10-Q 1 belair10q.txt BELAIR CAPITAL FUND LLC 10-Q FOR THE PERIOD ENDED 9/30/03 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 September 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 September 30, 2003 (Unaudited) and December 31, 2002 3 Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended September 30, 2003 and 2002 and for the Nine Months Ended September 30, 2003 and 2002 4 Condensed Consolidated Statements of Changes in Net Assets (Unaudited) for the Nine Months Ended September 30, 2003 and 2002 6 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2003 and 2002 7 Financial Highlights (Unaudited) for the Nine Months Ended September 30, 2003 9 Notes to Condensed Consolidated Financial Statements as of September 30, 2003 (Unaudited) 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 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 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 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 September 30, 2003 December 31, (Unaudited) 2002 ------------------ ------------- Assets: Investment in Belvedere Capital Fund Company LLC (Belvedere Capital) $ 1,458,096,610 $ 1,361,415,813 Investment in Partnership Preference Units 344,676,082 391,195,982 Investment in other real estate 163,475,077 157,492,935 Short-term investments 45,026,476 3,426,881 ---------------- ---------------- Total investments $ 2,011,274,245 $ 1,913,531,611 Cash 4,955,907 16,067,430 Escrow deposits - restricted 80,503 1,073,943 Receivable for investments sold - 4,952,435 Dividends and interest receivable 1,786,885 5,327,452 Other assets 1,163,851 1,285,939 ---------------- ---------------- Total assets $ 2,019,261,391 $ 1,942,238,810 ---------------- ---------------- Liabilities: Loan payable - Credit Facility $ 503,000,000 $ 540,769,000 Mortgage payable 112,630,517 112,630,517 Open interest rate swap agreements, at value 8,503,915 21,367,938 Swap interest payable 1,417,600 5,029,500 Security deposits 384,847 403,844 Accrued expenses: Interest expense 940,424 1,787,051 Property taxes 1,342,615 705,965 Other expenses and liabilities 508,599 706,227 Minority interests in controlled subsidiaries 9,816,565 13,031,112 ---------------- ---------------- Total liabilities $ 638,545,082 $ 696,431,154 ---------------- ---------------- Net assets $ 1,380,716,309 $ 1,245,807,656 ---------------- ---------------- Shareholders' Capital $ 1,380,716,309 $ 1,245,807,656 ---------------- ---------------- Shares outstanding 13,018,644 13,485,660 ---------------- ---------------- Net asset value and redemption price per Share $ 106.06 $ 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 Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2003 2002 2003 2002 ------------- ------------- ------------- ------------- Investment Income: Dividends allocated from Belvedere Capital (net of foreign taxes of $43,881, $42,418, $195,924 and $161,697, respectively) $ 5,242,711 $ 4,726,239 $ 15,215,372 $ 14,646,879 Interest allocated from Belvedere Capital 43,444 108,312 293,296 387,454 Expenses allocated from Belvedere Capital (2,243,700) (2,186,364) (6,368,209) (7,449,533) --------------- --------------- ------------- --------------- Net investment income allocated from Belvedere Capital $ 3,042,455 $ 2,648,187 $ 9,140,459 $ 7,584,800 Dividends from Partnership Preference Units 7,776,686 9,400,672 27,085,587 27,538,520 Rental income 5,408,027 5,644,042 16,475,632 24,778,816 Interest 82,837 16,150 192,285 82,982 --------------- --------------- ------------- --------------- Total investment income $ 16,310,005 $ 17,709,051 $ 52,893,963 $ 59,985,118 --------------- --------------- ------------- --------------- Expenses: Investment advisory and administrative fees $ 1,371,845 $ 1,302,584 $ 4,008,918 $ 4,462,753 Property management fees 216,118 226,923 660,784 998,029 Servicing fees 136,472 103,797 384,192 420,176 Interest expense on mortgages 2,386,112 2,386,112 7,158,334 9,795,166 Interest expense on Credit Facility 2,160,493 3,261,594 7,131,846 9,976,826 Interest expense on swap agreements 2,444,721 7,767,646 14,429,097 22,654,696 Property and maintenance expenses 1,677,834 1,579,825 4,795,594 6,119,951 Property taxes and insurance 611,626 821,827 2,118,180 3,174,822 Amortization of deferred expenses - 27,665 9,099 82,094 Miscellaneous 200,650 165,289 510,791 569,799 --------------- --------------- ------------- --------------- Total expenses $ 11,205,871 $ 17,643,262 $ 41,206,835 $ 58,254,312 --------------- --------------- ------------- --------------- Net investment income before minority interest in net income of controlled subsidiary $ 5,104,134 $ 65,789 $ 11,687,128 $ 1,730,806 Minority interest in net income of controlled subsidiary (3,159) (171,959) (324,910) (1,186,621) --------------- --------------- ------------- --------------- Net investment income (loss) $ 5,100,975 $ (106,170) $ 11,362,218 $ 544,185 --------------- --------------- ------------- ---------------

