among the Fund, Merrill Lynch Mortgage Capital, Inc., as
Agent, the Lenders referred to therein and Merrill Lynch Capital
Services, Inc.
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
None.
26
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 9, 2004.
BELAIR CAPITAL FUND LLC
/s/ Michelle A. Alexander
-------------------------
Michelle A. Alexander
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
27
EXHIBIT INDEX
-------------
4.2(b) Form of Amendment No. 2 dated August 3, 2004 to Loan and Security
Agreement among the Fund, Merrill Lynch Mortgage Capital, Inc., as
Agent, the Lenders referred to therein and Merrill Lynch Capital
Services, Inc.
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
28