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, 2000
Commision File No. 0002-25767
Belair Capital Fund LLC
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3404037
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(State of organization) (I.R.S. Employer Identification No.)
The Eaton Vance Building
255 State Street, Boston, Massachusetts 02109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 617-482-8260
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None
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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 27
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Belair Capital Fund LLC
Index to Form 10Q
PART I - FINANCIAL INFORMATION
Page
Item 1. Consolidated Financial Statements 3
Consolidated Statements of Assets and
Liabilities as of September 30, 2000
(unaudited) and December 31, 1999 3
Consolidated Statements of Operations
For the Three Months Ended September 30,
2000 and 1999 (unaudited) for the Nine Months
Ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Changes in Net Assets
For the Nine Months Ended September 30, 2000 and
1999 (unaudited) 6
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999
(unaudited) 7
Notes to Financial Statements as of September 30, 2000
(unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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<TABLE>
BELAIR CAPITAL FUND LLC
Consolidated Statements of Assets and Liabilities
September 30,
2000 December 31,
(Unaudited) 1999
------------------- ------------------
<S> <C> <C>
Assets:
Investment in Belvedere Capital LLC $2,247,172,734 $2,228,073,699
Investment in real estate partnership preference units 519,518,264 502,999,255
Investment in other real estate 346,596,989 -
Short-term investments 7,135,351 -
------------------- ------------------
Total investments $3,120,423,338 $2,731,072,954
Cash 15,193,232 3,802,594
Receivable for open swap contracts 11,605,222 23,158,186
Prepaid and deferred expenses 7,294,119 338,678
Escrow deposits - restricted 11,692,254 -
Swap interest receivable 461,778 24,814
Dividends receivable 9,236 608,281
Other assets 654,301 -
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Total Assets $3,167,333,480 $2,759,005,507
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Liabilities:
Loan payable $710,000,000 $655,000,000
Mortgage payable 259,790,536 -
Minority interest in controlled subsidiaries 33,659,403 208,000
Special distributions payable 3,100,036 -
Security deposits 1,101,862 -
Payable for Fund shares redeemed 1,402,500 1,072,380
Accrued Expenses
Interest expense 8,297,191 8,156,260
Accrued property taxes 2,896,696 -
Other liabilities and accrued expenses 1,628,681 199,114
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Total Liabilities $1,021,876,905 $664,635,754
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Net assets $2,145,456,575 $2,094,369,753
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Shareholders' Capital
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Shareholders' capital $2,145,456,575 $2,094,369,753
------------------- ------------------
------------------- ------------------
Shares Outstanding 15,110,588 15,900,744
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------------------- ------------------
Net Asset Value and Redemption Price Per Share $141.98 $131.72
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</TABLE>
3
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<TABLE>
BELAIR CAPITAL FUND LLC
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,
2000 1999 2000 1999
------------------ ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends allocated from Belvedere Capital $4,561,646 $4,661,462 $14,355,477 $14,020,021
(net of foreign taxes of $26,473, $148,
$114,895 and 141,505, respectively)
Interest allocated from Belvedere Capital 1,867,157 1,481,654 3,941,550 3,901,182
Expenses allocated from Belvedere Capital (3,379,134) (3,153,084) (10,031,422) (9,516,927)
------------------ ------------------ ----------------- ----------------
Net investment income allocated from
Belvedere Capital $3,049,669 $2,990,032 $8,265,605 $8,404,276
Dividends from partnership preference units 4,432,023 10,757,794 33,617,226 34,413,868
Interest income on swaps 736,216 - 641,984 -
Rental income 7,779,044 - 7,779,044 -
Interest 227,045 109,384 434,673 274,954
------------------ ------------------ ----------------- ----------------
Total investment income $16,223,997 $13,857,210 $50,738,532 $43,093,098
------------------ ------------------ ----------------- ----------------
Expenses:
Investment advisor fees $1,950,850 $1,672,556 $5,478,299 $4,847,333
Property management fees 302,112 - 302,112 -
Service fees 212,781 222,936 640,187 692,017
Interest expense on credit facility 12,979,682 9,296,362 36,778,445 26,227,265
Interest expense on mortgages 3,174,021 - 3,174,021 -
Interest expense on swap contracts - 1,840,990 - 5,313,558
Depreciation and amortization 1,635,182 27,666 1,690,013 66,436
Property taxes and insurance 777,168 - 777,168 -
Property and maintenance expenses 1,985,385 - 1,985,385 -
Custodian and transfer agent fees 21,887 17,886 102,026 49,837
Legal and accounting services 387,416 128,007 791,633 554,423
Printing and postage 2,493 419 7,293 5,279
Miscellaneous (23,035) 11,562 26,666 13,860
------------------ ------------------ ----------------- ----------------
Total expenses $23,405,942 $13,218,384 $51,753,248 $37,770,008
------------------ ------------------ ----------------- ----------------
Net investment income before minority interest
In share of net loss of controlled
subsidiaries $(7,181,945) - $(1,014,716) -
Minority interest net loss of
controlled subsidiaries 42,579 - 42,579 -
------------------ ------------------ ----------------- ----------------
Net investment income (loss) $(7,139,366) $638,826 $(972,137) $5,323,090
------------------ ------------------ ----------------- ----------------
4
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Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions from Belvedere $(18,424,329) $2,783,853 $29,873,588 $9,177,648
Capital
Investment transactions in partnership (15,231,759) (8,937,720) (18,177,972) (17,179,148)
