-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RJ4Mc/fuHPvKrCz8J0akm2uQP2Rrxign2XbLfAyqCKahNx1tIAJuexIfmj9m/ZhK RoyBL/Qs4vWWnELg947JqA== 0000940394-03-000969.txt : 20030814 0000940394-03-000969.hdr.sgml : 20030814 20030814155513 ACCESSION NUMBER: 0000940394-03-000969 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELAIR CAPITAL FUND LLC CENTRAL INDEX KEY: 0001050816 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25767 FILM NUMBER: 03847585 BUSINESS ADDRESS: STREET 1: 24 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174828260 MAIL ADDRESS: STREET 1: 24 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 10-Q 1 belair10q.txt BELAIR CAPITAL FUND LLC FORM 10-Q FOR PERIOD ENDING 6/30/03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2003 ------------- 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 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 ---- ---- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO ---- ---- BELAIR CAPITAL FUND LLC Index to Form 10-Q PART I FINANCIAL INFORMATION Page Item 1. Condensed Consolidated Financial Statements 3 Condensed Consolidated Statements of Assets and Liabilities as of June 30, 2003 (Unaudited) and December 31, 2002 3 Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended June 30, 2003 and June 30, 2002 and for the Six Months Ended June 30, 2003 and June 30, 2002 4 Condensed Consolidated Statements of Changes in Net Assets (Unaudited) for the Six Months Ended June 30, 2003 and June 30, 2002 6 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2003 and June 30, 2002 7 Financial Highlights (Unaudited) for the Six Months Ended June 30, 2003 9 Notes to Condensed Consolidated Financial Statements as of June 30, 2003 (Unaudited) 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Item 4. Controls and Procedures 22 PART II OTHER INFORMATION Item 1. Legal Proceedings 22 Item 2. Changes in Securities and Use of Proceeds 22 Item 3. Defaults Upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 23 SIGNATURES 24 EXHIBIT INDEX 25 2 PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements - ------------------------------------------------------------------------------------------------------------------------------------ BELAIR CAPITAL FUND LLC Condensed Consolidated Statements of Assets and Liabilities June 30, 2003 December 31, (Unaudited) 2002 -------------- -------------- Assets: Investment in Belvedere Capital Fund Company LLC (Belvedere Capital) $1,436,699,926 $1,361,415,813 Investment in Partnership Preference Units 414,357,194 391,195,982 Investment in other real estate 162,764,564 157,492,935 Short-term investments - 3,426,881 -------------- -------------- Total investments $2,013,821,684 $1,913,531,611 Cash 6,746,964 16,067,430 Escrow deposits - restricted 80,503 1,073,943 Receivable for investments sold - 4,952,435 Dividends and interest receivable 4,586,711 5,327,452 Other assets 1,191,716 1,285,939 -------------- -------------- Total assets $2,026,427,578 $1,942,238,810 -------------- -------------- Liabilities: Loan payable - Credit Facility $ 532,769,000 $ 540,769,000 Mortgage payable 112,630,517 112,630,517 Open interest rate swap contracts, at value 10,911,798 21,367,938 Swap interest payable 1,376,146 5,029,500 Security deposits 405,333 403,844 Accrued expenses: Interest expense 1,695,805 1,787,051 Property taxes 814,939 705,965 Other expenses and liabilities 384,601 706,227 Minority interests in controlled subsidiaries 13,505,282 13,031,112 -------------- -------------- Total liabilities $ 674,493,421 $ 696,431,154 -------------- -------------- Net assets $1,351,934,157 $1,245,807,656 -------------- -------------- Shareholders' Capital $1,351,934,157 $1,245,807,656 -------------- -------------- Shares Outstanding 13,135,313 13,485,660 -------------- -------------- Net asset value and redemption price per Share $ 102.92 $ 92.38 -------------- -------------- See notes to unaudited condensed consolidated financial statements 3
BELAIR CAPITAL FUND LLC Condensed Consolidated Statements of Operations (Unaudited) Three Months Three Months Six Months Six Months Ended June 30, Ended June 30, Ended June 30, Ended June 30, 2003 2002 2003 2002 --------------- --------------- --------------- --------------- Investment Income: Dividends allocated from Belvedere Capital (net of foreign taxes of $92,086, $94,275, $152,043 and $119,279, respectively) $ 5,051,085 $ 5,276,280 $ 9,972,661 $ 9,920,640 Interest allocated from Belvedere Capital 158,005 124,003 249,852 279,142 Expenses allocated from Belvedere Capital (2,122,158) (2,576,957) (4,124,509) (5,263,169) --------------- --------------- --------------- --------------- Net investment income allocated from Belvedere Capital $ 3,086,932 $ 2,823,326 $ 6,098,004 $ 4,936,613 Dividends from Partnership Preference Units 9,656,110 9,400,673 19,308,901 18,137,848 Rental income 5,483,433 7,626,858 11,067,605 19,134,774 Interest 63,229 32,686 109,448 66,832 --------------- --------------- --------------- --------------- Total investment income $ 18,289,704 $ 19,883,543 $ 36,583,958 $ 42,276,067 --------------- --------------- --------------- --------------- Expenses: Investment advisory and administrative fees $ 1,352,111 $ 1,526,847 $ 2,637,073 $ 3,160,169 Property management fees 222,039 307,859 444,666 771,106 Servicing fees 131,906 148,286 247,720 316,379 Interest expense on mortgages 2,386,111 3,045,319 4,772,222 7,409,054 Interest expense on Credit Facility 2,422,481 3,324,638 4,971,353 6,715,232 Interest expense on swap contracts 4,875,697 7,526,723 11,984,376 14,887,050 Property and maintenance expenses 1,567,507 1,928,651 3,117,760 4,540,126 Property taxes and insurance 751,907 904,025 1,506,554 2,352,995 Amortization of deferred expenses - 27,365 9,099 54,429 Miscellaneous 183,543 132,364 310,141 404,510 --------------- --------------- --------------- --------------- Total expenses $ 13,893,302 $ 18,872,077 $ 30,000,964 $ 40,611,050 --------------- --------------- --------------- --------------- Net investment income before minority interest in net income of controlled subsidiary $ 4,396,402 $ 1,011,466 $ 6,582,994 $ 1,665,017 Minority interest in net income of controlled subsidiary (149,592) (353,710) (321,751) (1,014,662) --------------- --------------- --------------- --------------- $ 4,246,810 $ 657,756 $ 6,261,243 $ 650,355 --------------- --------------- --------------- --------------- See notes to unaudited condensed consolidated financial statements 4
BELAIR CAPITAL FUND LLC Condensed Consolidated Statements of Operations (Unaudited) (Continued) Three Months Three Months Six Months Six Months Ended June 30, Ended June 30, Ended June 30, Ended June 30, 2003 2002 2003 2002 --------------- --------------- --------------- --------------- Realized and Unrealized Gain (Loss) Net realized gain (loss) - Investment transactions from Belvedere Capital (identified cost basis) $ 3,705,353 $ (129,614,629) $ (2,191,186) $ (140,883,693) Investment transactions in Partnership Preference Units (identified cost basis) - - 92 (614,855) Investment transactions in other real estate - (9,540,011) - (9,540,011) --------------- --------------- --------------- --------------- Net realized gain (loss) $ 3,705,353 $ (139,154,640) $ (2,191,094) $ (151,038,559) --------------- --------------- --------------- --------------- Change in unrealized appreciation (depreciation) - Investment in Belvedere Capital (identified cost basis) $ 165,762,777 $ (83,763,480) $ 104,742,932 $ (61,358,538) Investments in Partnership Preference Units (identified cost basis) 3,001,536 11,429,104 27,138,712 9,393,932 Investments in other real estate (net of minority interests in unrealized gain (loss) of controlled subsidiaries of $519,169, $(683,217), $170,020 and $(214,303), respectively) 670,139 (2,235,555) 236,994 (2,704,469) Interest rate swap contracts 4,213,887 (5,388,714) 10,456,140 2,130,496 --------------- --------------- --------------- --------------- Net change in unrealized appreciation (depreciation) $ 173,648,339 $ (79,958,645) $ 142,574,778 $ (52,538,579) --------------- --------------- --------------- --------------- Net realized and unrealized gain (loss) $ 177,353,692 $ (219,113,285) $ 140,383,684 $ (203,577,138) --------------- --------------- --------------- --------------- Net increase (decrease) in net assets from operations $ 181,600,502 $ (218,455,529) $ 146,644,927 $ (202,926,783) =============== =============== =============== =============== See notes to unaudited condensed consolidated financial statements 5
