10-Q 1 belair10q.txt BELAIR CAPITAL FUND LLC 10Q FOR QE9/30/01 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2001 Commission File No. 0002-25767 ---------- 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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Page 1 of 24 Belair Capital Fund LLC Index to Form 10Q PART I - FINANCIAL INFORMATION Page Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Statements of Assets and Liabilities as of September 30, 2001 (Unaudited) and December 31, 2000 3 Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended September 30, 2001 and 2000 and for the Nine Months Ended September 30, 2001 and 2000 4 Condensed Consolidated Statements of Changes in Net Assets (Unaudited)for the Nine Months Ended September 30, 2001 and 2000 6 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2001 and 2000 7 Notes to Condensed Consolidated Financial Statements as of September 30, 2001 (Unaudited) 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 PART II - OTHER INFORMATION Item 1. Legal Proceedings 22 Item 2. Changes in Securities and Use of Proceeds 22 Item 3. Defaults Upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 22 Item 6. Exhibits and Reports 22 SIGNATURES 23 2 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- BELAIR CAPITAL FUND LLC Condensed Consolidated Statements of Assets and Liabilities September 30, 2001 December 31, (Unaudited) 2000 --------------------- ------------------- Assets: Investment in Belvedere Capital LLC $1,700,296,368 $2,132,795,139 Investment in real estate Partnership Preference Units 448,619,380 439,043,259 Investment in other real estate 327,210,174 157,812,925 Short-term investments 3,738,290 6,665,871 -------------------- ------------------- Total investments $2,479,864,212 $2,736,317,194 Cash 6,183,497 46,875,064 Dividends receivable - 8,021,686 Deferred expenses 147,125 1,379,102 Escrow deposits - restricted 5,961,391 2,143,464 Swap interest receivable - 526,653 Other assets 274,999 286,469 -------------------- ------------------- Total assets $2,492,431,224 $2,795,549,632 -------------------- ------------------- Liabilities: Loan payable $ 663,000,000 $ 643,000,000 Mortgage payable, net of unamortized debt issuance costs 226,355,502 111,088,447 Open interest rate swap contracts, at value 35,502,366 4,834,653 Swap interest payable 2,815,691 - Security deposits 889,520 394,546 Accrued expenses: Interest expense 5,111,762 7,430,119 Accrued property taxes 2,918,761 659,702 Other accrued expenses and other liabilities 1,941,736 4,172,804 Minority interest in controlled subsidiaries 28,783,655 12,971,521 -------------------- ------------------- Total liabilities $967,318,993 $ 784,551,792 -------------------- ------------------- Net assets $1,525,112,231 $2,010,997,840 -------------------- ------------------- Shareholders' Capital -------------------- ------------------- Shareholders' capital $1,525,112,231 $2,010,997,840 -------------------- ------------------- Shares Outstanding 14,607,075 15,106,086 -------------------- ------------------- Net Asset Value and Redemption Price Per Share $104.41 $133.13 -------------------- -------------------
3 BELAIR CAPITAL FUND LLC Condensed Consolidated Statements of Operations (Unaudited) Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ----------------- ------------------ ------------------ ----------------- Investment Income: Dividends allocated from Belvedere Capital $4,874,695 $4,561,646 $ 14,280,241 $14,355,477 (net of foreign taxes of $44,221, $26,473, $105,714 and $114,895, respectively) Interest allocated from Belvedere Capital 305,015 1,867,157 1,410,055 3,941,550 Expenses allocated from Belvedere Capital (2,773,700) (3,379,134) (8,800,292) (10,031,422) ----------------- ------------------ ------------------ ----------------- Net investment income allocated from Belvedere Capital $2,406,010 $3,049,669 $6,890,004 $8,265,605 Dividends from Partnership Preference Units 10,990,418 4,432,023 25,947,746 33,617,226 Interest income from swaps - 736,216 - 641,984 Rental income 11,799,211 7,779,044 26,217,134 7,779,044 Interest 133,957 227,045 435,192 434,673 ----------------- ------------------ ------------------ ----------------- Total investment income $25,329,596 $16,223,997 $59,490,076 $50,738,532 ----------------- ------------------ ------------------ ----------------- Expenses: Investment advisory and administrative fees $1,769,268 $1,950,850 $5,283,226 $5,478,299 Property management fees 477,876 302,112 1,055,018 302,112 Service fees 148,829 212,781 537,892 640,187 Interest expense on credit facility 7,331,251 12,979,682 26,315,577 36,778,445 Interest expense on mortgages 4,363,500 4,772,855 9,984,380 4,772,855 Interest expense on swap contracts 4,034,455 - 7,575,195 - Property and maintenance 2,915,737 1,985,385 6,452,652 1,985,385 Property taxes and insurance 1,363,655 777,168 2,857,539 777,168 Legal and accounting services 179,094 387,416 420,159 791,633 Amortization of deferred expenses 27,063 36,348 81,492 91,179 Custodian and transfer agent fees 13,124 21,887 67,168 102,026 Printing and postage 2,466 2,493 9,084 7,293 Miscellaneous 149,721 (23,035) 674,241 26,666 ----------------- ------------------ ------------------ ----------------- Total expenses $22,776,039 $23,405,942 $61,313,623 $51,753,248 ----------------- ------------------ ------------------ ----------------- Net investment income (loss) before minority interest in net (income) loss of controlled subsidiaries $2,553,557 $(7,181,945) $(1,823,547) $(1,014,716) Minority interest in net (income) loss of controlled subsidiaries (562,905) 42,579 (752,948) 42,579 ----------------- ------------------ ------------------ ----------------- Net investment income (loss) $1,990,652 $(7,139,366) $(2,576,495) $(972,137) ----------------- ------------------ ------------------ -----------------