preference units
Termination of interest rate swap contracts 2,241,000 - 2,241,000 -
------------------ ------------------ ----------------- ----------------
Net realized gain (loss) $(31,415,088) $(6,153,867) $13,936,616 $(8,001,500)
------------------ ------------------ ----------------- ----------------
Change in unrealized appreciation
(depreciation) -
Investment in Belvedere Capital $42,372,981 $(169,040,091) $ 102,843,747 $(8,061,449)
Investments in partnership preference units 62,495,119 (2,940,299) 61,127,867 (16,703,277)
Interest rate swap contracts (12,077,601) (1,316,821) (11,552,964) 26,779,122
------------------ ------------------ ----------------- ----------------
Net change in unrealized
appreciation/(depreciation) $92,790,499 $(173,297,211) $152,418,650 $2,014,396
------------------ ------------------ ----------------- ----------------
Net realized and unrealized gain (loss) $61,375,411 $(179,451,078) $ 166,355,266 $(5,987,104)
------------------ ------------------ ----------------- ----------------
Net increase (decrease) in net assets from
operations $54,236,045 $(178,812,252) $165,383,129 $(664,014)
================== ================== ================= ================
</TABLE>
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<TABLE>
BELAIR CAPITAL FUND LLC
Consolidated Statements of Changes in Net Assets (Unaudited)
Nine Months Nine Months
ended Ended
September 30, September 30,
2000 1999
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<S> <C> <C>
Increase (Decrease) in Net Assets:
Net investment income (loss) $(972,137) $5,323,090
Net realized gain (loss) on investment transactions 13,936,616 (8,001,500)
Net change in unrealized appreciation (depreciation) of
investments 152,418,650 2,014,396
------------------- ------------------
Net increase (decrease) in net assets from
operations $165,383,129 $(664,014)
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Transactions in Fund shares -
Net asset value of shares redeemed $(107,183,581) $(62,997,811)
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Net decrease in net assets from Fund share transactions $(107,183,581) $(62,997,811)
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Distributions to shareholders -
Special distributions to Shareholders $(7,112,726) -
------------------- ------------------
Total distributions $(7,112,726) -
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Net increase (decrease) in net assets $51,086,822 $(63,661,825)
Net assets:
Beginning of period 2,094,369,753 1,932,848,372
------------------- ------------------
End of period $2,145,456,575 $1,869,186,547
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</TABLE>
6
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<TABLE>
BELAIR CAPITAL FUND LLC
Consolidated Statements of Cash Flows (Unaudited)
Nine months Nine months
Ended Ended
September 30, September 30,
2000 1999
------------------ ------------------
<S> <C> <C>
Cash flows from (for) Operating Activities -
Net investment income(loss) $ (972,137) $ 5,323,090
Adjustments to reconcile net investment income to net
cash flows used for operating activity -
Amortization of organization and other deferred expenses 1,690,022 66,436
Net investment income allocated from Belvedere Capital (8,265,605) (8,404,276)
Payment of organization and offering expenses - (443,560)
(Increase) decrease in dividends receivable 599,045 (5,094,955)
Increase in interest receivable for open swap contracts (436,964) -
Increase in interest payable for open swap contracts - 475,260
Increase in deferred expenses (1,902,659) -
Increase in prepaid expenses (121,758) -
Decrease in escrow deposits 87,691 (12,139)
Decrease in other assets 487,328 -
Increase in accrued property taxes 1,203,892 -
Increase (decrease) in accrued interest and operating expenses (726,900) 101,646
Purchases of partnership preference units (101,895,368) (409,000,000)
Payments for investments in other real property (66,714,705) -
Improvements to real estate (1,030,729)
Sales of partnership preference units 128,326,254 358,486,052
Gain on terminated swaps 2,241,000 -
Net decrease in investment in Belvedere Capital 45,494,018 43,557,536
Minority interest in share of net investment loss of -
controlled subsidiaries 42,579 -
Increase in short-term investments (7,135,351) -
--------------------------------------
Net cash flows used for operating activities $(9,030,347) $ (14,944,910)
Cash Flows for Financing Activities -
Proceeds from loan $55,000,000 $ 62,000,000
Payments for Fund shares redeemed (30,566,325) (23,852,610)
Special distributions paid (4,012,690) -
--------------------------------------
Net cash flows from financing activities $ 20,420,985 $ 38,147,390
Net increase in cash 11,390,638 23,202,480
Cash at beginning of period 3,802,594 2,711,580
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Cash at end of period $ 15,193,232 $ 25,914,060
================== ==================
7
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Supplemental Disclosure and Non-cash Investing and
Financing Activities-
Unrealized appreciation of investments and open swap contracts $ 658,953,731 $ 215,374,591
Interest paid for loan $ 38,221,787 $ 25,947,174
Interest received (paid) for swap contracts $ 205,020 $ (4,838,298)
Interest paid for mortgages $1,589,748 -
Market value of securities distributed in payment of redemptions $ 76,287,136 $ 39,145,201
Market value of real property and other assets, net of current
liabilities, contributed to Bel Residential $359,843,727 -
Mortgage assumed in connection with acquisition of real property $ 259,790,536 -
</TABLE>
8
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BELAIR CAPITAL FUND LLC as of September 30, 2000
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1 Organization
A Investment Objective--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.
B Subsidiaries--Belair Capital invests in real estate through its subsidiary
Belair Real Estate Corporation (BREC). BREC invests directly in partnership
preference units and indirectly in real property through controlled
subsidiaries, Bel Residential Properties Trust (Bel Residential) and Bel
Alliance Communities, LLC (Bel Communities).