BELAIR CAPITAL FUND LLC Condensed Consolidated Statements of Changes in Net Assets (Unaudited) Six Months Six Months Ended June 30, Ended June 30, 2003 2002 ---------------- ---------------- Increase (Decrease) in Net Assets: Net investment income $ 6,261,243 $ 650,355 Net realized loss from investment transactions (2,191,094) (151,038,559) Net change in unrealized appreciation (depreciation) of investments 142,574,778 (52,538,579) ---------------- ---------------- Net increase (decrease) in net assets from operations $ 146,644,927 $ (202,926,783) ---------------- ---------------- Transactions in Fund Shares - Net asset value of Fund Shares issued to Shareholders in payment of distributions declared $ 2,956,829 $ - Net asset value of Fund Shares redeemed (36,867,282) (45,221,183) ---------------- ---------------- Net decrease in net assets from Fund Share transactions $ (33,910,453) $ (45,221,183) ---------------- ---------------- Distributions - Distributions to Shareholders $ (6,607,973) $ - ---------------- ---------------- Total distributions $ (6,607,973) $ - ---------------- ---------------- Net increase (decrease) in net assets $ 106,126,501 $ (248,147,966) Net assets: At beginning of period $ 1,245,807,656 $ 1,687,637,826 ---------------- ---------------- At end of period $ 1,351,934,157 $ 1,439,489,860 ================ ================ See notes to unaudited condensed consolidated financial statements 6
BELAIR CAPITAL FUND LLC Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Six Months Ended June 30, Ended June 30, 2003 2002 ---------------- ---------------- Cash Flows From (For) Operating Activities - Net increase (decrease) in net assets from operations $ 146,644,927 $(202,926,783) Adjustments to reconcile net increase (decrease) in net assets from operations to net cash flows from operating activities - Amortization of debt issuance costs 81,161 105,576 Amortization of deferred expenses 9,099 54,429 Net investment income allocated from Belvedere Capital (6,098,004) (4,936,613) Decrease (increase) in escrow deposits 993,440 (5,390) Decrease in receivable for investments sold 4,952,435 - Increase in interest receivable from other real estate (65,074) - Decrease (increase) in other assets 3,963 (237,693) Decrease (increase) in dividends and interest receivable 740,741 (5,172,141) (Decrease) increase in interest payable for open swap contracts (3,653,354) 230,105 Decrease in security deposits, accrued interest and accrued other expenses and liabilities (411,383) (33,954) Decrease in cash in connection with sale of majority interest in controlled subsidiary - (2,429,734) Increase (decrease) in accrued property taxes 108,974 (532,664) Purchases of Partnership Preference Units - (30,488,829) Proceeds from sale of investments in other real estate - 32,965,765 Proceeds from sale of Partnership Preference Units - 18,708,345 Improvements to rental property (821,949) (747,548) Net (increase) decrease in investment in Belvedere Capital (3,500,000) 1,864,615 Decrease in minority interest - (52,500) Decrease in short-term investments 3,426,881 4,559,775 Minority interest in net income of controlled subsidiary 321,751 1,014,662 Net realized loss from investment transactions 2,191,094 151,038,559 Net change in unrealized (appreciation) depreciation of investments (142,574,778) 52,538,579 ---------------- ---------------- Net cash flows from operating activities $ 2,349,924 $ 15,516,561 Cash Flows From (For) Financing Activities - Repayment of Credit Facility $ (8,000,000) $ (15,000,000) Payments for Fund Shares redeemed (1,646) (3,290,609) Distributions paid to Shareholders (3,651,144) - Distributions paid to minority shareholders (17,600) (1,098,369) ---------------- ---------------- Net cash flows for financing activities $ (11,670,390) $ (19,388,978) Net decrease in cash $ (9,320,466) $ (3,872,417) Cash at beginning of period $ 16,067,430 $ 6,540,394 ---------------- ---------------- Cash at end of period $ 6,746,964 $ 2,667,977 ================ ================ See notes to unaudited condensed consolidated financial statements 7
BELAIR CAPITAL FUND LLC Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued) Six Months Six Months Ended June 30, Ended June 30, 2003 2002 ---------------- ---------------- Supplemental Disclosure and Non-cash Investing and Financing Activities - Interest paid on loan - Credit Facility $ 4,933,537 $ 6,957,413 Interest paid on swap contracts $ 15,637,730 $ 14,656,945 Interest paid on mortgages $ 4,691,061 $ 7,956,582 Market value of securities distributed in payment of redemptions $ 36,865,637 $ 41,930,574 Partnership Preference Units exchanged for a real estate equity investment and an investment in note receivable $ (3,977,592) $ - Market value of real estate equity investment $ 1,907,012 $ - Investment in note receivable $ 2,070,580 $ - Market value of real property and other assets, net of current liabilities, disposed of in conjunction with sale of real estate investment in Katahdin $ - $ 169,610,451 Mortgage disposed of in conjunction with sale of real estate investment in Katahdin $ - $ 115,850,000 See notes to unaudited condensed consolidated financial statements 8
BELAIR CAPITAL FUND LLC as of June 30, 2003 Condensed Consolidated Financial Statements (Continued) Financial Highlights (Unaudited) For the Six Months Ended June 30, 2003 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value - Beginning of period $ 92.380 - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) from operations - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income (6) $ 0.468 Net realized and unrealized gain 10.562 - ------------------------------------------------------------------------------------------------------------------------------------ Total income from operations $ 11.030 - ------------------------------------------------------------------------------------------------------------------------------------ Distributions - ------------------------------------------------------------------------------------------------------------------------------------ Distributions to Shareholders $ (0.490) - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions $ (0.490) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value - End of period $ 102.920 - ------------------------------------------------------------------------------------------------------------------------------------ Total Return (1) 11.99% - ------------------------------------------------------------------------------------------------------------------------------------ As a Percentage As a Percentage of Average Net of Average Gross Ratios Assets (5) Assets (2)(5) - ------------------------------------------------------------------------------------------------------------------------------------ Expenses of Consolidated Real Property Subsidiaries Interest and other borrowing costs (7) 0.56% (8) 0.37% (8) Operating expenses (7) 0.60% (8) 0.40% (8) Belair Capital Fund LLC Expenses Interest and other borrowing costs (4) 2.71% (8) 1.82% (8) Investment advisory and administrative fees, servicing fees and other Fund operating expenses (3)(4) 1.16% (8) 0.78% (8) ------------------------------------------ Total expenses 5.03% (8) 3.37% (8) Net investment income 1.00% (8) 0.67% (8) - ------------------------------------------------------------------------------------------------------------------------------------ Supplemental Data - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (000's omitted) $ 1,351,934 Portfolio Turnover of Tax-Managed Growth Portfolio (the Portfolio) 11% - ------------------------------------------------------------------------------------------------------------------------------------ (1) Returns are calculated by determining the percentage change in net asset value with all distributions reinvested. Total return is not computed on an annualized basis. (2) Average Gross Assets is defined as the average daily amount of all assets of Belair Capital Fund LLC (Belair Capital) (not including its investment in Belair Real Estate Corporation (Belair Real Estate)) plus all assets of Belair Real Estate minus the sum of their liabilities other than the principal amount of money borrowed. For this purpose, the assets of Belair Real Estate's controlled subsidiary are reduced by the proportionate interests therein of investors other than Belair Real Estate. (3) Includes Belair Capital's share of Belvedere Capital Fund Company LLC's allocated expenses, including those expenses allocated from the Portfolio. (4) Includes the expenses of Belair Capital and Belair Real Estate. Does not include expenses of the real estate subsidiary majority-owned by Belair Real Estate. (5) For the purpose of calculating ratios, the income and expenses of Belair Real Estate's controlled subsidiary are reduced by the proportionate interests therein of investors other than Belair Real Estate. (6) Calculated using average shares outstanding. (7) Includes Belair Real Estate's proportional share of expenses incurred by its majority-owned subsidiary. (8) Annualized. See notes to unaudited condensed consolidated financial statements 9
