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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 2004 --------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _____________
Commission File No. 000-25767
---------
Belair Capital Fund LLC
-----------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3404037
------------- ----------
(State of organization) ( I.R.S. Employer Identification No.)
The Eaton Vance Building
255 State Street
Boston, Massachusetts 02109
--------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 617-482-8260
------------
None
----
(Former Name, Former Address and Former Fiscal Year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
YES [X] NO [ ]
BELAIR CAPITAL FUND LLC
Index to Form 10-Q
PART I FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Statements of Assets and Liabilities
as of March 31, 2004 (Unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Operations (Unaudited
for the Three Months Ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Changes in Net Assets for
the Three Months Ended March 31, 2004 (Unaudited) and the Year
Ended December 31, 2003 6
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the Three Months Ended March 31, 2004 and 2003 7
Financial Highlights (Unaudited) for the Three Months Ended
March 31, 2004 9
Notes to Condensed Consolidated Financial Statements
as of March 31, 2004 (Unaudited) 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
EXHIBIT INDEX 24
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
- ------------------------------------------------------------------------------------------------------------------------------------
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Assets and Liabilities
March 31, 2004 December 31,
(Unaudited) 2003
--------------- ------------
Assets:
Investment in Belvedere Capital Fund Company LLC
(Belvedere Company) $ 1,604,097,252 $1,588,195,284
Investment in Partnership Preference Units 311,437,195 318,042,995
Investment in other real estate 162,906,906 162,585,380
Short-term investments 28,460,000 11,765,330
--------------- ---------------
Total investments $ 2,106,901,353 $2,080,588,989
Cash 8,195,416 8,687,577
Escrow deposits - restricted 80,839 80,839
Open interest rate swap agreements, at value - 1,644,344
Distributions and interest receivable 1,252,330 694,054
Other assets 1,055,941 1,144,720
--------------- ---------------
Total assets $ 2,117,485,879 $2,092,840,523
--------------- ---------------
Liabilities:
Loan payable - Credit Facility $ 468,000,000 $ 447,000,000
Mortgage payable 112,630,517 112,630,517
Payable for Fund shares redeemed 350,000 1,180,000
Distributions payable to minority shareholders - 16,800
Open interest rate swap agreements, at value 3,229,510 -
Swap interest payable 246,209 243,920
Security deposits 394,979 372,900
Accrued expenses:
Interest expense 939,114 920,797
Property taxes 791,481 576,590
Other expenses and liabilities 669,045 669,458
Minority interests in controlled subsidiaries 8,966,059 6,947,692
--------------- ---------------
Total liabilities $ 596,216,914 $ 570,558,674
--------------- ---------------
Net assets $ 1,521,268,965 $1,522,281,849
--------------- ---------------
Shareholders' Capital $ 1,521,268,965 $1,522,281,849
--------------- ---------------
Shares outstanding 12,654,268 12,728,157
--------------- ---------------
Net asset value and redemption price per Share $ 120.22 $ 119.60
--------------- ---------------
See notes to unaudited condensed consolidated financial statements
3
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
-------------- --------------
Investment Income:
Dividends allocated from Belvedere Company
(net of foreign taxes of $66,409, and $59,957, respectively) $ 5,557,427 $ 4,921,576
Interest allocated from Belvedere Company 26,538 91,847
Expenses allocated from Belvedere Company (2,410,134) (2,002,351)
-------------- --------------
Net investment income allocated from Belvedere Company $ 3,173,831 $ 3,011,072
Distributions from Partnership Preference Units 8,470,877 9,652,791
Rental income 5,511,218 5,584,172
Interest 105,148 46,219
-------------- --------------
Total investment income $ 17,261,074 $ 18,294,254
-------------- --------------
Expenses:
Investment advisory and administrative fees $ 1,401,115 $ 1,284,962
Property management fees 218,537 222,627
Servicing fees 167,543 115,814
Interest expense on mortgage 2,386,111 2,386,111
Interest expense on Credit Facility 1,670,880 2,548,872
Property and maintenance expenses 1,576,526 1,550,253
Property taxes and insurance 700,781 754,647
Amortization of deferred expenses - 9,099
Miscellaneous 136,386 126,598
-------------- --------------
Total expenses $ 8,257,879 $ 8,998,983
-------------- --------------
Net investment income before minority interest
in net income of controlled subsidiary $ 9,003,195 $ 9,295,271
Minority interest in net income of controlled subsidiary (110,236) (172,159)
-------------- --------------
Net investment income $ 8,892,959 $ 9,123,112
-------------- --------------
See notes to unaudited condensed consolidated financial statements
4
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited) (Continued)
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
--------------- ----------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions from Belvedere Company (identified cost basis) $ 5,850,913 $ (5,896,539)
Investment transactions in Partnership Preference Units (identified cost basis) 2,399,543 92
Interest rate swap agreements (1) (3,051,795) (7,108,679)
--------------- ----------------
Net realized gain (loss) $ 5,198,661 $ (13,005,126)
--------------- ----------------
Change in unrealized appreciation (depreciation) -
Investment in Belvedere Company (identified cost basis) $ 24,013,775 $ (61,019,845)
Investment in Partnership Preference Units (identified cost basis) (6,958,051) 24,137,176
Investment in other real estate (net of minority interests in unrealized
gain (loss) of controlled subsidiary of $1,908,131 and $(349,150),
respectively) (1,958,342) (433,145)
Interest rate swap agreements (4,873,854) 6,242,253
--------------- ----------------
Net change in unrealized appreciation (depreciation) $ 10,223,528 $ (31,073,561)
--------------- ----------------
Net realized and unrealized gain (loss) $ 15,422,189 $ (44,078,687)
--------------- ----------------
Net increase (decrease) in net assets from operations $ 24,315,148 $ (34,955,575)
=============== ================
(1) Amount represents periodic payments made in connection with interest rate
swap agreements. (Note 4)
See notes to unaudited condensed consolidated financial statements
5
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Changes in Net Assets
Three Months
Ended Year Ended
March 31, 2004 December 31,
(Unaudited) 2003
--------------- ---------------
Increase (Decrease) in Net Assets:
Net investment income $ 8,892,959 $ 34,029,533
Net realized gain (loss) from investment transactions 5,198,661 (6,702,427)
Net change in unrealized appreciation (depreciation) of investments 10,223,528 335,001,122
--------------- ---------------
Net increase in net assets from operations $ 24,315,148 $ 362,328,228
--------------- ---------------
Transactions in Fund Shares -
Net asset value of Fund Shares issued to Shareholders in payment of
distributions declared $ 7,259,756 $ 2,956,829
Net asset value of Fund Shares redeemed (16,308,309) (82,202,891)
--------------- ---------------
Net decrease in net assets from Fund Share transactions $ (9,048,553) $ (79,246,062)
--------------- ---------------
Distributions -
Distributions to Shareholders $ (16,279,479) $ (6,607,973)
--------------- ---------------
Total distributions $ (16,279,479) $ (6,607,973)
--------------- ---------------
