UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
Commission File No. 000-25767
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Belair Capital Fund LLC (the Fund)
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(Exact name of registrant as specified in its charter)
Securities registered pursuant to Section 12(g) of the Act:
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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Limited Liability Company Interests in the Fund (Shares)
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 [ ]
Aggregate market value of the Shares held by non-affiliates of registrant, based
on the closing net asset value on June 30, 2003 was $1,351,816,182.69.
Calculation of holdings by non-affiliates is based upon the assumption, for
these purposes only, that the registrant's manager, its executive officers and
directors and persons holding 5% or more of the registrant's Shares are
affiliates.
Incorporation by Reference:
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The financial statements contained in registrant's Form 10-K filed with the
Securities and Exchange Commission on March 27, 2003 have been incorporated into
the following Parts of this report: Part II and Part IV.
The Exhibit Index is located on page 66.
Belair Capital Fund LLC
Index to Form 10-K
Item Page
PART I
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1 Business...............................................................1
Fund Overview........................................................1
Structure of the Fund..............................................1
Fund Management....................................................1
The Fund's Offering................................................2
The Fund's Investment in Belvedere Capital Fund Company LLC and
Tax-Managed Growth Portfolio.........................................2
Belvedere Company..................................................2
The Portfolio......................................................2
The Portfolio's Investment Objective and Policies..................3
The Portfolio's Tax-Sensitive Management Strategies................3
The Fund's Real Estate Investments through Belair Real Estate
Corporation..........................................................4
Real Estate Joint Venture Investments..............................4
Partnership Preference Units.......................................5
Organization of Belair Real Estate and the
Real Estate Joint Venture .........................................6
Fund Borrowings......................................................6
Interest Rate Swap Agreements......................................6
The Eaton Vance Organization.........................................7
Conflicts of Interest .............................................7
2 Properties.............................................................7
3 Legal Proceedings......................................................7
4 Submission of Matters to a Vote of Security Holders....................7
PART II
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5 Determining Net Asset Value, Market for Fund Shares
and Related Shareholder Matters........................................8
Market Information, Restrictions on Transfers and
Redemption of Shares.................................................8
Transfers of Fund Shares...........................................8
Redemption of Fund Shares..........................................8
Determining Net Asset Value .......................................9
Historic Net Asset Values ........................................10
Record Holders of Shares of the Fund................................10
Distributions.......................................................10
Income and Capital Gain Distributions.............................10
Special Distributions.............................................11
6 Selected Financial Data...............................................11
Table of Selected Financial Data....................................11
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................12
Results of Operations...............................................12
Performance of the Fund...........................................12
Performance of the Portfolio......................................13
Performance of Real Estate Investments............................13
Performance of Interest Rate Swap Agreements......................14
Liquidity and Capital Resources.....................................14
Outstanding Borrowings............................................14
Liquidity.........................................................15
Off-Balance Sheet Arrangements......................................15
The Fund's Contractual Obligations..................................15
Critical Accounting Estimates .....................................16
7A Quantitative and Qualitative Disclosures About Market Risk............18
Quantitative Information About Market Risk..........................18
Interest Rate Risk................................ ...............18
Qualitative Information About Market Risk...........................20
Risks Associated with Equity Investing............................20
Risks of Investing in Foreign Securities..........................20
Risks of Certain Investment Techniques............................20
Risks of Real Estate Investments..................................21
Risks of Interest Rate Swap Agreements............................23
Risks of Leverage.................................................23
8 Financial Statements and Supplementary Data...........................24
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures..................................25
9A Controls and Procedures...............................................25
PART III
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10 Directors and Executive Officers......................................26
Management..........................................................26
Compliance with Section 16(a) of the Securities
Exchange Act of 1934................................................27
Code of Ethics...................................... ...............27
11 Executive Compensation................................................27
12 Security Ownership of Certain Beneficial Owners and Management........27
Security Ownership of Certain Beneficial Owners.....................27
Security Ownership of Management....................................27
Changes in Control..................................................27
13 Certain Relationships and Related Transactions........................27
The Fund's Investment Advisory and Administrative Fee...............28
Belair Real Estate's Management Fee.................................28
The Portfolio's Investment Advisory Fee ............................28
Servicing Fees Paid by the Fund.....................................29
Servicing Fees Paid by Belvedere Company ...........................29
Certain Real Estate Investment Transactions.........................29
14 Principal Accountant Fees and Services................................29
PART IV
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15 Exhibits, Financial Statements and Reports on Form 8-K................30
APPENDIX A ..................................................................32
FINANCIAL STATEMENTS..........................................................33
SIGNATURES ..................................................................65
EXHIBIT INDEX.................................................................66
PART I
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ITEM 1. BUSINESS.
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FUND OVERVIEW. Belair Capital Fund LLC (the Fund) is a private investment
company organized by Eaton Vance Management (Eaton Vance) to provide
diversification and tax-sensitive investment management to investors holding
large and concentrated positions in equity securities of selected public
companies. The Fund's investment objective is to achieve long-term, after-tax
returns for persons who have invested in the Fund (Shareholders). The Fund, a
Massachusetts limited liability company, commenced its investment operations on
February 6, 1998. Limited liability company interests of the Fund (Shares) were
issued to Shareholders at three closings during 1998. At each Fund closing, the
Fund accepted contributions of stock from investors in exchange for Shares of
the Fund. The Fund discontinued offering Shares on June 25, 1998 and, while the
Fund is not prohibited from doing so, no future offering is anticipated. As of
December 31, 2003, the Fund had net assets of approximately $1.5 billion.
STRUCTURE OF THE FUND. The Fund is structured to provide tax-free
diversification and tax-sensitive investment management to Shareholders. To meet
the objective of tax-free diversification, the Fund must satisfy specific
requirements of the Internal Revenue Code of 1986, as amended (the Code). In
order for the contributions of appreciated stock to the Fund by Shareholders to
be nontaxable, not more than 80% of the Fund's assets (calculated in the manner
prescribed) may consist of "stocks and securities" as defined in the Code. To
meet this requirement, the Fund invests at least 20% of its assets as so
determined in certain real estate investments (see "The Fund's Real Estate
Investments through Belair Real Estate Corporation" below). The Fund invests up
to 80% of its assets in a diversified portfolio of common stocks (see "The
Fund's Investment in Belvedere Capital Fund Company LLC and Tax-Managed Growth
Portfolio" below). The Fund acquired its real estate investments with borrowed
funds, as described below under "Fund Borrowings". See Appendix A for a chart
detailing the investment structure of the Fund.
In its investment program, the Fund balances investment considerations and tax
considerations, and takes into account the taxes payable by Shareholders on
allocated investment income and realized capital gains. See "The Fund's
Investment in Belvedere Capital Fund Company LLC and Tax-Managed Growth
Portfolio" below.
There is no trading market for the Fund's Shares. As described further under
"Redemption of Fund Shares" in Item 5(a), Fund Shares may be redeemed on any
business day. The Fund satisfies redemption requests principally by distributing
securities, but may also distribute cash. The value of securities and cash
distributed to satisfy a redemption will equal the net asset value of the number
of Shares redeemed. Under most circumstances, a redemption from the Fund that is
met by distributing securities as described herein will not result in the
recognition of capital gains by the Fund or by the redeeming Shareholder. The
redeeming Shareholder would generally recognize capital gains upon the sale of
the securities received upon the redemption.
The Fund intends to distribute each year the amount of its net investment income
for such year, if any. The Fund also intends to make annual capital gain
distributions equal to approximately 18% of the amount of its net realized
capital gains, if any, other than precontribution gain. The Fund's distributions
generally are based on determinations of net investment income and net realized
capital gains for federal income tax purposes. Such amounts may differ from net
investment income (or loss) and net realized gain (or loss) as set forth in the
Fund's consolidated financial statements due to differences in the treatment of
various income, gain, loss, expense and other items for federal income tax
purposes and under generally accepted accounting principles. The Fund's income
distributions are not expected to be significant. The Fund intends to pay any
distributions on the last business day of each fiscal year of the Fund (which
concludes on December 31) or shortly thereafter. See "Distributions" in Item
5(c).
FUND MANAGEMENT. The manager of the Fund is Eaton Vance, a Massachusetts
business trust registered as an investment adviser. Eaton Vance and its
subsidiary, Boston Management and Research (Boston Management), provide
management and advisory services to the Fund, its real estate subsidiary and the
investment portfolio in which the Fund invests. Eaton Vance and Boston
Management provide advisory, administration and/or management services to over
170 investment companies, as well as individual and institutional investors. As
of December 31, 2003, Eaton Vance and its affiliates managed approximately $80
billion on behalf of clients. The fees payable to the Eaton Vance organization,
as well as other fees payable by the Fund, are described in Item 13 below. The
Eaton Vance organization is subject to certain conflicts of interest in
providing services to the Fund, its subsidiaries and the investment portfolio in
which the Fund invests. See "The Eaton Vance Organization - Conflicts of
Interest" below.
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THE FUND'S OFFERING. Shares of the Fund were privately offered and sold only to
"accredited investors" as defined in Rule 501(a) under the Securities Act of
1933, as amended, (the Securities Act) who were "qualified purchasers" (as
defined in Section 2(a)(51)(A) of the Investment Company Act of 1940, as amended
(the 1940 Act)). The offering was conducted by Eaton Vance Distributors, Inc., a
wholly-owned subsidiary of Eaton Vance (EV Distributors), as placement agent and
by certain subagents appointed by EV Distributors. The Shares were offered and
sold in reliance upon an exemption from registration provided by Rule 506 under
the Securities Act. The Fund issued Shares to Shareholders at closings taking
place on February 6, 1998, April 20, 1998 and June 25, 1998. At the three
closings, an aggregate of 17,178,761 Shares were issued in exchange for
Shareholder contributions totaling approximately $1.9 billion.
The Fund is registered under the Securities Exchange Act of 1934, as amended,
(the 1934 Act) and files periodic reports (such as reports on Form 10-Q and Form
10-K) thereunder. Copies of the reports filed by the Fund are available: at the
public reference room of the Securities and Exchange Commission (the SEC) in
Washington, DC (call 1-202-942-8090 for information on the operation of the
public reference room); on the EDGAR Database on the SEC's Internet site
(http://www.sec.gov); or, upon payment of copying fees, by writing to the SEC's
public reference section, Washington, DC 20549-0102, or by electronic mail at
publicinfo@sec.gov. The Fund does not have a website. The Fund intends to
provide Shareholders with an annual and semiannual report containing the Fund's
consolidated financial statements, audited by the Fund's independent auditor in
the case of the annual report.
THE FUND'S INVESTMENT IN BELVEDERE CAPITAL FUND COMPANY LLC AND TAX-MANAGED
GROWTH PORTFOLIO. At each Fund closing, all of the securities accepted for
contribution to the Fund were contributed by the Fund to Belvedere Capital Fund
Company LLC, a Massachusetts limited liability company (Belvedere Company), in
exchange for shares of Belvedere Company. Belvedere Company, in turn,
immediately thereafter contributed the securities received from the Fund to
Tax-Managed Growth Portfolio (the Portfolio) in exchange for an interest in the
Portfolio. The Portfolio is a diversified, open-end management investment
company registered under the 1940 Act with net assets of approximately $17.6
billion as of December 31, 2003. As of December 31, 2003, the Fund's investment
in the Portfolio through Belvedere Company had a value of approximately $1.6
billion (equal to approximately 75.9% of the Fund's total assets on a
consolidated basis).
BELVEDERE COMPANY. Belvedere Company was organized in 1997 by Eaton Vance to
offer tax-free diversification and tax-sensitive investment management to
certain qualified investors who contributed diversified portfolios of equity
securities. As of December 31, 2003, the investment assets of Belvedere Company
consisted exclusively of an interest in the Portfolio with a value of
approximately $11.1 billion. As of such date, the Fund owned approximately 14.3%
of Belvedere Company's outstanding shares. The other investors in Belvedere
Company include six other investment funds sponsored by the Eaton Vance
organization (investment fund investors), as well as qualified individual
investors who acquired shares of Belvedere Company in exchange for portfolios of
acceptable securities (non-investment fund investors).
Belvedere Company considers for acceptance equity securities that (i) are listed
on the New York Stock Exchange, the American Stock Exchange, the NASDAQ National
Market or a major foreign exchange, (ii) have a trading price of at least $10.00
per share and (iii) are issued by issuers having an equity market capitalization
of at least $500 million. Because Belvedere Company only accepts contributions
of diversified baskets of securities (as described below), it is not subject to
the requirement that not more than 80% of its assets consist of "stocks and
securities" as defined in the Code. For investors that own a diversified basket
of securities, investing in Belvedere Company (rather than in the Fund) avoids
the costs and risks of investing in real estate and the associated financial
leverage to which the Fund is subject.
Belvedere Company provides a vehicle through which investment fund and
non-investment fund investors contributing a "diversified basket of securities"
can acquire an indirect interest in the Portfolio. A "diversified basket of
securities" means a group of securities that is diversified such that not more
than 25% of the value of the securities are investments in the securities of any
one issuer and not more than 50% of the value of the securities are investments
in the securities of five or fewer issuers. The securities contributed to
Belvedere Company at each Fund closing constituted a diversified basket of
securities. Because the Fund is required to hold a percentage of its investments
in non-Portfolio assets in order to meet certain tax requirements (see
"Structure of the Fund" above and "The Fund's Real Estate Investments through
Belair Real Estate Corporation" below), it could not satisfy the conditions of
the 1940 Act for investing directly in the Portfolio.
THE PORTFOLIO. The Portfolio was organized in 1995 by Eaton Vance as the
successor to the investment operations of Eaton Vance Tax-Managed Growth Fund
1.0 (Tax-Managed Growth 1.0), a mutual fund established in 1966 by Eaton Vance
and managed from inception for long-term, after-tax returns. As of December 31,
2003, investors in the Portfolio included six investors in addition to Belvedere
Company and Tax-Managed Growth 1.0, each of which has acquired or is acquiring
2
on a continuous basis interests in the Portfolio with cash. All investors in the
Portfolio are sponsored by or affiliated with Eaton Vance. As of December 31,
2003, Belvedere Company owned approximately 63.0% of the Portfolio.
The Fund invests in the Portfolio (on an indirect basis through Belvedere
Company) because it is a well-established investment portfolio that has an
investment objective and policies that are compatible to those of the Fund.
Investing in the Portfolio enables the Fund to participate in a substantially
larger and more diversified investment portfolio than it could achieve by
managing the contributed securities directly. The audited financial statements
of the Portfolio for the year ended December 31, 2003 are included in the Fund's
annual report to Shareholders and incorporated by reference into Item 8 below.
The Portfolio's audited financial statements include information about the
assets and liabilities of the Portfolio, including Portfolio expenses. For a
discussion of the Portfolio's performance for the year ended December 31, 2003,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7. For the investment advisory fee payable by the Portfolio,
see "The Portfolio's Investment Advisory Fee" in Item 13.