See notes to unaudited condensed consolidated financial statements 4 BELAIR CAPITAL FUND LLC Condensed Consolidated Statements of Operations (Unaudited) (Continued) Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, Septemer 30, 2003 2002 2003 2002 ------------- ------------- ------------- ------------ Realized and Unrealized Gain (Loss) Net realized gain (loss) - Investment transactions from Belvedere Capital (identified cost basis) $ 1,035,691 $ (29,423,656) $ (1,155,495) $ (170,307,349) Investment transactions in Partnership Preference Units (identified cost basis) 420,584 - 420,676 (614,855) Investment transactions in other real estate - - - (9,540,011) --------------- ---------------- -------------- --------------- Net realized gain (loss) $ 1,456,275 $ (29,423,656) $ (734,819) $ (180,462,215) --------------- ---------------- -------------- --------------- Change in unrealized appreciation (depreciation) - Investment in Belvedere Capital (identified cost basis) $ 29,558,954 $ (210,483,891) $ 134,301,886 $ (271,842,429) Investments in Partnership Preference Units (identified cost basis) (1,256,112) 13,987,308 25,882,600 23,381,240 Investments in other real estate (net of minority interests in unrealized (loss) gain of controlled subsidiaries of $(3,691,876), $202,776, $(3,521,856) and $(11,527), respectively) 3,755,474 (202,776) 3,992,468 (2,907,245) Interest rate swap agreements 2,407,883 (47,205) 12,864,023 2,083,291 --------------- ---------------- -------------- --------------- Net change in unrealized appreciation (depreciation) $ 34,466,199 $ (196,746,564) $ 177,040,977 $ (249,285,143) --------------- ---------------- -------------- --------------- Net realized and unrealized gain (loss) $ 35,922,474 $ (226,170,220) $ 176,306,158 $ (429,747,358) --------------- ---------------- -------------- --------------- Net increase (decrease) in net assets from operations $ 41,023,449 $ (226,276,390) $ 187,668,376 $ (429,203,173) =============== ================ ============== ===============

See notes to unaudited condensed consolidated financial statements 5 BELAIR CAPITAL FUND LLC Condensed Consolidated Statements of Changes in Net Assets (Unaudited) Nine Months Nine Months Ended Ended September 30, September 30, 2003 2002 ------------- ------------- Increase (Decrease) in Net Assets: Net investment income $ 11,362,218 $ 544,185 Net realized loss from investment transactions (734,819) (180,462,215) Net change in unrealized appreciation (depreciation) of investments 177,040,977 (249,285,143) ---------------- ------------------ Net increase (decrease) in net assets from operations $ 187,668,376 $ (429,203,173) ---------------- ------------------ 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 (49,108,579) (68,437,211) ---------------- ------------------ Net decrease in net assets from Fund Share transactions $ (46,151,750) $ (68,437,211) ---------------- ------------------ Distributions - Distributions to Shareholders $ (6,607,973) $ - Special distributions to Shareholders - (1,188) ---------------- ------------------ Total distributions $ (6,607,973) $ (1,188) ---------------- ------------------ Net increase (decrease) in net assets $ 134,908,653 $ (497,641,572) Net assets: At beginning of period $ 1,245,807,656 $ 1,687,637,826 ---------------- ------------------ At end of period $ 1,380,716,309 $ 1,189,996,254 ================ ==================