Net (decrease) increase in net assets $ (1,012,884) $ 276,474,193
Net assets:
At beginning of period $1,522,281,849 $1,245,807,656
--------------- ---------------
At end of period $1,521,268,965 $1,522,281,849
=============== ===============
See notes to unaudited condensed consolidated financial statements
6
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
--------------- ---------------
Cash Flows From (For) Operating Activities -
Net increase (decrease) in net assets from operations $ 24,315,148 $ (34,955,575)
Adjustments to reconcile net increase (decrease) in net assets from
operations to net cash flows (for) from operating activities -
Net investment income allocated from Belvedere Company (3,173,831) (3,011,072)
Decrease in escrow deposits - 993,440
Decrease in receivable for investments sold - 4,952,435
Increase in interest receivable from other real estate investments (43,174) (24,234)
Decrease in other assets 88,779 73,308
(Increase) decrease in distributions and interest receivable (558,276) 546,855
Increase (decrease) in interest payable for open swap agreements 2,289 (956,538)
Increase (decrease) in security deposits, accrued interest and accrued
other expenses and liabilities 39,983 (115,079)
Increase in accrued property taxes 214,891 114,810
Purchases of Partnership Preference Units (48,668,050) -
Proceeds from sales of Partnership Preference Units 50,715,342 -
Improvements to rental property (328,563) (403,695)
Net increase in investment in Belvedere Company - (3,500,002)
Interest incurred on interest rate swap agreements (3,051,795) (7,108,679)
(Increase) decrease in short-term investments (16,694,670) 1,995,811
Minority interest in net income of controlled subsidiary 110,236 172,159
Net realized (gain) loss from investment transactions (5,198,661) 13,005,126
Net change in unrealized (appreciation) depreciation of investments (10,223,528) 31,073,561
--------------- ---------------
Net cash flows (for) from operating activities $ (12,453,880) $ 2,852,631
--------------- ---------------
Cash Flows From (For) Financing Activities -
Proceeds from (repayment of) Credit Facility $ 21,000,000 $ (10,000,000)
Payments for Fund Shares redeemed (1,758) (698)
Distributions paid to Shareholders (9,019,723) (3,652,999)
Distributions paid to minority shareholders (16,800) -
--------------- ---------------
Net cash flows from (for) financing activities $ 11,961,719 $ (13,653,697)
--------------- ---------------
Net decrease in cash $ (492,161) $ (10,801,066)
Cash at beginning of period $ 8,687,577 $ 16,067,430
--------------- ---------------
Cash at end of period $ 8,195,416 $ 5,266,364
=============== ===============
See notes to unaudited condensed consolidated financial statements
7
BELAIR CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
--------------- ---------------
Supplemental Disclosure and Non-cash Investing and Financing Activities -
Interest paid on loan - Credit Facility $ 1,627,008 $ 2,579,816
Interest paid on swap agreements $ 3,049,506 $ 6,043,609
Interest paid on mortgage $ 2,345,531 $ 2,345,531
Market value of securities distributed in payment of redemptions $ 17,136,551 $ 6,903,489
Partnership Preference Units exchanged for an equity investment in real
estate companies and an investment in note receivable $ - $ (3,977,592)
Market value of an equity investment in real estate companies $ - $ 1,907,012
Investment in note receivable $ - $ 2,070,580
See notes to unaudited condensed consolidated financial statements
8
BELAIR CAPITAL FUND LLC as of March 31, 2004
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial Highlights (Unaudited)
For the Three Months Ended March 31, 2004
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value - Beginning of period $ 119.600
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income (6) $ 0.699
Net realized and unrealized gain 1.201
- -----------------------------------------------------------------------------------------------------------------------------------
Total income from operations $ 1.900
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders $ (1.280)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (1.280)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value - End of period $ 120.220
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return (1) 1.60%
- -----------------------------------------------------------------------------------------------------------------------------------
As a Percentage As a Percentage
of Average Net of Average Gross
Ratios Assets(5) Assets (2)(5)
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses of Consolidated Real Property Subsidiary
Interest and other borrowing costs (7) 0.52% (9) 0.38% (9)
Operating expenses (7) 0.54% (9) 0.40% (9)
Belair Capital Fund LLC Expenses
Interest and other borrowing costs (4)(8) 0.44% (9) 0.32% (9)
Investment advisory and administrative fees,
servicing fees and other Fund operating expenses (3)(4) 1.07% (9) 0.79% (9)
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 2.57% (9) 1.89% (9)
Net investment income 2.33% (9) 1.71% (9)
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 1,521,269
Portfolio turnover of Tax-Managed Growth Portfolio (the Portfolio) 0.61%
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Returns are calculated by determining the percentage change in net asset
value with all distributions reinvested. Total return is not computed on an
annualized basis.
(2) Average Gross Assets is defined as the average daily amount of all assets
of Belair Capital Fund LLC (Belair Capital) (not including its investment
in Belair Real Estate Corporation (Belair Real Estate)) plus all assets of
Belair Real Estate minus the sum of their liabilities other than the
principal amount of money borrowed. For this purpose, the assets of Belair
Real Estate's controlled subsidiary are reduced by the proportionate
interests therein of investors other than Belair Real Estate.
(3) Includes Belair Capital's share of Belvedere Capital Fund Company LLC's
allocated expenses, including those expenses allocated from the Portfolio.
(4) Includes the expenses of Belair Capital and Belair Real Estate. Does not
include expenses of the real estate subsidiary majority-owned by Belair
Real Estate.
(5) For the purpose of calculating ratios, the income and expenses of Belair
Real Estate's controlled subsidiaries are reduced by the proportionate
interests therein of investors other than Belair Real Estate.
(6) Calculated using average shares outstanding.
(7) Includes Belair Real Estate's proportional share of expenses incurred by
its majority-owned subsidiary.
(8) Ratios do not include interest incurred in connection with the interest
rate swap agreements. Had such amounts been included, ratios would be
higher.
(9) Annualized.
See notes to unaudited condensed consolidated financial statements
9
BELAIR CAPITAL FUND LLC as of March 31, 2004
Notes To Condensed Consolidated Financial Statements (Unaudited)
1 Basis of Presentation
The condensed consolidated interim financial statements of Belair Capital Fund
LLC (Belair Capital) and its subsidiaries (collectively, the Fund) have been
prepared, without audit, in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted as permitted by such rules and regulations. All adjustments, consisting
of normal recurring adjustments, have been included. Management believes that
the disclosures are adequate to present fairly the financial position, results
of operations, cash flows and financial highlights as of the dates and for the
periods presented. It is suggested that these interim financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Fund's latest annual report on Form 10-K. Results for interim periods are
not necessarily indicative of those to be expected for the full fiscal year.