4 BELAIR CAPITAL FUND LLC Condensed Consolidated Statements of Operations (Unaudited) (Continued) Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ----------------- ------------------ ------------------ ----------------- Realized and Unrealized Gain (Loss) Net realized gain (loss) - Investment transactions from Belvedere Capital (identified cost basis) $(22,669,199) $(18,424,329) $(23,927,100) $29,873,588 Termination of interest rate swap contracts - 2,241,000 - 2,241,000 Investment transactions in Partnership Preference Units (identified cost basis) (1,784,999) (15,231,759) (2,927,609) (18,177,972) ------------------ ----------------- ----------------- ------------------ Net realized gain (loss) $(24,454,198) $(31,415,088) $(26,854,709) $13,936,616 ------------------ ----------------- ----------------- ------------------ Change in unrealized appreciation (depreciation) - Investment in Belvedere Capital (identified cost basis) $(252,359,949) $42,372,981 $(396,904,169) $102,843,747 Investments in Partnership Preference Units (identified cost basis) (8,565,113) 62,495,119 36,218,730 61,127,867 Interest rate swap contracts (20,961,445) (12,077,601) (30,667,713) (11,552,964) Investment in real property (1,032,376) - (3,219,608) - ----------------- ------------------ ------------------ ----------------- Net change in unrealized appreciation(depreciation) $(282,918,883) $92,790,499 $(394,572,760) $152,418,650 ----------------- ------------------ ------------------ ----------------- Net realized and unrealized gain (loss) $(307,373,081) $61,375,411 $(421,427,469) $ 166,355,266 ----------------- ------------------ ------------------ ----------------- Net increase (decrease) in net assets from operations $(305,382,429) $54,236,045 $(424,003,964) $165,383,129 ================= ================== ================== =================
5 BELAIR CAPITAL FUND LLC Condensed Consolidated Statements of Changes in Net Assets (Unaudited) Nine Months Nine Months Ended Ended September 30, September 30, 2001 2000 ------------------- ------------------ Increase (Decrease) in Net Assets: Net investment loss $ (2,576,495) $ (972,137) Net realized gain (loss) on investment transactions (26,854,709) 13,936,616 Net change in unrealized appreciation (depreciation) of investments (394,572,760) 152,418,650 ------------------- ------------------ Net increase (decrease) in net assets from operations $ (424,003,964) $ 165,383,129 ------------------- ------------------ Transactions in Fund Shares - Net asset value of Fund Shares redeemed $ (61,030,200) $ (107,183,581) ------------------- ------------------ Net decrease in net assets from Fund Share transactions $ (61,030,200) $ (107,183,581) ------------------- ------------------ Distributions to Shareholders Special Distributions $ - $ (7,112,726) Minority shareholders of controlled subsidiaries (851,445) - ------------------- ------------------ Total distributions to Shareholders $ (851,445) $ (7,112,726) ------------------- ------------------ Net increase (decrease) in net assets $ (485,885,609) $ 51,086,822 Net assets: Beginning of period $2,010,997,840 $2,094,369,753 ------------------- ------------------ End of period $1,525,112,231 $2,145,456,575 =================== ==================
6 BELAIR CAPITAL FUND LLC Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Nine Months Ended Ended September 30, September 30, 2001 2000 ------------------- ------------------ Cash Flows From (For) Operating Activities - Net investment loss $ (2,576,495) $ (972,137) Adjustments to reconcile net investment loss to net cash flows used for operating activities - Amortization of deferred expenses 81,492 91,179 Amortization of debt issuance costs 145,760 45,225 Net investment income allocated from Belvedere Capital (6,890,004) (8,265,605) Decrease in dividends receivable 8,021,686 599,045 Increase (decrease) in interest payable for open swap contracts 3,342,344 (436,964) (Increase) decrease in escrow deposits (1,733,312) 87,691 Decrease in other assets and prepaid expenses 11,470 365,570 Increase in accrued property taxes 1,626,572 1,203,892 Increase in deferred expenses - (1,902,659) Decrease in accrued interest, other accrued expenses and other liabilities (5,380,826) (726,900) Decrease in minority interest (52,500) - Payments for investments in other real property (41,261,497) (66,714,705) Cash assumed in connection with acquisition of real estate investments 1,745,868 - Purchases of Partnership Preference Units (9,386,616) (101,895,368) Sales of Partnership Preference Units 33,101,616 128,326,254 Proceeds from terminated interest rate swap contracts - 2,241,000 Improvements to property (1,685,371) (1,030,729) Net (increase) decrease in investment in Belvedere Capital (36,690,122) 47,047,636 (Increase) decrease in short-term investments 2,927,581 (7,135,351) Minority interest in net income of controlled subsidiaries 752,948 42,579 ------------------- ------------------ Net cash flows used for operating activities $(53,899,406) $ (9,030,347) Cash Flows From (For) Financing Activities - Proceeds from Credit Facility $20,000,000 $ 55,000,000 Return of capital to minority shareholder (268,065) - Payments for Fund Shares redeemed (5,672,651) (30,566,325) Distributions paid (851,445) (4,012,690) ------------------- ------------------ Net cash flows from financing activities $13,207,839 $ 20,420,985 Net increase (decrease) in cash $(40,691,567) $ 11,390,638 Cash at beginning of period $46,875,064 $ 3,802,594 ------------------- ------------------ Cash at end of period $ 6,183,497 $ 15,193,232 =================== ==================
7 SUPPLEMENTAL DISCLOSURE AND NON-CASH INVESTING AND FINANCING ACTIVITIES- Change in unrealized appreciation(depreciation) of investments and open swap contracts $ (394,572,760) $152,418,650 Interest paid for Credit Facility $ 29,176,035 $ 38,221,787 Interest paid for swap contracts $ 4,232,851 $ 205,020 Interest paid for mortgages $ 9,185,516 $ 1,589,748 Market value of securities distributed in payment of redemptions $ 55,357,549 $ 76,287,136 Market value of real property and other assets, net of current liabilities, contributed $ 170,124,083 $359,843,727 Mortgage assumed in connection with the acquisition of real property $ 115,850,000 $259,790,536