BREC - BREC invests directly in partnership preference units and also holds
majority interests in Bel Residential and Bel Communities. At September 30,
2000, Belair Capital owned 100% of the common stock issued by BREC and intends
to hold all of BREC's common stock at all times. Approximately 105 charitable
organizations own preferred stock of BREC which has been recorded as a minority
interest on the Statement of Assets and Liabilities. The preferred stock has a
par value of $.01 per share and is redeemable by BREC at a redemption price of
$100 after the occurrence of certain tax events or after December 31, 2004.
Dividends on the preferred stock are cumulative and payable annually in arrears
in December in an amount equal to $8 per share per annum.
Bel Residential- Bel Residential, a majority owned subsidiary of BREC,
indirectly owns eleven multi-family residential properties (collectively, the
Bel Residential properties) located in seven states (Texas, Arizona, Georgia,
North Carolina, Washington, Colorado and Florida). BREC owns Class A units of
Bel Residential, representing a 75% equity interest in Bel Residential, and a
minority shareholder (the Bel Residential minority shareholder) owns Class B
units, representing a 25% equity interest in Bel Residential. The equity
interest of the Bel Residential minority shareholder is recorded as a minority
interest on the Statement of Assets and Liabilities. The primary distinction
between the two classes of shares is the distribution priority and voting
rights. BREC has priority in distributions and has greater voting rights than
the holder of Class B units.
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Bel Communities --- Bel Communities, a majority owned subsidiary of BREC,
indirectly owns twenty multi-family residential properties (collectively, the
Bel Communities properties) located in eight states ( North Carolina, South
Carolina, Texas, Virginia, Nevada, Tennessee, Florida and Georgia). BREC
indirectly owns 100% of the Class A units of Bel Communities, representing 60%
of the equity interests in Bel Communities, and a minority shareholder (the Bel
Communities minority shareholder) owns 100% of the Class B units, representing
40% of the equity interests in Bel Communities. The Class B equity interest is
recorded as a minority interest on the Statement of Assets and Liabilities. The
primary distinction between the two classes of shares is the distribution
priority and voting rights. BREC has priority in distributions and has greater
voting rights than the holders of the Class B units.
The accompanying consolidated financial statements include the accounts of
Belair Capital, BREC, Bel Residential and Bel Communities (collectively, the
Fund). All material intercompany accounts and transactions have been eliminated.
2 Significant Accounting Policies The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements. The policies are in conformity with generally accepted
accounting principles.
A Investment Costs--The Fund's investment assets were acquired through
contributions of common stock by shareholders in exchange for Shares of Belair
Capital, in private purchases of partnership preference units and through
contributions of real estate investments in exchange for minority interests in
controlled subsidiaries. Upon receipt of common stock from shareholders Belair
Capital immediately exchanged the contributed securities into Belvedere Capital
for shares thereof, and Belvedere Capital, in turn, immediately thereafter
exchanged the contributed securities into the Portfolio for an interest in the
Portfolio. The cost at which the Fund's investments of contributed common stock
are carried on the books and in the financial statements is the value of the
contributed common stock as of the close of business on the day prior to their
contribution to the Fund. The initial tax basis of the Fund's investment in the
Portfolio through Belvedere Capital is the same as the contributing
shareholders' basis in securities and cash contributed to the Fund. The initial
tax and financial reporting basis of securities and real estate investments
purchased by the Fund is the purchase cost. The initial financial reporting
basis of real estate investments contributed to the Fund is the market value of
the investments on contribution date. The initial tax basis of real estate
investments contributed to the Fund is the contributor's tax basis at the time
of contribution or value at the time of contribution, depending on the
taxability of the contribution.
B Investment Valuations--The Fund's investments consist of partnership
preference units, other real property investments, shares of Belvedere Capital
and short-term debt securities. Belvedere Capital's only investment is an
interest in the Portfolio, the value of which is derived from a proportional
interest therein. Additionally, the Fund has entered into interest rate swap
contracts (see Note 8). The valuation policy followed by the Fund, Belvedere
Capital and the Portfolio for all assets, other than real property, is as
follows:
Marketable securities, including options, that are listed on foreign or U.S.
securities exchanges or in the NASDAQ National Market System are valued at
closing sale prices on the exchange where such securities are principally
traded. Futures positions on securities or currencies are generally valued at
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closing settlement prices. Unlisted or listed securities for which closing sale
prices are not available are valued at the mean between the latest bid and asked
prices. Short-term debt securities with a remaining maturity of 60 days or less
are valued at amortized cost, which approximates value. Other fixed income and
debt securities, including listed securities and securities for which price
quotations are available, are normally valued on the basis of valuations
furnished by a pricing service. Investments held by the Portfolio for which
valuations or market quotations are unavailable are valued at fair value using
methods determined in good faith by or at the direction of the Trustees.
Interest rate swap contracts are valued by obtaining dealer or counterparty
quotes.
The value of the Fund's real estate assets is determined in good faith by Boston
Management and Research, as Manager of BREC, taking into account all 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 market values based upon
independent valuations. Detailed investment valuations, which include the
discounted cash flow method of appraisal, are performed annually and reviewed
periodically and adjusted if there has been a significant change in economic
circumstances since the previous valuation. The discounted cash flow method of
appraisal projects future cash inflows and outflows, and presumes a sales price
at the end of a holding period. Such amounts are discounted at an appropriate
rate of return that a prudent buyer would currently require to purchase the real
estate assets. The valuation of investments assumes the orderly disposition of
all assets.
C Escrow Accounts--The escrow accounts related to Bel Residential and Bel
Communities consist of deposits for real estate taxes, insurance, environmental,
renovation, reserve for replacements and capital repairs required under the
mortgage agreement, debt service, and security deposit accounts. Bel Residential
and Bel Communities have no access to these funds once deposited into the escrow
accounts. Amounts are held by the financial institution and controlled by the
lender (Note 9).