The balance sheet at December 31, 2003 has been derived from the December 31,
2003 audited financial statements but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements as permitted by the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Certain amounts in the prior period's condensed consolidated financial
statements have been reclassified to conform with the current period
presentation.
2 Investment Transactions
The following table summarizes the Fund's investment transactions for the three
months ended March 31, 2004 and March 31, 2003:
Three Months Ended Three Months Ended
Investment Transaction March 31, 2004 March 31, 2003
- ------------------------------------------------------------------------------------------------
Increases in investment in Belvedere Company $ - $ 4,000,000
Decreases in investment in Belvedere Company $ 17,136,551 $ 7,403,487
Purchases of Partnership Preference Units (1) $ 48,668,050 $ -
Sales of Partnership Preference Units (2) $ 50,715,342 $ -
- ------------------------------------------------------------------------------------------------
(1) Purchases of Partnership Preference Units during the three months ended
March 31, 2004 include Partnership Preference Units purchased from other
investment funds advised by Boston Management and Research (Boston
Management).
(2) Sales of Partnership Preference Units for the three months ended March 31,
2004 include Partnership Preference Units sold to another investment fund
advised by Boston Management for which a loss of $997,698 was recognized.
During the three months ended March 31, 2003, the Fund exchanged Partnership
Preference Units in the amount of $3,977,592 for an equity investment in two
private real estate companies affiliated with the issuer of such formerly held
Partnership Preference Units and a note receivable in the amounts of $1,907,012
and $2,070,580, respectively. The secured note receivable (valued at $2,262,886
as of March 31, 2004 and $2,094,814 as of March 31, 2003) earns interest of 8%
per annum and matures in February 2013 or on demand.
10
3 Indirect Investment in the Portfolio
The following table summarizes the Fund's investment in Tax-Managed Growth
Portfolio (the Portfolio) through Belvedere Capital Fund Company LLC (Belvedere
Company), for the three months ended March 31, 2004 and March 31, 2003,
including allocations of income, expenses and net realized and unrealized gains
(losses) for the respective periods then ended:
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
- -----------------------------------------------------------------------------------------------------------------------
Belvedere Company's interest in the Portfolio (1) $ 11,520,846,141 $ 8,400,349,853
The Fund's investment in Belvedere Company (2) $ 1,604,097,252 $ 1,294,107,014
Income allocated to Belvedere Company from the Portfolio $ 39,365,471 $ 32,398,573
Income allocated to the Fund from Belvedere Company $ 5,583,965 $ 5,013,423
Expenses allocated to Belvedere Company from the Portfolio $ 12,634,511 $ 9,667,954
Expenses allocated to the Fund from Belvedere Company $ 2,410,134 $ 2,002,351
Net realized gain (loss) allocated to Belvedere Company from the
Portfolio $ 41,048,575 $ (37,772,155)
Net realized gain (loss) allocated to the Fund from Belvedere Company $ 5,850,913 $ (5,896,539)
Change in unrealized appreciation (depreciation) allocated to Belvedere
Company from the Portfolio $ 163,577,445 $ (389,828,192)
Change in unrealized appreciation (depreciation) allocated to the Fund
from Belvedere Company $ 24,013,775 $ (61,019,845)
- -----------------------------------------------------------------------------------------------------------------------
(1) As of March 31, 2004 and 2003, the value of Belvedere Company's interest in
the Portfolio represents 63.9% and 61.1% of the Portfolio's net assets,
respectively.
(2) As of March 31, 2004 and 2003, the Fund's investment in Belvedere Company
represents 13.9% and 15.4% of Belvedere Company's net assets, respectively.
A summary of the Portfolio's Statement of Assets and Liabilities at March 31,
2004, December 31, 2003 and March 31, 2003 and its operations for the three
months ended March 31, 2004, for the year ended December 31, 2003 and for the
three months ended March 2003 follows:
March 31, December 31, March 31,
2004 2003 2003
--------------------------------------------------------------------
Investments, at value $ 18,003,359,532 $ 17,584,390,762 $13,797,517,752
Other assets 25,944,066 25,462,745 24,535,362
- ---------------------------------------------------------------------------------------------------------
Total assets $ 18,029,303,598 $ 17,609,853,507 $13,822,053,114
Total liabilities 254,697 264,502 73,659,303
- ---------------------------------------------------------------------------------------------------------
Net assets $ 18,029,048,901 $ 17,609,589,005 $13,748,393,811
=========================================================================================================
Dividends and interest $ 62,101,320 $ 232,925,912 $ 53,431,732
- ---------------------------------------------------------------------------------------------------------
Investment adviser fee $ 19,348,796 $ 67,584,543 $ 15,490,999
Other expenses 598,921 2,295,653 477,083
- ---------------------------------------------------------------------------------------------------------
Total expenses $ 19,947,717 $ 69,880,196 $ 15,968,082
- ---------------------------------------------------------------------------------------------------------
Net investment income $ 42,153,603 $ 163,045,716 $ 37,463,650
Net realized gain (loss) 64,894,806 70,909,770 (62,969,970)
Net change in unrealized
appreciation (depreciation) 261,922,214 3,174,709,110 (649,928,537)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $ 368,970,623 $ 3,408,664,596 $ (675,434,857)
- ---------------------------------------------------------------------------------------------------------
11
4 Interest Rate Swap Agreements
Belair Capital has entered into interest rate swap agreements with Merrill Lynch
Capital Services, Inc. in connection with its real estate investments and the
associated borrowings. Under such agreements, Belair Capital has agreed to make
periodic payments at fixed rates in exchange for payments at floating rates. The
notional or contractual amounts of these instruments may not necessarily
represent the amounts potentially subject to risk. The measurement of the risks
associated with these investments is meaningful only when considered in
conjunction with all related assets, liabilities and agreements. Interest rate
swap agreements open at March 31, 2004 and December 31, 2003 are listed below.
Notional Initial Unrealized Unrealized
Amount Optional Final Depreciation Appreciation
(000's) Fixed Floating Termination Termination At March 31, At December 31,
omitted) Rate Rate Date Date 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
$20,000 4.045% LIBOR + 0.30% - 6/10 $ (350,722) $ 230,597
95,952 5.00% LIBOR + 0.30% 8/04 6/10 (745,551) -
95,952 5.05% LIBOR + 0.30% 2/04 6/10 -* 218,976
61,500 4.865% LIBOR + 0.30% 7/04 6/10 (286,726) 212,857
75,000 4.795% LIBOR + 0.30% 9/04 6/10 (420,663) 304,067
42,000 4.69% LIBOR + 0.30% 2/05 6/10 (303,822) 201,570
49,000 4.665% LIBOR + 0.30% 3/05 6/10 (380,485) 240,892
35,330 4.18% LIBOR + 0.30% 7/09 6/10 (741,541) 235,385
- ----------------------------------------------------------------------------------------------------------------------
$ (3,229,510) $ 1,644,344
- ----------------------------------------------------------------------------------------------------------------------
* Agreement was terminated on the Initial Optional Termination Date.