See notes to unaudited condensed consolidated financial statements 6 BELAIR CAPITAL FUND LLC Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Nine Months Ended Ended September 30, September 30, 2003 2002 ------------- ------------- Cash Flows From (For) Operating Activities - Net increase (decrease) in net assets from operations $ 187,668,376 $ (429,203,173) Adjustments to reconcile net increase (decrease) in net assets from operations to net cash flows from operating activities - Net investment income allocated from Belvedere Capital (9,140,459) (7,584,800) Decrease (increase) in escrow deposits 993,440 (10,837) Decrease in receivable for investments sold 4,952,435 - Increase in interest receivable from other real estate (106,923) - Decrease (increase) in other assets 122,088 (360,657) Decrease (increase) in dividends and interest receivable 3,540,567 (3,680,860) (Decrease) increase in interest payable for open swap agreements (3,611,900) 358,094 Decrease in security deposits, accrued interest and accrued other expenses and liabilities (1,063,252) (180,114) Decrease in cash in connection with sale of majority interest in controlled subsidiary - (2,429,734) Increase in accrued property taxes 636,650 29,283 Purchases of Partnership Preference Units - (30,488,829) Proceeds from sale of investments in other real estate - 32,965,765 Proceeds from sales of Partnership Preference Units 68,845,584 18,708,345 Improvements to rental property (1,427,016) (1,209,566) Net (increase) decrease in investment in Belvedere Capital (3,500,000) 13,256,357 Decrease in minority interest - (52,500) (Increase) decrease in short-term investments (41,599,595) 3,655,660 Minority interest in net income of controlled subsidiary 324,910 1,186,621 Net realized loss from investment transactions 734,819 180,462,215 Net change in unrealized (appreciation) depreciation of investments (177,040,977) 249,285,143 -------------- --------------- Net cash flows from operating activities $ 30,328,747 $ 24,706,413 -------------- --------------- Cash Flows From (For) Financing Activities - Repayment of Credit Facility $ (37,769,000) $ (21,000,000) Payments for Fund Shares redeemed (2,526) (4,530,073) Distributions paid to Shareholders (3,651,144) - Distributions paid to minority shareholders (17,600) (1,355,983) -------------- --------------- Net cash flows for financing activities $ (41,440,270) $ (26,886,056) -------------- --------------- Net decrease in cash $ (11,111,523) $ (2,179,643) Cash at beginning of period $ 16,067,430 $ 6,540,394 -------------- --------------- Cash at end of period $ 4,955,907 $ 4,360,751 ============== ===============

See notes to unaudited condensed consolidated financial statements 7 BELAIR CAPITAL FUND LLC Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued) Nine Months Nine Months Ended Ended September 30, September 30, 2003 2002 ------------- ------------- Supplemental Disclosure and Non-cash Investing and Financing Activities - Interest paid on loan - Credit Facility $ 7,780,719 $ 10,249,157 Interest paid on swap agreements $ 18,040,997 $ 22,296,602 Interest paid on mortgages $ 7,036,592 $ 10,423,855 Market value of securities distributed in payment of redemptions $ 49,106,053 $ 63,437,211 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 other real estate $ - $ 169,610,451 Mortgage disposed of in conjunction with sale of other real estate $ - $ 115,850,000

See notes to unaudited condensed consolidated financial statements 8 BELAIR CAPITAL FUND LLC as of September 30, 2003 Condensed Consolidated Financial Statements (Continued) Financial Highlights (Unaudited) For the Nine Months Ended September 30, 2003 ------------------------------------------------------------------------------------------------------------------------------------ Net asset value - Beginning of period $ 92.380 ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) from operations ------------------------------------------------------------------------------------------------------------------------------------ Net investment income (6) $ 0.856 Net realized and unrealized gain 13.314 ------------------------------------------------------------------------------------------------------------------------------------ Total income from operations $ 14.170 ------------------------------------------------------------------------------------------------------------------------------------ Distributions ------------------------------------------------------------------------------------------------------------------------------------ Distributions to Shareholders $ (0.490) ------------------------------------------------------------------------------------------------------------------------------------ Total distributions $ (0.490) ------------------------------------------------------------------------------------------------------------------------------------ Net asset value - End of period $ 106.060 ------------------------------------------------------------------------------------------------------------------------------------ Total Return (1) 15.40% ------------------------------------------------------------------------------------------------------------------------------------ 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) 0.59%(8) 0.40%(8) Operating expenses (7) 0.63%(8) 0.43%(8) Belair Capital Fund LLC Expenses Interest and other borrowing costs (4) 2.21%(8) 1.51%(8) Investment advisory and administrative fees, servicing fees and other Fund operating expenses (3)(4) 1.15%(8) 0.79%(8) ----------------------------------------------------- Total expenses 4.58%(8) 3.13%(8) Net investment income 1.17%(8) 0.79%(8) ------------------------------------------------------------------------------------------------------------------------------------ Supplemental Data ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (000's omitted) $ 1,380,716 Portfolio Turnover of Tax-Managed Growth Portfolio (the Portfolio) 14% ------------------------------------------------------------------------------------------------------------------------------------