D Interest Rate Swaps--The Fund has entered into interest rate swap agreements
with respect to its borrowings and investments in fixed-rate partnership
preference units. Pursuant to these agreements, the Fund makes quarterly
payments to the counterparty at predetermined fixed rates, in exchange for
floating-rate payments from the counterparty at a predetermined spread to
three-month LIBOR, based on notional values approximately equal to the Fund's
acquisition cost for the fixed-rate partnership preference units. During the
terms of the outstanding swap agreements, changes in the underlying values of
the swaps are recorded as unrealized gains or losses. The Fund is exposed to
credit loss in the event of non-performance by the swap counterparty.
E Written Options--The Portfolio and the Fund may write listed and
over-the-counter call options on individual securities, on baskets of securities
and on stock market indices. Upon the writing of a call option, an amount equal
to the premium received by the Portfolio or Fund is included in the Statement of
Assets and Liabilities of the respective entity, as a liability. The amount of
the liability is subsequently marked-to-market to reflect the current value of
the option written in accordance with the investment valuation policies
discussed above. Premiums received from writing options that expire are treated
as realized gains. Premiums received from writing options that are exercised or
are closed are added to or offset against the proceeds or amount paid on the
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transaction to determine the realized gain or loss. The Portfolio or Fund as a
writer of an option may have no control over whether the underlying securities
may be sold and as a result bears the market risk of an unfavorable change in
the price of the securities underlying the written option.
F Purchased Options--Upon the purchase of a put option, the premium paid by the
Portfolio or Fund is included in the Statement of Assets and Liabilities of the
respective entity as an investment. The amount of the investment is subsequently
marked-to-market to reflect the current market value of the option purchased, in
accordance with the investment valuation policies discussed above. If an option
which the Portfolio or Fund has purchased expires on the stipulated expiration
date, the Portfolio or Fund will realize a loss in the amount of the cost of the
option. If the Portfolio or Fund enters into a closing sale transaction, the
Portfolio or Fund will realize a gain or loss, depending on whether the sales
proceeds from the closing sale transaction are greater or less than the cost of
the option. If the Portfolio or Fund exercises a put option, it will realize a
gain or loss from the sale of the underlying security and the proceeds from such
sale will be decreased by the premium originally paid.
G Rental Operations-- The apartment units held indirectly by Bel Residential are
leased to residents generally for a term of one year renewable upon consent of
both parties on a year-to-year or month-to-month basis. The apartment units held
indirectly by Bel Communities are leased to residents for terms of one year or
less, with monthly payments due in advance.
H Income--Dividend income is recorded on the ex-dividend date and interest and
rental income are recorded on the accrual basis.
Belvedere Capital's net investment income or loss consists of Belvedere
Capital's pro-rata share of the net investment income of the Portfolio, less all
actual or accrued expenses of Belvedere Capital, determined in accordance with
generally accepted accounting principles. The Fund's net investment income or
loss consists of the Fund's pro-rata share of the net investment income of
Belvedere Capital, plus all income earned on the Fund's investments (including
partnership preference units and other real property), less all actual and
accrued expenses of the Fund determined in accordance with generally accepted
accounting principles.
I Rental Property and Depreciation--Costs incurred in connection with
acquisitions of properties have been capitalized. Significant betterments and
improvements are capitalized as part of the building and improvements.
Depreciation of the buildings and improvements is computed using the straight
line and accelerated methods over the estimated useful lives of the related
assets, which range up to 30 years for buildings and up to ten years for
building and land improvements and up to ten years for furniture, fixtures and
equipment.
J Organization Costs and Deferred Expenses--Costs incurred by the Fund in
connection with its organization are being amortized on a straight-line basis
over five years. Costs incurred in connection with BREC are expensed as
incurred. Deferred costs of Bel Residential and Bel Communities consist of
deferred mortgage origination expenses which are amortized over the terms of the
loan.
K Income Taxes--Belair Capital, Belvedere Capital and the Portfolio are treated
as partnerships for federal income tax purposes. As a result, Belair Capital,
Belvedere Capital and the Portfolio do not incur federal income tax liability,
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and the shareholders and partners thereof are individually responsible for taxes
on items of partnership income, gain, loss, and deduction. The policy of BREC,
Bel Residential and Bel Communities is to comply with the Internal Revenue Code
applicable to REITs. BREC, Bel Residential and Bel Communities will generally
not be subject to federal income tax to the extent that they distribute their
earnings to their stockholders each year and maintain their qualification as a
REIT.
L Other--Investment transactions are accounted for on a trade date basis.
M Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expense during the reporting period. Actual results could differ from those
estimates.
N Interim Financial Statements--The interim financial statements relating to
September 30, 2000 and for the nine months then ended have not been audited by
independent certified public accountants, but in the opinion of the Fund's
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial statements.
3 Distributions to Shareholders
The Fund intends to distribute each year all of its net investment income for
the year, if any, and approximately 22% of its net realized capital gains for
such year, if any, other than precontribution gains allocated to a shareholder
in connection with a tender offer or other extraordinary corporate event with
respect to a security contributed by such shareholder, for which no capital gain
distribution is made. In addition, whenever a distribution in respect to a
precontribution gain is made, the Fund makes a special distribution to
compensate shareholders receiving such distributions for taxes that may be due
in connection with the precontribution gain and supplemental distributions.
Special distributions accrued for or paid during the nine month period ended
September 30, 2000 totaled $7,112,726.
4 Shareholder Transactions
The Fund may issue an unlimited number of full and fractional shares.