THE PORTFOLIO'S INVESTMENT OBJECTIVE AND POLICIES. The investment objective of
the Portfolio is to achieve long-term, after-tax returns for its investors by
investing in a diversified portfolio of equity securities. The Portfolio
primarily invests in common stocks of domestic and foreign growth companies that
are considered to be high in quality and attractive in their long-term
investment prospects. The Portfolio seeks to invest in a broadly diversified
portfolio of stocks and to invest primarily in established companies with
characteristics of above-average growth, predictability and stability that are
acquired with the expectation of being held for a period of years. Under normal
market conditions, the Portfolio invests primarily in common stocks. The
Portfolio has acquired securities through contributions from Belvedere Company
and Tax-Managed Growth 1.0, and by purchasing securities with cash invested in
the Portfolio by other investors.
Although the Portfolio may, in addition to investing in common stocks, invest in
investment-grade preferred stocks and debt securities, purchases of such
securities are normally limited to securities convertible into common stocks and
temporary investments in short-term notes and government obligations. During
periods in which the investment adviser to the Portfolio believes that returns
on common stock investments may be unfavorable, the Portfolio may invest a
portion of its assets in U.S. government obligations and high quality short-term
notes. The Portfolio's holdings represent a number of different industries. Not
more than 25% of the Portfolio's assets may be invested in the securities of
issuers having their principal business activity in the same industry,
determined as of the time of acquisition of any such securities.
THE PORTFOLIO'S TAX-SENSITIVE MANAGEMENT STRATEGIES. In its operations, the
Portfolio seeks to achieve long-term, after-tax returns in part by minimizing
the taxes incurred by investors in the Portfolio in connection with the
Portfolio's investment income and realized capital gains. Taxes on investment
income are minimized by investing primarily in lower-yielding securities and
stocks that pay dividends that qualify for favorable federal tax treatment.
Taxes on realized capital gains are minimized by avoiding or minimizing the sale
of securities holdings with large accumulated capital gains. The Portfolio
generally seeks to avoid realizing short-term capital gains.
When a decision is made to sell a particular appreciated security, the Portfolio
will select for sale the share lots resulting in the most favorable tax
treatment, generally those with holding periods sufficient to qualify for
long-term capital gain treatment that have the highest cost basis. The Portfolio
may, when deemed prudent by its investment adviser, sell securities to realize
capital losses that can be used to offset realized gains. While the Portfolio
generally retains the securities contributed to the Portfolio by Belvedere
Company, the Portfolio has the flexibility to sell contributed securities.
Securities acquired by the Portfolio with cash may be sold in accordance with
the tax-management strategies described above. In lieu of selling a security,
the Portfolio may hedge its exposure to that security by using the techniques
described below. The Portfolio also disposes of contributed securities through
its practice of settling redemptions by investors in the Portfolio that
contributed securities primarily by a distribution of securities as described in
Item 5(a) under "Redemption of Fund Shares." As described in Item 5(a), settling
redemptions with securities may result in certain tax benefits to the Portfolio,
Belvedere Company, the Fund and the redeeming Shareholder.
To protect against price declines in securities holdings with large accumulated
capital gains, the Portfolio may use various investment techniques, including,
but not limited to, the purchase of put options on securities held, equity
collars (combining the purchase of a put option and the sale of a call option),
equity swaps, covered short sales, forward sales of stocks held, and the
purchase and sale of futures contracts on stocks and stock indexes and options
thereon. By using these techniques rather than selling such securities, the
Portfolio may, within certain limits, reduce its exposure to price declines in
the securities without realizing substantial capital gains under current tax
law.
The Portfolio's ability to utilize covered short sales, certain equity swaps,
forward sales, futures and certain equity collar strategies as a tax-efficient
management technique with respect to holdings of appreciated securities is
limited to circumstances in which the hedging transaction is closed out within
3
30 days after the end of the taxable year of the Portfolio in which the hedging
transaction was initiated and the underlying appreciated securities position is
held unhedged for at least the next 60 days after such hedging transaction is
closed. In addition, dividends received on stock for which the Portfolio is
obligated to make related payments (pursuant to a short sale or otherwise) with
respect to positions in substantially similar or related property are subject to
federal income tax at ordinary rates and do not qualify for favorable tax
treatment. Also, holding periods required to receive tax-advantaged treatment of
qualified dividends on a stock holding are suspended whenever the Portfolio has
an option or contractual obligation to sell or an open short sale of
substantially identical stock, is the grantor of an option to buy substantially
identical stock or has diminished risk of loss in such stock by holding
positions with respect to substantially similar or related property. The use of
these investment techniques may require the Portfolio to commit or make
available cash and, therefore, may not be available at such times as the
Portfolio has limited holdings of cash. During 2003, the Portfolio held covered
short positions that were closed in January. The Portfolio did not otherwise
employ any of the techniques described above on securities holdings during the
year ended December 31, 2003.
THE FUND'S REAL ESTATE INVESTMENTS THROUGH BELAIR REAL ESTATE CORPORATION.
Separate from its investment in the Portfolio through Belvedere Company, the
Fund invests in certain real estate investments through its subsidiary, Belair
Real Estate Corporation (Belair Real Estate). The ownership structure of Belair
Real Estate is described below under "Organization of Belair Real Estate and the
Real Estate Joint Venture". As referred to above under "Fund Overview -
Structure of the Fund", the Fund invests in real estate investments to satisfy
certain requirements of the Code for contributions of appreciated stocks to the
Fund by Shareholders to be nontaxable. As of December 31, 2003, the consolidated
real estate investments of Belair Real Estate totaled approximately $480.6
million and represented 23.0% of the Fund's assets on a consolidated basis. The
Fund acquired its real estate investments with borrowed funds, as described
below under "Fund Borrowings". The Fund seeks a return on its real estate
investments over the long-term that exceeds the cost of the borrowings incurred
to acquire such investments.
At December 31, 2003, Belair Real Estate invested in a real estate joint venture
(Real Estate Joint Venture) that is controlled by Belair Real Estate, in a
portfolio of income-producing preferred equity interests in real estate
operating partnerships that generally are affiliated with and controlled by real
estate investment trusts (REITs) that are publicly traded (Partnership
Preference Units) and in certain other real estate investments. As of December
31, 2003, approximately 33.0% of the consolidated real estate investments of
Belair Real Estate was its investment in the Real Estate Joint Venture,
approximately 66.2% was investments in Partnership Preference Units and
approximately 0.8% was other real estate investments.
In the future, Belair Real Estate may invest in other types of real estate
investments, such as interests in real properties subject to long-term leases
(Net Leased Properties). Belair Real Estate may purchase real estate investments
from, and sell them to, other investment funds sponsored by the Eaton Vance
organization and REIT subsidiaries of such investment funds that are similar to
Belair Real Estate. During the year ended December 31, 2003, Belair Real Estate
sold Partnership Preference Units to one such REIT subsidiary and Belair Real
Estate recognized losses of approximately $1.2 million on such transactions. See
"Certain Real Estate Investment Transactions" in Item 13.
Boston Management serves as manager of Belair Real Estate. In that capacity,
Boston Management manages the investment and reinvestment of Belair Real
Estate's assets and administers its affairs. See Item 13 for a description of
the management fee payable by Belair Real Estate to Boston Management.
REAL ESTATE JOINT VENTURE INVESTMENTS. At December 31, 2003, Belair Real Estate
owned a controlling interest in a Real Estate Joint Venture, Bel Residential
Properties Trust (Bel Residential). With respect to the Real Estate Joint
Venture, Belair Real Estate owns a majority economic interest therein and
controls a majority of its board of trustees. Belair Real Estate's approval is
required for all major decisions affecting the Real Estate Joint Venture.
The day-to-day operating management of the real properties owned by the Real
Estate Joint Venture is provided by the real estate operating company (the
Operating Partner) that is the principal minority investor in the Real Estate
Joint Venture or an affiliated company thereof. The Operating Partner (or its
affiliate) receives a property management fee for the services rendered to such
properties. For the year ended December 31, 2003, property management fees
relating to real properties held through the Real Estate Joint Venture were
approximately $0.9 million.
At December 31, 2003, the assets of the Real Estate Joint Venture consisted of a
total of 11 multifamily residential communities acquired from or in conjunction
with the Operating Partner of the Real Estate Joint Venture. See Item 2.
Distributable cash flows from the Real Estate Joint Venture are allocated in a
manner that provides Belair Real Estate: 1) a priority position versus the
Operating Partner with respect to a fixed annual preferred return; and 2)
4
participation on a pro rata or reduced basis in distributable cash flows in
excess of the annual preferred return of Belair Real Estate and a subordinated
preferred return of the Operating Partner.
Financing for the Real Estate Joint Venture consists primarily of fixed-rate
secured mortgage debt obligations of the Real Estate Joint Venture that
generally are without recourse to Belair Real Estate and the Fund, as described
in "Risks of Real Estate Investments" in Item 7A(b). Both Belair Real Estate and
the Operating Partner invested equity in the Real Estate Joint Venture. Belair
Real Estate's equity in the Real Estate Joint Venture was acquired using the
proceeds of Fund borrowings. At acquisition, Belair Real Estate's equity
investment in Bel Residential was approximately $36.3 million.
A board of trustees controlled by Belair Real Estate oversees the performance of
the Operating Partner and controls the major decisions of the Real Estate Joint
Venture. Belair Real Estate controls three of the four seats on the board of
trustees. The persons serving as trustees on behalf of Belair Real Estate are
employees of Boston Management. See "Directors and Executive Officers" in Item
10. No director of Belair Real Estate or trustee of the Real Estate Joint
Venture is a Shareholder of the Fund. The Operating Partner of Belair Real
Estate's Real Estate Joint Venture also serves as an operating partner of other
Real Estate Joint Ventures that are majority owned by REIT subsidiaries of other
similarly-structured investment funds sponsored by the Eaton Vance organization.
Eaton Vance has no financial interest in the Real Estate Joint Venture.
The Operating Partner of Bel Residential is ERP Operating Limited Partnership
(ERP), an affiliate of Equity Residential. Equity Residential is a publicly
owned, self-administered and self-managed REIT. Equity Residential is the
largest publicly traded apartment company in America. As of December 31, 2003,
Equity Residential owned or had investments in 968 apartment communities in 34
states consisting of 207,506 apartment units. Equity Residential's corporate
headquarters are located in Chicago, Illinois. Equity Residential's common
shares are traded on the New York Stock Exchange under the symbol "EQR". ERP
owns 25% of the issued and outstanding shares of Bel Residential that are
entitled to vote for election of trustees of Bel Residential. Belair Real Estate
owns the balance of such shares.
The Real Estate Joint Venture includes a buy/sell provision that can be
exercised by either Belair Real Estate or the Operating Partner after a fixed
period of years. Pursuant to the buy/sell provision entered into at the time Bel
Residential was established, either Belair Real Estate or the Bel Residential
Operating Partner can give notice on or after July 31, 2009 either to buy the
other's equity interest in Bel Residential or to sell its own equity interest in
Bel Residential.
A purchase or sale pursuant to the buy/sell provision would be made at a
negotiated price. The agreement containing the buy/sell provision applicable to
the Real Estate Joint Venture continues indefinitely, but could be terminated
upon the receipt of the requisite approval of the owners of the voting interests
in the Real Estate Joint Venture. The sale to Belair Real Estate by the
Operating Partner of the Operating Partner's interest in Bel Residential would
not affect the REIT qualification of Bel Residential. If Belair Real Estate were
to dispose of its interest in the Real Estate Joint Venture pursuant to the
buy/sell provision or otherwise, it may acquire an interest in a different real
estate investment to replace the investment sold.
PARTNERSHIP PREFERENCE UNITS. Belair Real Estate's investments in Partnership
Preference Units represent preferred equity interests in real estate operating
partnerships that are affiliated with publicly traded REITs. The assets of the
partnerships that issued the Partnership Preference Units owned by Belair Real
Estate on December 31, 2003 consisted of direct or indirect ownership interests
in real properties, including manufactured home communities, office and
industrial properties, self-storage facilities, golf course properties, regional
malls, community shopping centers and, in the case of one issuer, a diversified
portfolio of properties. The Partnership Preference Units owned by Belair Real
Estate as of December 31, 2003 are described in Item 7A and in the consolidated
portfolio of investments included in the Fund's consolidated financial
statements, which are incorporated by reference into Item 8.
Eaton Vance is not, and has not been, involved in the management or operation of
the real estate operating partnerships that issued the Partnership Preference
Units owned by Belair Real Estate. In February 2003, Belair Real Estate
exchanged certain Partnership Preference Units for an equity investment in two
private real estate companies affiliated with the issuer of the exchanged
Partnership Preference Units and a note receivable from one such company.
William R. Cross, Vice President of Eaton Vance and Boston Management and a
member of the board of the Real Estate Joint Venture, serves as a director of
the two private real estate companies. Additional information about Mr. Cross
appears in Item 10.
The Partnership Preference Units held by Belair Real Estate were issued by
partnerships that are not publicly-traded partnerships within the meaning of
Code Section 7704(b). The Partnership Preference Units are perpetual life
instruments (subject to call provisions) and are not, by their terms, readily
5
convertible or exchangeable into cash or securities of the affiliated public
company. The Partnership Preference Units are not rated by a
nationally-recognized rating agency, and such interests may not be as high in
quality as issues that are rated investment grade.
Each issue of Partnership Preference Units held by Belair Real Estate pays
regular quarterly distributions at fixed rates from the net profits of the
issuing partnership, with preferential rights over common and other subordinated
units. None of the issues of Partnership Preference Units is or will be
registered under the Securities Act and each issue is thus subject to
restrictions on transfer.
ORGANIZATION OF BELAIR REAL ESTATE AND THE REAL ESTATE JOINT VENTURE. Belair
Real Estate and the Real Estate Joint Venture operate in such a manner as to
qualify for taxation as REITs under the Code. As REITs, Belair Real Estate and
the Real Estate Joint Venture generally are not subject to federal income tax on
that portion of their ordinary income or taxable gain that is distributed to
stockholders each year. The Fund owns 100% of the common stock issued by Belair
Real Estate, and intends to hold all of Belair Real Estate's common stock at all
times. Belair Real Estate and the Operating Partner own all of the common shares
or similar interests of the Real Estate Joint Venture.
Belair Real Estate and the Real Estate Joint Venture also have issued preferred
shares to satisfy certain provisions of the Code, which require (among other
things) that a REIT be beneficially owned in the aggregate by 100 or more
persons. The preferred shares of each such entity are owned by approximately 105
charitable organizations that received the preferred shares as gifts. Each
charitable organization that received preferred stock was an "accredited
investor" (as defined in the Securities Act) with total assets in excess of $5
million at the time the organization received the preferred shares. Eaton Vance
selected the charitable organizations from the charities for which it has
matched employee contributions and/or suggestions from its employees or the
Operating Partner. As of December 31, 2003, the total value of the preferred
shares outstanding of Belair Real Estate and Bel Residential was $210,000 and
$220,000, respectively. Dividends on preferred shares are cumulative and payable
annually at a dividend rate of 8% per year. The dividends paid on preferred
shares have priority over payments on common shares. For the year ended December
31, 2003, Belair Real Estate and Bel Residential paid or accrued distributions
to preferred shareholders of $16,800 and $17,600, respectively.