BELAIR CAPITAL FUND LLC as of June 30, 2003 Notes To Condensed Consolidated Financial Statements (Unaudited) 1 Basis of Presentation The condensed consolidated interim financial statements of Belair Capital Fund LLC (Belair Capital) and its subsidiaries (collectively, the Fund) have been prepared by the Fund, without audit, in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes that the disclosures are adequate to present fairly the financial position, results of operations, cash flows and financial highlights at the dates and for the periods presented. It is suggested that these interim financial statements be read in conjunction with the financial statements and the notes thereto included in the Fund's latest annual report on Form 10-K. Results for interim periods are not necessarily indicative of those to be expected for the full fiscal year. The balance sheet at December 31, 2002 has been derived from the December 31, 2002 audited financial statements but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements as permitted by the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain amounts in the prior period's condensed consolidated financial statements have been reclassified to conform with the current period presentation. 2 Investment Transactions The following table summarizes the Fund's investment transactions for the six months ended June 30, 2003 and June 30, 2002: SIX MONTHS ENDED SIX MONTHS ENDED INVESTMENT TRANSACTION JUNE 30, 2003 JUNE 30, 2002 - ------------------------------------------------------------------------------------------------------------ Increases in investment in Belvedere Capital $ 4,000,000 $ 69,951,562 Decreases in investment in Belvedere Capital $ 37,365,637 $ 113,746,750 Purchases of Partnership Preference Units $ - $ 30,488,829 Sales of Partnership Preference Units (1) $ - $ 18,708,345 Sales of other real estate (2) $ - $ 32,965,765 - ------------------------------------------------------------------------------------------------------------
(1) Sales of Partnership Preference Units during the six months ended June 30, 2002 include Partnership Preference Units sold to other funds sponsored by Eaton Vance Management (Eaton Vance) for which a loss of $775,295 was recognized. (2) During the six months ended June 30, 2002, Belair Real Estate Corporation (Belair Real Estate) sold its majority interest in Katahdin Property Trust LLC (Katahdin) to another fund sponsored by Eaton Vance. A loss of $9,540,011 was recognized on the transaction. During the six months ended June 30, 2003, the Fund exchanged Partnership Preference Units in the amount of $3,977,592 for an equity investment in two private real estate companies affiliated with the issuer of such formerly held Partnership Preference Units and a note receivable in the amounts of $1,907,012 and $2,070,580, respectively. The secured note receivable earns interest of 8% per annum and matures in February 2013 or on demand. 10 3 Indirect Investment in Portfolio The following table summarizes the Fund's investment in Tax-Managed Growth Portfolio (the Portfolio) through Belvedere Capital Fund Company LLC (Belvedere Capital), for the six months ended June 30, 2003 and June 30, 2002, including allocations of income and expenses for the respective periods then ended: SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2003 JUNE 30, 2002 - --------------------------------------------------------------------------------------------------------------- Belvedere Capital's interest in the Portfolio (1) $9,599,217,401 $9,414,074,868 The Fund's investment in Belvedere Capital (2) $1,436,699,926 $1,578,920,235 Income allocated to Belvedere Capital from the Portfolio $ 66,798,353 $ 59,178,086 Income allocated to the Fund from Belvedere Capital $ 10,222,513 $ 10,199,782 Expenses allocated to Belvedere Capital from the Portfolio $ 20,113,419 $ 22,716,704 Expenses allocated to the Fund from Belvedere Capital $ 4,124,509 $ 5,263,169 - ---------------------------------------------------------------------------------------------------------------
(1) As of June 30, 2003 and 2002, the value of Belvedere Capital's interest in the Portfolio represents 61.7% and 57.0% of the Portfolio's net assets, respectively. (2) As of June 30, 2003 and 2002, the Fund's investment in Belvedere Capital represents 15.0% and 16.8% of Belvedere Capital's net assets, respectively. A summary of the Portfolio's Statement of Assets and Liabilities at June 30, 2003, December 31, 2002 and June 30, 2002 and its operations for the six months ended June 30, 2003, for the year ended December 31, 2002 and for the six months ended June 30, 2002 follows: June 30, December 31, June 30, 2003 2002 2002 ------------------------------------------------------------------ Investments, at value $ 15,616,951,272 $ 14,544,149,182 $ 16,438,266,069 Other assets 26,660,614 70,073,039 258,245,026 - ------------------------------------------------------------------------------------------------------- Total assets $ 15,643,611,886 $ 14,614,222,221 $ 16,696,511,095 Total liabilities 93,843,137 42,700,633 171,302,142 - ------------------------------------------------------------------------------------------------------- Net assets $ 15,549,768,749 $ 14,571,521,588 $ 16,525,208,953 ======================================================================================================= Dividends and interest $ 109,393,140 $ 213,292,082 $ 104,789,317 - ------------------------------------------------------------------------------------------------------- Investment adviser fee $ 31,979,032 $ 71,564,552 $ 38,983,369 Other expenses 985,298 2,577,489 1,249,484 - ------------------------------------------------------------------------------------------------------- Total expenses $ 32,964,330 $ 74,142,041 $ 40,232,853 - ------------------------------------------------------------------------------------------------------- Net investment income $ 76,428,810 $ 139,150,041 $ 64,556,464 Net realized losses (29,306,399) (459,996,840) (198,388,599) Net change in unrealized appreciation (depreciation) 1,126,151,279 (3,312,547,564) (1,921,047,828) - ------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets from operations $ 1,173,273,690 $ (3,633,394,363) $ (2,054,879,963) - -------------------------------------------------------------------------------------------------------
4 Cancelable Interest Rate Swap Agreements Belair Capital has entered into cancelable interest rate swap agreements in connection with its real estate investments and the associated borrowings. Under such agreements, Belair Capital has agreed to make periodic payments at fixed rates in exchange for payments at floating rates. The notional or contractual amounts of these instruments may not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these investments is meaningful only when considered in conjunction with all related assets, liabilities and agreements. As of June 30, 2003 and December 31, 2002, Belair Capital has entered into cancelable interest rate swap agreements with Merrill Lynch Capital Services, Inc. as listed below. 11 Initial Unrealized Notional Amount Optional Unrealized Depreciation (000's Fixed Floating Termination Maturity Depreciation At December 31, omitted) Rate Rate Date Date At June 30, 2003 2002 - ---------------------------------------------------------------------------------------------------------------------- $120,000 6.715% LIBOR+0.45% 2/03 2/05 $ -* $ 592,865 50,000 6.84% LIBOR+0.45% 2/03 2/05 -* 253,428 150,000 6.835% LIBOR+0.45% 4/03 4/05 -* 2,209,596 20,000 6.67% LIBOR+0.45% 6/03 2/05 -* 462,191 75,000 6.68% LIBOR+0.45% 6/03 2/05 -* 1,736,787 80,000 6.595% LIBOR+0.45% 6/03 2/05 -* 1,820,237 14,709 6.13% LIBOR+0.45% 11/03 2/05 258,737 553,844 34,951 6.34% LIBOR+0.45% 2/04 2/05 1,049,507 1,729,610 5,191 6.49% LIBOR+0.45% 2/04 2/05 165,072 269,419 24,902 7.077% LIBOR+0.45% 7/04 2/05 1,431,871 1,906,989 10,471 7.37% LIBOR+0.45% 9/04 2/05 727,188 922,144 19,149 7.89% LIBOR+0.45% 2/04 2/05 763,652 1,284,855 70,000 7.71% LIBOR+0.45% 2/05 2/05 6,515,771 7,625,973 - ---------------------------------------------------------------------------------------------------------------------- $ 10,911,798 $ 21,367,938 - ----------------------------------------------------------------------------------------------------------------------