Transactions in Fund shares were as follows:
Nine Months Ended Nine Months Ended
September 30, September 30,
2000 1999
-------------------- --------------------
Redemptions (790,156) (515,352)
-------------------- --------------------
Net decrease (790,156) (515,352)
-------------------- --------------------
Redemptions of shares held less than three years are generally subject to a
redemption fee of 1% of the net asset value of shares redeemed. The redemption
fee is paid to Eaton Vance Distributors, Inc. (EVD) by the Fund on behalf of the
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redeeming shareholder. No charge is levied on redemptions of shares acquired
through the reinvestment of distributions, shares redeemed in connection with a
tender offer or other extraordinary corporate event with respect to a
contributed security or shares redeemed following the death of all of the
initial holders of the shares redeemed. In addition, no fee applies to
redemptions by shareholders, who, during any 12-month period, redeems less than
8% of the total number of shares held by the shareholder as of the beginning of
the 12-month period. For the nine months ended September 30, 2000 and September
30, 1999, EVD received $778,730 and $360,657, respectively, in redemption fees.
5 Investment Transactions
Increases and decreases of the Fund's investment in Belvedere Capital for the
nine months ended September 30, 2000 aggregated $126,179,202 and $248,063,107
respectively, and for the nine months ended September 30, 1999 aggregated
$21,680,018 and $104,382,755, respectively. Purchases and sales of partnership
preference units aggregated $101,895,368 and $128,326,254 for the nine months
ended September 30, 2000, and $409,000,000 and $358,486,052 for the nine months
ended September 30, 1999. For the nine months ended September 30, 2000,
acquisitions of other real property, through purchases and contributions,
totaled $346,847,008. There were no acquisitions of real property other than
partnership preference units for the nine months ended September 30, 1999.
Purchases and sales of partnership preference units during the period ended
September 30, 2000 and sales of partnership preference units during the period
ended September 30, 1999 include amounts purchased from and sold to other funds
sponsored by Eaton Vance Management.
6 Indirect Investment in Portfolio
Belvedere Capital's interest in the Portfolio at September 30, 2000 was
$9,826,270,245, representing 53.8% of the Portfolio's net assets, and at
September 30, 1999 was $6,567,348,215, representing 51.5% of the Portfolio's
assets. The Fund's investment in Belvedere Capital at September 30, 2000 was
$2,247,172,734, representing 22.9% of Belvedere Capital's net assets, and at
September 30, 1999 was $1,931,317,944, representing 29.4% of Belvedere Capital's
net assets. 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. Investment income allocated to Belvedere
Capital from the Portfolio for the nine months ended September 30, 1999 totaled
$43,288,145, of which $17,921,203 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.
Expenses allocated to Belvedere Capital from the Portfolio for the nine months
ended September 30, 1999 totaled $16,940,614, of which $7,116,523 was allocated
to the Fund. 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. Belvedere Capital allocated
additional expenses to the Fund of $2,400,404 for the nine months ended
September 30, 1999, representing $103,753 of operating expenses and $2,296,651
of service fees (see Note 10).
A summary of the Portfolio's Statement of Assets and Liabilities, at September
30, 2000, December 31, 1999 and September 30, 1999 and its operations for the
nine months ended September 30, 2000, the year ended December 31, 1999 and the
nine months ended September 30, 1999 follows:
14
<PAGE>
<TABLE>
September 30, December 31, September 30,
2000 1999 1999
-------------------- ------------------------ ---------------------
<S> <C> <C> <C>
Investments, at value $18,195,602,562 $15,009,514,121 $12,750,511,786
Other Assets 279,625,633 105,404,490 11,587,842
----------------------------------- -------------------- ------------------------ ---------------------
Total Assets $18,475,228,195 $15,114,918,611 $12,762,099,628
Total Liabilities 215,812,049 269,652 174,903
----------------------------------- -------------------- ------------------------ ---------------------
Net Assets $18,259,416,146 $15,114,648,959 $12,761,924,725
=================================== ==================== ======================== =====================
Dividends and interest $135,806,873 $135,795,086 $94,362,172
Investment adviser fee 53,698,628 51,368,943 36,125,499
Other expenses 1,603,375 1,599,875 1,022,728
----------------------------------- -------------------- ------------------------ ---------------------
Total expenses $55,302,003 $52,968,818 $37,148,227
----------------------------------- -------------------- ------------------------ ---------------------
Net investment income $80,504,870 $82,826,268 $57,213,945
Net realized gains 203,183,788 19,281,587 46,838,127
Net unrealized gains (losses) 787,635,595 1,954,982,313 (205,241,641)
----------------------------------- -------------------- ------------------------ ---------------------
Net increase (decrease) in net
assets from operations $1,071,324,253 $2,057,090,168 $(101,189,569)
----------------------------------- -------------------- ------------------------ ---------------------
</TABLE>
7 Rental Property
The average occupancy rate for real property held by Bel Residential, consisting
of 2,681 residential units, was approximately 96% at September 30, 2000. The
average occupancy rate for real property held by Bel Communities, consisting of
5,014 residential units, was approximately 92% at September 30, 2000. The
carrying value of real property owned by the Fund through Bel Residential and
Bel Communites at September 30, 2000 is as follows:
Land $ 62,047,686
Buildings, improvements and other depreciable assets 294,024,475
Accumulated depreciation (9,475,172)
-------------
Carrying value $346,596,989
-------------
-------------
8 Cancelable Interest Rate Swap Agreements
The Fund may enter into cancelable interest rate swap agreements in connection
with its investments in partnership preference units 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, 2000, the
Fund has entered into cancelable interest rate swap agreements with Merrill
Lynch Capital Services, Inc. (MLCS) with respect to each of its holdings of
partnership preference units and the associated borrowings. The Fund has the
right to terminate the interest rate swap agreements beginning in the first half
of 2003, at dates corresponding approximately to the initial call dates of the
partnership preference units held by the Fund.