FUND BORROWINGS. To finance its real estate investments held through Belair Real
Estate, the Fund has entered into credit arrangements with DrKW Holdings, Inc.
(the DrKW Credit Facility) and Merrill Lynch Mortgage Capital, Inc. (the MLMC
Credit Facility) (collectively, the Credit Facility). The Credit Facility is
secured by a pledge of the Fund's assets, excluding the assets of Bel
Residential, and expires in June 2010. At December 31, 2003, the total principal
amount outstanding under the Credit Facility was $447.0 million. The Credit
Facility is also used to provide 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 Credit Facility and the
amount of outstanding borrowings thereunder.
Borrowings under the DrKW Credit Facility accrue interest at a rate of one-month
LIBOR plus 0.30% per annum. As of December 31, 2003, outstanding borrowings
under the DrKW Credit Facility totaled $447.0 million.
The Fund may borrow up to $100.0 million under the MLMC Credit Facility, of
which up to $10 million may be letters of credit. Borrowings under the MLMC
Credit Facility accrue interest at a rate of one-month LIBOR plus 0.38% per
annum. As of December 31, 2003, there were no outstanding borrowings under the
MLMC Credit Facility. There was a $1.5 million letter of credit issued as of
December 31, 2003. The unused loan commitment amount totaled $98.5 million. A
commitment fee of 0.10% per annum is paid on the unused commitment amount. The
Fund pays all fees associated with issuing letters of credit.
Obligations under the Credit Facility are without recourse to Fund Shareholders.
As described above, financing for the Real Estate Joint Venture consists
primarily of fixed-rate secured mortgage debt obligations of the Real Estate
Joint Venture that are without recourse to Fund Shareholders and are generally
without recourse to Belair Real Estate and the Fund, as described under "Risks
of Real Estate Investments" in Item 7A(b).
INTEREST RATE SWAP AGREEMENTS. The Fund has entered into interest rate swap
agreements with Merrill Lynch Capital Services, Inc. (MLCS) to fix the cost of
borrowings under the Credit Facility used to acquire Belair Real Estate's equity
in its real estate investments. Pursuant to the interest rate swap agreements,
the Fund makes cash payments to MLCS at fixed rates in exchange for floating
rate payments from MLCS that fluctuate with one-month LIBOR. The interest rate
swap agreements extend until June 25, 2010 and provide for the Fund to make
payments to MLCS at fixed rates averaging 4.75%. See Note 7 to the Fund's
consolidated financial statements incorporated by reference into Item 8.
6
THE EATON VANCE ORGANIZATION. The Eaton Vance organization sponsors the Fund.
Eaton Vance serves as the Fund's manager. Boston Management serves as the Fund's
investment adviser and as manager of Belair Real Estate. EV Distributors served
as the Fund's placement agent. The Fund's business affairs are conducted by
Eaton Vance (as its manager) and its investment operations are conducted by
Boston Management (as its adviser). The Fund's officers are employees of Eaton
Vance. Eaton Vance, Boston Management and EV Distributors are indirect
wholly-owned subsidiaries of Eaton Vance Corp., a publicly-traded holding
company that, through its affiliates and subsidiaries, engages primarily in
investment management, administration and marketing activities.
As noted above, the Fund pursues its objective primarily by investing in
Belvedere Company. Belvedere Company invests exclusively in the Portfolio.
Boston Management acts as investment adviser of the Portfolio and manager of
Belvedere Company. EV Distributors acts as placement agent for Belvedere Company
and the Portfolio. As of December 31, 2003, the assets of the Fund represented
approximately 2.6% of assets under management by Eaton Vance and its affiliates.
The offices of the Fund, Eaton Vance, Boston Management and EV Distributors are
located at 255 State Street, Boston, Massachusetts 02109.
CONFLICTS OF INTEREST. Boston Management and other Eaton Vance affiliates are
subject to certain conflicts of interests in their dealings with the Fund,
Belair Real Estate, Belvedere Company and the Portfolio. Also investing in the
Portfolio are other investment companies sponsored by Eaton Vance. Portfolio
management activities with respect to securities contributed to the Portfolio
may have different tax consequences for the contributing investor in the
Portfolio than for other investors in the Portfolio. Boston Management manages
the Portfolio in pursuit of long-term, after-tax returns for all investors in
the Portfolio and, with respect to contributed securities, takes into account
the tax position of the contributing investor in the Portfolio. Whenever
conflicts of interest arise, Eaton Vance, Boston Management and other Eaton
Vance affiliates will endeavor to exercise their discretion in a manner that
they believe is equitable to all interested persons.
Belair Real Estate may purchase real estate investments from the REIT
subsidiaries of other funds similar in purpose to the Fund that are sponsored by
the Eaton Vance organization. Belair Real Estate may also co-invest with such
entities in real estate investments and sell real estate investments to such
entities. In any such transaction, the assets purchased and sold will be valued
in good faith by Boston Management, after consideration of factors, data and
information that Boston Management considers relevant. Transaction prices
generally include an allocation of the original costs incurred in creating and
acquiring the transferred assets. Real estate investments are often difficult to
value and others could in good faith arrive at valuations different from those
of Boston Management.
ITEM 2. PROPERTIES.
- --------------------
The Fund does not own any physical properties, other than indirectly through
Belair Real Estate's investments. As of December 31, 2003, Belair Real Estate
held investments in Partnership Preference Units of nine issuers. At December
31, 2003, Belair Real Estate owned majority interests in Bel Residential, whose
assets are reflected in the consolidated financial statements of the Fund. Bel
Residential owns 11 multifamily residential properties located in seven states
(Washington, Colorado, North Carolina, Arizona, Florida, Georgia and Texas).
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the quarter ended
December 31, 2003.
7
PART II
-------
ITEM 5. DETERMINING NET ASSET VALUE, MARKET FOR FUND SHARES AND RELATED
SHAREHOLDER MATTERS.
- --------------------------------------------------------------------------------
This Item and other Items in this report contain summaries of certain provisions
contained in the Amended and Restated Operating Agreement of the Fund (the LLC
Agreement), which was filed as an exhibit to the Fund's registration statement
on Form 10. All such summaries are qualified in their entirety by the actual
provisions of the LLC Agreement, which are incorporated by reference herein.
(a) MARKET INFORMATION, RESTRICTIONS ON TRANSFERS AND REDEMPTION OF SHARES.
- --------------------------------------------------------------------------------
TRANSFERS OF FUND SHARES. There is no established public trading market for the
Shares of the Fund. Other than transfers to the Fund in a redemption, transfers
of Shares are expressly prohibited by the LLC Agreement of the Fund without the
consent of Eaton Vance. Eaton Vance's consent to a transfer may be withheld in
its sole discretion for any reason or for no reason.
The Shares have not been and will not be registered under the Securities Act,
and may not be resold unless an exemption from such registration is available.
Shareholders have no right to require registration of the Shares and the Fund
does not intend to register the Shares under the Securities Act or take any
action to cause an exemption (whether pursuant to Rule 144 of the Securities Act
or otherwise) to be available.
The Fund is not and will not be registered under the 1940 Act, and no transfer
of Shares may be made if, as determined by Eaton Vance or counsel to the Fund,
such transfer would result in the Fund being required to be registered under the
1940 Act. In addition, no transfer of Shares may be made unless, in the opinion
of counsel for the Fund, such transfer would not result in termination of the
Fund for purposes of Section 708 of the Code or result in the classification of
the Fund as an association or a publicly traded partnership taxable as a
corporation under the Code.
In no event shall all or any part of a Shareholder's Shares be assigned to a
minor or an incompetent, unless in trust for the benefit of such person. Shares
may be sold, transferred, assigned or otherwise disposed of by a Shareholder
only if it is determined by Eaton Vance or counsel to the Fund that such
transfer, assignment or disposition would not violate federal securities or
state securities or "blue sky" laws (including investor qualification
standards).
There are no outstanding options or warrants to purchase, or securities
convertible into, Shares of the Fund. Shares of the Fund cannot be sold pursuant
to Rule 144 under the Securities Act, and the Fund does not propose to publicly
offer any of its Shares at any time.
REDEMPTION OF FUND SHARES. Shares of the Fund may be redeemed on any business
day. The redemption price of Shares that are redeemed is based on the Fund's net
asset value next computed after receipt of the redemption request.
The Fund satisfies redemption requests principally by distributing securities
drawn from the Portfolio, but may also distribute cash. If requested by a
redeeming Shareholder, the Fund will satisfy a redemption request by
distributing securities that were contributed by the redeeming Shareholder,
provided that such securities are held in the Portfolio at the time of
redemption. The securities contributed by a Shareholder will not be distributed
to any other Shareholder in the Fund (or to any other investor in Belvedere
Company or the Portfolio) during the first seven years following their
contribution unless the contributing Shareholder has withdrawn from the Fund.
Under most circumstances, a redemption from the Fund that is settled with
securities as described herein will not result in the recognition of capital
gains by the Fund or by the redeeming Shareholder. The redeeming Shareholder
would generally recognize capital gains upon the sale of the securities received
through redemption. If a redeeming Shareholder receives cash in addition to
securities to settle a redemption, the amount of cash received will be taxable
to the Shareholder to the extent it exceeds such Shareholder's tax basis in Fund
Shares. Shareholders should consult their tax advisors about the tax
consequences of redeeming Fund Shares.
A Shareholder redemption request within seven years of a contribution of
securities by such Shareholder will ordinarily be satisfied by distributing
securities that were contributed by such Shareholder, prior to distributing to
such Shareholder any other securities held in the Portfolio. Securities
contributed by a Shareholder may be distributed to other Shareholders in the
Fund (or to other investors in Belvedere Company or the Portfolio) after a
holding period of at least seven years and, if so distributed, would not be
available to meet subsequent redemption requests made by the contributing
Shareholder.
8
If requested by a redeeming Shareholder making a redemption of at least $1
million occurring more than seven years after such Shareholder's final
contribution of securities to the Fund, the Fund will generally distribute to
the redeeming Shareholder a diversified basket of securities representing a
range of industry groups that is drawn from the Portfolio, but the selection of
individual securities would be made by Boston Management in its sole discretion.
No interests in Real Estate Joint Ventures, Partnership Preference Units or
other real estate investments held by Belair Real Estate will be distributed to
meet a redemption request, and "restricted securities" will be distributed only
to the Shareholder who contributed such securities or such Shareholder's
successor in interest.
Other than as set forth above, the allocation of each redemption between
securities and cash and the selection of securities to be distributed will be at
the sole discretion of Boston Management. Distributed securities may include
securities contributed by Shareholders as well as other readily marketable
securities held in the Portfolio. The value of securities and cash distributed
to meet a redemption will equal the net asset value of the number of Shares
being redeemed. The Fund's Credit Facility prohibits the Fund from honoring
redemption requests while there is an event of default outstanding under the
Credit Facility.
The Fund may compulsorily redeem all or a portion of the Shares of a Shareholder
if the Fund has determined that such redemption is necessary or appropriate to
avoid registration of the Fund or Belvedere Company under the 1940 Act, or to
avoid adverse tax, or other consequences to the Portfolio, Belvedere Company,
the Fund or Fund Shareholders, including those arising as the result of
applicable anti-money laundering requirements.
A capital account for each Shareholder is maintained on the books of the Fund.
The account reflects the value of such Shareholder's interest in the Fund, which
is adjusted for profits, liabilities and distributions allocable to such account
in accordance with Article 6 of the Fund's LLC Agreement.
DETERMINING NET ASSET VALUE. Boston Management, as investment adviser, is
responsible for determining the value of the Fund's assets. The Fund's
custodian, Investors Bank & Trust Company, calculates the value of the assets of
the Fund, Belvedere Company and the Portfolio each day that the New York Stock
Exchange (NYSE) is open for trading, as of the close of regular trading on the
NYSE. The Fund's net asset value per Share is calculated by dividing the value
of the Fund's total assets, less its liabilities, by the number of Shares
outstanding.
The Fund's net assets are valued in accordance with the Fund's valuation
procedures and reflect the value of its directly-held assets and liabilities, as
well as the net asset value of the Fund's investment in the Portfolio held
through Belvedere Company and in real estate investments held through Belair
Real Estate. The Trustees of the Portfolio have established procedures for the
fair valuation of the Portfolio's assets under normal market conditions.
Pursuant to these procedures, marketable securities listed on U.S. securities
exchanges generally are valued at the last sale price on the day of the
valuation or, if there were no sales, at the mean between the closing bid and
asked prices therefor on the exchange where such securities are principally
traded. Marketable securities listed on the NASDAQ National Market System
generally are valued at the NASDAQ official closing price. Unlisted or listed
securities for which closing sale prices are not available are valued at the
mean between the last available bid and asked prices. Exchange-traded options
are valued at the last sale price for the day of valuation as quoted on the
principal exchange or board of trade on which the options are traded, or in the
absence of a sale on such day, at the mean between the latest bid and asked
prices therefor. Futures positions on securities or currencies are generally
valued at closing settlement prices. Short-term debt securities with a remaining
maturity of 60 days or less are valued at amortized cost. If short-term debt
securities were acquired with a remaining maturity of more than 60 days, their
amortized cost value will be based on their value on the sixty-first day prior
to maturity. Other fixed income and debt securities, including listed securities
and securities for which price quotations are available, will normally be valued
on the basis of valuations furnished by a pricing service.
The daily valuation of foreign securities held by the Portfolio generally is
determined as of the close of trading on the principal exchange on which such
securities trade. Events occurring after the close of trading on foreign
exchanges may result in adjustments to the valuation of foreign securities to
more accurately reflect their fair value as of the close of regular trading on
the NYSE. The Portfolio may rely on an independent fair valuation service in
adjusting the valuations of foreign securities. Foreign securities and
currencies held by the Portfolio are valued in U.S. dollars, as calculated by
the Portfolio's custodian based on foreign currency exchange rate quotations
supplied by an independent quotation service. All other securities are valued at
fair value as determined in good faith by or at the direction of the Portfolio's
Trustees considering relevant factors, data and information including the market
value of freely tradable securities of the same class in the principal market on
which such securities are normally traded.
The Fund's real estate investments are valued each day as determined in good
faith by Boston Management, as investment adviser to Belair Real Estate, after
consideration of relevant factors, data and information. The procedures for
9
valuing Belair Real Estate's assets are described under "Critical Accounting
Estimates" in Item 7 and under "Risks of Real Estate Investments" in Item 7A.
Boston Management values the Fund's interest rate swap agreements based upon
dealer and counterparty quotes and pricing models which take into consideration
the market trading prices of interest rate swap agreements that have similar
terms to the Fund's interest rate swap agreements. Fixed liabilities of the Fund
generally are stated at principal value.
HISTORIC NET ASSET VALUES. Set forth below are the high and low net asset values
per Share (NAVs) of the Fund for each full quarter during the two years ended
December 31, 2003 and 2002, the closing NAV on the last business day of each
full quarter, and the percentage change in NAV during each such quarter.