8 BELAIR CAPITAL FUND LLC as of September 30, 2001 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1 Organization Belair Capital Fund LLC (Belair Capital) is a Massachusetts limited liability company established to offer diversification and tax-sensitive investment management to persons holding large and concentrated positions in equity securities of selected publicly-traded companies. The investment objective of Belair Capital is to achieve long-term, after-tax returns for Shareholders. Belair Capital pursues this objective primarily by investing indirectly in Tax-Managed Growth Portfolio (the Portfolio), a diversified, open-end management investment company registered under the Investment Company Act of 1940, as amended. The Portfolio is organized as a trust under the laws of the State of New York. Belair Capital maintains its investment in the Portfolio by investing in Belvedere Capital Fund Company LLC (Belvedere Capital), a separate Massachusetts limited liability company that invests exclusively in the Portfolio. The performance of Belair Capital and Belvedere Capital are directly and substantially affected by the performance of the Portfolio. Separate from its investment in the Portfolio through Belvedere Capital, Belair Capital invests in real estate assets including income-producing preferred equity interests in real estate operating partnerships (Partnership Preference Units) affiliated with publicly-traded real estate investment trusts (REITs) and interests in controlled real property subsidiaries. During the nine months ended September 30, 2001, Belair Real Estate Corporation (BREC) purchased a majority interest in Katahdin Property Trust, LLC (Katahdin). Katahdin owns six multi-family residential properties located in five states (Florida, North Carolina, New Mexico, Texas and Washington). BREC owns Class A units of Katahdin, representing approximately 75% of equity interests in Katahdin, and a minority shareholder owns Class B units, representing approximately 25% of equity interests in Katahdin. The equity interest of the Katahdin minority shareholder is recorded as a minority interest on the Consolidated Statement of Assets and Liabilities. The primary distinction between the two classes of shares is the distribution priority and the voting rights. BREC has priority in distributions and has greater voting rights than the holder of Class B units. The accompanying condensed consolidated financial statements of Belair Capital include the accounts of BREC, Bel Residential Properties Trust (Bel Residential) and Katahdin (collectively, the Fund). All material intercompany accounts and transactions have been eliminated. 2 Interim Financial Statements The condensed consolidated interim financial statements of Belair Capital and subsidiaries as of September 30, 2001 and September 30, 2000 and for the nine months ended September 30, 2001 and September 30, 2000 have been prepared by the Fund, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. 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 and cash flows at the dates and for the periods presented. It is suggested that these interim financial statements be read in conjunction with the financial statements and the notes thereto 9 included in the Fund's latest annual report on Form 10-K. Results for the interim period are not necessarily indicative of those to be expected for the full fiscal year. Reclassifications have been made to the prior period's financial statements to conform to the current period's presentation. 3 Investment Transactions Increases and decreases of the Fund's investment in Belvedere Capital for the nine months ended September 30, 2001 aggregated $101,770,233, and $120,327,739, respectively, and for the nine months ended September 30, 2000 aggregated $126,179,202 and $248,063,107, respectively. Purchases and sales of Partnership Preference Units aggregated $9,386,616 and $33,101,616, respectively, for the nine months ended September 30, 2001 and $101,895,368 and $128,326,254, respectively, for the nine months ended September 30, 2000. For the nine months ended September 30, 2001, acquisitions of other real property aggregated $41,261,497. For the nine months ended September 30, 2000, acquisitions of other real property aggregated $66,714,705. Purchases and sales of Partnership Preference Units during the nine months ended September 30, 2001 and September 30, 2000 include amounts purchased from and sold to other funds sponsored by Eaton Vance Management (EVM). 4 Indirect Investment in Portfolio Belvedere Capital's interest in the Portfolio at September 30, 2001 was $8,914,385,448, representing 55.5% of the Portfolio's net assets and at September 30, 2000 was $9,826,270,245 representing 53.8% of the Portfolio's net assets. The Fund's investment in Belvedere Capital at September 30, 2001 was $1,700,296,368 representing 19.1% of Belvedere Capital's net assets and at September 30, 2000 was $2,247,172,734, representing 22.9% of Belvedere Capital's net assets. Investment income allocated to Belvedere Capital from the Portfolio for the nine months ended September 30, 2001 totaled $77,460,677, of which $15,690,296 was allocated to the Fund. Investment income allocated to Belvedere Capital from the Portfolio for the nine months ended September 30, 2000 totaled $70,963,408, of which $18,297,027 was allocated to the Fund. Expenses allocated to Belvedere Capital from the Portfolio for the nine months ended September 30, 2001 totaled $32,264,414, of which $6,538,815 was allocated to the Fund. Expenses allocated to Belvedere Capital from the Portfolio for the nine months ended September 30, 2000 totaled $28,888,244, of which $7,467,956 was allocated to the Fund. Belvedere Capital allocated additional expenses to the Fund of $2,261,477 for the nine months ended September 30, 2001, representing $54,852 of operating expenses and $2,206,625 of service fees. Belvedere Capital allocated additional expenses to the Fund of $2,563,466 for the nine months ended September 30, 2000, representing $71,506 of operating expenses and $2,491,960 of service fees (Note 8). A summary of the Portfolio's Statement of Assets and Liabilities, at September 30, 2001, December 31, 2000 and September 30, 2000 and its operations for the nine months ended September 30, 2001, the year ended December 31, 2000 and the nine months ended September 30, 2000 follows: 10 September 30, December 31, September 30, 2001 2000 2000 -------------------- ------------------------ --------------------- Investments, at value $15,879,363,685 $18,318,105,043 $18,195,602,562 Other assets 247,862,763 251,324,504 279,625,633 ----------------------------------- -------------------- ------------------------ --------------------- Total Assets $16,127,226,448 $18,569,429,547 $18,475,228,195 Total Liabilities 63,436,483 184,360,662 215,812,049 ----------------------------------- -------------------- ------------------------ --------------------- Net Assets $16,063,789,965 $18,385,068,885 $18,259,416,146 =================================== ==================== ======================== ===================== Dividends