15
<PAGE>
<TABLE>
Unrealized
Notional Initial Appreciation/ Unrealized
Amount Optional (Depreciation) Appreciation
Effective (000's Fixed Floating Termination Maturity At September At December 31,
Date omitted) Rate Rate Date Date 30, 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2/98 $60,000 6.72% Libor+.45% 2/03 2/05 $ - $ 2,190,325
2/98 120,000 6.715% Libor+.45% 2/03 2/05 2,887,854 4,404,500
4/98 50,000 6.84% Libor+.45% 2/03 2/05 1,004,870 1,579,937
4/98 150,000 6.835% Libor+.45% 4/03 4/05 3,103,542 4,983,531
6/98 20,000 6.67% Libor+.45% 6/03 2/05 485,226 747,192
6/98 75,000 6.68% Libor+.45% 6/03 2/05 1,794,138 2,768,906
6/98 80,000 6.595% Libor+.45% 6/03 2/05 2,135,569 3,236,267
11/98 14,709 6.13% Libor+.45% 11/03 2/05 608,631 871,658
2/99 34,951 6.34% Libor+.45% 2/04 2/05 1,168,667 1,732,927
4/99 5,191 6.49% Libor+.45% 2/04 2/05 146,349 223,114
7/99 24,902 7.077% Libor+.45% 7/04 2/05 143,191 396,636
9/99 10,471 7.37% Libor+.45% 9/04 2/05 (59,602) 23,193
3/00 19,149 7.89% Libor+.45% 2/04 2/05 (365,614) -
3/00 70,000 7.71% Libor+.45% - 2/05 (1,447,599) -
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Total $ 11,605,222 $ 23,158,186
------------------------------------------------------------------------------------------------------------------------
</TABLE>
9 Debt
A Mortgage - 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, 2000 is as follows:
Annual Monthly
Interest Interest Balance at
Maturity Date Rate Payment* September 30, 2000
------------- -------- -------- ------------------
May 1, 2010 8.33% $781,844 $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.
Real property held by Bel Communities is financed through loans collateralized
by its real estate assets, mortgage loan deposit accounts including all
subaccounts thereunder, and an assignment of certain leases and rents. Balances
at September 30, 2000 are as follows:
Annual Principal and Balance at
Interest Interest September 30,
Maturity Date Rate Payment 2000
------------- -----------------------------------------------
October 1, 2010 8.54% $ 540,643 $ 70,054,090
October 1, 2010 8.53% 594,518 77,105,929
----------------------------
$1,135,161 $147,160,019
----------------------------
16
<PAGE>
The maturities of mortgages for the five years subsequent to September 30, 2000
are as follows:
Years Ending September 30, Amount
-------------------------- ------
2001 $ 1,009,031
2002 1,187,898
2003 1,291,121
2004 1,405,729
2005 1,530,510
Thereafter 253,366,247
------------
$259,790,536
B Credit Facility--Belair Capital has obtained a $790,000,000 Credit Facility
with a term of seven years 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 Bel Communities. 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, 2000, and December 31, 1999, amounts outstanding under the Credit
Facility totaled $710,000,000 and $655,000,000, respectively.
10 Management Fee and Other Transactions with Affiliates
The Fund and the Portfolio have engaged Boston Management and Research (BMR), a
wholly-owned subsidiary of Eaton Vance Management (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, 2000, and September 30, 1999
the advisory fee applicable to the Portfolio was 0.43% (annualized) and 0.45%
(annualized), respectively, of average daily net assets for such periods.
Belvedere Capital's allocated portion of the advisory fee was $28,049,372 of
which $7,270,843 was allocated to the Fund, for the nine months ended September
30, 2000, and $16,474,285, of which $6,903,616 was allocated to the Fund, for
the nine months ended September 30, 1999. 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 (including 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
17
<PAGE>
money borrowed) and 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 (which consist of all assets of BREC minus the sum 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.). The advisory fee
payable by the Portfolio in respect of Belair Capital's indirect investment in
the Portfolio is credited toward Belair Capital's advisory and administrative
fee payment. For the nine months ended September 30, 2000 and September 30, 1999
the advisory and administrative fee payable to BMR by the Fund, less the Fund's
allocated share of the Portfolio's advisory fee, totaled $5,478,299 and
$4,847,333, respectively.
Eaton Vance Management (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 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 $9,645,180 and $5,476,924 for the nine months ended September 30, 2000
and September 30, 1999, respectively, of which $2,491,960 and $2,296,651 was
allocated to Belair Capital for the respective periods. 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, 2000 and
September 30, 1999 the servicing fee paid directly by Belair Capital totaled
$640,187 and $692,017, respectively. Of the amounts allocated to and incurred by
the Fund, for the nine months ended September 30, 2000 and September 30, 1999,
$3,132,147 and $1,835,305, respectively, were paid to subagents.
Equity Residential Properties Management Corp. (ERPM), an affiliate of the Bel
Residential minority shareholder, provides day to day management of Bel
Residential pursuant to a management agreement which expires June 30, 2010 (Note
1B). The management agreement provides for a management fee in the amount of 4%
of gross collections and allows for reimbursement to ERPM of payroll expenses
incurred by ERPM. For the period from inception, June 30, 2000, to September 30,
2000, Bel Residential paid or accrued management fees and payroll to ERPM
amounting to $227,050 and $587,017, respectively.