NAV at Quarterly %
Quarter Ended High NAV Low NAV Quarter End Change in NAV(1)
------------- -------- ------- ----------- ------------------
12/31/03 $ 119.60 $ 108.59 $ 119.60 12.77%
9/30/03 $ 110.01 $ 102.04 $ 106.06 3.05%
6/30/03 $ 107.19 $ 90.28 $ 102.92 15.23%
3/31/03 $ 96.89 $ 83.39 $ 89.32 -3.31%
12/31/02 $ 96.86 $ 81.98 $ 92.38 6.56%
9/30/02 $ 102.10 $ 81.50 $ 86.69 -15.83%
6/30/02 $ 118.36 $ 101.04 $ 103.00 -13.07%
3/31/02 $ 121.26 $ 110.66 $ 118.49 0.94%
(1) Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that Shares, if redeemed, may be worth
more or less than their original cost. Changes in NAV are historical.
Performance is for the stated time period only; due to market volatility,
the Fund's current performance may be lower or higher. For more information
about the performance of the Fund, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7.
(b) RECORD HOLDERS OF SHARES OF THE FUND.
- ------------------------------------------
As of March 1, 2004, there were 548 record holders of Shares of the Fund.
(c) DISTRIBUTIONS.
- -------------------
INCOME AND CAPITAL GAIN DISTRIBUTIONS. The Fund intends to distribute each year
the amount of its net investment income for such year, if any. The Fund also
intends to make annual capital gain distributions equal to approximately 18%
(reduced from 22% to reflect the reduction in federal long-term capital gains
rates) of the amount of its net realized capital gains, if any, other than
precontribution gain allocated to a Shareholder in connection with a taxable
tender offer or other taxable corporate event for a security contributed to the
Fund by that Shareholder or that Shareholder's predecessor in interest. The
Fund's net investment income and net realized gains include the Fund's allocated
share of the net investment income and net realized gains of Belair Real Estate,
Belvedere Company and, indirectly, the Portfolio. The Fund's distributions
generally are based on determinations of net investment income and net realized
capital gains for federal income tax purposes. Such amounts may differ from net
investment income (or loss) and net realized gain (or loss) as set forth in the
Fund's consolidated financial statements due to differences in the treatment of
various income, gain, loss, expense and other items for federal income tax
purposes and under generally accepted accounting principles. Because the
Portfolio invests primarily in lower yielding securities, seeks to avoid net
realized short-term capital gains and bears certain ongoing expenses, it is not
expected that income distributions will be significant. The Fund intends to pay
distributions (if any) on the last business day of each fiscal year of the Fund
(which concludes on December 31) or shortly thereafter. The Fund's distribution
rates with respect to realized gains may be adjusted in the future to reflect
changes in the effective maximum marginal individual federal tax rate applicable
to long-term capital gains.
Shareholder distributions with respect to net investment income and realized
post-contribution gains are made pro rata in proportion to the number of Shares
held as of the record date of the distribution. All distributions (including
Special Distributions described below) are paid by the Fund in cash.
Distributions are generally not taxable to the recipient Shareholder unless the
distributions exceed the recipient Shareholder's tax basis in Fund Shares. The
Fund's Credit Facility prohibits the Fund from making any distribution to
Shareholders while there is an event of default outstanding under the Credit
Facility.
10
On January 14, 2004, the Fund made a distribution of $1.28 per Share to
Shareholders of record on January 13, 2004. On January 17, 2003, the Fund made a
distribution of $0.49 per Share to Shareholders of record on January 16, 2003.
The Fund made no distributions in 2002.
SPECIAL DISTRIBUTIONS. In addition to the income and capital gain distributions
described above, the Fund also makes distributions whenever a Shareholder
recognizes a precontribution gain (other than precontribution gain allocated to
a Shareholder in connection with a tender offer or other extraordinary corporate
event involving a security contributed by such Shareholder) (a Special
Distribution). Special Distributions generally equal approximately 18% of the
amount of realized precontribution gains plus approximately 4% of the allocated
precontribution gain or such other percentage as deemed appropriate to
compensate Shareholders receiving such distributions for taxes that may be due
in connection with the precontribution gain and Special Distributions. Special
Distributions will be made solely to the Shareholders to whom the
precontribution gain is allocated. The Fund does not intend to make Special
Distributions to a Shareholder in respect of realized precontribution gain
allocated to a Shareholder in connection with a tender offer or other
extraordinary corporate event involving a security contributed by such
Shareholder. For the year ended December 31, 2003, the Fund made no Special
Distributions. For the year ended December 31, 2002, the Fund made Special
Distributions of approximately $850.
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------
TABLE OF SELECTED FINANCIAL DATA. The consolidated data referred to below
reflects the Fund's historical results for the years ended December 31, 2003,
2002, 2001, 2000 and 1999. The following information should be read in
conjunction with all of the consolidated financial statements and related notes
incorporated by reference into Item 8. The other consolidated data referred to
below is as of each period end.
Year Ended Year Ended Year Ended
December 31, 2003 December 31, 2002(1) December 31, 2001(1)
-------------------- ---------------------- ----------------------
Total investment income $ 69,405,545 $ 78,233,872 $ 91,896,767
Interest Expense $ 18,432,578 $ 25,116,047 $ 45,913,849
Total expenses (including
interest expense) $ 35,039,905 $ 44,896,899 $ 70,454,477
Net investment income $ 34,029,533 $ 31,919,610 $ 19,211,073
Minority interests in net
income of controlled
subsidiaries $ (336,107) $ (1,417,363) $ (2,231,217)
Net realized (loss) gain $ (6,702,427) $ (73,194,357) $ 3,292,331
Net change in unrealized
appreciation (depreciation $ 335,001,122 $ (310,435,564) $ (241,417,383)
Net increase (decrease) in
net assets from operations $ 362,328,228 $ (351,710,311) $ (218,913,979)
Total assets $2,092,840,523 $1,942,238,810 $2,545,136,580
Loan payable $ 447,000,000 $ 540,769,000 $ 558,769,000
Mortgages payable $ 112,630,517 $ 112,630,517 $ 228,480,517
Net assets $1,522,281,849 $1,245,807,656 $1,687,637,826
Shares outstanding 12,728,157 13,485,660 14,376,567
Net asset value and
redemption price per Share $ 119.60 $ 92.38 $ 117.39
Net increase (decrease) in
net assets from operations
per Share $ 27.71 $ (25.01) $ (14.52)
Distribution paid per
Share(2) $ 0.49(3)(4) $ 0.00(3) $ 1.22
Year Ended Year Ended
December 31, 2000(1) December 31, 1999(1)
---------------------- ------------------------
Total investment income $ 84,553,765 $ 59,436,107
Interest Expense $ 57,304,272 $ 36,722,400
Total expenses (including
interest expense) $ 75,194,663 $ 45,032,162
Net investment income $ 8,432,411 $ 14,403,945
Minority interests in net
income of controlled
subsidiaries $ (926,691) $ --
Net realized (loss) gain $ 30,925,079 $ (43,998,210)
Net change in unrealized
appreciation (depreciation) $ 16,818,313 $ 293,174,886
Net increase (decrease) in
net assets from operations $ 56,175,803 $ 263,580,621
Total assets $2,797,091,702 $2,759,005,507
Loan payable $ 643,000,000 $ 655,000,000
Mortgages payable $ 112,630,517 $ --
Net assets $2,010,997,840 $2,094,369,753
Shares outstanding 15,106,086 15,900,744
Net asset value and
redemption price per Share $ 133.13 $ 131.72
Net increase (decrease) in
net assets from operations
per Share $ 3.02 $ 16.33
Distribution paid per
Share(2) $ 1.61 $ 1.27
(1) Certain amounts have been reclassified to conform with the current year
presentation.
(2) The Fund also makes Special Distributions, which are not made on a pro rata
basis. See Item 5(c). During the period ended December 31, 2001, the Fund
made Special Distributions of $0.47 per Share. Special distributions made
in 2002 amount to less than $0.001 per Share.
(3) On January 17, 2003, the Fund made a distribution of $0.49 per Share to
Shareholders of record on January 16, 2003.
(4) On January 14, 2004, the Fund made distributions of $1.28 per Share to
Shareholders of record on January 13, 2004.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
- --------------------------------------------------------------------------------
THE INFORMATION IN THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE FEDERAL SECURITIES LAWS. FORWARD-LOOKING STATEMENTS TYPICALLY ARE
IDENTIFIED BY USE OF TERMS SUCH AS "MAY," "WILL," "SHOULD," "MIGHT," "EXPECT,"
"ANTICIPATE," "ESTIMATE," AND SIMILAR WORDS, ALTHOUGH SOME FORWARD-LOOKING
STATEMENTS ARE EXPRESSED DIFFERENTLY. THE ACTUAL RESULTS OF 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. SEE "QUALITATIVE INFORMATION ABOUT
MARKET RISK" IN ITEM 7A BELOW.
The following discussion should be read in conjunction with the Fund's
consolidated financial statements and related notes incorporated by reference
into Item 8.
(a) RESULTS OF OPERATIONS.
- ---------------------------
Increases and decreases in the Fund's net asset value per Share are derived from
net investment income or loss, and realized and unrealized gains and losses on
investments. The Fund's net investment income (or loss) is determined by
subtracting the Fund's total expenses from its investment income and then
deducting the minority interest in net income of Belair Real Estate's controlled
subsidiary. The Fund's investment income includes the net investment income
allocated to the Fund from Belvedere Company, rental income from the properties
owned by Belair Real Estate's controlled subsidiary, partnership income
allocated to the 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
and interest allocated to Belvedere Company by 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, property management
fees, servicing fees, interest expense from mortgages owned by Belair Real
Estate's controlled subsidiary, interest expense on the Credit Facility,
property and maintenance expenses and property taxes and insurance expenses
relating to the properties owned by Belair Real Estate's controlled subsidiary,
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.
The realized and unrealized gains and losses on investments and interest rate
swap agreements 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, 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 commonly used as a measure of U.S.
stock market performance. Eaton Vance's primary focus in pursuing total return
is on the Fund's common stock portfolio, which consists of its indirect interest
in the Portfolio. In measuring the performance of the Fund's real estate
investments, 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 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.
(1) Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that Shares, when redeemed, may be worth
more or less than their original cost. Returns are calculated by
determining the percentage change in net asset value with all distributions
reinvested. Performance is for the stated time period only; 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.
12
The Fund's total return for the year ended December 31, 2003 was 30.14%. This
return reflects an increase in the Fund's net asset value per Share from $92.38
to $119.60 and a distribution of $0.49 per Share during the period. For
comparison, the S&P 500 had a total return of 28.67% over the same period. The
combined impact on performance of the Fund's investment activities outside of
the Portfolio was positive for the year ended December 31, 2003. The performance
of the Fund exceeded that of the Portfolio by approximately 6.26% for the year.
The Fund had a total return of -21.30% for the year ended December 31, 2002.
This return reflected a decrease in the Fund's net asset value per Share from
$117.39 to $92.38. For comparison, the S&P 500 had a total return of -22.09%
over the same period. For the year ended December 31, 2002, the performance of
the Fund trailed that of the Portfolio by approximately 1.78%.
PERFORMANCE OF THE PORTFOLIO. U.S. equities experienced a successful 2003 with
most major indices posting their first annual gains since 1999. Strength in the
broader market was a function of a favorable economic environment: historically
low inflation and interest rates coupled with robust earnings growth and
continued consumer strength. While the Portfolio's performance for the year
ended December 31, 2003 of 23.88% was strong, the Portfolio trailed the S&P 500,
which had a total return of 28.67% for the year. The total return of the
Portfolio for the year ended December 31, 2002 was -19.52%.
The Portfolio's sector allocation in 2003 was substantially unaltered from 2002
in that the Portfolio continued to maintain overweighted positions in the
industrial, consumer discretionary and financials sectors. Although these
sectors generally performed well during 2003, the sub-par performance of the
Portfolio's holdings across the constituent industries, and multi-line retail
and aerospace/defense names in particular, hindered its performance. The
Portfolio's continued underweight of the best performing sector of the year,
information technology, was another factor contributing to the Portfolio's
relative underperformance versus the S&P 500. As in 2002, lack of earnings
visibility and unattractive valuations caused Boston Management, the Portfolio's
investment adviser, to remain cautious on the technology sector. A similar
rationale prompted a de-emphasis of the telecommunications sector, the
underweighting of which had a positive impact on the Portfolio's return in 2003.
During the year, Boston Management increased the Portfolio's allocation to more
economically sensitive sectors, such as consumer discretionary and energy, from
2002 levels. This shift, particularly with respect to investments in
pro-cyclical industries such as consumer electronics, energy services, and oil
and gas, was particularly beneficial. Financial and health care investments also
contributed to relative performance in 2003, with strong performance by consumer
finance, pharmaceuticals and biotechnology investments. While the Portfolio
remained underweighted in the materials and the utilities sectors during 2003,
stock selections in the electric and gas utilities groups positively impacted
returns for the year.
Unlike in 2002, the market favored lower quality and higher volatility
securities in 2003, something that is not unusual when coming out of an economic
slowdown or bear market. The Portfolio's policy of investing primarily in higher
quality securities and its valuation discipline contributed to its
underperformance versus its benchmark and the Portfolio's more aggressive peers
during the past year. Looking forward, Boston Management believes the economic
recovery will continue at a sustainable pace, and that the market will better
reward quality companies that can consistently deliver earnings. The longer-term
success of the Portfolio will be determined by the performance of U.S. equity
markets and the ability of Boston Management's research staff to deliver
superior stock selection versus the Portfolio's benchmark. Higher quality
investments are gradually gaining strength in the market, and the Portfolio's
investment focus will continue to be in companies with strong business
franchises and solid long-term earnings prospects.
PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate investments held
through Belair Real Estate include investments in Partnership Preference Units
and a majority interest in a Real Estate Joint Venture. During the year ended
December 31, 2003, Belair Real Estate sold (or experienced scheduled redemptions
of) certain of its Partnership Preference Units, recognizing gains of $0.04
million on the transactions (including sales to another investment fund advised
by Boston Management). For the year ended December 31, 2003, Belair Real
Estate's investments in Partnership Preference Units continued to benefit from
lower interest rates and tighter spreads on real estate securities. At December
31, 2003, the estimated fair value of Belair Real Estate's Partnership
Preference Units totaled $318.0 million compared to $391.2 million at December
31, 2002, a decrease of $73.2 million or 19%. The decrease was due to fewer
Partnership Preference Units being held at December 31, 2003, offset in part by
increases in the per unit value of the Partnership Preference Units held by
Belair Real Estate. Belair Real Estate saw unrealized appreciation of the
estimated fair value in its Partnership Preference Units of approximately $26.6
million during the year ended December 31, 2003 compared to approximately $13.6
million for the year ended December 31, 2002.
13
Distributions received from Partnership Preference Units for the year ended
December 31, 2003 totaled $34.3 million compared to $36.9 million for the year
ended December 31, 2002, a decrease of $2.6 million or 7%. The decrease was due
to fewer Partnership Preference Units held on average during the year ended
December 31, 2003.