and interest $141,895,798 $189,740,537 $135,806,873 ----------------------------------- -------------------- ------------------------ --------------------- Investment adviser fee $57,512,662 $73,317,616 $53,698,628 Other expenses 1,602,705 2,500,093 1,603,375 ----------------------------------- -------------------- ------------------------ --------------------- Total Expenses $59,115,367 $75,817,709 $55,302,003 ----------------------------------- -------------------- ------------------------ --------------------- Net investment income $82,780,431 $113,922,828 $80,504,870 Net realized gains (losses) (226,406,730) 196,962,539 203,183,788 Net change in unrealized gains (losses) (3,614,091,583) 141,360,943 787,635,595 ----------------------------------- -------------------- ------------------------ --------------------- Net increase (decrease) in net assets from operations $(3,757,717,882) $452,246,310 $1,071,324,253 ----------------------------------- -------------------- ------------------------ ---------------------
5 Rental Property The average occupancy rate for real property held by Bel Residential, consisting of 2,681 residential units, was approximately 95% at September 30, 2001 and December 31, 2000. The fair value of real property owned by the Fund through Bel Residential at September 30, 2001 and December 31, 2000 is as follows: September 30, December 31, 2001 2000 ----- ----- Land $ 23,565,000 $ 23,565,000 Buildings, improvements and other assets 135,750,713 134,247,925 ---------------------- ---------------------- Fair value $159,315,713 $157,812,925 ---------------------- ----------------------
The average occupancy rate for real property held by Katahdin, consisting of 2,476 residential units, was approximately 95% at September 30, 2001. The fair value of real property owned by the Fund through Katahdin at September 30, 2001 is as follows: September 30, 2001 ----- Land $ 26,378,087 Buildings, improvements and other assets 141,516,374 --------------------- Fair value $167,894,461 --------------------- 11 6 Cancelable Interest Rate Swap Agreements The Fund has entered into cancelable interest rate swap agreements in connection with its real estate investments and the associated borrowings. Under such agreements, the Fund has agreed to make periodic payments at fixed rates in exchange for payments at floating rates. The notional or contractual amounts of these instruments may not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these investments is meaningful only when considered in conjunction with all related assets, liabilities and agreements. As of September 30, 2001 and December 31, 2000, the Fund has entered into cancelable interest rate swap agreements with Merrill Lynch Capital Services, Inc. Unrealized Unrealized Notional Initial Depreciation Appreciation/ Amount Optional At September (Depreciation) Effective (000's Fixed Floating Termination Maturity 30, 2001 At December 31, Date omitted) Rate Rate Date Date (Unaudited) 2000 ---------------------------------------------------------------------------------------------------------------------------------- 2/98 120,000 6.715% Libor+.45% 2/03 2/05 $ (4,765,116) $ 158,467 4/98 50,000 6.84% Libor+.45% 2/03 2/05 (2,090,519) (105,708) 4/98 150,000 6.835% Libor+.45% 4/03 4/05 (6,893,437) (413,833) 6/98 20,000 6.67% Libor+.45% 6/03 2/05 (917,931) 1,994 6/98 75,000 6.68% Libor+.45% 6/03 2/05 (3,459,583) (14,230) 6/98 80,000 6.595% Libor+.45% 6/03 2/05 (3,550,134) 181,644 11/98 14,709 6.13% Libor+.45% 11/03 2/05 (577,342) 210,991 2/99 34,951 6.34% Libor+.45% 2/04 2/05 (1,647,671) 221,768 4/99 5,191 6.49% Libor+.45% 2/04 2/05 (264,615) 6,770 7/99 24,902 7.077% Libor+.45% 7/04 2/05 (1,808,147) (524,587) 9/99 10,471 7.37% Libor+.45% 9/04 2/05 (875,838) (341,770) 3/00 19,149 7.89% Libor+.45% 2/04 2/05 (1,639,422) (809,750) 3/00 70,000 7.71% Libor+.45% - 2/05 (7,012,611) (3,406,409) ---------------------------------------------------------------------------------------------------------------------------------- Total $ (35,502,366) $(4,834,653) ----------------------------------------------------------------------------------------------------------------------------------
7 Debt A Mortgages - Rental property held by the Fund is financed through various mortgages issued to the real estate subsidiaries. Mortgages payable are reported on the Condensed Consolidated Statement of Assets and Liabilities net of unamortized debt issuance costs. A description of the mortgages issued to each of the real estate subsidiaries, excluding debt issuance costs, is as follows: Real property held by Bel Residential is financed through a loan secured by cross-collateralized first mortgage liens on such real property. The balance at September 30, 2001 and December 31, 2000, excluding unamortized debt issuance costs, is as follows: Monthly Balance at Balance at Annual Interest September 30, December 31, Maturity Date Interest Rate Payment* 2001 2000 ------------- ------------- -------- ---- ---- May 1, 2010 8.33% $781,844 $112,630,517 $112,630,517 *Mortgage provides for monthly payments of interest only through May 1, 2010, with the entire principal balance due on May 1, 2010. 12 Real property held by Katahdin is financed through a mortgage loan secured by the six real properties. The balance at September 30, 2001, excluding unamortized debt issuance costs, is as follows: Monthly Annual Interest Balance at Maturity Date Interest Rate Payment* September 30, 2001 ------------- ------------- -------- ------------------ June 1, 2011 6.765% $653,104 $115,850,000 *Mortgage provides for monthly payments of interest only through June 1, 2011, with the entire principal balance due on June 1, 2011. B Credit Facility -- Belair Capital has obtained a $790,000,000 credit facility (the Credit Facility) with a term of seven years (expiring in 2005) from Merrill Lynch International Bank Limited. Belair Capital's obligations under the Credit Facility are secured by a pledge of its assets, excluding the assets of Bel Residential and Katahdin. Interest on borrowed funds is based on the prevailing LIBOR rate for the respective interest period plus a spread of 0.45% per annum. Belair Capital may borrow for interest periods of one month to five years. In addition, Belair Capital pays a commitment fee at a rate of 0.10% per annum on the unused amount of the loan commitment. Borrowings under the Credit Facility have been used to purchase qualifying assets, pay selling commissions and organizational expenses, and to provide for the short-term liquidity needs of the Fund. Additional borrowings under the Credit Facility may be made in the future for these purposes. At September 30, 2001 and December 31, 2000, amounts outstanding under the Credit Facility totaled $663,000,000 and $643,000,000, respectively. 