(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 September 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 nine months ended September 30, 2003 and September 30, 2002: Nine Months Ended Nine Months Ended Investment Transaction September 30, 2003 September 30, 2002 -------------------------------------------------------------------------------------------------------------- Increases in investment in Belvedere Capital $ 4,000,000 $ 77,481,268 Decreases in investment in Belvedere Capital $ 49,606,053 $ 154,594,643 Purchases of Partnership Preference Units $ - $ 30,488,829 Sales of Partnership Preference Units (1) $ 68,845,584 $ 18,708,345 Sales of other real estate (2) $ - $ 32,965,765 --------------------------------------------------------------------------------------------------------------

(1) Sales of Partnership Preference Units during the nine months ended September 30, 2003 and 2002 include Partnership Preference Units sold to other funds sponsored by Eaton Vance Management (Eaton Vance) for which a loss of $771,250 and $775,295 was recognized, respectively. (2) During the nine months ended September 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 nine months ended September 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 (valued at $2,070,580 as of September 30, 2003) 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 nine months ended September 30, 2003 and September 30, 2002, including allocations of income and expenses for the respective periods then ended: Nine Months Ended Nine Months Ended September 30, 2003 September 30, 2002 ---------------------------------------------------------------------------------------------------------------------- Belvedere Capital's interest in the Portfolio (1) $ 9,775,572,306 $ 8,043,904,602 The Fund's investment in Belvedere Capital (2) $ 1,458,096,610 $ 1,308,342,688 Income allocated to Belvedere Capital from the Portfolio $ 102,346,416 $ 88,799,143 Income allocated to the Fund from Belvedere Capital $ 15,508,668 $ 15,034,333 Expenses allocated to Belvedere Capital from the Portfolio $ 31,352,609 $ 32,657,939 Expenses allocated to the Fund from Belvedere Capital $ 6,368,209 $ 7,449,533 Realized loss allocated to Belvedere Capital from the Portfolio $ (10,803,952) $ (613,666,720) Realized loss allocated to the Fund from Belvedere Capital $ (1,155,495) $ (170,307,349) Change in unrealized appreciation (depreciation) allocated to Belvedere Capital from the Portfolio $ 898,392,188 $ (2,038,582,077) Change in unrealized appreciation (depreciation) allocated to the Fund from Belvedere Capital $ 134,301,886 $ (271,842,429) ----------------------------------------------------------------------------------------------------------------------

(1) As of September 30, 2003 and 2002, the value of Belvedere Capital's interest in the Portfolio represents 62.1% and 58.6% of the Portfolio's net assets, respectively. (2) As of September 30, 2003 and 2002, the Fund's investment in Belvedere Capital represents 14.9% and 16.3% of Belvedere Capital's net assets, respectively. A summary of the Portfolio's Statement of Assets and Liabilities at September 30, 2003, December 31, 2002 and September 30, 2002 and its operations for the nine months ended September 30, 2003, for the year ended December 31, 2002 and for the nine months ended September 30, 2002 follows: September 30, December 31, September 30, 2003 2002 2002 ------------------------------------------------------------------ Investments, at value $ 15,720,495,292 $ 14,544,149,182 $ 13,713,440,772 Other assets 22,166,551 70,073,039 59,906,476 ------------------------------------------------------------------------------------------------------- Total assets $ 15,742,661,843 $ 14,614,222,221 $ 13,773,347,248 Total liabilities 241,245 42,700,633 35,785,860 ------------------------------------------------------------------------------------------------------- Net assets $ 15,742,420,598 $ 14,571,521,588 $ 13,737,561,388 ======================================================================================================= Dividends and interest $ 166,725,898 $ 213,292,082 $ 155,639,717 ------------------------------------------------------------------------------------------------------- Investment adviser fee $ 49,370,631 $ 71,564,552 $ 55,373,624 Other expenses 1,730,334 2,577,489 1,956,361 ------------------------------------------------------------------------------------------------------- Total expenses $ 51,100,965 $ 74,142,041 $ 57,329,985 ------------------------------------------------------------------------------------------------------- Net investment income $ 115,624,933 $ 139,150,041 $ 98,309,732 Net realized losses (17,942,587) (459,996,840) (503,906,340) Net change in unrealized appreciation (depreciation) 1,449,036,078 (3,312,547,564) (4,125,048,140) ------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets from operations $ 1,546,718,424 $ (3,633,394,363) $ (4,530,644,748) -------------------------------------------------------------------------------------------------------