The sale of Belair Real Estate's interest in Katahdin Property Trust LLC
(Katahdin) in May 2002 reduced the scope of the Fund's real estate operations
for the year ended December 31, 2003 as compared to the year ended December 31,
2002. Operations of Belair Real Estate's remaining Real Estate Joint Venture
continued to be impacted by weak multifamily market fundamentals during the year
ended December 31, 2003. Rental income from real estate operations decreased to
$21.9 million for the year ended December 31, 2003 from $30.3 million for the
year ended December 31, 2002, a decrease of $8.4 million or 28%. This decrease
in rental income was principally due to the May 2002 sale of Belair Real
Estate's interest in Katahdin, as well as increased rent concessions and/or
reduced apartment rental rates and lower occupancy levels at properties owned by
Belair Real Estate's remaining Real Estate Joint Venture, a trend that continued
from 2002.
Property operating expenses decreased to $10.0 million for the year ended
December 31, 2003 from $12.6 million for the year ended December 31, 2002, a
decrease of $2.6 million or 21% (property operating expenses are before certain
operating expenses of Belair Real Estate of approximately $3.5 million for the
year ended December 31, 2003 and approximately $3.8 million for the year ended
December 31, 2002). The decrease in property operating expenses was principally
due to the May 2002 sale of Belair Real Estate's interest in Katahdin, offset in
part by modest increases in property operating expenses of Belair Real Estate's
remaining Real Estate Joint Venture. While the U.S. economy showed signs of
strength during the year ended December 31, 2003, significant employment growth
has not occurred in most markets and low interest rates have contributed to
continued apartment move-outs (due to new home purchases) and ongoing
development of new multifamily properties. As a result, Boston Management,
Belair Real Estate's manager, expects that real estate operating results in 2004
will be modestly below the levels of 2003.
At December 31, 2003, the estimated fair value of the real properties held
through Belair Real Estate was $158.5 million compared to $157.5 million at
December 31, 2002, an increase of $1.0 million or 1%. The modest increase in
estimated real property values at December 31, 2003 resulted from declines in
capitalization rates in a lower-return environment, which more than offset the
impact of lower income level expectations. The capitalization rate, a term
commonly used in the real estate industry, is the rate of return percentage
applied to actual or estimated income levels to determine the value of a real
estate investment. Belair Real Estate saw unrealized appreciation of the
estimated fair value in its other real estate investments (which includes Belair
Real Estate's interest in the Real Estate Joint Venture) of approximately $5.5
million during the year ended December 31, 2003 compared to approximately $2.3
million of unrealized depreciation for the year ended December 31, 2002. Belair
Real Estate sold its interest in Katahdin to another fund advised by Boston
Management and realized a loss of $8.2 million on the transaction during the
year ended December 31, 2002.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the year ended December 31,
2003, net realized and unrealized losses on the Fund's interest rate swap
agreements totaled approximately $3.3 million, compared to net realized and
unrealized losses of approximately $22.2 million for the year ended December 31,
2002. Net realized and unrealized losses on swap agreements in 2003 consisted of
$14.5 million of net realized and unrealized gains due to changes in swap
agreement valuations, offset by $17.8 million of periodic payments made pursuant
to outstanding swap agreements (and classified as net realized losses on
interest rate swap agreements in the Fund's consolidated statement of
operations). In 2002, net realized and unrealized gains of $8.5 million on swap
agreement valuation changes were offset by $30.7 million of swap agreement
periodic payments. The positive contribution to 2003 Fund performance from
changes in swap agreement valuations was attributable to a rise in swap rates
during the year and swap agreements entered into by the Fund approaching their
optional termination dates. The positive contribution to 2002 Fund performance
from changes in swap valuations was due primarily to the Fund's swap agreements
approaching optional termination dates, as relevant swap rates were
substantially unchanged.
On October 1, 2003, the Fund terminated all of its then outstanding swap
agreements and entered into new agreements to fix the cost of a substantial
portion of Fund borrowings under the Credit Facility. The Fund realized a loss
of approximately $8.5 million on the swap agreement terminations.
(b) LIQUIDITY AND CAPITAL RESOURCES.
- -------------------------------------
OUTSTANDING BORROWINGS. As of December 31, 2003, the Fund had outstanding
borrowings of $447.0 million and unused loan commitments of $98.5 million under
the Credit Facility. The Credit Facility is used primarily to finance the Fund's
equity in its real estate investments and will continue to be used for such
14
purpose in the future. The Credit Facility may also be used for any short-term
liquidity needs of the Fund. In the future, the Fund may increase the size of
the Credit Facility (subject to lender consent) and the amount of outstanding
borrowings thereunder for these purposes.
As of December 31, 2003, Bel Residential had outstanding borrowings consisting
of fixed-rate secured mortgage debt obligations of $112.6 million.
LIQUIDITY. The Fund may redeem shares of Belvedere Company at any time. Both
Belvedere Company and the Portfolio normally follow the practice of satisfying
redemptions by distributing securities drawn from the Portfolio. Belvedere
Company and the Portfolio may also satisfy redemptions by distributing cash. As
of December 31, 2003, the Portfolio had cash and short-term investments totaling
$122.4 million. The Portfolio participates in a $150.0 million multi-fund
unsecured line of credit agreement with a group of banks. The Portfolio may
temporarily borrow from the line of credit to satisfy redemption requests in
cash or to settle investment transactions. The Portfolio had no outstanding
borrowings at December 31, 2003. To ensure liquidity for investors in the
Portfolio, the Portfolio may not invest more than 15% of its net assets in
illiquid assets. As of December 31, 2003, illiquid assets (consisting of
restricted securities not available for current public sale) constituted 0.3% of
the net assets of the Portfolio.
The liquidity of Belair Real Estate's Real Estate Joint Venture investments is
extremely limited, and relies principally upon buy/sell arrangements with the
Operating Partner that may be exercised on or after July 31, 2009. See "Real
Estate Joint Venuture Investments" under "The Fund's Real Estate Investments
through Belair Real Estate Corporation" in Item 1. Transfers of Belair Real
Estate's interest in the Real Estate Joint Venture to parties other than the
Operating Partner are restricted by terms of the operating management
agreements, buy/sell arrangements with the Operating Partner, and lender consent
requirements. The Partnership Preference Units held by Belair Real Estate are
not registered under the Securities Act and are subject to substantial
restrictions on transfer. As such, they are illiquid.
(c) OFF-BALANCE SHEET ARRANGEMENTS.
- ------------------------------------
The Fund is required to disclose off-balance sheet arrangements that either
have, or are reasonably likely to have, a current or future effect on its
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to Shareholders. An off-balance sheet arrangement includes any
contractual arrangement to which an unconsolidated entity is a party and under
which the Fund has certain specified obligations. As of December 31, 2003, the
Fund did not have any such off-balance sheet arrangements.
(d) THE FUND'S CONTRACTUAL OBLIGATIONS.
- ----------------------------------------
The following table sets forth the amounts of payments due under the specified
contractual obligations outstanding on December 31, 2003:
Payments due:
- ------------------------------------------------------------------------------------------------------------------------------------
Type of Obligation Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years
- ------------------------------------------------------------------------------------------------------------------------------------
Long Term Debt:
Mortgage Debt(1) $112,630,517 $ -- $ -- $ -- $112,630,517
Borrowings under Credit Facility(2) $447,000,000 $ -- $ -- $ -- $447,000,000
Purchase Obligations(3)
Other Long Term Liabilities:
Interest Rate Swap Agreements(4) $116,518,985 $17,975,245 $35,950,490 $35,950,490 $ 26,642,760
- ------------------------------------------------------------------------------------------------------------------------------------
Total $676,149,502 $17,975,245 $35,950,490 $35,950,490 $586,273,277
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The rental property held by Belair Real Estate are financed through a
mortgage issued to the Real Estate Joint Venture. The mortgage is secured
by the underlying rental property and is generally without recourse to the
other assets of the Fund or Belair Real Estate as described in "Risks of
Real Estate Investments" in Item 7A(b). The mortgage matures in 2010.
Mortgage obligations cannot be prepaid or otherwise disposed of without
incurring a substantial prepayment penalty or without the sale of the
associated rental property.
15
(2) To finance its real estate investments held through Belair Real Estate, the
Fund has entered into a Credit Facility with $447.0 million of borrowings
outstanding as of December 31, 2003. The Credit Facility is secured by a
pledge of the Fund's assets, excluding the assets of Bel Residential, and
expires in June 2010. The Credit Facility is primarily used to finance the
Fund's equity in its real estate investments and will continue to be used
for such purpose in the future.
(3) The Fund and Belair Real Estate have entered into agreements with certain
service providers pursuant to which the Fund and Belair Real Estate pay
fees as a percentage of assets. These fees include fees paid to Eaton Vance
and its affiliates (which are described in Item 13). These agreements
generally continue indefinitely unless terminated by the Fund or Belair
Real Estate (as applicable) or the service provider. For the year ended
December 31, 2003, these fees equaled approximately 1.87% of the Fund's net
assets. Because these fees are based on the Fund's assets (which will
fluctuate over time) it is not possible to specify the dollar amounts
payable in the future.
(4) 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. Pursuant to the interest rate swap
agreements, the Fund makes cash payments to MLCS at fixed rates in exchange
for floating rate payments from MLCS that fluctuate with one-month LIBOR.
The amounts disclosed in the table represent the fixed interest amounts
payable by the Fund. The periodic floating rate payments that the Fund
expects to receive pursuant to the agreements will reduce the fixed
interest cost to the Fund. The swap agreements expire on June 25, 2010.
(e) CRITICAL ACCOUNTING ESTIMATES.
- -----------------------------------
The Fund's consolidated financial statements are 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. Estimates are deemed critical when a
different estimate could have reasonably been used or where changes in the
estimate are reasonably likely to occur from period to period, and where such
different or changed estimates would materially impact the Fund's financial
condition, changes in financial condition or results of operations. The Fund's
significant accounting policies are discussed in Note 2 of the notes to
consolidated financial statements; critical estimates inherent in these
accounting policies are discussed in the following paragraphs.
The Fund has determined that the valuation of the Fund's real estate investments
(including the Real Estate Joint Venture and the Partnership Preference Units)
are critical estimates. The Fund's investments in real estate are an important
component of its total investment program. Market prices for these investments
are not readily available and therefore they are stated in the Fund's
consolidated financial statements at estimated fair value. The estimated fair
value of an investment represents the amount at which Boston Management (as
manager of Belair Real Estate) believes the investment could be sold in a
current transaction between willing parties in an orderly disposition, that is,
other than in a forced or liquidation sale. The Fund reports the estimated fair
value of its real estate investments on its consolidated statement of assets and
liabilities with any changes to estimated fair value charged to unrealized
appreciation or depreciation in the Fund's consolidated statement of operations.
The need to estimate the fair value of the Fund's real estate investments
introduces uncertainty into the Fund's reported financial condition and
performance because:
* such assets are, by their nature, difficult to value and estimated
values may not accurately reflect what the Fund could realize in a
current sale between willing parties;
* property appraisals and other factors used to determine the estimated
fair value of the Fund's real estate investments depend on estimates
of future operating results and supply and demand assumptions that may
not reflect actual performance;
* property appraisals and other factors used to determine the estimated
fair value of the Fund's real estate investments are not continuously
updated and therefore may not be current as of specific dates; and
* if the Fund were forced to sell illiquid assets on a distressed basis,
the proceeds may be substantially less than stated values.
As of December 31, 2003, the estimated fair value of the Fund's real estate
investments represented 23.0% of the Fund's total assets. Adjusting for the
minority interest of the Operating Partner of the Real Estate Joint Venture as
of December 31, 2003, the Fund's real estate investments represented 30.2% of
the Fund's net assets. The estimated fair value of the Fund's real estate
16
investments may change due to changes in market conditions and changes in
valuation assumptions made by property appraisers and third party valuation
service providers as described below.
As noted in Item 1, to satisfy certain requirements of the Code the Fund invests
at least 20% of its assets (calculated in the manner prescribed) in real estate
investments (the 20% requirement). Should the estimated fair value of the Fund's
real estate investments decrease, the Fund may be required to acquire additional
real estate investments to satisfy the 20% requirement. Because the Fund
acquires real estate investments with borrowings, acquisitions of additional
real estate investments would increase the Fund's obligations under the Credit
Facility and thereafter reduce the amounts otherwise available to the Fund
thereunder. Should the estimated fair value of the Fund's real estate
investments increase, real estate investments could represent a larger
percentage of the Fund's investment portfolio.
PARTNERSHIP PREFERENCE UNITS. Boston Management, as manager of Belair Real
Estate, determines the estimated fair value of the Fund's Partnership Preference
Units based on analysis and calculations performed primarily on a monthly basis
by a third party service provider. The service provider calculates an estimated
price and yield (before accrued distributions) for each issue of Partnership
Preference Units based on descriptions of such issue provided by Boston
Management and certain publicly available information including, but not limited
to, the trading prices of publicly issued debt and/or preferred stock
instruments of the same or similar issuers, which may be adjusted to reflect the
illiquidity and other structural characteristics of the Partnership Preference
Units (such as call provisions). Daily valuations of Partnership Preference
Units are determined by adjusting prices from the service provider to account
for accrued distributions under the terms of the Partnership Preference Units.
If changes in relevant markets, events that materially affect an issuer or other
events that have a significant effect on the price or yield of Partnership
Preference Units occur, relevant prices or yields may be recalculated to take
such occurrences into account.
Valuations of Partnership Preference Units are inherently uncertain because they
are based on adjustments from the market prices of publicly-traded debt and/or
preferred stock instruments of the same or similar issuers to account for the
Partnership Preference Units' illiquidity, structural features (such as call
provisions) and other relevant factors. Each month Boston Management reviews the
analysis and calculations performed by the service provider. Boston Management
generally relies on the assumptions and judgments made by the service provider
in estimating the fair value of the Partnership Preference Units. If the
assumptions and estimates used by the service provider to calculate prices for
Partnership Preference Units were to change, it may materially impact the
estimated fair value of the Fund's holdings of Partnership Preference Units.
REAL ESTATE JOINT VENTURE. Boston Management determines the estimated fair value
of the Fund's interest in the Real Estate Joint Venture based primarily on
annual appraisals of the multifamily properties owned by such Real Estate Joint
Venture and an allocation of the equity value of the Real Estate Joint Venture
between the Fund and the Operating Partner. Appraisals of Real Estate Joint
Venture properties may be conducted more frequently than once a year if Boston
Management determines that significant changes in economic circumstances that
may materially impact estimated property values have occurred since the most
recent appraisal.
In deriving the estimated value of a property, an appraiser considers numerous
factors, including the expected future cash flows from the property, recent sale
prices for similar properties and, if applicable, the replacement cost of the
property in order to derive an indication of the amount that a prudent, informed
purchaser-investor would pay for the property. More specifically, the appraiser
considers the revenues and expenses of the property and the estimated future
growth or decline thereof, which may be based on tenant quality, property
condition, neighborhood change, market trends, interest rates, inflation rates
or other factors deemed relevant by the appraiser. The appraiser estimates
operating cash flows from the property and the sale proceeds of a hypothetical
transaction at the end of a hypothetical holding period. The cash flows are
discounted to their present values using a market-derived discount rate and are
added together to obtain a value indication. This value indication is compared
to the value indication that results from applying a market-derived
capitalization rate to a single years' stabilized net operating income for the
property. The assumed capitalization rate may be extracted from local market
transactions or, when transaction evidence is lacking, obtained from trade
sources. The appraiser considers the value indications derived by these two
methods, as well as the value indicated by recent market transactions involving
similar properties, in order to produce a final value estimate for the property.