8 Management Fee and Other Transactions with Affiliates The Fund and the Portfolio have engaged Boston Management and Research (BMR), a wholly-owned subsidiary of EVM, as investment adviser. Under the terms of the advisory agreement with the Portfolio, BMR receives a monthly fee of 5/96 of 1% (0.625% annually) of the average daily net assets of the Portfolio up to $500,000,000 and at reduced rates as daily net assets exceed that level. For the nine months ended September 30, 2001 and September 30, 2000 the advisory fee applicable to the Portfolio was 0.43% (annualized) of average daily net assets. Belvedere Capital's allocated portion of the advisory fee was $31,645,569 of which $6,413,673 was allocated to the Fund for the nine months ended September 30, 2001, and $28,049,372 of which $7,270,843 was allocated to the Fund, for the nine months ended September 30, 2000. In addition, Belair Capital pays BMR a monthly advisory and administrative fee of 1/20 of 1% (0.60% annually) of the average daily gross investment assets of Belair Capital, reduced by that portion of the monthly advisory fee for such month payable by the Portfolio which is attributable to the value of the Fund's investment in Belvedere Capital. The term gross investment assets is defined to include the value of all assets of Belair Capital other than Belair Capital's investment in BREC, minus the sum of Belair Capital's liabilities other than the principal amount of money borrowed. BREC pays BMR a monthly management fee at a rate of 1/20th of 1% (equivalent to 0.60% annually) of the average daily gross investment assets of BREC. The term gross investment assets is defined to include all assets of BREC minus the sum 13 of BREC's liabilities other than the principal amount of money borrowed. For this purpose, the assets and liabilities of BREC's controlled subsidiaries are reduced by the proportionate interests therein of investors other than BREC. For the nine months ended September 30, 2001 and September 30, 2000, the advisory fee paid or accrued to BMR by the Fund, less the Fund's allocated share of the Portfolio's advisory fee, totaled $5,283,226 and $5,478,299, respectively. EVM serves as manager of Belair Capital and receives no separate compensation for services provided in such capacity. Pursuant to a servicing agreement between Belvedere Capital and Eaton Vance Distributors, Inc. (EVD), Belvedere Capital pays a servicing fee to EVD for providing certain services and information to Shareholders. The servicing fee is paid on a quarterly basis at an annual rate of 0.15% of Belvedere Capital's average daily net assets and totaled $10,894,221, and $9,645,180 for the nine months ended September 30, 2001 and September 30, 2000, respectively, of which $2,206,625 and $2,491,960, respectively, was allocated to Belair Capital. Pursuant to a servicing agreement between Belair Capital and EVD, Belair Capital pays a servicing fee to EVD on a quarterly basis at an annual rate of 0.20% of Belair Capital's average daily net assets, less Belair Capital's allocated share of the servicing fee payable by Belvedere Capital. For the nine months ended September 30, 2001 and September 30, 2000, the servicing fee paid directly by Belair Capital totaled $537,892 and $640,187, respectively. All servicing fees allocated to and incurred by the Fund, for the nine months ended September 30, 2001 and September 30, 2000, were paid to subagents. An affiliate of the Bel Residential minority shareholder provides day-to-day management of Bel Residential pursuant to a management agreement. The management agreement provides for a management fee and allows for reimbursement of payroll expenses incurred by the manager for managing the properties owned by Bel Residential. For the nine months ended September 30, 2001 and for the period from inception, June 30, 2000 to September 30, 2000, Bel Residential paid or accrued management fees amounting to $719,867 and $227,050, respectively. An affiliate of the Katahdin minority shareholder provides day-to-day management of Katahdin pursuant to a management agreement. The management agreement provides for a management fee and allows for reimbursement of payroll expenses incurred by the manager for managing the properties owned by Katahdin. For the period from inception, May 23, 2001 to September 30, 2001, Katahdin paid or accrued management fees amounting to $335,151. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Increases and decreases in Belair Capital Fund LLC's (the Fund) net asset value per share are derived from net investment income or loss, and realized and unrealized gains and losses on the Fund's interest through Belvedere Capital Fund Company LLC (Belvedere Capital) in Tax-Managed Growth Portfolio (the Portfolio), real estate investments held through its subsidiary, Belair Real Estate Corporation (BREC) and any direct investments of the Fund. Expenses of the Fund include its pro-rata share of the expenses of Belvedere Capital, and indirectly the Portfolio, as well as the actual and accrued expenses of the Fund and BREC, including its subsidiaries Bel Residential Properties Trust (Bel 14 Residential) and Katahdin Property Trust, LLC (Katahdin). The Fund's most significant expense is interest incurred on borrowings incurred in connection with its real estate investments. The Fund's realized and unrealized gains and losses on investments are based on its allocated share of the realized and unrealized gains and losses of Belvedere Capital, and indirectly, the Portfolio, as well as realized and unrealized gains and losses on investments in real estate through BREC. The realized and unrealized gains and losses on investments have the most significant impact on the Fund's net asset value per share and result from sales of such investments and changes in their underlying value. The investments of the Portfolio consist primarily of common stocks of domestic and foreign growth companies that are considered to be high in quality and attractive in their long-term