* Agreement was terminated on the Initial Optional Termination Date. 5 Debt Credit Facility - Effective on July 15, 2003, Belair Capital refinanced the existing Credit Facility with Merrill Lynch International Bank Limited with two new credit arrangements (collectively, the New Credit Facility) totaling $615,000,000. The New Credit Facility has a seven-year maturity and will expire on June 25, 2010. Belair Capital's obligations under the New Credit Facility are secured by a pledge of its assets, excluding the assets of Bel Residential Properties Trust (Bel Residential). The credit arrangement with DrKW Holdings, Inc. is for $515,000,000. This credit arrangement accrues interest at a rate of one-month LIBOR + 0.30% per annum. As of July 15, 2003, outstanding borrowings under this credit arrangement totaled $515,000,000. The credit arrangement with Merrill Lynch Mortgage Capital is for $100,000,000 and includes the ability to issue letters of credit up to $10,000,000. This credit arrangement accrues interest at a rate of one-month LIBOR + 0.38% per annum. A commitment fee of 0.10% per annum is paid on the unused commitment amount. Belair Capital pays all fees associated with issuing the letters of credit. As of July 15, 2003, outstanding borrowings under this credit arrangement totaled $17,769,000, as well as one letter of credit outstanding for $1,354,068. The letter of credit was issued as a substitute for funding certain mortgage escrow accounts required by the lender of Bel Residential. The letter of credit expires in 2004 and automatically extends for one-year periods, not to extend beyond June 15, 2010. Fees paid or accrued under the terms of the letter of credit issued under the existing Credit Facility totaled $5,372, for the six months ended June 30, 2003. 6 Segment Information Belair Capital pursues its investment objective primarily by investing indirectly in the Portfolio through Belvedere Capital. The Portfolio is a diversified investment company that emphasizes investments in common stocks of domestic and foreign growth companies that are considered to be high in quality and attractive in their long-term investment prospects. Separate from its investment in Belvedere Capital, Belair Capital invests in real estate assets through its subsidiary Belair Real Estate. Belair Real Estate invests directly in Partnership Preference Units and debt and equity investments in private real estate companies, and indirectly in real property through a controlled subsidiary, Bel Residential. At June 30, 2002, Belair Real Estate's controlled subsidiaries also included Katahdin (for the period from January 1, 2002 through May 21, 2002). 12 Belair Capital evaluates performance of the reportable segments based on the net increase (decrease) in net assets from operations of the respective segment, which includes net investment income (loss), net realized gain (loss) and unrealized gain (loss). The accounting policies of the reportable segments are the same as those for Belair Capital on a consolidated basis. No reportable segments have been aggregated. Reportable information by segment is as follows: FOR THE THREE MONTHS ENDED TAX-MANAGED GROWTH REAL JUNE 30, 2003 PORTFOLIO* ESTATE TOTAL - --------------------------------------------------------------------------------------------------------------------- Revenue $ 3,086,932 $ 15,191,521 $ 18,278,453 Interest expense on mortgages - (2,386,111) (2,386,111) Interest expense on Credit Facility - (2,324,317) (2,324,317) Interest expense on swap contracts - (4,875,697) (4,875,697) Operating expenses (543,486) (3,455,002) (3,998,488) Minority interest in net income of controlled subsidiaries - (149,592) (149,592) - --------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME $ 2,543,446 $ 2,000,802 $ 4,544,248 Net realized gain 3,705,353 - 3,705,353 Change in unrealized gain (loss) 165,762,777 7,885,562 173,648,339 - --------------------------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS FROM OPERATIONS OF REPORTABLE SEGMENTS $ 172,011,576 $ 9,866,364 $ 181,897,940 - --------------------------------------------------------------------------------------------------------------------- FOR THE THREE MONTHS ENDED TAX-MANAGED GROWTH REAL JUNE 30, 2002 PORTFOLIO* ESTATE TOTAL - --------------------------------------------------------------------------------------------------------------------- Revenue $ 2,823,326 $ 17,042,453 $ 19,865,779 Interest expense on mortgages - (3,045,319) (3,045,319) Interest expense on Credit Facility - (3,292,051) (3,292,051) Interest expense on swap contracts - (7,526,723) (7,526,723) Operating expenses (671,138) (4,037,741) (4,708,879) Minority interest in net income of controlled subsidiaries - (353,710) (353,710) - --------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) $ 2,152,188 $ (1,213,091) $ 939,097 Net realized loss (129,614,629) (9,540,011) (139,154,640) Change in unrealized gain (loss) (83,763,480) 3,804,835 (79,958,645) - --------------------------------------------------------------------------------------------------------------------- NET DECREASE IN NET ASSETS FROM OPERATIONS OF REPORTABLE SEGMENTS $ (211,225,921) $ (6,948,267) $ (218,174,188) - --------------------------------------------------------------------------------------------------------------------- FOR THE SIX MONTHS ENDED TAX-MANAGED GROWTH REAL JUNE 30, 2003 PORTFOLIO* ESTATE TOTAL - --------------------------------------------------------------------------------------------------------------------- Revenue $ 6,098,004 $ 30,456,141 $ 36,554,145 Interest expense on mortgages - (4,772,222) (4,772,222) Interest expense on Credit Facility - (4,822,212) (4,822,212) Interest expense on swap contracts - (11,984,376) (11,984,376) Operating expenses (1,047,225) (6,825,261) (7,872,486) Minority interest in net income of controlled subsidiaries - (321,751) (321,751) - --------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME $ 5,050,779 $ 1,730,319 $ 6,781,098 Net realized (loss) gain (2,191,186) 92 (2,191,094) Change in unrealized gain (loss) 104,742,932 37,831,846 142,574,778 - --------------------------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS FROM OPERATIONS OF REPORTABLE SEGMENTS $ 107,602,525 $ 39,562,257 $ 147,164,782 - --------------------------------------------------------------------------------------------------------------------- FOR THE SIX MONTHS ENDED TAX-MANAGED GROWTH REAL JUNE 30, 2002 PORTFOLIO* ESTATE TOTAL - --------------------------------------------------------------------------------------------------------------------- Revenue $ 4,936,613 $ 37,314,464 $ 42,251,077 Interest expense on mortgages - (7,409,054) (7,409,054) Interest expense on Credit Facility - (6,580,927) (6,580,927) Interest expense on swap contracts - (14,887,050) (14,887,050) Operating expenses (1,368,890) (9,722,145) (11,091,035) Minority interest in net income of controlled 13 subsidiaries - (1,014,662) (1,014,662) - --------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) $ 3,567,723 $ (2,299,374) $ 1,268,349 Net realized loss (140,883,693) (10,154,866) (151,038,559) Change in unrealized gain (loss) (61,358,538) 8,819,959 (52,538,579) - --------------------------------------------------------------------------------------------------------------------- NET DECREASE IN NET ASSETS FROM OPERATIONS OF REPORTABLE SEGMENTS $ (198,674,508) $ (3,634,281) $ (202,308,789) - --------------------------------------------------------------------------------------------------------------------- TAX-MANAGED GROWTH REAL AT JUNE 30, 2003 PORTFOLIO* ESTATE TOTAL - --------------------------------------------------------------------------------------------------------------------- Segment assets $1,436,699,926 $ 586,131,417 $ 2,022,831,343 Segment liabilities - 658,365,805 658,365,805 - --------------------------------------------------------------------------------------------------------------------- NET ASSETS OF REPORTABLE SEGMENTS $1,436,699,926 $ (72,234,388) $ 1,364,465,538 - --------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 2002 - --------------------------------------------------------------------------------------------------------------------- Segment assets $1,366,368,248 $ 558,359,888 $ 1,924,728,136 Segment liabilities - 685,527,420 685,527,420 - --------------------------------------------------------------------------------------------------------------------- NET ASSETS OF REPORTABLE SEGMENTS $1,366,368,248 $(127,167,532) $ 1,239,200,716 - --------------------------------------------------------------------------------------------------------------------- *Belair Capital invests indirectly in Tax-Managed Growth Portfolio through Belvedere Capital.