Appraisals of properties owned by the Real Estate Joint Venture are conducted by
independent appraisers who are licensed in their respective states and not
affiliated with Eaton Vance or the Operating Partner. Each appraisal is
conducted in accordance with the Uniform Standards Board and the Code of
Professional Appraisal Practice of the Appraisal Institute (as well as other
relevant standards). Boston Management reviews the appraisal of each property
and generally relies on the assumptions and judgments made by the appraiser.
17
Property appraisals are inherently uncertain because they apply assumed discount
rates, capitalization rates, growth rates and inflation rates to the appraiser's
estimated stabilized cash flows, and due to the unique characteristics of a
property, which may affect its value but may not be taken into account. If the
assumptions and estimates used by the appraisers to determine the value of the
properties owned by the Fund's Real Estate Joint Venture were to change, it may
materially impact the estimated fair value of the Fund's Real Estate Joint
Venture.
Boston Management determines the estimated fair value of the Fund's equity
interest in the Real Estate Joint Venture based on an estimate of the allocation
of equity interests between the Fund and the Operating Partner, as calculated by
a third party service provider. The service provider uses a financial model that
considers the (i) terms of the joint venture agreement relating to allocation of
distributable cash flow, (ii) the duration of the joint venture; and (iii) the
projected property values and cash flows from the properties based on estimates
made by the appraisers. The estimated allocation of equity interests between the
Fund and the Operating Partner of the Real Estate Joint Venture is prepared
quarterly and reviewed by Boston Management. Interim valuations of Real Estate
Joint Venture assets may be adjusted to reflect significant changes in economic
circumstances, and the results of operations and distributions. If the estimate
of the allocation of equity interests in the Real Estate Joint Venture were to
change (because, for example, the appraisers' estimate of property values or
projected cash flows of the Real Estate Joint Venture changed), it may
materially impact the estimated fair value of the Fund's Real Estate Joint
Venture.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- ---------------------------------------------------------------------
(a) QUANTITATIVE INFORMATION ABOUT MARKET RISK.
- ------------------------------------------------
INTEREST RATE RISK. The Fund's primary exposure to interest rate risk arises
from its real estate investments that are financed by the Fund with floating
rate borrowings under the Fund's Credit Facility and by fixed-rate secured
mortgage debt obligations of the Real Estate Joint Venture. Partnership
Preference Units are fixed rate instruments whose values will generally increase
when interest rates rise and decrease 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-month LIBOR. The Fund's interest rate swap agreements will generally
increase in value when interest rates rise and decrease in value when interest
rates fall. In the 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 Notes 7 and 8 to
the Fund's consolidated financial statements incorporated by reference into Item
8.
Interest Rate Sensitivity
Cost, Principal (Notional) Amount
by Contractual Maturity and Callable Date
for the Twelve Months Ended December 31,*
Estimated
2004 2005 2006-2008 Thereafter Total Fair Value
- --------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
- -----------------------------------------
Long-term debt:
- -----------------------------------------
Fixed-rate mortgages $112,630,517 $112,630,517 $134,000,000
Average interest rate 8.33% 8.33%
- -----------------------------------------
Variable-rate Credit Facility $447,000,000 $447,000,000 $447,000,000
Average interest rate 1.42% 1.42%
- --------------------------------------------------------------------------------------------------------------------------
18
Estimated
2004 2005 2006-2008 Thereafter Total Fair Value
- --------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative financial
instruments:
- -----------------------------------------
Pay fixed/ receive variable interest
rate swap agreements $378,782,000 $378,782,000 $ 1,644,344
Average pay rate 4.75% 4.75%
Average receive rate 1.42% 1.42%
- --------------------------------------------------------------------------------------------------------------------------
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: 8.80% $22,521,853 $ 22,521,853 $ 25,809,946
Colonial Realty Limited Partnership,
8.875% Series B Cumulative Redeemable
Perpetual Preferred Units, Callable
2/23/04, Current Yield: 8.82%(1) $44,807,072 $ 44,807,072 $ 48,800,700
Kilroy Realty, L.P., 8.075% Series A
Cumulative Redeemable Preferred Units,
Callable 2/6/03, Current Yield: 8.75% $20,000,000 $ 20,000,000 $ 18,457,880
Liberty Property L.P., 9.25% Series B
Cumulative Redeemable Preferred Units,
Callable 7/28/04, Current Yield: 9.04% $30,875,000 $ 30,875,000 $ 31,603,650
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
2/6/03, Current Yield: 9.50% $31,454,184 $ 31,454,184 $ 32,315,819
National Golf Operating Partnership,
L.P., 9.30% Series B Cumulative
Redeemable Preferred Units, Callable
2/6/03, Current Yield: 9.50% $ 5,000,000 $ 5,000,000 $ 4,894,000
19
Estimated
2004 2005 2006-2008 Thereafter Total Fair Value
- --------------------------------------------------------------------------------------------------------------------------
PSA Institutional Partners, L.P., 9.50%
Series N Cumulative Redeemable
Perpetual Preferred Units, Callable
3/17/05, Current Yield: 9.13% $48,250,000 $ 48,250,000 $ 50,180,000
Price Development Company, L.P., 8.95%
Series B Cumulative Redeemable
Preferred Partnership Units, Callable
7/28/04, Current Yield: 9.11% $30,625,000 $ 30,625,000 $ 30,086,000
Urban Shopping Centers, L.P., 9.45%
Series D Cumulative Redeemable
Perpetual Preferred Units, Callable $25,000,000 $ 25,000,000 $ 25,635,000
10/1/04, Current Yield: 9.22%
- -----------------------------------------
Note Receivable:
- -----------------------------------------
Fixed-rate note receivable, 8% $ 2,070,580 $ 2,070,580 $ 2,219,712
* The investments listed reflect holdings as of December 31, 2003. The Fund's
current holdings may differ.
(1) In February 2004, the call date was changed to 2/24/09 and the distribution
rate was changed to 7.25%.
(b) QUALITATIVE INFORMATION ABOUT MARKET RISK.
- -----------------------------------------------
RISKS ASSOCIATED WITH EQUITY INVESTING. The value of Fund Shares may not
increase and may decline. The performance of the Fund fluctuates. The Fund
invests primarily in a diversified portfolio of common stocks and is thereby
subject to general stock market risk. There can be no assurance that the
performance of the Fund will match that of the U.S. stock market or that of
other equity funds. In managing the Portfolio for long-term, after-tax returns,
Boston Management generally seeks to avoid or minimize sales of securities with
large accumulated capital gains, including contributed securities. Such
securities constitute a substantial portion of the assets of the Portfolio.
Although the Portfolio may utilize certain management strategies in lieu of
selling appreciated securities, the Portfolio's, and hence the Fund's, exposure
to losses during stock market declines may nonetheless be higher than funds that
do not follow a general policy of avoiding sales of highly-appreciated
securities.
RISKS OF INVESTING IN FOREIGN SECURITIES. The Portfolio invests in securities
issued by foreign companies and the Fund may acquire foreign investments.
Foreign investments involve considerations and possible risks not typically
associated with investing in the United States. The value of foreign investments
to U.S. investors may be adversely affected by changes in currency rates.
Foreign brokerage commissions, custody fees and other costs of investing are
generally higher than in the United States, and foreign investments may be less
liquid, more volatile and subject to more government regulation than in the
United States. Foreign investments could be adversely affected by other factors
not present in the United States, including expropriation, confiscatory
taxation, lack of uniform accounting and auditing standards, armed conflict, and
potential difficulty in enforcing contractual obligations. These risks can be
more significant for investments in emerging markets.
RISKS OF CERTAIN INVESTMENT TECHNIQUES. In managing the Portfolio, Boston
Management may purchase or sell derivative instruments (which derive their value
by reference to other securities, indexes, instruments or currencies) to hedge
against securities price declines and currency movements and to enhance returns.
Such transactions may include, without limitation, the purchase and sale of
futures contracts on stocks and stock indexes and options thereon; the purchase
of put options and the sale of call options on securities held; equity swaps;
forward sales of stocks; and the purchase and sale of forward currency exchange
contracts and currency futures. The Portfolio may make short sales of securities
provided that it holds an equal amount of the security sold short (or securities
convertible into or exchangeable for an equal amount of the securities sold
short without payment of additional consideration) or cash or other liquid
securities in an amount equal to the current market value of the securities sold
short. The Portfolio may also lend portfolio securities.
20
The use of these investment techniques is a specialized activity that may be
considered speculative and which can expose the Fund and the Portfolio to
significant risk of loss. Successful use of these investment techniques is
subject to the ability and performance of the investment adviser. The Fund's and
the Portfolio's ability to achieve their investment objectives may be adversely
affected by the use of these techniques. The writer of an option or a party to
an equity swap may incur losses that substantially exceed the payments, if any,
received from a counterparty. Forward sales, swaps, caps, floors, collars and
over-the-counter options are private contracts in which there is also a risk of
loss in the event of a default on an obligation to pay by the counterparty. Such
instruments may be difficult to value, may be illiquid and may be subject to
wide swings in valuation caused by changes in the price of the underlying
security, index, instrument or currency. In addition, if the Fund or the
Portfolio has insufficient cash to meet margin, collateral or settlement
requirements, it may have to sell assets to meet such requirements.
Alternatively, should the Fund or the Portfolio fail to meet these requirements,
the counterparty or broker may liquidate positions of the Fund or the Portfolio.
The Portfolio may also have to sell or deliver securities holdings in the event
that it is not able to purchase securities on the open market to cover its short
positions or to close out or satisfy an exercise notice with respect to options
positions it has sold. In any of these cases, such sales may be made at prices
or in circumstances that Boston Management considers unfavorable.
The Portfolio's ability to utilize covered short sales, certain equity swaps,
forward sales, futures and certain equity collar strategies (combining the
purchase of a put option and the sale of a call option) as a tax-efficient
management technique with respect to holdings of appreciated securities is
limited to circumstances in which the hedging transaction is closed out within
30 days of the end of the taxable year of the Portfolio in which the hedging
transaction was initiated and the underlying appreciated securities position is
held unhedged for at least the next 60 days after such hedging transaction is
closed. In addition, dividends received on stock for which the Portfolio is
obligated to make related payments (pursuant to a short sale or otherwise) with
respect to positions in substantially similar or related property are subject to
federal income taxation at ordinary rates and do not qualify for favorable tax
treatment. There can be no assurance that counterparties will at all times be
willing to enter into covered short sales, forward sales of stocks, interest
rate hedges, equity swaps and other derivative instrument transactions on terms
satisfactory to the Fund or the Portfolio. The Fund's and the Portfolio's
ability to enter into such transactions may also be limited by covenants under
the Fund's Credit Facility, the federal margin regulations and other laws and
regulations. The Portfolio's use of certain investment techniques may be
constrained because the Portfolio is a diversified, open-end management
investment company registered under the 1940 Act and because other investors in
the Portfolio are regulated investment companies under Subchapter M of the Code.
Moreover, the Fund and the Portfolio are subject to restrictions under the
federal securities laws on their ability to enter into transactions in respect
of securities that are subject to restrictions on transfer pursuant to the
Securities Act.
RISKS OF REAL ESTATE INVESTMENTS. The success of Belair Real Estate's real
estate investments depends in part on many factors related to the real estate
market. These factors include, without limitation, general economic conditions,
the supply and demand for different types of real properties, the financial
health of tenants, the timing of lease expirations and terminations,
fluctuations in rental rates and operating costs, exposure to adverse
environmental conditions and losses from casualty or condemnation, fluctuations
in interest rates, availability of financing, managerial performance, government
rules and regulations, and acts of God (whether or not insured against). There
can be no assurance that Belair Real Estate's ownership of real estate
investments will be an economic success.
The success of investments in Partnership Preference Units depends upon factors
relating to the issuing partnerships that may affect such partnerships'
profitability and their ability to make distributions to holders of Partnership
Preference Units. Belair Real Estate's interests in the Real Estate Joint
Venture and Partnership Preference Units are not registered under the federal
securities laws and are subject to restrictions on transfer. Due to their
illiquidity, they may be difficult to value and the ongoing value of the
investments is uncertain. Investments in Partnership Preference Units are valued
primarily by referencing market trading prices for comparable preferred equity
securities or other fixed-rate instruments having similar investment
characteristics. The valuations of Partnership Preference Units fluctuate over
time to reflect, among other factors, changes in interest rates, changes in the
perceived riskiness of such units (including call risk), changes in the
perceived riskiness of comparable or similar securities trading in the public
market and the relationship between supply and demand for comparable or similar
securities trading in the public market. Increases in interest rates and
increases in the perceived riskiness of such units or comparable or similar
securities will adversely affect the valuation of the Partnership Preference
Units. Fluctuations in the value of Partnership Preference Units derived from
changes in general interest rates can be expected to be offset in part (but not
entirely) by changes in the value of interest rate swap agreements or other
interest rate hedges entered into by the Fund with respect to its borrowings
under the Credit Facility. Because the Partnership Preference Units are not
rated by a nationally-recognized rating agency, they may be subject to more
credit risk than securities that are rated investment grade.
21
The performance of the Real Estate Joint Venture is substantially influenced by
the property management capabilities of the Operating Partner and conditions in
the specific real estate sub-markets in which the properties owned by the Real
Estate Joint Venture are located. The Operating Partner is subject to
substantial conflicts of interest in structuring, operating and winding up the
Real Estate Joint Venture. The Operating Partner had an economic incentive to
maximize the prices at which it sold properties to the Real Estate Joint Venture
and has a similar incentive to minimize the prices at which it may acquire
properties from the Real Estate Joint Venture. The Operating Partner may devote
greater attention or more resources to managing its wholly-owned properties than
properties held by the Real Estate Joint Venture. Future investment
opportunities identified by the Operating Partner will more likely be pursued
independently, rather than through, the Real Estate Joint Venture. Financial
difficulties encountered by the Operating Partner in its other businesses may
interfere with the operations of the Real Estate Joint Venture. Belair Real
Estate's investments in the Real Estate Joint Venture may be significantly
concentrated in terms of geographic regions, property types and operators,
increasing the Fund's exposure to regional, property type and operator specific
risks. Given a lack of stand-alone operating history and relatively high
financial leverage, the Real Estate Joint Venture will not be equivalent in
quality to real estate companies whose preferred equity or senior debt
securities are rated investment grade. Distributable cash flows from the Real
Estate Joint Venture may not be sufficient for Belair Real Estate to receive its
fixed annual preferred return, or any returns in excess thereof.