5 Debt
Credit Facility - On March 16, 2004, Belair Capital amended its credit agreement
with DrKW Holdings, Inc. to establish a borrowing limit of $468,000,000 under
that agreement. Borrowings under this credit arrangement accrue interest at a
rate of one month LIBOR plus 0.30% per annum. As of March 31, 2004, outstanding
borrowings under this credit arrangements totaled $468,000,000.
6 Segment Information
Belair Capital pursues its investment objective primarily by investing
indirectly in the Portfolio through Belvedere Company. The Portfolio is a
diversified investment company that emphasizes investments in common stocks of
domestic and foreign growth companies that are considered to be high in quality
and attractive in their long-term investment prospects. Separate from its
investment in Belvedere Company, Belair Capital invests in real estate assets
through its subsidiary, Belair Real Estate. Belair Real Estate invests directly
and indirectly in Partnership Preference Units, debt and equity investments in
private real estate companies and in real property through a controlled
subsidiary, Bel Residential Properties Trust.
Belair Capital evaluates performance of the reportable segments based on the net
increase (decrease) in net assets from operations of the respective segment,
which includes net investment income (loss), net realized gain (loss) and
unrealized appreciation (depreciation). The accounting policies of the
reportable segments are the same as those for the Fund on a consolidated basis.
No reportable segments have been aggregated. Reportable information by segment
is as follows:
12
Tax-Managed
For the Three Months Ended Growth Real
March 31, 2004 Portfolio* Estate Total
- --------------------------------------------------------------------------------------------------------------------
Revenue $ 3,173,831 $ 14,034,549 $ 17,208,380
Interest expense on mortgage - (2,386,111) (2,386,111)
Interest expense on Credit Facility - (1,570,627) (1,570,627)
Operating expenses (699,664) (3,275,833) (3,975,497)
Minority interest in net income of controlled
subsidiary - (110,236) (110,236)
- --------------------------------------------------------------------------------------------------------------------
Net investment income $ 2,474,167 $ 6,691,742 $ 9,165,909
Net realized gain (loss) 5,850,913 (652,252) 5,198,661
Change in unrealized appreciation (depreciation) 24,013,775 (13,790,247) 10,223,528
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations of reportable segments $ 32,338,855 $ (7,750,757) $ 24,588,098
- --------------------------------------------------------------------------------------------------------------------
Tax-Managed
For the Three Months Ended Growth Real
March 31, 2003 Portfolio* Estate Total
- --------------------------------------------------------------------------------------------------------------------
Revenue $ 3,011,072 $ 15,240,385 $ 18,251,457
Interest expense on mortgage - (2,386,111) (2,386,111)
Interest expense on Credit Facility - (2,472,406) (2,472,406)
Operating expenses (503,739) (3,370,259) (3,873,998)
Minority interest in net income of controlled
subsidiary - (172,159) (172,159)
- --------------------------------------------------------------------------------------------------------------------
Net investment income $ 2,507,333 $ 6,839,450 $ 9,346,783
Net realized loss (5,896,539) (7,108,587) (13,005,126)
Change in unrealized appreciation (depreciation) (61,019,845) 29,946,284 (31,073,561)
- --------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets from
operations of reportable segments $ (64,409,051) $ 29,677,147 $ (34,731,904)
- --------------------------------------------------------------------------------------------------------------------
Tax-Managed
Growth Real
At March 31, 2004 Portfolio* Estate Total
- --------------------------------------------------------------------------------------------------------------------
Segment assets $ 1,604,097,252 $ 480,708,602 $2,084,805,854
Segment liabilities 350,000 548,139,137 548,489,137
- --------------------------------------------------------------------------------------------------------------------
Net assets (liabilities) of reportable segments $ 1,603,747,252 $ (67,430,535) $1,536,316,717
- --------------------------------------------------------------------------------------------------------------------
At December 31, 2003
- --------------------------------------------------------------------------------------------------------------------
Segment assets $ 1,588,195,284 $ 487,471,604 $2,075,666,888
Segment liabilities 1,180,000 544,629,124 545,809,124
- --------------------------------------------------------------------------------------------------------------------
Net assets (liabilities) of reportable segments $ 1,587,015,284 $ (57,157,520) $1,529,857,764
- --------------------------------------------------------------------------------------------------------------------
* Belair Capital invests indirectly in Tax-Managed Growth Portfolio through
Belvedere Company.
The following tables reconcile the reported segment information to the condensed
consolidated financial statements for the periods indicated:
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
---------------- ----------------
Revenue:
Revenue from reportable segments $ 17,208,380 $ 18,251,457
Unallocated amounts:
Interest earned on cash not invested in the Portfolio or in subsidiaries 52,694 42,797
---------------- ----------------
Total revenue $ 17,261,074 $ 18,294,254
---------------- ----------------
13
Net increase (decrease) in net assets from operations:
Net increase (decrease) in net assets from operations of reportable segments $ 24,588,098 $ (34,731,904)
Unallocated amounts:
Interest earned on cash not invested in the Portfolio or in subsidiaries 52,694 42,797
Unallocated amounts (1):
Servicing fees (167,543) (115,814)
Interest expense on Credit Facility (100,253) (76,466)
Audit, tax and legal fees (45,101) (47,931)
Other operating expenses (12,747) (26,257)
---------------- ----------------
Total net increase (decrease) in net assets from operations $ 24,315,148 $ (34,955,575)
---------------- ----------------
March 31, 2004 December 31, 2003
---------------- -------------------
Net assets:
Net assets of reportable segments $1,536,316,717 $1,529,857,764
Unallocated cash (2) 4,220,025 5,408,305
Short-term investments (2) 28,460,000 11,765,330
Loan payable - Credit Facility (3) (47,626,774) (24,579,481)
Other liabilities (101,003) (170,069)
---------------- -------------------
Total net assets $1,521,268,965 $1,522,281,849
---------------- -------------------
(1) Unallocated amounts represent expenses incurred that pertain to the overall
operation of Belair Capital, and do not pertain to either operating
segment.
(2) Unallocated cash and short-term investments represent cash and cash
equivalents not currently invested in the Portfolio or real estate assets.
(3) Unallocated amount of loan payable - Credit Facility primarily represents
borrowings on hand to be used for acquiring investments. However, such
borrowings have also been used to pay selling commissions, organization
expenses and other liquidity needs of the Fund.