The following tables reconcile the reported segment information to the condensed consolidated financial statements for the periods indicated: THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002 ----------------- ------------------ ------------------ ------------------- Revenue: Revenue from reportable segments $ 18,278,453 $ 19,865,779 $ 36,554,145 $ 42,251,077 Unallocated revenue 11,251 17,764 29,813 24,990 ----------------- ------------------ ------------------ ------------------- TOTAL REVENUE $ 18,289,704 $ 19,883,543 $ 36,583,958 $ 42,276,067 ----------------- ------------------ ------------------ ------------------- Net increase (decrease) in net assets from operations: Net increase (decrease) in net assets from operations of reportable segments $181,897,940 $ (218,174,188) $ 147,164,782 $ (202,308,789) Unallocated revenue 11,251 17,764 29,813 24,990 Unallocated expenses ** (308,689) (299,105) (549,668) (642,984) ----------------- ------------------ ------------------ ------------------- TOTAL NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $181,600,502 $ (218,455,529) $ 146,644,927 $ (202,926,783) ----------------- ------------------ ------------------ -------------------
** Unallocated expenses include Belair Capital's cost to operate the Fund such as servicing fees, as well as other miscellaneous administrative costs of Belair Capital. DECEMBER 31, JUNE 30, 2003 2002 ------------------ ------------------- Net assets: Net assets of reportable segments $ 1,364,465,538 $ 1,239,200,716 Unallocated cash 3,596,235 14,074,693 Short-term investments - 3,426,881 Other assets - 9,100 Loan payable - Credit Facility (15,983,070) (10,815,380) Other liabilities (144,546) (88,354) ------------------ ------------------- TOTAL NET ASSETS $ 1,351,934,157 $ 1,245,807,656 ------------------ -------------------
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information in this report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements typically are identified by use of terms such as "may," "will," "should," "might," "expect," "anticipate," "estimate," and similar words, although some forward-looking statements are expressed differently. The actual results of Belair Capital Fund LLC (the Fund) could differ materially from those contained in the forward-looking statements due to a number of factors. The Fund undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Factors that could affect the Fund's performance include a decline in the U.S. stock markets or in general economic conditions, adverse developments affecting the real estate industry, or fluctuations in interest rates. The following discussion should be read in conjunction with the Fund's unaudited condensed consolidated financial statements and related notes in Item 1 above. RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2003 COMPARED TO THE QUARTER ENDED JUNE 30, 2002 PERFORMANCE OF THE FUND.1 The Fund's total return was 15.23% for the quarter ended June 30, 2003. This return reflects an increase in the Fund's net asset value per share from $89.32 to $102.92 during the period. For comparison, the Standard & Poor's 500 Index (the S&P 500), an unmanaged index of large capitalization stocks commonly used as a benchmark for the U.S. equity market, had a total return of 15.39% over the same period. The performance of the Fund exceeded that of Tax-Managed Growth Portfolio (the Portfolio) by approximately 1.69% during the period. Last year, the Fund had a total return performance of - -13.07% for the quarter ended June 30, 2002. This return reflected a decrease in the Fund's net asset value per share from $118.49 to $103.00 during the period. For comparison, the S&P 500 had a total return of -13.39% over the same period. The performance of the Fund trailed that of the Portfolio by approximately 1.43% during that period. PERFORMANCE OF THE PORTFOLIO. The total return of the Portfolio for the quarter ended June 30, 2003 was 13.54% compared to the 15.39% return achieved by the S&P 500 over the same period. The S&P 500 enjoyed a strong rally in the quarter, posting its best quarterly return since the fourth quarter of 1998. Encouraging fiscal and monetary policies, resilient consumer spending and positive earnings momentum contributed to the market's strength during the period. In general, small capitalization stocks outperformed large capitalization holdings during the quarter and value investing outperformed growth, a continuing theme from the same period last year. The total return of the Portfolio for the quarter ended June 30, 2002 was -11.64%. The performance of the Portfolio trailed the performance of the S&P 500 during the quarter ended June 30, 2003 primarily due to the Portfolio's relatively more defensive tilt and its de-emphasis of stocks considered by the Portfolio's investment adviser, Boston Management and Research (Boston Management), to be of lower quality. Higher volatility, lower quality stocks exhibited strong momentum across most industry groups during the period. The Portfolio's sector allocation during the quarter remained very similar to its positioning relative to the S&P 500 during the year ended December 31, 2002, with no major sector or industry shifts. The Portfolio's exposure to pharmaceuticals in the health care sector and media investments in the consumer discretionary sector was particularly beneficial to the Portfolio's performance during the quarter. Boston Management remained cautious in the technology and telecommunications sectors during the quarter, maintaining an underweight allocation comparable to the same period a year ago. The Portfolio continued its de-emphasis of stocks in the semiconductor equipment, peripherals, and wireless telecommunication industries. This posture has added to performance over longer time periods and during the same period a year ago, but hindered the Portfolio's performance during the second quarter of 2003. The Portfolio's overweight of the industrials sector in the areas of airfreight logistics and aerospace and defense, another continuing theme from last year, detracted from quarterly results, but has positively contributed to the Portfolio's longer-term returns. The Portfolio's continued de-emphasis of the utilities and materials sectors and the quality of its stock selection in those sectors was beneficial to performance during the quarter. 1 Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that Shares, when redeemed, may be worth more or less than their original cost. Comparison to the S&P 500 is for reference only. It is not possible to invest directly in an index. 15 PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate investments include Partnership Preference Units and an interest in a Real Estate Joint Venture. For the quarter ended June 30, 2003, the Fund's investments in Partnership Preference Units continued to benefit from declining interest rates and tightening spreads in income-oriented securities, particularly in real estate-related securities. At June 30, 2003, the estimated fair value of the Fund's Partnership Preference Units totaled $414.4 million compared to $397.0 million at June 30, 2002, an increase of $17.4 million or 4%. The Fund saw unrealized appreciation of the estimated fair value in its Partnership Preference Units of approximately $3.0 million during the quarter ended June 30, 2003 compared to approximately $11.4 million for the quarter ended June 30, 2002. Dividends received from Partnership Preference Units for the quarter ended June 30, 2003 totaled $9.7 million compared to $9.4 million for the quarter ended June 30, 2002, an increase of $0.3 million or 3%. The Fund conducts its real estate operations through a Real Estate Joint Venture that is majority-owned by Belair Real Estate Corporation (Belair Real Estate), a controlled subsidiary of the Fund. During the quarter ended June 30, 2003, the Fund's real estate operations continued to be impacted by weaker multifamily market fundamentals, as well as the uncertain outlook for the U.S. economy. The Fund's sale of its interest in Katahdin Property Trust LLC (Katahdin) in May 2002 reduced the scope of the Fund's real estate activities for the quarter ended June 30, 2003 as compared to the quarter ended June 30, 2002. Rental income from real estate operations decreased to $5.5 million for the quarter ended June 30, 2003 from $7.6 million for the quarter ended June 30, 2002, a decrease of $2.1 million or 28%. While this decrease in rental income principally resulted from the sale of the Fund's interest in Katahdin in 2002, rental income was also affected by increased rent concessions or reduced apartment rental