The debt of Bel Residential is fixed-rate, secured by the underlying properties
and generally without recourse to Belair Real Estate and the Fund. Belair Real
Estate and the Fund may be directly or indirectly responsible for certain
liabilities constituting exceptions to the generally non-recourse nature of the
mortgage indebtedness, including liabilities associated with fraud,
misrepresentation, misappropriation of funds, or breach of material covenants,
and liabilities arising from environmental conditions involving or affecting
Real Estate Joint Venture properties. The Fund and Belair Real Estate have
received indemnification from the Operating Partner of Bel Residential for
certain of such potential liabilities. The availability of financing and other
financial conditions can have a material impact on property values and therefore
on the value of Real Estate Joint Venture assets. Mortgage debt of the Real
Estate Joint Venture normally cannot be refinanced prior to maturity without
substantial penalties.
The ongoing value of Belair Real Estate's investments in the Real Estate Joint
Venture is substantially uncertain. The real property held through Belair Real
Estate's Real Estate Joint Venture is stated at estimated fair value based on
independent valuations, assuming an orderly disposition of assets, that is,
other than in a forced or liquidation sale. Independent valuations include
property appraisals performed by appraisers that are licensed in their
respective states and not affiliated with Eaton Vance or the Operating Partner
of the Real Estate Joint Venture. Such appraisals are performed in accordance
with the Uniform Standards of Professional Appraisal Practice of the Appraisal
Standards Board, as well as the Code of Professional Ethics and Standards of
Professional Appraisal Practice of the Appraisal Institute (and other relevant
standards).
Detailed investment evaluations are performed at least annually and reviewed
periodically. The value of the Real Estate Joint Venture is estimated using the
real property valuations and an allocation of the equity value of the Real
Estate Joint Venture between Belair Real Estate and the Operating Partner based
on the terms of the Real Estate Joint Venture. Interim valuations reflect
results of operations and distributions, and may be adjusted to reflect
significant changes in economic circumstances since the most recent independent
valuation. The policies for valuing real estate investments involve significant
judgments that are based upon a number of factors, which may include, without
limitation, general economic conditions, the supply and demand for different
types of real properties, the financial health of tenants, the timing of lease
expirations and terminations, fluctuations in rental rates and operating costs,
exposure to adverse environmental conditions and losses from casualty or
condemnation, interest rates, availability of financing, managerial performance
and government rules and regulations. Given that such valuations include many
assumptions, including, but not limited to, an orderly disposition of assets,
values may differ from amounts ultimately realized.
Investments in Net Leased Properties will be subject to general real estate
market risks similar to Real Estate Joint Ventures. Net Leased Properties will
also be subject to risks specific to this type of investment, including a
concentration of risk exposure to specific real estate submarkets and individual
properties and tenants. Principal among the risks of investing in Net Leased
Properties is the risk that a major tenant fails to satisfy its lease
obligations due to financial distress or other reasons. A tenant's failure to
meet its lease obligations would expose Belair Real Estate to substantial loss
of income without a commensurate reduction in debt service costs and other
expenses, and would transfer to Belair Real Estate all the costs, expenses and
liabilities of property ownership and management borne by the tenant under the
terms of the lease. Re-leasing a property could involve considerable time and
22
expense. Re-leasing opportunities may be limited by the nature and location of
the property, which may not be well suited to the needs of other possible
tenants. Even if a property is re-leased, the property may not generate
sufficient rental income to cover debt service and other expenses.
Net Leased Properties are generally illiquid, and the ongoing value of an
investment in Net Leased Properties will be substantially uncertain. Net Leased
Properties will be stated at estimated fair values based on annual appraisals.
These appraisals are conducted by independent, licensed appraisers in a manner
similar to the appraisals of properties owned by the Real Estate Joint Ventures
(described above). Because the value of Net Leased Properties will reflect in
part the creditworthiness of their principal tenants, any reduction in the
credit standing of a major tenant could have an adverse effect on the appraised
value of a property and the value realized upon the disposition of such
property. Tenants may hold rights to renew or extend expiring leases, and
exercise of such rights would extend Belair Real Estate's risk exposure to a
particular tenant beyond the initial lease term. Tenants may also hold options
to purchase Net Leased Properties, including options to purchase at below market
levels. The value received upon the disposition of Net Leased Properties will
depend on real estate market conditions, lease and mortgage terms, tenant credit
quality, tenant purchase options, lender approvals and other factors affecting
valuation as may then apply. Because sales of Net Leased Properties are not
expected to occur for many years, market conditions and other valuation factors
at the time of sale cannot be predicted. Since valuations of Net Leased
Properties assume an orderly disposition of assets, amounts realized in a
distressed sale may differ substantially from stated values. Mortgage debt
associated with Net Leased Properties normally cannot be refinanced prior to
maturity without substantial penalties. The terms of outstanding leases and
mortgage debt obligations and restrictions on refinancing such debt will limit
Belair Real Estate's ability to dispose of Net Leased Properties.
Because the mortgage debt obligations of Net Leased Properties will generally be
without recourse to Belair Real Estate, the Fund and Shareholders, the potential
loss from investments in Net Leased Properties is normally limited to the amount
of equity invested in such properties by Belair Real Estate. The Fund and Belair
Real Estate may, however, be directly or indirectly responsible for certain
liabilities constituting exceptions to the generally non-recourse nature of the
mortgage indebtedness, including liabilities associated with fraud,
misrepresentation, misappropriation of funds, or breach of material covenants,
and liabilities arising from environmental conditions involving or affecting the
Net Leased Properties, increasing the potential for loss under extraordinary
circumstances. To the extent practicable, the Fund and Belair Real Estate will
seek indemnification for certain of such potential liabilities.
Because all or substantially all of the rental payments on Net Leased Properties
generally will be dedicated to servicing the associated mortgage debt, during
the initial lease term Belair Real Estate will not generate significant cash
flow from investments in Net Leased Properties to offset Belair Real Estate's
operating expenses and the cost of Fund borrowings used to finance Belair Real
Estate's equity in the Net Leased Properties. Such costs and expenses must be
provided from other sources of cash flow for Belair Real Estate and the Fund,
which may include additional Fund borrowings under the Credit Facility. Realized
returns on investments in Net Leased Properties generally will be deferred until
the properties are sold or re-leased following the initial lease term.
Fluctuations in the value of Partnership Preference Units and Belair Real
Estate's equity in the Real Estate Joint Venture and any Net Leased Properties
acquired in the future that are derived from other factors besides general
interest rate movements (including issuer-specific and sector-specific credit
concerns, property or tenant-specific concerns, and changes in interest rate
spread relationships) will not be offset by changes in the value of interest
rate swap agreements or other interest rate hedges entered into by the Fund.
Changes in the value of real estate investments not offset by changes in the
valuation of interest rate swap agreements or other interest rate hedges entered
into by the Fund will cause the performance of the Fund to deviate from the
performance of the Portfolio. Over time, the performance of the Fund can be
expected to be more volatile than the performance of the Portfolio. See
"Critical Accounting Estimates" in Item 7.
RISKS OF INTEREST RATE SWAP AGREEMENTS. Interest rate swap agreements are
subject to changes in valuation caused principally by movements in interest
rates. Interest rate swap agreements are private contracts in which there is a
risk of loss in the event of a default on an obligation to pay by the
counterparty. Interest rate swap agreements may be difficult to value and may be
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 that may be entered into by the Fund with respect to its
borrowings.
RISKS OF LEVERAGE. Although intended to add to returns, the borrowing of funds
to purchase real estate investments exposes the Fund to the risk that the
returns achieved on the real estate investments will be lower than the cost of
borrowing to purchase such assets and that the leveraging of the Fund to buy
such assets will therefore diminish the returns achieved by the Fund as a whole.
In addition, there is a risk that the availability of financing will be
interrupted at some future time, requiring the Fund to sell assets to repay
outstanding borrowings or a portion thereof. It may be necessary to make such
23
sales at unfavorable prices. The Fund's obligations under the Credit Facility
are secured by a pledge of its assets, excluding the assets of Bel Residential.
In the event of default, the lender could elect to sell assets of the Fund
without regard to consequences of such action for Shareholders. The rights of
the lender to receive payments of interest on and repayments of principal of
borrowings under the Credit Facility are senior to the rights of the
Shareholders.
Under the terms of the Credit Facility, the Fund is not permitted to make
distributions of cash or securities while there is an event of default
outstanding under the Credit Facility. During such periods, the Fund would not
be able to honor redemption requests or make cash distributions. In addition,
the rights of lenders under the mortgages used to finance Real Estate Joint
Venture properties are senior to Belair Real Estate's right to receive
distributions from the Real Estate Joint Venture.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
The Fund's consolidated financial statements for the year ended December 31,
2003, together with the auditors' report thereon, appearing on pages 33 through
64 hereof, are incorporated herein by reference. The Fund's consolidated
financial statements and auditors report thereon for the year ended December 31,
2002, appearing on pages 32 through 91 of the Fund's Form 10-K filed with the
Securities and Exchange Commission on March 27, 2003, are also incorporated
herein by reference. The Portfolio's audited financial statements accompany the
Fund's consolidated financial statements and are also incorporated herein by
reference. The following is a summary of unaudited quarterly results of
operations of the Fund for the years ended December 31, 2003 and 2002.
2003
-----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------------
Investment income $ 18,294,254 $ 18,298,704 $16,310,005 $ 16,502,582
Minority interest in net income of controlled subsidiaries $ (172,159) $ (149,592) $ (3,159) $ (11,197)
Net investment income(1) $ 9,123,112 $ 9,122,507 $ 7,545,696 $ 8,238,218
Net increase (decrease) in net assets from operations $(34,955,575) $181,600,502 $41,023,449 $174,659,852
Per share data:(2)
Investment income $ 1.36 $ 1.38 $ 1.25 $ 1.28
Net investment income(1) $ 0.68 $ 0.69 $ 0.58 $ 0.64
Net increase (decrease) in net assets from operations $ (2.59) $ 13.68 $ 3.14 $ 13.56
2002
-----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------------
Investment income $22,392,524 $ 19,883,543 $ 17,709,051 $18,248,754
Minority interest in net income of controlled subsidiaries $ (660,952) $ (353,710) $ (171,959) $ (230,742)
Net investment income(3) $ 7,352,926 $ 8,184,479 $ 7,661,476 $ 8,720,729
Net increase (decrease) in net assets from operations $15,528,746 $(218,455,529) $(226,276,390) $77,492,862
Per share data:(2)
Investment income $ 1.56 $ 1.41 $ 1.28 $ 1.35
Net investment income(3) $ 0.51 $ 0.58 $ 0.55 $ 0.64
Net increase (decrease) in net assets from operations $ 1.08 $ (15.44) $ (16.33) $ 5.71
24
(1) Net investment income is presented without reduction for interest expense
on swap agreements. Such amounts were previously presented as a reduction
to net investment income. For the quarters ended March 31, 2003, June 30,
2003 and September 30, 2003 interest expense on swap agreements in the
amounts of $5,087,071, $4,875,697 and $2,444,721, respectively, is
presented as a realized loss (see Note 2 to the Fund's consolidated
financial statements incorporated herein by reference).
(2) Based on average Shares outstanding.
(3) Net investment income is presented without reduction for interest expense
on swap agreements. Such amounts were previously presented as a reduction
to net investment income. For the quarters ended March 31, 2002, June 30,
2002, September 30, 2002 and December 31, 2002, interest expense on swap
agreements in the amounts of $7,360,327, $7,526,723, $7,767,646 and
$7,996,504, respectively, is presented as a realized loss (see Note 2 to
the Fund's consolidated financial statements incorporated herein by
reference).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
- --------------------------------------------------------------------------------
There have been no changes in, or disagreements with, accountants on accounting
and financial disclosures.
ITEM 9A. 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 December 31, 2003 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.
25
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
- -------------------------------------------
(a) MANAGEMENT.
- ---------------
Pursuant to the Fund's LLC Agreement, the Fund's manager, Eaton Vance, has the
authority to conduct the Fund's business. Eaton Vance appointed Thomas E. Faust
Jr. and Michelle A. Alexander to serve indefinitely as the Fund's Chief
Executive Officer and Chief Financial Officer, respectively, on October 16,
2002. Information about Mr. Faust appears below. Ms. Alexander, 34, is a Vice
President of Eaton Vance and Boston Management. She also serves as Chief
Financial Officer of Belcrest Capital Fund LLC, Belmar Capital Fund LLC, Belport
Capital Fund LLC and Belrose Capital Fund LLC and as an officer of various
investment companies managed by Eaton Vance or Boston Management. Ms Alexander
has been an employee of Eaton Vance since 1997. As members of the Eaton Vance
organization, Mr. Faust and Ms. Alexander receive no compensation from the Fund
for serving as Fund officers. There are no other officers of the Fund. The Fund
does not have a board of directors or similar governing body.
The Board of Directors of Eaton Vance, Inc., the sole trustee of Eaton Vance,
oversees the accounting and financial reporting processes of the Fund and audits
of the Fund's financial statements. The Fund's audit committee financial expert
(as that term is defined in Item 7(d)(3)(iv) of Schedule 14A under the Exchange
Act) is William M. Steul. Mr. Steul is a senior officer of Eaton Vance and, as
such, is not independent of Fund management. Information about Mr. Steul appears
below.
Boston Management is investment adviser to the Fund and the Portfolio and
manager of Belair Real Estate. The portfolio manager of the Fund and the
Portfolio is Duncan W. Richardson, Senior Vice President and Chief Equity
Investment Officer of Eaton Vance and Boston Management. Mr. Richardson has been
employed by the Eaton Vance organization since 1987 and has served as portfolio
manager of the Fund since its inception and of the Portfolio and its predecessor
since 1990. A majority of Mr. Richardson's time is spent managing the Portfolio
and related entities. Boston Management has an experienced team of analysts that
provides Mr. Richardson with research and recommendations on investments.
The directors of Belair Real Estate are Mr. Faust, James B. Hawkes and Alan R.
Dynner, each of whom is described below. William R. Cross, Vice President of
Belport Realty, is primarily responsible for providing research and analysis
relating to the Fund's real estate investments held through Belair Real Estate.
Mr. Cross is a Vice President of Eaton Vance and Boston Management and has been
employed by the Eaton Vance organization since 1996. Mr. Cross, David Carlson
and Mr. Dynner serve as trustees of the Real Estate Joint Venture owned by
Belair Real Estate. Mr. Dynner is also Vice President and Secretary of the Real
Estate Joint Venture and Mr. Cross serves as President and Chairman of the Real
Estate Joint Venture. Mr. Carlson is a Vice President of Eaton Vance and Boston
Management and has been employed by the Eaton Vance organization since 2001.
Prior to joining Eaton Vance, Mr. Carlson was President of ILM Holding, Inc., a
real estate holding company. Information about Mr. Dynner appears below.
As disclosed under "The Eaton Vance Organization" in Item 1, Eaton Vance and
Boston Management are indirect wholly-owned subsidiaries of Eaton Vance Corp.
The non-voting common stock of Eaton Vance Corp. is listed and traded on the
NYSE. All shares of the voting common stock of Eaton Vance Corp. are held in a
voting trust, the voting trustees of which are senior officers of the Eaton
Vance organization. Eaton Vance, Inc., a wholly-owned subsidiary of Eaton Vance
Corp., is the sole trustee of Eaton Vance and of Boston Management, each of
which is a Massachusetts business trust. The names of the executive officers and
the directors of Eaton Vance, Inc. and their ages and principal occupations (in
addition to their responsibilities described above) are set forth below.