11 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 September 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. Notional Initial Unrealized Unrealized Amount Optional Depreciation Depreciation (000's Fixed Floating Termination Maturity At September 30, At December 31, omitted) Rate Rate Date Date 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 95,465 553,844 34,951 6.34% LIBOR+0.45% 2/04 2/05 642,739 1,729,610 5,191 6.49% LIBOR+0.45% 2/04 2/05 102,735 269,419 24,902 7.077% LIBOR+0.45% 7/04 2/05 1,105,165 1,906,989 10,471 7.37% LIBOR+0.45% 9/04 2/05 584,097 922,144 19,149 7.89% LIBOR+0.45% 2/04 2/05 467,945 1,284,855 70,000 7.71% LIBOR+0.45% 2/05 2/05 5,505,769 7,625,973 ---------------------------------------------------------------------------------------------------------------------- $ 8,503,915 $ 21,367,938 ----------------------------------------------------------------------------------------------------------------------

* Agreement was terminated on the Initial Optional Termination Date. On October 1, 2003, new interest rate swap agreements were entered into to fix the cost of a portion of Belair Capital's borrowings under the Credit Facility (as defined in Note 5 below) established on July 15, 2003. At the same time all swap agreements outstanding on September 30, 2003 were terminated, resulting in realized losses of $8,499,438. The table below identifies the terms of the interest rate swap agreements effective on October 1, 2003. Notional Initial Amount Optional (000's Fixed Floating Termination Final Termination omitted) Rate Rate Date Date -------------------------------------------------------------------------------------------------- $ 20,000 4.045% LIBOR+0.30% - 6/10 95,952 5.05% LIBOR+0.30% 2/04 6/10 61,500 4.865% LIBOR+0.30% 7/04 6/10 75,000 4.795% LIBOR+0.30% 9/04 6/10 42,000 4.69% LIBOR+0.30% 2/05 6/10 49,000 4.665% LIBOR+0.30% 3/05 6/10 35,330 4.18% LIBOR+0.30% 7/09 6/10 --------------------------------------------------------------------------------------------------