Bel Communities indirectly holds real property through two operating
partnerships. Each operating partnership has entered into or assumed a
management agreement with Alliance Residential Management, LLC, an affiliate of
the Bel Communities minority shareholder (Note 1B), for a period of 10 years. If
neither BREC nor the Bel Communities minority shareholder gives notice to
terminate, the agreement automatically renews from year to year. The management
agreements provide for a management fee in the amount of 4% of gross collections
and allows for reimbursement to the manager for all direct expenses incurred by
the manager for managing the Bel Communities properties. For the period from
inception, September 8, 2000, to September 30, 2000, Bel Communities paid or
accrued management fees to Alliance Residential Management, LLC amounting to
$75,062.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Increases and decreases in Belair Capital's net asset value per share are
derived from net investment income, and realized and unrealized gains and losses
on Belair Capital's interest (through Belvedere Capital) in the Portfolio, real
estate investments held through BREC and any direct investments of Belair
Capital. Expenses of Belair Capital include its pro-rata share of the expenses
of Belvedere Capital, and indirectly the Portfolio, as well as the actual and
accrued expenses of Belair Capital and BREC, including its subsidiaries Bel
Residential and Bel Communities. Belair Capital's most significant expense is
interest incurred on borrowings incurred in connection with its real estate
investments. Belair Capital'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 Belair Capital'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 the securities holding 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 Belair Capital 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. The Portfolio is
registered as a diversified management investment company under the Investment
Company Act of 1940, as amended, and makes filings with the Securities and
Exchange Commission that include information about its investment holdings.
Through the impact of interest rates on the valuation of Belair Capital's
investments in Partnership Preference Units through BREC and its positions in
interest rate swap agreements, the performance of Belair Capital is also
affected by movements in interest rates, and particularly, changes in credit
spread relationships. On a combined basis, Belair Capital's Partnership
Preference Units 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, 2000 AND THE NINE
MONTHS ENDED SEPTEMBER 30, 2000
The Fund achieved total return performance of 2.5% for the quarter ended
September 30, 2000. This return reflects an increase in the Fund's net asset
value per share from $138.55 to $141.98. 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 -1.0% over the same period. The
Fund had a total return of -8.7% for the quarter ended September 30, 1999.
During the third quarter of 2000, U.S. equity market leadership was concentrated
in defensive sectors such as utilities, financial services, aerospace/defense
and energy. Stocks viewed as particularly vulnerable to a slowing economy,
including most retail and basic industries stocks were generally weak.
Technology stocks were also generally weak, as a number of leading technology
19
<PAGE>
companies reported slowdowns or disappointment in their business results and
investors became more sensitized to valuation and risk considerations. A number
of speculative technology and Internet-related stocks saw their stock prices
plunge during the third quarter. In this more cautious environment the Fund
benefited from Tax-Managed Growth Portfolio's valuation-sensitive investment
approach and broad diversification.
In the fixed income markets, the third quarter saw declining interest rates on
benchmark long-term government bonds. Spreads versus Treasuries for long-term
corporate bonds widened to reflect credit concerns in a weakening economy. Real
estate fixed income securities were relatively strong performers. The
performance of the Fund during the quarter was favorably impacted by changes in
valuation of its holdings of real estate partnership preference units.
The Fund achieved total return performance of 7.8% for the nine months ended
September 30, 2000. This return reflects an increase in the Fund's net asset
value per share from $131.72 to $141.98. For comparison, the S&P 500, an
unmanaged index of large capitalization stocks commonly used as a benchmark for
U.S. stocks, had a total return of -1.4% over the same period. The Fund had a
total return of -0.2% for the nine months ended September 30, 1999.
During the nine months ended September 30, 2000, the U.S. equity markets were
lead by health care, financial services, utilities and energy stocks. Value
stocks outperformed growth stocks. Retail stocks and basic industry stocks were
hurt by increased concerns about a slowing economy. After a very strong start to
the year, technology stocks generally turned weaker. Particularly during the
third quarter, a number of leading technology companies reported business
slowdowns or disclosed reduced expectations for future growth. As the year has
progressed, stock investors have become more risk averse. A large number of
speculative technology and Internet-related stocks saw plunging stock prices in
the second and third quarters. In this more cautious environment the Fund
benefited from Tax-Managed Growth Portfolio's valuation-sensitive investment
approach and broad diversification.
In the fixed income markets, the first nine months of 2000 saw declining
interest rates on benchmark long-term government bonds. Credit spreads for
corporate issues widened appreciably to reflect increased concerns about credit
issues in a weakening economy. Real estate fixed income securities were strong
performers compared to fixed income issues in general. The Fund's investments in
real estate partnership preference units and associated borrowings had a
positive impact on the Fund's performance during the first nine months of 2000.
Liquidity and Capital Resources
As of September 30, 2000, Belair Capital had outstanding borrowings of $710.0
million under the Credit Facility established with Merrill Lynch International
Bank Limited, the term of which extends until February 6, 2005. Belair Capital
has available under the Credit Facility $80.0 million to meet short-term
liquidity need and for other purposes.
Belair Capital 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, 2000, the Portfolio had cash and short-term investments totaling
$767.6 million. The Portfolio participates in a $150 million multi-fund
20
<PAGE>
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, 2000, and, as
of that date, the net assets of the Portfolio totaled $18,259.4 million. To
ensure liquidity for investors in the Portfolio, the Portfolio may not invest
more than 15% of its net assets in illiquid assets. As of September 30, 2000,
restricted securities, which are considered illiquid, constituted 2.3% of the
net assets of the Portfolio.