James B. Hawkes (62) is Chairman, President and Chief Executive Officer of Eaton
Vance, Boston Management, Eaton Vance Corp. and Eaton Vance, Inc. and a Director
of Eaton Vance Corp. and Eaton Vance, Inc. He is Vice President and Director of
EV Distributors. He is also a Trustee and an officer of various investment
companies managed by Eaton Vance or Boston Management and has been employed by
Eaton Vance since 1970.
Thomas E. Faust Jr. (45) is Executive Vice President and Chief Investment
Officer of Eaton Vance, Boston Management, Eaton Vance Corp. and Eaton Vance,
Inc., and a Director of Eaton Vance Corp. He is also Chief Executive Officer of
Belcrest Capital Fund LLC, Belmar Capital Fund LLC, Belport Capital Fund LLC and
Belrose Capital Fund LLC and is an officer of various investment companies
managed by Eaton Vance or Boston Management. Mr. Faust has been employed by
Eaton Vance since 1985.
26
Alan R. Dynner (63) is Vice President, Chief Legal Officer and Secretary of
Eaton Vance, Boston Management, Eaton Vance Corp., EV Distributors and Eaton
Vance, Inc. He is also an officer of various investment companies managed by
Eaton Vance or Boston Management and has been employed by Eaton Vance since
1996.
William M. Steul (61) is Vice President and Chief Financial Officer of Eaton
Vance, Boston Management, Eaton Vance Corp. and Eaton Vance, Inc. and a Director
of Eaton Vance, Inc. He is also Vice President of EV Distributors. He has been
employed by Eaton Vance since 1994.
(b) COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.
- --------------------------------------------------------------------------
Section 16(a) of the 1934 Act requires the Fund's officers and directors and
persons who own more than ten percent of the Fund's Shares to file forms
reporting their affiliation with the Fund and reports of ownership and changes
in ownership of the Fund's Shares with the SEC. Eaton Vance, as manager of the
Fund, and the Directors and executive officers of Eaton Vance, Inc., the sole
trustee of Eaton Vance, also comply with Section 16(a). These persons and
entities are required by SEC regulations to furnish the Fund with copies of all
Section 16(a) forms they file. To the best of the Fund's knowledge, based solely
on a review of the copies of such reports furnished to the Fund, during the year
ended December 31, 2003 all Section 16(a) filing requirements applicable to such
persons and entities were complied with for such year, except that each of James
B. Hawkes, Alan R. Dynner and William S. Steul, in their capacities as Directors
and/or executive officers of Eaton Vance, Inc., failed to file one Form 3. Each
such Form 3 reported no transactions in Fund Shares.
(c) CODE OF ETHICS.
- --------------------
The Fund has adopted a Code of Ethics that applies to the principal executive
officer and principal financial officer (who is also the Fund's principal
accounting officer). A copy of the Code of Ethics is available at no cost by
request to the Fund's Chief Financial Officer, 255 State Street, Boston, MA
02109 or by calling (800) 225-6265. If the Fund makes any substantive amendments
to the Code of Ethics or grants any waiver, including an implicit waiver, from a
provision of the Code of Ethics as applicable to the principal executive officer
or principal financial officer, the Fund will disclose the nature of such
amendment or waiver in a report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION.
- ---------------------------------
As noted in Item 10, the officers of the Fund receive no compensation from the
Fund. The Fund's manager, Eaton Vance, and its affiliates receive compensation
from the Fund for services provided to the Fund, which is described in Item 13
below.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. To the knowledge of the Fund,
no person beneficially owns more than five percent of the Shares of the Fund.
SECURITY OWNERSHIP OF MANAGEMENT. As of March 1, 2004, Eaton Vance, the manager
of the Fund, beneficially owned 1,158.7 Shares of the Fund. The Shares owned by
Eaton Vance represent less than 1% of the outstanding Shares of the Fund as of
March 1, 2004. None of the other entities or individuals named in response to
Item 10 above beneficially owned Shares of the Fund as of such date.
CHANGES IN CONTROL. Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
The table below sets forth the fees, paid or payable by, or allocable to, the
Fund and Belair Real Estate for the years ended December 31, 2003 and 2002 in
connection with services rendered by Eaton Vance and its affiliates. Each fee is
described following the table.
27
Year ended Year ended
December 31, December 31,
2003 2002
- -------------------------------------------------------------------------------------------------------------------
Fund Advisory and Administrative Fees* $2,316,298 $2,402,565
- -------------------------------------------------------------------------------------------------------------------
Belair Real Estate Management Fees* $3,077,303 $3,351,450
- -------------------------------------------------------------------------------------------------------------------
Fund's Allocable Portion of the Portfolio's Advisory Fees** $6,262,226 $6,885,848
- -------------------------------------------------------------------------------------------------------------------
Fund Servicing Fees $ 535,111 $ 524,356
- -------------------------------------------------------------------------------------------------------------------
Fund's Allocable Portion of Belvedere Company's Servicing Fees $2,146,589 $2,368,875
- -------------------------------------------------------------------------------------------------------------------
Aggregate Compensation Paid by the Fund to Eaton Vance and its
Affiliates $5,393,601 $5,754,015
- -------------------------------------------------------------------------------------------------------------------
* Boston Management has agreed to waive the portion of the investment
advisory and administrative fee payable by the Fund to the extent that such
fee, together with the Fund's attributable share of the investment advisory
and management fees payable by the Portfolio and Belair Real Estate,
respectively, exceeds 0.60% of the average daily gross assets of the Fund.
The amount shown reflects this waiver by Boston Management.
** For the years ended December 31, 2003 and 2002, advisory fees paid or
payable by the Portfolio totaled $67,584,543 and $71,564,552, respectively.
For the year ended December 31, 2003, Belvedere Company's allocable portion
of that fee was $41,671,111, of which $6,262,226 was allocable to the Fund.
For the year ended December 31, 2002, Belvedere Company's allocable portion
of that fee was $41,180,870, of which $6,885,848 was allocable to the Fund.
THE FUND'S INVESTMENT ADVISORY AND ADMINISTRATIVE FEE. Under the terms of the
Fund's investment advisory and administrative agreement, Boston Management is
entitled to receive a monthly advisory and administrative fee at the rate of
1/20 of 1% (equivalent to 0.60% annually) of the average daily gross investment
assets of the Fund, reduced by the amount of that portion of the monthly
advisory fee paid by the Portfolio that is attributable to the Fund's indirect
investment in Belvedere Company. The term "gross investment assets of the Fund"
means the value of all Fund assets other than the Fund's investment in Belair
Real Estate minus the sum of the Fund's liabilities other than the principal
amount of money borrowed.
BELAIR REAL ESTATE'S MANAGEMENT FEE. Under the terms of Belair Real Estate's
management agreement with Boston Management, Boston Management receives a
monthly management fee at the rate of 1/20 of 1% (equivalent to 0.60% annually)
of the average daily gross investment assets of Belair Real Estate. The term
"gross assets of Belair Real Estate" means the value of all assets of Belair
Real Estate, minus the sum of Belair Real Estate's liabilities other than the
principal amount of money borrowed. For this purpose, the assets and liabilities
of Belair Real Estate's controlled subsidiary are reduced by the proportionate
interests therein of other investors than Belair Real Estate.
THE PORTFOLIO'S INVESTMENT ADVISORY FEE. Under the terms of the Portfolio's
investment advisory agreement with Boston Management, Boston Management receives
a monthly advisory fee as follows:
Annual Fee Rate
Average Daily Net Assets for the Month (for each level)
------------------------------------------------------------
Up to $500 million 0.6250%
$500 million but less than $1 billion 0.5625%
$1 billion but less than $1.5 billion 0.5000%
$1.5 billion but less than $7 billion 0.4375%
$7 billion but less than $10 billion 0.4250%
$10 billion but less than $15 billion 0.4125%
$15 billion and over 0.4000%
28
In accordance with the terms of the 1940 Act, the Portfolio's Board of Trustees
considers the continuation of the Portfolio's investment advisory agreement
annually.
SERVICING FEES PAID BY THE FUND. Pursuant to a servicing agreement between the
Fund and EV Distributors, the Fund pays a servicing fee to EV Distributors for
providing certain services and information to the Shareholders of the Fund. The
servicing fee is paid on a quarterly basis at an annual rate of 0.20% of the
Fund's average daily net assets. With respect to Shareholders who subscribed
through a subagent, EV Distributors has assigned servicing responsibilities and
fees to the applicable subagent, beginning twelve months after the issuance of
Shares of the Fund to such persons. The Fund's allocated share of the servicing
fee paid by Belvedere Company is credited toward the Fund's servicing fee
payment, thereby reducing the amount of the servicing fee payable by the Fund.
SERVICING FEES PAID BY BELVEDERE COMPANY. Pursuant to a servicing agreement
between Belvedere Company and EV Distributors, Belvedere Company pays a
servicing fee to EV Distributors for providing certain services and information
to direct and indirect investors in Belvedere Company. The servicing fee is paid
on a quarterly basis, at an annual rate of 0.15% of Belvedere Company's average
daily net assets. With respect to investors in Belvedere Company and
Shareholders of the Fund who subscribed through a subagent, EV Distributors has
assigned servicing responsibilities and fees to the applicable subagent,
beginning twelve months after the issuance of shares of Belvedere Company or
Shares of the Fund to such persons. The Fund assumes its allocated share of
Belvedere Company's servicing fee. The servicing fee payable in respect of the
Fund's investment in Belvedere Company is credited toward the Fund servicing fee
described above.
CERTAIN REAL ESTATE INVESTMENT TRANSACTIONS. During the year ended December 31,
2003, Belair Real Estate sold Partnership Preference Units of two issuers to
Belshire Realty Corporation, a REIT subsidiary of another investment fund
managed by Eaton Vance and advised by Boston Management, for approximately $35.0
million. The Fund realized a loss of approximately $1.2 million on the
transactions. The sale prices for such Partnership Preference Units were
determined in good faith by Boston Management after consideration of factors,
data and information that it considered relevant.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- -------------------------------------------------
The following table presents fees for the professional audit services rendered
by Deloitte & Touche LLP for the audit of the Fund's annual financial statements
for the years ended December 31, 2003 and 2002 and fees billed for other
services rendered by Deloitte & Touche LLP during those periods.
Year ended December 31, 2003 2002
- --------------------------------------------------------------------------------
Audit fees $ 24,731 $ 20,300
Audit related fees(1) 35,040 34,255
Tax fees(2) 84,874 191,480
------------------------------------
Total $ 144,645 $ 246,035
------------------------------------
(1) Audit related fees consist of assurance and related services that are
reasonably related to the performance of the audit of the Fund's
consolidated financial statements. The category includes fees related to
the performance of audits and attest services not required by statute or
regulation and accounting consultations regarding the application of
generally accepted accounting principles to proposed transactions.
(2) Tax fees consist of the aggregate fees billed for professional services
rendered by Deloitte & Touche LLP for tax compliance, tax advice and tax
planning.
29
PART IV
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ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
- -----------------------------------------------------------------
(a) The following is a list of all financial statements incorporated
by reference into this report from the Fund's Form 10-K filed
March 27, 2003:
(1) (i) Consolidated Portfolio of Investments as of December 31, 2002
Consolidated Statement of Assets and Liabilities as of December
31, 2002
Consolidated Statement of Operations for the year ended December
31, 2002
Consolidated Statements of Changes in Net Assets for the years
ended December 31, 2002 and December 31, 2001
Consolidated Statement of Cash Flows for the year ended December
31, 2002
Financial Highlights for the year ended December 31, 2002
Notes to Consolidated Financial Statements
Independent Auditors' Report dated February 28, 2003
Portfolio of Investments of Tax-Managed Growth Portfolio as of
December 31, 2002
Statement of Assets and Liabilities of Tax-Managed Growth
Portfolio as of December 31, 2002
Statement of Operations of Tax-Managed Growth Portfolio for the
year ended December 31, 2002
Statements of Changes in Net Assets of Tax-Managed Growth
Portfolio for the years ended December 31, 2002 and December 31,
2001
Supplementary Data of Tax-Managed Growth Portfolio for the years
ended December 31, 2002, December 31, 2001, December 31, 2000,
December 31, 1999, the two month period ended December 31, 1998,
and the year ended October 31, 1998
Notes to Financial Statements
Independent Auditors' Report dated February 14, 2003
(ii) The following is a list of all financial statements filed as a
part of this report:
Consolidated Portfolio of Investments as of December 31, 2003
Consolidated Statement of Assets and Liabilities as of December
31, 2003
Consolidated Statement of Operations for the year ended December
31, 2003
Consolidated Statements of Changes in Net Assets for the years
ended December 31, 2003 and December 31, 2002
Consolidated Statement of Cash Flows for the year ended December
31, 2003
Financial Highlights for the year ended December 31, 2003
Notes to Consolidated Financial Statements
Independent Auditors' Report dated March 5, 2004
Portfolio of Investments of Tax-Managed Growth Portfolio as of
December 31, 2003
Statement of Assets and Liabilities of Tax-Managed Growth
Portfolio as of December 31, 2003
Statement of Operations of Tax-Managed Growth Portfolio for the
year ended December 31, 2003
Statements of Changes in Net Assets of Tax-Managed Growth
Portfolio for the years ended December 31, 2003 and December 31,
2002
Supplementary Data of Tax-Managed Growth Portfolio for the years
ended December 31, 2003, December 31, 2002, December 31, 2001,
December 31, 2000 and December 31, 1999
Notes to Financial Statements
30
Independent Auditors' Report dated February 20, 2004
(b) Reports on Form 8-K:
None.
(c) A list of the exhibits filed as a part of this Form 10-K is
included in the Exhibit Index appearing on page 66 hereof.
31
Appendix A
Set forth below is a chart depicting the various entities in which the Fund
invested as of December 31, 2003. Defined terms used below have the meaning
ascribed to them in Item 1.
[Chart depicting (1) the Fund investing in Belvedere Company and Belair Real
Estate; (2) Belvedere Company investing in the Portfolio; and (3) Belair Real
Estate investing in Bel Residential. The Fund is followed by footnote (A);
Belvedere Company is followed by footnote (B); the Portfolio is followed by
footnote (C); Belair Real Estate is followed by footnote (D); and Bel
Residential is followed by footnote (E). The footnotes appear below.]
(A) Eaton Vance is the manager of the Fund; Boston Management is the Fund's
investment adviser.
(B) Boston Management is the manager and investment adviser of Belvedere
Company.
(C) Boston Management is the Portfolio's investment adviser.
(D) Boston Management is the manager of Belair Real Estate. Belair Real Estate
also holds investments in Partnership Preference Units.
(E) Belair Real Estate owns a majority interest in this Real Estate Joint
Venture.
32
BELAIR CAPITAL FUND LLC as of December 31, 2003
CONSOLIDATED PORTFOLIO OF INVESTMENTS
INVESTMENT IN BELVEDERE CAPITAL FUND
COMPANY LLC -- 76.3%