7 Subsequent Events
On May 3, 2004, Belair Real Estate entered an agreement to establish and acquire
a majority interest in a controlled subsidiary. This controlled subsidiary will
indirectly own certain industrial properties with an estimated value of
approximately $193,000,000 at acquisition. Belair Real Estate is expected to own
an 80% interest in the controlled subsidiary and a minority shareholder will own
the remaining interest. Based on the terms of the current agreements, Belair
Real Estate expects to acquire the investment in the third quarter of 2004. The
minority shareholder of the controlled subsidiary, or an affiliate thereof, will
manage the real property.
It is expected that the real property will be financed through first mortgage
loans secured by the properties and an assignment of certain leases and rents.
The loans are expected to be without recourse to Belair Capital and Belair Real
Estate. No financing agreement has been entered into at this time.
On May 3, 2004, Belair Capital entered into a forward interest rate swap
agreement with Merrill Lynch Capital Services, Inc. in anticipation of its
future investment in the controlled subsidiary for the purpose of hedging the
interest rate of substantially all of the expected fixed-rate mortgage financing
of the real property over an expected 8-year term. Under such agreement, Belair
Capital has agreed to made periodic payments at fixed rates in exchange for
payments at floating rates. The notional amount of the contract is $104,176,000,
which approximates Belair Capital's expected 80% interest in the anticipated
secured debt of the controlled subsidiary. The floating interest rate to be
received by Belair Capital is three-month LIBOR and the fixed interest rate to
be paid by Belair Capital is 4.875%. The swap agreement entered into by Belair
Capital is effective in June 2004 and terminates in June 2012.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
------------------------------------------------------------------------
THE INFORMATION IN THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE FEDERAL SECURITIES LAWS. FORWARD-LOOKING STATEMENTS TYPICALLY ARE
IDENTIFIED BY USE OF TERMS SUCH AS "MAY," "WILL," "SHOULD," "MIGHT," "EXPECT,"
"ANTICIPATE," "ESTIMATE," AND SIMILAR WORDS, ALTHOUGH SOME FORWARD-LOOKING
STATEMENTS ARE EXPRESSED DIFFERENTLY. THE ACTUAL RESULTS OF BELAIR CAPITAL FUND
LLC (THE FUND) COULD DIFFER MATERIALLY FROM THOSE CONTAINED IN THE
FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS. THE FUND UNDERTAKES NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS, OR OTHERWISE, EXCEPT AS REQUIRED BY
APPLICABLE LAW. FACTORS THAT COULD AFFECT THE FUND'S PERFORMANCE INCLUDE A
DECLINE IN THE U.S. STOCK MARKETS OR IN GENERAL ECONOMIC CONDITIONS, ADVERSE
DEVELOPMENTS AFFECTING THE REAL ESTATE INDUSTRY, OR FLUCTUATIONS IN INTEREST
RATES.
The following discussion should be read in conjunction with the Fund's unaudited
condensed consolidated financial statements and related notes in Item 1 above.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2004 COMPARED TO THE
QUARTER ENDED MARCH 31, 2003
- --------------------------------------------------------------------------------
(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 the controlled subsidiary of
Belair Real Estate Corporation (Belair Real Estate). The Fund's investment
income includes the net investment income allocated to the Fund from Belvedere
Capital Fund Company LLC (Belvedere Company), rental income from the properties
owned by Belair Real Estate's controlled subsidiary, partnership income
allocated to the income-producing preferred equity interests in real estate
operating partnerships (Partnership Preference Units) owned by Belair Real
Estate and interest earned on the Fund's short-term investments (if any). The
net investment income of Belvedere Company allocated to the Fund includes
dividends, interest and expenses allocated to Belvedere Company by Tax-Managed
Growth Portfolio (the Portfolio) less the expenses of Belvedere Company
allocated to the Fund. The Fund's total expenses include the Fund's investment
advisory and administrative fees, servicing fees, interest expense from
mortgages on properties owned by Belair Real Estate's controlled subsidiary,
interest expense on the Fund's credit arrangements (the Credit Facility),
property management fees, property taxes, insurance, maintenance and other
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.
Realized and unrealized gains and losses on investments have the most
significant impact on the Fund's net asset value per Share and result primarily
from sales of such investments and changes in their underlying value. The
investments of the Portfolio consist primarily of common stocks of domestic and
foreign growth companies that are considered to be high in quality and
attractive in their long-term investment prospects. Because the securities
holdings of the Portfolio are broadly diversified, the performance of the
Portfolio cannot be attributed to one particular stock or one particular
industry or market sector. The performance of the Portfolio and the Fund are
substantially influenced by the overall performance of the U.S. stock market, as
well as by the relative performance versus the overall market of specific stocks
and classes of stocks in which the Portfolio maintains large positions.
PERFORMANCE OF THE FUND.(1) The Fund's investment objective is to achieve
long-term, after-tax returns for Shareholders. Eaton Vance Management (Eaton
Vance), as the Fund's manager, measures the Fund's success in achieving its
objective based on the investment returns of the Fund, using the Standard &
Poor's 500 Composite Index (the S&P 500) as the Fund's primary performance
benchmark. The S&P 500 is a broad-based unmanaged index of common stocks widely
used as a measure of U.S. stock market performance. Eaton Vance's primary focus
in pursuing total return is on the Fund's common stock portfolio, which consists
of its indirect interest in the Portfolio. In measuring the performance of the
Fund's real estate investments held through Belair Real Estate, Eaton Vance
considers whether, through current returns and changes in valuation, the real
- -----------------------------
(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. The Portfolio's total return for the period reflects the total
return of another fund that invests in the Portfolio, adjusted for certain
fund expenses. Performance is for the stated time period only and is not
annualized; due to market volatility, the Fund's current performance may be
lower or higher. The performance of the Fund and the Portfolio is compared
to that of their benchmark, the S&P 500. It is not possible to invest
directly in an Index.
15
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.
The Fund's total return was 1.60% for the quarter ended March 31, 2004. This
return reflects an increase in the Fund's net asset value per share from $119.60
to $120.22 and a distribution of $1.28 per share during the period. For
comparison, the S&P 500 had a total return of 1.69% over the same period. The
performance of the Fund trailed that of the Portfolio by approximately 0.52%
during the period. Last year, the Fund's total return was -2.81% for the quarter
ended March 31, 2003. This return reflected a decrease in the Fund's net asset
value per share from $92.38 to $89.32 and a distribution of $0.49 per share
during the period. For comparison, the S&P 500 had a total return of -3.15% over
the same period. The performance of the Fund exceeded that of the Portfolio by
approximately 1.90% during that period.