investment prospects. Because security 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 United States stock market, as well as by the relative performance versus the overall market of specific stocks and classes of stocks in which the Portfolio maintains large positions. Through the impact of interest rates on the valuation of the Fund's real estate investments through BREC and its positions in interest rate swap agreements, the performance of the Fund is also affected by movements in interest rates, and particularly, changes in credit spread relationships. On a combined basis, the Fund's real estate investments and interest rate swaps generally decline in value when credit spreads widen (as fixed income markets grow more risk-averse) and generally increase in value when credit spreads tighten. RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2001 The Fund had total return performance of -16.6% for the quarter ended September 30, 2001. This return reflects a decrease in the Fund's net asset value per share from $125.23 to $104.41. For comparison, the Standard & Poors 500 Index (S&P 500), an unmanaged index of large capitalization stocks commonly used as a benchmark for the U.S. equity market, had a total return of -14.7% over the same period. During the third quarter of 2001, the U.S. equity market fell sharply, initially to reflect deteriorating domestic economic conditions and then in response to the events of September 11th. The coordinated actions of the Federal Reserve, the Bush Administration and Congress since September 11th have attempted to maintain orderly and liquid markets and to stimulate the economy. Through the end of September, the S&P 500 rallied by nearly 8% from the lows reached on September 21st. The relative performance of different market sectors during the third quarter was influenced primarily by investors' initial assessment of the September 11th events. Market leading industries and sectors in the third quarter included aerospace and defense stocks, gold mining stocks and defensive plays such as consumer products, pharmaceuticals, packaged foods and utilities. The quarter's weakest performers included airlines and other travel-related industries, entertainment, consumer durables and specialty retailers. Technology stocks resumed their decline from the highs reached in the first half of 2000. Financial stocks were mixed, with the benefits of declining short-term interest rates largely offset by rising credit concerns. In this most difficult of environments, the performance of the Portfolio was slightly better than that of the overall market. The Fund underperformed both the Portfolio and the S&P 500 in the quarter. The underperformance was primarily in the month of September and can be attributed to three factors: 1) rising credit spreads impacting the value of the Fund's real estate investments, 2) declining intermediate-term interest rates impacting the Fund's interest rate 15 swap positions and 3) the Fund's slightly leveraged exposure to the Portfolio. Although the U.S. real estate market remains in generally good balance, fallout from the September 11th events will likely have a negative effect. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 The Fund had total return performance of -21.6% for the nine months ended September 30, 2001. This return reflects a decrease in the Fund's net asset value per share from $133.13 to $104.41. For comparison, the S&P 500, an unmanaged index of large capitalization stocks commonly used as a benchmark for the U.S. equity market, had a total return of -20.4% over the same period. During the first nine months of 2001, the U.S. equity market continued the weak performance pattern in place since early 2000. After a strong start in January, the market fell through the balance of the first quarter, rallied into May, and then began a long slide that climaxed in the wake of the September 11th attacks. The best performing industries and sectors in the nine-month period included gold mining, utilities, healthcare services, foods, and tobacco. The weakest performing industries and sectors included airlines, oil and gas drillers, media, and most technology groups. The market suffered from a deteriorating economic outlook, a collapse in corporate profits and, finally, the significant economic and market dislocation and heightened risk sensitivity in the wake of the September 11th events. In this period of market weakness, the performance of the Portfolio was modestly above that of the overall market. The Fund underperformed both the Portfolio and the S&P 500, with all of the underperformance in the third quarter. The underperformance can be attributed to three factors: 1) rising credit spreads impacting the value of the Fund's real estate investments, 2) declining intermediate-term interest rates impacting the Fund's interest rate swap positions and 3) the Fund's slightly leveraged exposure to the Portfolio. The U.S. real estate market remains in generally good balance. Fallout from the September 11th events will likely have a negative effect, the full dimensions of which are not yet evident. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2001, the Fund had outstanding borrowings of $663.0 million under the credit facility (the Credit Facility) established with Merrill Lynch International Bank Limited, the term of which extends until February 6, 2005. The Fund has available under the Credit Facility $127.0 million to meet short-term liquidity needs and for other purposes. The Fund may redeem shares of Belvedere Capital at any time. Both Belvedere Capital and the Portfolio follow the practice of normally meeting redemptions by distributing securities drawn from the Portfolio. Belvedere Capital and the Portfolio may also meet redemptions by distributing cash. As of September 30, 2001, the Portfolio had cash and short-term investments totaling $258.5 million. The Portfolio participates in a $150 million multi-fund unsecured line of credit agreement with a group of banks. The Portfolio may temporarily borrow from the line of credit to satisfy redemption requests in cash or to settle investment transactions. The Portfolio had no outstanding borrowings under the $150 million line of credit at September 30, 2001, and, as of that date, the net assets of the Portfolio totaled $16,063.8 million. To ensure liquidity for investors in 16 the Portfolio, the Portfolio may not invest more than 15% of its net assets in illiquid assets. As of September, 2001, restricted securities, which are considered illiquid, constituted 1.9% of the net assets of the Portfolio. The Partnership Preference Units held by BREC are not registered under the Securities Act of 1933 (the Securities Act) and are subject to substantial restrictions on transfer. As such, they are considered illiquid. BREC's investments in real estate joint ventures are extremely illiquid. Bel Residential and Katahdin have been structured as investments of up to ten years, at which time a buy/sell mechanism may offer a measure of liquidity to both BREC and its minority shareholders. Redemptions of Fund shares are met primarily by distributing securities drawn from the Portfolio, although cash may also be distributed. Shareholders generally do not have the right to receive the proceeds of Fund redemptions in cash. ITEM 3. 