rates and lower occupancy levels at properties owned by the Fund's remaining Real Estate Joint Venture, a trend that continued from 2002. Property operating expenses decreased to $2.5 million for the quarter ended June 30, 2003 from $3.1 million for the quarter ended June 30, 2002, a decrease of $0.6 million or 19% (property operating expenses are before debt service and certain operating expenses of Belair Real Estate of approximately $1.0 million for the quarter ended June 30, 2003 and approximately $0.9 million for the quarter ended June 30, 2002). The decrease in operating expenses was principally due to the sale of the Fund's interest in Katahdin. The decrease was partially offset by modest increases in property and maintenance, taxes and insurance expenses of the Fund's remaining Real Estate Joint Venture. Given the continued uncertain outlook for the U.S. economy as a whole, Boston Management, Belair Real Estate's manager, expects that real estate operating results for the Fund's remaining Real Estate Joint Venture in 2003 will continue to be modestly below the levels of 2002. At June 30, 2003, the estimated fair value of the real properties held through Belair Real Estate was $158.7 million compared to $156.3 million at June 30, 2002, an increase of $2.4 million or 2% (because the Fund sold its interest in Katahdin in May 2002, estimated property values at June 30, 2002 do not include the Katahdin properties). The modest increase in estimated real property values at June 30, 2003 resulted from declines in capitalization rates in a lower-return environment. Declines in capitalization rates more than offset the impact on property values of lower income level expectations. The Fund saw unrealized appreciation of the estimated fair value in its other real estate investments (which includes Belair Real Estate's interest in a Real Estate Joint Venture) of approximately $0.7 million during the quarter ended June 30, 2003 compared to approximately $2.2 million of unrealized depreciation for the quarter ended June 30, 2002. During the quarter ended June 30, 2002, the Fund sold its interest in Katahdin to another fund advised by Boston Management and recognized a loss of $9.5 million on the transaction. PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the quarter ended June 30, 2003, interest rate swap agreement values appreciated by $4.2 million due to the exercise of early termination options on a number of swap agreements and the remaining agreements approaching their initial optional termination dates. The appreciation was offset by a slight decline in swap rates. For the quarter ended June 30, 2002, the value of interest rate swap agreements decreased by $5.4 million due to a decline in swap rates. Approximately 61% of the notional amount of the Fund's existing interest rate swap agreements will reach their initial optional termination dates over the next five quarters and all remaining agreements will expire on February 10, 2005. 16 RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002 PERFORMANCE OF THE FUND. The Fund's total return was 11.99% for the six months ended June 30, 2003. This return reflects an increase in the Fund's net asset value per share from $92.38 to $102.92 and a distribution of $0.49 per share during the period. For comparison, the S&P 500 had a total return of 11.75% over the same period. The performance of the Fund exceeded that of the Portfolio by approximately 3.80% during the period. Last year, the Fund had a total return performance of -12.26% for the six months ended June 30, 2002. This return reflected a decrease in the Fund's net asset value per share from $117.39 to $103.00. For comparison, the S&P 500 had a total return of -13.15% over the same period. The performance of the Fund trailed that of the Portfolio by approximately 1.32% for the six months ended June 30, 2002. PERFORMANCE OF THE PORTFOLIO. The total return of the Portfolio for the six months ended June 30, 2003 was 8.19% compared to the 11.75% return achieved by the S&P 500 over the same period. Market performance during the first six months of 2003 remained volatile, but markets proved resilient, achieving impressive returns and positively concluding the first half of the year. War angst, questionable economic recovery, and the SARS outbreak were just a few of the factors contributing to increased volatility and unsettled investor sentiment during the period. During the second quarter of 2003, an easing of geopolitical concerns, positive consumer data, a strong housing market, and a low interest rate environment provided significant support and a boost to the equity markets. The Portfolio's total return for the quarter ended June 30, 2002 was -10.94%. The Portfolio's performance trailed the S&P 500 in the first six months of 2003, mostly due to its lower exposure to higher volatility, lower quality stocks, which were the strongest price performers during the first six months of 2003. Despite this short-term performance, the Portfolio is committed to its investment strategy of seeking quality stocks that are reasonably priced in relation to their fundamental value. Boston Management continued to de-emphasize health care investments during the period, a directional move initiated last year that has been positive for the Portfolio's relative returns. Boston Management continued to emphasize industrial company investments, especially in the airfreight logistics and aerospace and defense areas, which has helped the Portfolio's longer-term record, but detracted from first half results. The Portfolio also maintained an overweight stance in the consumer discretionary and consumer staples sectors during the period, as it did in the first half of 2002. Lack of earning visibility during the period reinforced the Portfolio's cautious weighting in the telecommunications and information technology sectors. Both of the aforementioned sectors were de-emphasized last year as well. The Portfolio's underweight of diversified telecommunication service and software holdings relative to the S&P 500 was particularly beneficial to relative performance in the first half of 2003. Boston Management also continued to underweight the Portfolio's exposure to the materials and utilities sectors, a similar stance to last year's allocation. PERFORMANCE OF REAL ESTATE INVESTMENTS. For the six months ended June 30, 2003, the Fund's investments in Partnership Preference Units generally benefited from declining interest rates and tightening spreads in income-oriented securities, particularly in real estate-related securities. The estimated fair value of the Fund's Partnership Preference Units totaled $414.4 million at June 30, 2003 compared to $397.0 million at June 30, 2002, an increase of $17.4 million or 4%. The Fund saw unrealized appreciation in the estimated fair value of its Partnership Preference Units of approximately $27.1 million during the six months ended June 30, 2003, compared to approximately $9.4 million during the six months ended June 30, 2002. Dividends received from Partnership Preference Units for the six months ended June 30, 2003 totaled $19.3 million compared to $18.1 million for the six months ended June 30, 2002, an increase of $1.2 million or 7%. Rental income from real estate operations decreased to $11.1 million for the six months ended June 30, 2003 from $19.1 million for the six months ended June 30, 2002, a decrease of $8.0 million or 42%. Property operating expenses decreased to $5.1 million for the six months ended June 30, 2003 from $7.7 million for the six months ended June 30, 2002, a decrease of $2.6 million or 34% (property operating expenses are before debt service and certain operating expenses of Belair Real Estate of approximately $1.7 million for the six months ended June 30, 2003 and approximately $2.0 million for the six months ended June 30, 2002). While these decreases were principally due to the May 2002 sale of the Fund's 17 interest in Katahdin, weaker multifamily market fundamentals in most regions combined with lower occupancy levels and increased rent concessions also impacted results during the period, as did modest increases in operating expenses. At June 30, 2003, the estimated fair value of the real properties held through Belair Real Estate was $158.7 million compared to $156.3 million at June 30, 2002, an increase of $2.4 million or 2%. The increase was due to modest increases in estimated property values that resulted from declines in capitalization rates in a lower-return environment. The Fund saw unrealized appreciation of the estimated fair value in its other real estate investments of approximately $0.2 