PERFORMANCE OF THE PORTFOLIO. For the quarter ended March 31, 2004, the
Portfolio's total return was 2.12%, compared to -4.71% for the quarter ended
March 31, 2003. International unrest coupled with weak employment, a struggling
dollar and surging oil prices pressured domestic markets in the first quarter of
2004. Like the quarter ended March 31, 2003, volatility was high during the
first quarter of 2004. However, unlike the first quarter of 2003, major indices
experienced positive returns in 2004 as fiscal and monetary stimuli supported
robust corporate earnings and productivity growth. During the first quarter of
2004, companies on average reported better than expected sales trends, increased
dividends and initiated sizeable share buybacks reflecting a steady global
economic recovery. While large capitalization stocks outperformed smaller
capitalization stocks during the first quarter of 2003, small capitalization
stocks outperformed large-cap companies during the later months of 2003, and
continued to do so in the first quarter of 2004. In addition, during the first
quarter of 2004 higher quality stocks regained performance leadership over last
year's prevailing higher volatility stocks.
During the quarter ended March 31, 2004, the Portfolio's sector allocation
remained similar to its allocation at March 31, 2003. The Portfolio's stronger
quarterly performance relative to the S&P 500 during the first quarter of 2004
resulted from its diversified industry exposure and positive stock selection
decisions. During the quarter ended March 31, 2004, the Portfolio remained
underweight in the information technology sector, the market's weakest
performing sector. Stock selection by the Portfolio's investment adviser, Boston
Management and Research (Boston Management), in the computer peripherals and
electronic equipment industries was particularly beneficial to the Portfolio's
performance during the first quarter of 2004. Similar to the first quarter of
2003, valuation concerns prompted a de-emphasis of the telecommunication sector
during the first quarter of 2004. However, telecommunication services stocks
generally performed well during the first quarter of 2004. Similar to the first
quarter of 2003, the Portfolio was overweight the industrials sector. During the
first quarter of 2004, attractive valuations and positive secular business
trends helped machinery, building products and airfreight stocks of the
aforementioned sector advance higher.
In the first quarter of 2003, Boston Management began increasing the Portfolio's
exposure to the energy sector, a change from its previous underweight stance
versus the S&P 500. This allocation shift has aided performance, as oil
exploration and other energy equipment and service names benefited from rising
oil prices. Although the Portfolio's relative overweight of the financials
sector contributed to its positive return during the quarter ended March 31,
2004, the sub-par performance of its commercial bank and capital market stocks
hindered returns during the quarter. While Boston Management remained optimistic
on the consumer, it slightly trimmed the Portfolio's relative overweight in the
consumer discretionary and staples sectors. Portfolio holdings in leisure,
retail, and personal products benefited from continued consumer spending driven
by tax refunds, strong refinancing activity and increases in wages and salaries.
The Portfolio maintained an underweight of the healthcare sector relative to the
S&P 500 during the quarter ended March 31, 2004, but added to holdings of
stronger quarterly performers such as healthcare equipment and service
companies.
PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate investments are
held through Belair Real Estate. As of March 31, 2004, real estate investments
included a portfolio of Partnership Preference Units that generally are
affiliated with publicly traded and private real estate investment trusts
(REITs) and a majority interest in a real estate joint venture (the Real Estate
Joint Venture). As of March 31, 2004, the estimated fair value of the Fund's
real estate investments represented 22.4% of the Fund's total assets. Adjusting
for the minority interest of the real estate operating company that is the
principal minority investor in the Real Estate Joint Venture as of March 31,
2004, the Fund's real estate investments represented 29.3% of the Fund's net
assets.
During the quarter ended March 31, 2004, Belair Real Estate sold (or experienced
scheduled redemptions of) certain of its Partnership Preference Units for
approximately $50.7 million (including sales to another investment fund advised
by Boston Management), recognizing gains of $2.4 million on the transactions.
16
During the quarter ended March 31, 2004, Belair Real Estate also acquired
interests in additional Partnership Preference Units from another investment
fund advised by Boston Management for approximately $48.7 million.
At March 31, 2004, the estimated fair value of the Fund's Partnership Preference
Units was approximately $311.4 million compared to approximately $411.4 million
at March 31, 2003, a decrease of $100.0 million or 24%. While the decrease in
value was principally due to fewer Partnership Preference Units held at March
31, 2004, the decrease also reflects the lower per unit values of Partnership
Preference Units held at March 31, 2004 due to their lower average coupon rates.
In the current low interest rate environment, issuers have been redeeming
Partnership Preference Units as Belair Real Estate's call protections expire or
restructuring the terms of outstanding Partnership Preference Units in advance
of their call dates. As a result, many of the higher-yielding Partnership
Preference Units held by Belair Real Estate during the quarter ended March 31,
2003 were no longer held at March 31, 2004. Boston Management expects this trend
to continue through 2004.
The Fund saw unrealized depreciation of the estimated fair value in its
Partnership Preference Units of approximately $7.0 million during the quarter
ended March 31, 2004 compared to approximately $24.1 million of unrealized
appreciation for the quarter ended March 31, 2003. The net unrealized
depreciation in the first quarter of 2004 consisted of approximately $3.3
million of unrealized depreciation resulting from decreases in per unit values
of the Partnership Preference Units held by Belair Real Estate at March 31, 2004
(as described above) and approximately $3.7 million of unrealized depreciation
resulting from the reclassification of previously recorded unrealized
appreciation as realized gains due to sales of Partnership Preference Units
during the quarter ended March 31, 2004. During the quarter ended March 31,
2003, Belair Real Estate's investments in Partnership Preference Units generally
benefited from declining interest rate levels and tightening spreads in
income-oriented securities, particularly in real estate-related securities.
Distributions from Partnership Preference Units for the quarter ended March 31,
2004 totaled $8.5 million compared to $9.7 million for the quarter ended March
31, 2003, a decrease of $1.2 million or 12%. The decrease was principally due to
fewer Partnership Preference Units held on average, as well as to lower average
yields for the Partnership Preference Units held during the quarter ended March
31, 2004.
Like the quarter ended March 31, 2003, operations of Belair Real Estate's Real
Estate Joint Venture were impacted by weak multifamily market fundamentals
during the quarter ended March 31, 2004. Rental income from real estate
operations decreased to approximately $5.5 million for the quarter ended March
31, 2004 from approximately $5.6 million for the quarter ended March 31, 2003, a
decrease of $0.1 million or 2%. This decrease in rental income was due to
reduced apartment rental rates and increased rent concessions at properties
owned by Belair Real Estate's Real Estate Joint Venture, trends that continued
from 2003.
Property operating expenses for Belair Real Estate's Real Estate Joint Venture
were approximately $2.5 million for each of the quarters ended March 31, 2004
and March 31, 2003 (property operating expenses are before certain operating
expenses of Belair Real Estate of approximately $0.8 million for each of the
quarters ended March 31, 2004 and March 31, 2003). The near-term outlook for
multifamily property operations continues to be weak. While anticipated economic
and employment growth is expected to lead to improvements over the longer-term,
significant employment growth has not yet occurred in most markets and low
interest rates have contributed to continued apartment move-outs due to new home
purchases and increased competition for new residents from 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
continue to be similar to 2003's results.