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 investments in real estate that are financed with floating rate bank borrowings. The interest rate on borrowings under the Fund's Credit Facility is reset at regular intervals based on a fixed and predetermined premium to LIBOR for short-term extensions of credit. The Fund utilizes cancelable interest rate swap agreements to fix the cost of its borrowings over the term of the Credit Facility and to mitigate the impact of interest rate changes on the Fund's net asset value. Under the terms of the interest rate swap agreements, the Fund makes cash payments at fixed rates in exchange for floating rate payments that fluctuate with three-month LIBOR. In the future, the Fund may use other interest rate hedging arrangements (such as caps, floors and collars) to fix or limit borrowing costs. The use of interest rate hedging arrangements is a specialized activity that may be considered speculative and which can expose the Fund to significant loss. The 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 6 and 7 to the condensed consolidated financial statements. 17 Interest Rate Sensitivity Principal (Notional) Amount by Contractual Maturity For the Twelve Months Ended September 30, 2002 2003 2004 2005 2006 Thereafter Total Fair Value -------- -------- -------- --------------- ------- -------------- ---------------- ---------------- Rate sensitive liabilities: ----------------------- Long term debt- variable rate $663,000,000 $663,000,000 $663,000,000 Credit Facility Average interest rate 3.04% 3.04% Rate sensitive derivative financial instruments: ----------------------- Pay fixed/ Receive variable interest rate swap contracts $674,373,000 $674,373,000 $(35,502,366) Average pay rate 6.86% 6.86% Average receive rate 3.04% 3.04%
(b) Qualitative Information About Market Risk The value of Fund Shares may not increase or may decline. The performance of the Fund fluctuates. There can be no assurance that the performance of the Fund will match that of the United States stock market or that of other equity funds. In managing the Portfolio for long-term, after-tax returns, the Portfolio's investment adviser generally seeks to avoid or minimize sales of securities with large accumulated capital gains, including contributed securities. Such securities constitute a substantial portion of the assets of the Portfolio. Although the Portfolio may utilize certain management strategies in lieu of selling appreciated securities, the Portfolio's, and hence the Fund's, exposure to losses during stock market declines may nonetheless be higher than that of funds that do not follow a general policy of avoiding sales of highly-appreciated 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 more subject to 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. 18 Risks of Certain Investment Techniques -------------------------------------- In managing the Portfolio, the investment adviser may purchase or sell derivative instruments (which derive their value by reference to other securities, indices, 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 stock index futures contracts and options on stock index futures; the purchase of put options and the sale of call options on securities held; equity swaps; and the purchase and sale of forward currency exchange contracts and currency futures. The Portfolio may make short sales of securities provided that an equal amount is held of the security sold short (a covered short sale) and may also lend portfolio securities. The use of these investment techniques is a specialized activity that may be considered speculative and which can expose the Fund and the Portfolio to significant risk of loss. Successful use of these investment techniques is subject to the ability and performance of the investment adviser. The Fund's and the Portfolio's ability to meet 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. Swaps, caps, floors, collars and over-the-counter options are private contracts in which there is also a risk of loss in the event of a default on an obligation to pay by the counterparty. Such instruments may be difficult to value, may be illiquid and may be subject to wide swings in valuation caused by changes in the price of the underlying security, index, instrument or currency. In addition, if the Fund or the Portfolio has insufficient cash to meet margin, collateral or settlement requirements, it may have to sell assets to meet such requirements. Alternatively, should the Fund or the Portfolio fail to meet these requirements, the counterparty or broker may liquidate positions of the Fund or the Portfolio. The Portfolio may also have to sell or deliver securities holdings in the event that it is not able to purchase securities on the open market to cover its short positions or to close out or satisfy an exercise notice with respect to options positions it has sold. In any of these cases, such sales may be made at prices or in circumstances that the investment adviser considers unfavorable. The Portfolio's ability to utilize covered short sales, certain equity swaps and certain equity collar strategies (combining the purchase of a put option and the sale of a call option) as a tax-efficient management technique with respect to holdings of appreciated securities is limited to circumstances in which the hedging transaction is closed out within thirty days of the end of the Portfolio's taxable year and the underlying appreciated securities position is held unhedged for at least the next sixty days after such hedging transaction is closed. There can be no assurance that counterparties will at all times be willing to enter into covered short sales, 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 revolving securitization 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 Investment Company Act of 1940 and because other investors in the Portfolio are regulated investment companies under Subchapter M of the Internal Revenue 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. 