million during the six months ended June 30, 2003, compared to approximately $2.7 million of unrealized depreciation during the six months ended June 30, 2002. During the six months ended June 30, 2002, the Fund sold its interest in Katahdin to another fund advised by Boston Management and recognized a loss of $9.5 million on the transaction. PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the six months ended June 30, 2003, interest rate swap agreement values appreciated by approximately $10.5 million compared to appreciation of approximately $2.1 million for the six months ended June 30, 2002. The appreciation is primarily due to the exercise of early termination options during the first half of 2003 on a number of swap agreements and the remaining agreements approaching their initial optional termination dates. Swap rates declined during the periods, offsetting some of the appreciation from approaching terminations. LIQUIDITY AND CAPITAL RESOURCES Effective July 15, 2003, the Fund refinanced its Credit Facility with Merrill Lynch International Bank by entering into new credit arrangements with DrKW Holdings, Inc. (DrKW) and Merrill Lynch Mortgage Capital, Inc. (MLMC) (collectively, the New Credit Facility), which together total $615 million. The New Credit Facility is secured by a pledge of the Fund's assets, excluding the assets of Bel Residential Properties Trust, and has a seven-year maturity. The New Credit Facility will expire in June 2010. The New Credit Facility is primarily used to fund the Fund's equity in real estate investments and will continue to be used for such purpose in the future. The New Credit Facility also provides for selling commissions, organizational expenses and any short-term liquidity needs of the Fund. Under certain circumstances, the Fund may increase the size of the New Credit Facility and the amount of outstanding borrowings thereunder for these purposes. The Fund has a $515 million credit arrangement with DrKW. Borrowings under the DrKW credit arrangement accrue interest at a rate of one-month LIBOR plus 0.30% per annum. As of July 15, 2003, outstanding borrowings under the DrKW credit arrangement totaled $515 million. The Fund has a $100 million credit arrangement with MLMC, including up to $10 million under letters of credit. Borrowings under the MLMC credit arrangement accrue interest at a rate of one-month LIBOR plus 0.38% per annum. As of July 15, 2003, outstanding borrowings under the MLMC credit arrangement totaled $17.8 million, with an additional $1.4 million outstanding under a letter of credit. The unused loan commitment amount totaled approximately $80.8 million. A commitment fee of 0.10% per annum is paid on the unused commitment amount. The Fund pays all fees associated with issuing the letters of credit. The Fund has entered into interest rate swap agreements with respect to its borrowings and real estate investments. Pursuant to these agreements, the Fund makes quarterly payments to the counterparty at predetermined fixed rates, in exchange for floating-rate payments at a predetermined spread to three-month LIBOR. During the terms of the outstanding swap agreements, changes in the underlying values of the swaps are recorded as unrealized gains or losses. As of June 30, 2003 and June 30, 2002, the unrealized depreciation related to the interest rate swap agreements was $10.9 million and $27.7 million, respectively. 18 CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Fund's discussion and analysis of its financial condition and results of operations are based upon its unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Fund to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The Fund bases these estimates, judgments and assumptions on historical experience and on other various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Fund's critical accounting policies affect the Fund's more significant estimates and assumptions used in valuing the Fund's real estate investments and interest rate swap agreements. Prices are not readily available for these types of investments and therefore they are valued on an ongoing basis by Boston Management, in its capacity as manager of Belair Real Estate, in the case of the real estate investments, and in its capacity as the Fund's investment adviser, in the case of the interest rate swap agreements. In estimating the value of the Fund's investments in real estate, Boston Management takes into account relevant factors, data and information, including, with respect to investments in Partnership Preference Units, information from dealers and similar firms with knowledge of such issues and the prices of comparable preferred equity securities and other fixed or adjustable rate instruments having similar investment characteristics. Real estate investments other than Partnership Preference Units are generally stated at estimated fair values, which represent the amount at which the investments could be sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Detailed investment valuations are performed at least annually and reviewed periodically. Interim valuations reflect results of operations and distributions, and may be adjusted if there has been a significant change in economic circumstances since the most recent independent valuation. Given that such valuations include many assumptions, including but not limited to the assumption that the investment could be sold in a transaction between willing parties, values may differ from amounts ultimately realized. Boston Management, as the Fund's investment adviser, determines the value of interest rate swaps, and, in doing so, may consider among other things, dealer and counter-party quotes and pricing models. The policies for valuing real estate investments involve significant judgments that are based upon, without limitation, general economic conditions, the supply and demand for different types of real properties, the financial health of tenants, the timing of lease expirations and terminations, fluctuations in rental rates and operating costs, exposure to adverse environmental conditions and losses from casualty or condemnation, interest rates, availability of financing, managerial performance and government rules and regulations. The valuations of Partnership Preference Units held by the Fund through its investment in Belair Real Estate fluctuate over time to reflect, among other factors, changes in interest rates, changes in perceived riskiness of such units (including call risk), changes in the perceived riskiness of comparable or similar securities trading in the public market and the relationship between supply and demand for comparable or similar securities trading in the public market. The value of interest rate swaps may be subject to wide swings in valuation caused principally by changes in interest rates. Interest rate swaps may be difficult to value since such instruments may be considered illiquid. Fluctuations in the value of Partnership Preference Units derived from changes in general interest rates can be expected to be offset in part (but not entirely) by changes in the value of interest rate swap agreements or other interest rate hedges entered into by the Fund with respect to its borrowings. Fluctuations in the value of real estate investments derived from other factors besides general interest rate movements (including issuer-specific and sector-specific credit concerns, property-specific concerns and changes in interest rate spread relationships) will not be offset by changes in the value of interest rate swap agreements or other interest rate hedges entered into by the Fund. Changes in the valuation of Partnership Preference Units not offset by changes in the valuation of interest rate swap agreements or other interest rate hedges entered into by the Fund and changes in the value of other real estate investments will cause the performance of the Fund to deviate from the performance of the Portfolio. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Fund's primary exposure to interest rate risk arises from its real estate investments that are financed by the Fund with floating rate borrowings under the Fund's Credit Facility and by fixed-rate secured mortgage debt obligations of the Real Estate Joint Venture. The interest rates on borrowings under the 19 Fund's Credit Facility are reset at regular intervals based on fixed and predetermined premiums to LIBOR for short-term extensions of credit. The Fund utilizes cancelable interest rate swap agreements to fix the cost of its borrowings under the Credit Facility and to mitigate the impact of interest rate changes on the Fund's net asset value. Under the terms of the interest rate swap agreements, the Fund makes cash payments at fixed rates in exchange for floating rate payments that fluctuate with three-month LIBOR. In the future, the Fund may use other interest rate hedging arrangements (such as caps, floors and collars) to fix or limit borrowing costs. The use of interest rate hedging arrangements is a specialized activity that can expose the Fund to significant loss. The value of Partnership Preference Units and, to a lesser degree, other real estate investments is sensitive to interest rate risk. Increases in interest rates generally will have an adverse affect on the value of Partnership Preference Units and other real estate investments. The following table summarizes the contractual maturities and weighted-average interest rates associated with the Fund's significant non-trading financial instruments. The Fund has no market risk sensitive instruments held for trading purposes. This information should be read in conjunction with Note 4 to the Fund's unaudited condensed consolidated financial statements in Item 1 above. Interest Rate Sensitivity Cost, Principal (Notional) Amount by Contractual Maturity For the Twelve Months Ended June 30,