At March 31, 2004, the estimated fair value of the real properties held through
Belair Real Estate was approximately $158.7 million compared to approximately
$157.1 million at March 31, 2003, an increase of $1.6 million or 1%. The modest
increase in estimated real property values at March 31, 2004 resulted from lower
capitalization rates, which more than offset the impact on property values of
lower near-term income expectations. The Fund saw unrealized depreciation in the
estimated fair value of its other real estate investments (which includes Belair
Real Estate's interest in the Real Estate Joint Venture) of approximately $2.0
million during the quarter ended March 31, 2004 compared to approximately $0.4
million of unrealized depreciation for the quarter ended March 31, 2003. During
the quarter ended March 31, 2003, Belair Real Estate experienced modest
decreases in property values due to declines in near-term earnings expectations
and the economic downturn. However, declines in asset values for multifamily
properties during the quarter ended March 31, 2003 generally were modest as
decreases in capitalization rates largely offset declining income level
expectations.
On May 3, 2004, Belair Real Estate entered into agreements to establish Elkhorn
Property Trust (Elkhorn), form ProLogis Six Rivers Limited Partnership (in
association with subsidiaries of other investment funds advised by Boston
Management and ProLogis, a publicly-held REIT) (Six Rivers) and merge Six Rivers
with Keystone Property Trust, a publicly-held REIT (Keystone). It is expected
17
that the merger will be consummated during the third quarter of 2004, subject to
the satisfaction of certain conditions precedent. Upon the ultimate consummation
of the transactions, Belair Real Estate will own an 80% interest in Elkhorn and
ProLogis will own a 20% interest in Elkhorn. Elkhorn will own a partnership
interest in Six Rivers through which it will own 100% of the economic interest
in certain industrial properties acquired through the merger of Six Rivers and
Keystone and valued at approximately $193 million at the date of acquisition.
Prologis, or an affiliate thereof, will manage the properties. It is anticipated
that Keystone's existing direct fixed-rate obligations will be retired after the
merger date. It is anticipated that first mortgage financing estimated to be
60-65% of the property value will be obtained in connection with the acquisition
and will be secured by the properties. There can be no assurance that the
conditions precedent to the consummation of the transactions described above
will be satisfied or that the financing required to acquire the properties will
be obtained.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the quarter ended March 31,
2004, net realized and unrealized losses on the Fund's interest rate swap
agreements totaled approximately $7.9 million, compared to net realized and
unrealized losses of approximately $0.9 million for the quarter ended March 31,
2003. Net realized and unrealized losses on swap agreements for the quarter
ended March 31, 2004 consisted of $4.9 million of unrealized depreciation due to
changes in swap agreement valuations and $3.0 million of periodic payments made
pursuant to outstanding swap agreements (and classified as net realized losses
on interest rate swap agreements). For the quarter ended March 31, 2003,
unrealized appreciation of $6.2 million on swap agreement valuation changes were
offset by $7.1 million of swap agreement periodic payments. The negative impact
on Fund performance for the quarter ended March 31, 2004 from changes in swap
agreement valuations was attributable to a decline in swap rates during the
period. The positive contribution to Fund performance for the quarter ended
March 31, 2003 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.
(b) LIQUIDITY AND CAPITAL RESOURCES.
- ------------------------------------
OUTSTANDING BORROWINGS. The Fund has entered into credit arrangements with DrKW
Holdings, Inc. and Merrill Lynch Mortgage Capital, Inc. (collectively, the
Credit Facility) primarily to finance the Fund's equity in its real estate
investments and will continue to use the Credit Facility for such purpose in the
future. The Credit Facility may also be used for other purposes, including any
short-term liquidity needs of the Fund. In the future, the Fund may increase the
size of the Credit Facility (subject to lender consent) and the amount of
outstanding borrowings thereunder. As of March 31, 2004, the Fund had
outstanding borrowings of $468.0 million and unused loan commitments of $98.5
million under the Credit Facility. During the quarter ended March 31, 2004, the
Fund amended its loan agreement with DrKW Holdings, Inc. to establish a
borrowing limit of $468 million under that agreement.
On May 3, 2004, Belair Real Estate entered an agreement to establish and acquire
a majority interest in a Real Estate Joint Venture, Elkhorn. Belair Real
Estate's acquisition of its interest in Elkhorn is expected to occur in the
third quarter of 2004. Elkhorn is expected to indirectly own industrial
properties with a value of approximately $193 million at acquisition. Belcrest
Realty will own 80% of the interests in Elkhorn. The amount of Belair Real
Estate's net investment in Elkhorn will depend in part on the terms of the
anticipated mortgage financing to be obtained for the real estate assets,
closing costs and other consideration. The Fund plans to increase its borrowings
under the existing Credit Facility to fund its equity in Elkhorn and has begun
discussions with DrKW Holdings, Inc. and Merrill Lynch Mortgage Capital, Inc. in
anticipation of its investment in Elkhorn.
The Fund has entered into interest rate swap agreements with respect to its real
estate investments and associated borrowings. Pursuant to these agreements, the
Fund makes periodic payments to the counterparty at predetermined fixed rates,
in exchange for floating-rate payments at a predetermined spread plus one-month
LIBOR. During the terms of the outstanding interest rate swap agreements,
changes in the underlying values of the agreements are recorded as unrealized
appreciation or depreciation. As of March 31, 2004, the unrealized depreciation
related to the interest rate swap agreements was approximately $3.2 million. As
of March 31, 2003, the unrealized depreciation related to the interest rate swap
agreements was approximately $15.1 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- -------------------------------------------------------------------
INTEREST RATE RISK. The Fund's primary exposure to interest rate risk arises
from its real estate investments that are financed by the Fund with floating
rate borrowings under the Fund's Credit Facility and by fixed-rate secured
mortgage debt obligations of the Real Estate Joint Venture. Partnership
Preference Units are fixed rate instruments whose values will generally decrease
when interest rates rise and increase when interest rates fall. The interest
rates on borrowings under the Fund's Credit Facility are reset at regular
intervals based on one-month LIBOR. The Fund has entered into interest rate swap
18
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 Note 4 and Note 5
to the Fund's unaudited condensed consolidated financial statements in Item 1
above.