19 Risks of Investing in Qualifying Assets and Leverage ---------------------------------------------------- The success of BREC'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, interest rates, availability of financing, managerial performance, government rules and regulations, and acts of God (whether or not insured against). Partnership Preference Units also depend 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. BREC's investments in interests in real estate joint ventures (Real Estate Joint Ventures) may be influenced by decisions which the principal minority investor in each Real Estate Joint Venture (the Operating Partner) may make on behalf of the property owned thereby and potential changes in the specific real estate sub-markets in which the properties are located. The debt of each Real Estate Joint Venture is fixed-rate, secured by the underlying properties and with limited recourse to BREC. However, changes in interest rates, the availability of financing and other financial conditions can have a material impact on property values and therefore on the value of BREC's equity interest. There can be no assurance that BREC's ownership of real estate investments will be an economic success. Moreover, the success of any Real Estate Joint Venture investment depends in large part upon the performance of the Operating Partner. Operating Partners will be subject to substantial conflicts of interest in structuring, operating and winding up the Real Estate Joint Ventures. Operating Partners will have an economic incentive to maximize the prices at which they sell properties to Real Estate Joint Ventures and to minimize the prices at which they acquire properties from Real Estate Joint Ventures. Operating Partners may devote greater attention or more resources to managing their wholly-owned properties than properties held by Real Estate Joint Ventures. Future investment opportunities identified by Operating Partners will more likely be pursued independently, rather than through, the Real Estate Joint Ventures. Financial difficulties encountered by Operating Partners in their other businesses may interfere with the operations of Real Estate Joint Ventures. 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 to be achieved by the Fund as a whole. In addition, there is a risk that the availability of financing will be interrupted at some future time, requiring the Fund to sell assets to repay outstanding borrowings or a portion thereof. It may be necessary to make such sales at unfavorable prices. The Fund's obligations under the Credit Facility are secured by a pledge of its assets. In the event of default, the lender could elect to sell assets of the Fund without regard to consequences of such action for Shareholders. The rights of the lender to receive payments of interest on and repayments of principal of borrowings is 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 outstanding an event of default under the Credit Facility. During such periods, the Fund would not be able to honor redemption requests or make cash distributions. The valuations of Partnership Preference Units held by the Fund through its investment in BREC fluctuate over time to reflect, among other factors, changes in interest rates, changes in the perceived riskiness of such units (including 20 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. The ongoing value of BREC's investments in Real Estate Joint Ventures will be substantially uncertain. BREC's investments in Real Estate Joint Ventures generally will be stated at estimated market value based on independent valuations, assuming an orderly disposition of assets. Detailed investment evaluations will be performed annually and reviewed periodically. Interim valuations will reflect results of operations and distributions, and may be adjusted to reflect significant changes in economic circumstances since the most recent independent evaluation. Fluctuations in the value of real estate investments derived from changes in general interest rates can be expected to be offset in part (but not entirely) by changes in the value of interest rate swap agreements or other interest rate hedges entered into by the Fund with respect to its borrowings under the Credit Facility. Fluctuations in the value of real estate investments derived from other factors besides general interest rate movements (including issuer-specific and sector-specific credit concerns, property-specific concerns and changes in interest rate spread relationships) will not be offset by changes in the value of interest rate swap agreements or other interest rate hedges entered into by the Fund. Changes in the valuation of 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. 21 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Fund is not aware of any pending legal proceedings to which the Fund is a party or to which their assets are subject. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. THE FOLLOWING IS A LIST OF ALL EXHIBITS FILED AS PART OF THIS FORM 10Q: (a) Exhibits 10(1)(a) Copy of Amendment dated January 2, 2001 to Investment Advisory and Administrative Agreement between the Fund and Boston Management and Research filed herewith. 21 List of subsidiaries 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned officer of its Manager, Eaton Vance Management thereunto duly authorized on November 14, 2001. BELAIR CAPITAL FUND LLC (Registrant) By: EATON VANCE MANAGEMENT, its Manager By: /s/ James L. O'Connor --------------------------------- James L. O'Connor Vice President By: /s/ William M. Steul ---------------------------------- William M. Steul Chief Financial Officer 23 EXHIBIT INDEX 10(2)(a) Copy of Amendment dated January 2, 2001 to Investment Advisory and Administrative Agreement between the Fund and Boston Management and Research filed herewith. 21 List of subsidiaries 24