Estimated 2004 2005 2006-2008 Thereafter Total Fair Value - ------------------------------------------------------------------------------------------------------- Rate sensitive liabilities: - ------------------------ Long-term debt: - ------------------------ Fixed-rate mortgages $112,630,517 $112,630,517 $ 131,000,000 Average interest rate 8.33% 8.33% - ------------------------ Variable-rate Credit Facility $532,769,000 $532,769,000 $ 532,769,000 Average interest rate 1.57% 1.57% - ------------------------------------------------------------------------------------------------------ Rate sensitive derivative financial instruments: - ------------------------ Pay fixed/ receive variable interest rate swap contracts $179,373,000 $179,373,000 $(10,911,798) Average pay rate 7.19% 7.19% Average receive rate 1.57% 1.57% - ------------------------------------------------------------------------------------------------------ Rate sensitive investments: - ------------------------ Fixed-rate Partnership Preference Units: - ------------------------ Bradley Operating Limited Partnership, 8.875% Series B Cumulative Redeemable Perpetual Preferred Units, Callable 2/23/04, Current Yield: 8.82% $ 22,521,852 $ 22,521,852 $ 25,748,543 20 Camden Operating, L.P., 8.50% Series B Cumulative Redeemable Perpetual Preferred Units, Callable 2/23/04, Current Yield: 8.34% $ 27,384,494 $ 27,384,494 $ 28,039,000 Colonial Realty Limited Partnership, 8.875% Series B Cumulative Redeemable Perpetual Preferred Units, Callable 2/23/04, Current Yield: 8.71% $ 44,807,072 $ 44,807,072 $ 49,411,800 Kilroy Realty, L.P., 8.075% Series A Cumulative Redeemable Preferred Units, Callable 2/06/03, Current Yield: 8.79% $ 28,800,000 $ 28,800,000 $ 26,464,147 Liberty Property L.P., 9.25% Series B Cumulative Redeemable Preferred Units, Callable 7/28/04, Current Yield: 8.91% $ 30,875,000 $ 30,875,000 $ 32,060,600 MHC Operating Limited Partnership, 9% Series D Cumulative Redeemable Perpetual Preference Units, Callable 9/29/04, Current Yield: 8.95% $ 50,000,000 $ 50,000,000 $ 50,260,000 National Golf Operating Partnership, L.P., 9.30% Series A Cumulative Redeemable Preferred Units, Callable 3/4/03, Current Yield: 9.89% $ 31,454,184 $ 31,454,184 $ 31,047,754 National Golf Operating Partnership, L.P., 9.30% Series B Cumulative Redeemable Preferred Units, Callable 7/28/04, Current Yield: 9.89% $ 5,000,000 $ 5,000,000 $ 4,700,000 PSA Institutional Partners, L.P., 9.50% Series N Cumulative Redeemable Perpetual Preferred Units, Callable 3/17/05, Current Yield: 8.99% $ 48,250,000 $ 48,250,000 $ 50,990,600 Price Development Company, L.P., 8.95% Series B Cumulative Redeemable Preferred Partnership Interests, Callable 7/28/04, Current Yield: 9.27% $ 30,625,000 $ 30,625,000 $ 29,571,500 Regency Centers, L.P., 8.125% Series A Cumulative Redeemable Preferred Units, Callable 6/25/03, Current Yield: 8.09% $ 30,000,000 $ 30,000,000 $ 30,132,000 21 Summit Properties Partnership, L.P., 8.95% Series B Cumulative Redeemable Perpetual Preferred Units, Callable 4/29/04, Current Yield: 8.85% $ 29,625,000 $ 29,625,000 $ 29,944,950 Urban Shopping Centers, L.P., 9.45% Series D Cumulative Redeemable Perpetual Preferred Units, Callable 10/01/04, $ 25,000,000 $ 25,000,000 $ 25,986,300 Current Yield: 9.09% - ------------------------ Note Receivable: - ------------------------ Fixed-rate note receivable, 8% $ 2,135,654 $ 2,135,654 $ 2,135,654
ITEM 4. CONTROLS AND PROCEDURES. Eaton Vance Management (Eaton Vance), as the Fund's manager, with the participation of the Fund's Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Fund's disclosure controls and procedures (as defined by Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Fund's disclosure controls and procedures were effective. There were no changes in the Fund's internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Fund's internal control over financial reporting. As the Fund's manager, the complete and entire management, control and operation of the Fund are vested in Eaton Vance. The Fund's organizational structure does not provide for a board of directors or a board audit committee. As such, the Fund's Chief Executive Officer and Chief Financial Officer intend to report to Eaton Vance any significant deficiency in the design or operation of internal control over financial reporting which could adversely affect the Fund's ability to record, process, summarize and report financial data, and any fraud, whether or not material, that involves management or other employees who have a significant role in the Fund's internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Although in the ordinary course of business, the Fund, Belair Real Estate and Belair Real Estate's controlled subsidiary may become involved in legal proceedings, the Fund is not aware of any material pending legal proceedings to which any of them is subject. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the three months ended June 30, 2003. ITEM 5. OTHER INFORMATION. None. 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) The following is a list of all exhibits filed as part of this Form 10-Q: 31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: None. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized officer on August 14, 2003. BELAIR CAPITAL FUND LLC /s/ Michelle A. Alexander -------------------------------- Michelle A. Alexander Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 24 EXHIBIT INDEX ------------- 31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 25 EX-31.1 3 ex311.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 31.1 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION - ------------- I, Thomas E. Faust Jr., certify that: 1. I have reviewed this Form 10-Q of Belair Capital Fund LLC; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ Thomas E. Faust Jr. ----------------------- Thomas E. Faust Jr. Chief Executive Officer EX-31.2 4 ex312.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 31.2 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION - ------------- I, Michelle A. Alexander, certify that: 1. I have reviewed this Form 10-Q of Belair Capital Fund LLC; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ Michelle A. Alexander ------------------------- Michelle A. Alexander Chief Financial Officer EX-32.1 5 ex321.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 32.1 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certifies in his capacity as Chief Executive Officer of Belair Capital Fund LLC (the "Fund"), that: (a) the Quarterly Report of the Fund on Form 10-Q for the quarter ended June 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (b) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Fund for such period. Date: August 14, 2003 /s/ Thomas E. Faust Jr. ----------------------- Thomas E. Faust Jr. Chief Executive Officer EX-32.2 6 ex322.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 32.2 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certifies in her capacity as Chief Financial Officer of Belair Capital Fund LLC (the "Fund"), that: (a) the Quarterly Report of the Fund on Form 10-Q for the quarter ended June 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (b) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Fund for such period. Date: August 14, 2003 /s/ Michelle A. Alexander ------------------------- Michelle A. Alexander Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----