The Partnership Preference Units held by BREC are not registered under the
Securities Act and are subject to substantial restrictions on transfer. As such,
they are considered illiquid.
BREC's investments in real estate apart from Partnership Preference Units is
also considered illiquid. Bel Residential and Bel Communities have been
structured as investments of at least ten years (until 2010), 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 RISKS
The value of Fund shares may not increase or may decline. The performance of
Belair Capital fluctuates. There can be no assurance that the performance of
Belair Capital will match that of the United States stock market or that of
other equity funds. In managing the Portfolio for the 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 Belair
Capital's, exposure to losses during stock market declines may nonetheless be
higher than funds that do not follow a general policy of avoiding sales of
highly-appreciated securities.
The Portfolio invests in securities issued by foreign companies and Belair
Capital 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.
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 to enhance returns. Such transactions may
include, without limitation, the purchase and sale of stock index futures
21
<PAGE>
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. Belair Capital utilizes interest rate swap agreements to fix the
cost of its borrowings over the term of the Credit Facility. In the future,
Belair Capital may use other interest rate hedging arrangements (such as caps,
floors and collars) to fix or limit borrowing costs. The use of these investment
techniques is a specialized activity that may be considered speculative and
which can expose Belair Capital 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. Belair Capital'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 Belair Capital 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 Belair
Capital or the Portfolio fail to meet these requirements, the counterparty or
broker may liquidate positions of Belair Capital 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 ninety 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 transaction on terms satisfactory to Belair
Capital or the Portfolio. Belair Capital's and the Portfolio's ability to enter
into such transactions may also be limited by covenants under the Credit
Facility, the federal margin regulations and other laws and regulations. The
Portfolio's use of certain investment techniques may be constrained because the
Portfolio is a diversified, open-end management investment company registered
under the 1940 Act and because other investors in the Portfolio are regulated
investment companies under Subchapter M of the Code. Moreover, Belair Capital
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.
Although intended to add to returns, the borrowing of funds to purchase
Partnership Preference Units through BREC exposes Belair Capital to the risk
that the returns achieved on the Partnership Preference Units will be lower than
the cost of borrowing to purchase such assets and that the leveraging of Belair
Capital to buy such assets will therefore diminish the returns to be achieved by
Belair Capital as a whole. In addition, there is a risk that the availability of
22
<PAGE>
financing will be interrupted at some future time, requiring Belair Capital to
sell assets to repay outstanding borrowings or a portion thereof. It may be
necessary to make such sales at unfavorable prices. Belair Capital's obligations
under the Credit Facility and mortgages are secured by a pledge of its assets.
In the event of default, a lender could elect to sell assets of Belair Capital
without regard to consequences of such action for shareholders. The rights of a
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, Belair Capital 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, Belair Capital would not be able to honor
redemption requests or make cash distributions.
The Partnership Preference Units held by Belair Capital through its investment
in BREC are subject to restrictions on transfer, including, among other
restrictions, limitations on the manner of resale and the requirement that the
general partner of the issuer consent to transfers. In addition, there is no
active secondary market for any Partnership Preference Units that BREC holds.
Accordingly, BREC's investments in Partnership Preference Units are illiquid.
The success of BREC's investments in Partnership Preference Units depends in
part on many factors related to the real estate market and to the issuing
partnerships that may affect such partnerships' profitability and their ability
to make distributions to holders of Partnership Preference Units. 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. Although BREC's
investments in Partnership Preference Units are, to some degree, insulated from
risk by virtue of their senior position relative to other equity interests in
the issuing partnerships and by their diversification across a range of property
types and geographic regions, the above-referenced factors can substantially
affect the value and marketability of such investments over time. There can be
no assurance that the investments in Partnership Preference Units will be an
economic success.
The valuations of Partnership Preference Units held by Belair Capital 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 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. As described in Note 7 to the
Fund's Consolidated Financial Statements, the Fund has entered into interest
rate swap contracts to hedge interest rate risks. Fluctuation 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
Belair Capital with respect to its borrowings under the Credit Facility.
Fluctuations in the value of Partnership Preference Units derived from other
factors besides general interest rate movements (including issuer-specific and
sector-specific credit 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 Belair Capital. Changes
in the valuation of the Partnership Preference Units not offset by changes in
the valuation of interest rate swap agreements or other interest rate hedges
entered into by Belair Capital will cause the performance of Belair Capital to
deviate from the performance of the Portfolio.
23
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While Belair Capital's manager intends that BREC's investments in Bel
Residential and Bel Communities will reduce overall portfolio risk and
volatility and contribute to returns over time, these investments expose Belair
Capital to certain additional risks as well. The performance of BREC's
investment may be influenced by decisions which Bel Residential's minority
shareholder and Bel Communities minority shareholder may make on behalf of Bel
Residential and Bel Communities, respectively, and potential changes in the
submarkets in which Bel Residential's and Bel Communities' buildings are
located. The debt of Bel Residential and Bel Communities 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. Other factors bearing on the value of BREC's real estate
investments, include, without limitation, general economic conditions, the
supply and demand of comparable real properties, fluctuations in rental rates
and operating costs, exposure to adverse environmental conditions and losses
from casualty or condemnation, government rules and regulations, and acts of
God. There can be no assurance that BREC's real estate investments will be an
economic success.
Over time, the performance of Belair Capital can be expected to be more volatile
than the performance of the Portfolio.
24
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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. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
21 List of subsidiaries
27 Financial Data Schedules
(b) Reports on Form 8-K
None.
25
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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, 2000.
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
26
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EXHIBIT INDEX
21 List of subsidiaries
27 Financial Data Schedules
27