Interest Rate Sensitivity
Cost, Principal (Notional) Amount
by Contractual Maturity and Callable Date
for the Twelve Months Ended March 31,*
Estimated
2005 2006-2008 2009 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
- -----------------------------------------
Long-term debt:
- -----------------------------------------
Fixed-rate mortgages $112,630,517 $112,630,517 $137,700,000
Average interest rate 8.33% 8.33%
- -----------------------------------------
Variable-rate Credit Facility $468,000,000 $468,000,000 $468,000,000
Average interest rate 1.39% 1.39%
- ---------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative financial instruments:
- -----------------------------------------
Pay fixed/ receive variable interest
rate swap agreements $378,782,000 $378,782,000 $ (3,229,510)
Average pay rate 4.73% 4.73%
Average receive rate 1.39% 1.39%
- ---------------------------------------------------------------------------------------------------------------------------
Rate sensitive investments:
- -----------------------------------------
Fixed-rate Partnership Preference
Units:
- -----------------------------------------
Cabot Industrial Properties, L.P.,
8.625% Series B Cumulative Redeemable
Preferred Units, Callable 4/29/04,
Current Yield: 8.30% $28,455,170 $ 28,455,170 $ 27,544,100
Colonial Realty Limited Partnership,
7.25% Series B Cumulative Redeemable
Perpetual Preferred Units, Callable
2/24/09, Current
Yield: 7.39% $19,013,123 $ 19,013,123 $ 22,068,000
19
Estimated
2005 2006-2008 2009 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
Essex Portfolio, L.P., 9.3% Series D
Cumulative Redeemable Preferred Units,
Callable 7/28/10, Current Yield: 8.90% $ 20,212,880 $ 20,212,880 $ 20,888,480
Kilroy Realty, L.P., 7.45% Series A
Cumulative Redeemable Preferred Units,
Callable 9/30/09,
Current Yield: 7.82% $ 20,000,000 $ 20,000,000 $ 19,064,520
Liberty Property L.P., 9.25% Series B
Cumulative Redeemable Preferred Units,
Callable 7/28/04, Current Yield: 9.06% $30,875,000 $ 30,875,000 $ 31,529,550
MHC Operating Limited Partnership, 9%
Series D Cumulative Redeemable
Perpetual Preference Units, Callable
9/29/04, Current
Yield: 8.86% $50,000,000 $ 50,000,000 $ 50,800,000
National Golf Operating Partnership,
L.P., 9.30% Series A Cumulative
Redeemable Preferred Units, Callable
2/6/03, Current Yield: 9.26% $31,454,184 $ 31,454,184 $ 33,161,195
National Golf Operating Partnership,
L.P., 9.30% Series B Cumulative
Redeemable Preferred Units, Callable
2/6/03, Current Yield: 9.26% $ 5,000,000 $ 5,000,000 $ 5,020,000
PSA Institutional Partners, L.P., 6.4%
Series NN Cumulative Redeemable
Perpetual Preferred Units, Callable
3/17/10, Current Yield: 6.90% $ 48,250,000 $ 48,250,000 $ 44,737,400
Price Development Company, L.P., 8.95%
Series B Cumulative Redeemable
Preferred Partnership Units, Callable
7/28/04, Current Yield: 8.86% $30,625,000 $ 30,625,000 $ 30,931,250
Urban Shopping Centers, L.P., 9.45%
Series D Cumulative Redeemable
Perpetual Preferred Units, Callable $25,000,000 $ 25,000,000 $ 25,692,700
10/1/04, Current Yield: 9.20%
- -----------------------------------------
Note Receivable:
- -----------------------------------------
Fixed-rate note receivable, 8% $ 2,070,580 $ 2,070,580 $ 2,262,886
* The investments listed reflect holdings as of March 31, 2004. The Fund's
current holdings may differ.
20
ITEM 4. CONTROLS AND PROCEDURES.
- ---------------------------------
Eaton Vance, as the Fund's manager, conducted an evaluation of the effectiveness
of the Fund's disclosure controls and procedures (as defined by Rule 13a-15(e)
of the 1934 Act) as of the end of the period covered by this report, with the
participation of the Fund's Chief Executive Officer and Chief Financial Officer.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Fund's disclosure controls and procedures were
effective. There were no changes in the Fund's internal control over financial
reporting that occurred during the quarter ended March 31, 2004 that have
materially affected, or are reasonably likely to materially affect, the Fund's
internal control over financial reporting.
As the Fund's manager, the complete and entire management, control and operation
of the Fund are vested in Eaton Vance. The Fund's Chief Executive Officer and
Chief Financial Officer intend to report to the Board of Directors of Eaton
Vance, Inc. (the sole trustee of Eaton Vance) any significant deficiency in the
design or operation of internal control over financial reporting which could
adversely affect the Fund's ability to record, process, summarize and report
financial data, and any fraud, whether or not material, that involves management
or other employees who have a significant role in the Fund's internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ---------------------------
Although in the ordinary course of business, the Fund, Belair Real Estate and
Belair Real Estate's controlled subsidiaries may become involved in legal
proceedings, the Fund is not aware of any material pending legal proceedings to
which any of them is subject.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
- --------------------------------------------------------------------------------
As described in the Fund's Annual Report on Form 10-K for the year ended
December 31, 2003, shares of the Fund may be redeemed by Shareholders on any
business day. Redemptions are met at the net asset value per share of the Fund.
The right to redeem is available to all Shareholders and all outstanding Fund
shares are eligible. During each month in the quarter ended March 31, 2004, the
total number of shares redeemed and the average price paid per share were as
follows:
Total No. of Shares Average Price Paid Per
Month Ended Redeemed(1) Share
- --------------------------------------------------------------------------------
January 31, 2004 25,864.66 $120.57
- --------------------------------------------------------------------------------
February 29, 2004 49,597.46 $122.06
- --------------------------------------------------------------------------------
March 31, 2004 59,648.83 $121.77
- --------------------------------------------------------------------------------
Total 135,110.94 $121.55
- --------------------------------------------------------------------------------
(1) All shares redeemed during the periods were redeemed at the option of
Shareholders pursuant to the Fund's redemption policy. The Fund has not
announced any plans or programs to repurchase shares other than at the
option of Shareholders.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- -----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the three months
ended March 31, 2004.
ITEM 5. OTHER INFORMATION.
- ---------------------------
None.
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
- ------------------------------------------
(a) The following is a list of all exhibits filed as part of this Form 10-Q:
4.1(a) Amendment No. 1 dated March 16, 2004 to the Loan and Security Agreement
between Belair Capital Fund LLC and DrKW Holdings, Inc.
4.2(a) Amendment No. 1 dated March 16, 2004 to the Loan and Security Agreement
between Belair Capital Fund LLC, Merrill Lynch Mortgage Capital, Inc.,
the Lenders referred to therein and Merrill Lynch Capital Services, Inc.
21 List of Subsidiaries
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
None.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned duly authorized officer on May 10, 2004.
BELAIR CAPITAL FUND LLC
/s/ Michelle A. Alexander
-------------------------
Michelle A. Alexander
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
23
EXHIBIT INDEX
-------------
4.1(a) Amendment No. 1 dated March 16, 2004 to the Loan and Security Agreement
between Belair Capital Fund LLC and DrKW Holdings, Inc.
4.2(a) Amendment No. 1 dated March 16, 2004 to the Loan and Security Agreement
between Belair Capital Fund LLC, Merrill Lynch Mortgage Capital, Inc.,
the Lenders referred to therein and Merrill Lynch Capital Services, Inc.
21 List of Subsidiaries
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
24