12 5 Debt Credit Facility - On July 15, 2003, Belair Capital refinanced the existing credit facility with Merrill Lynch International Bank Limited with two new credit arrangements (collectively, the Credit Facility) totaling $615,000,000. The Credit Facility has a seven-year maturity and will expire on June 25, 2010. Belair Capital's obligations under the 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 plus 0.30% per annum. As of September 30, 2003, outstanding borrowings under this credit arrangement totaled $503,000,000. 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 plus 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 September 30, 2003, there were no outstanding borrowings under this credit arrangement. There was a letter of credit issued in the amount of $1,493,776 at September 30, 2003. 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 $8,103, for the nine months ended September 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 September 30, 2002, Belair Real Estate's controlled subsidiaries also included Katahdin (for the period from January 1, 2002 through May 21, 2002). Belair Capital evaluates performance of the reportable segments based on the net increase (decrease) in net assets from operations of the respective segment, which includes net investment income (loss), net realized gain (loss) and unrealized appreciation (depreciation). The accounting policies of the reportable segments are the same as those for 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 SEPTEMBER 30, 2003 PORTFOLIO* ESTATE TOTAL ------------------------------------------------------ --------------------- ------------------- -------------------- Revenue $ 3,042,455 $ 13,235,387 $ 16,277,842 Interest expense on mortgages - (2,386,112) (2,386,112) Interest expense on Credit Facility - (2,024,360) (2,024,360) Interest expense on swap agreements - (2,444,721) (2,444,721) Operating expenses (601,236) (3,418,353) (4,019,589) Minority interest in net income of controlled subsidiary - (3,159) (3,159) ------------------------------------------------------ --------------------- ------------------- -------------------- NET INVESTMENT INCOME $ 2,441,219 $ 2,958,682 $ 5,399,901 Net realized gain 1,035,691 420,584 1,456,275 Change in unrealized appreciation (depreciation) 29,558,954 4,907,245 34,466,199 ------------------------------------------------------ --------------------- ------------------- -------------------- NET INCREASE IN NET ASSETS FROM OPERATIONS OF REPORTABLE SEGMENTS $ 33,035,864 $ 8,286,511 $ 41,322,375 ------------------------------------------------------ --------------------- ------------------- -------------------- 13 FOR THE THREE MONTHS ENDED TAX-MANAGED GROWTH REAL SEPTEMBER 30, 2002 PORTFOLIO* ESTATE TOTAL ------------------------------------------------------ --------------------- ------------------- -------------------- Revenue $ 2,648,187 $ 15,059,788 $ 17,707,975 Interest expense on mortgages - (2,386,112) (2,386,112) Interest expense on Credit Facility - (3,196,362) (3,196,362) Interest expense on swap agreements - (7,767,646) (7,767,646) Operating expenses (521,904) (3,520,866) (4,042,770) Minority interest in net income of controlled subsidiary - (171,959) (171,959) ------------------------------------------------------ --------------------- ------------------- -------------------- NET INVESTMENT INCOME (LOSS) $ 2,126,283 $ (1,983,157) $ 143,126 Net realized loss (29,423,656) - (29,423,656) Change in unrealized appreciation (depreciation) (210,483,891) 13,737,327 (196,746,564) ------------------------------------------------------ --------------------- ------------------- -------------------- NET (DECREASE) INCREASE IN NET ASSETS FROM OPERATIONS OF REPORTABLE SEGMENTS $ (237,781,264) $ 11,754,170 $(226,027,094) ------------------------------------------------------ --------------------- ------------------- -------------------- FOR THE NINE MONTHS ENDED TAX-MANAGED GROWTH REAL SEPTEMBER 30, 2003 PORTFOLIO* ESTATE TOTAL ------------------------------------------------------ --------------------- ------------------- -------------------- Revenue $ 9,140,459 $ 43,691,528 $ 52,831,987 Interest expense on mortgages - (7,158,334) (7,158,334) Interest expense on Credit Facility - (6,846,572) (6,846,572) Interest expense on swap agreements - (14,429,097) (14,429,097) Operating expenses (1,648,461) (10,243,614) (11,892,075) Minority interest in net income of controlled subsidiary - (324,910) (324,910) ------------------------------------------------------ --------------------- ------------------- -------------------- NET INVESTMENT INCOME $ 7,491,998 $ 4,689,001 $ 12,180,999 Net realized (loss) gain (1,155,495) 420,676 (734,819) Change in unrealized appreciation (depreciation) 134,301,886 42,739,091 177,040,977 ------------------------------------------------------ --------------------- ------------------- -------------------- NET INCREASE IN NET ASSETS FROM OPERATIONS OF REPORTABLE SEGMENTS $ 140,638,389 $ 47,848,768 $ 188,487,157 ------------------------------------------------------ --------------------- ------------------- -------------------- FOR THE NINE MONTHS ENDED TAX-MANAGED GROWTH REAL SEPTEMBER 30, 2002 PORTFOLIO* ESTATE TOTAL ------------------------------------------------------ --------------------- ------------------- -------------------- Revenue $ 7,584,800 $ 52,374,252 $ 59,959,052 Interest expense on mortgages - (9,795,166) (9,795,166) Interest expense on Credit Facility - (9,777,289) (9,777,289) Interest expense on swap agreements - (22,654,696) (22,654,696) Operating expenses (1,890,794) (13,243,011) (15,133,805) Minority interest in net income of controlled subsidiaries - (1,186,621) (1,186,621) ------------------------------------------------------ --------------------- ------------------- -------------------- NET INVESTMENT INCOME (LOSS) $ 5,694,006 $ (4,282,531) $ 1,411,475 Net realized loss (170,307,349) (10,154,866) (180,462,215) Change in unrealized appreciation (depreciation) (271,842,429) 22,557,286 (249,285,143) ------------------------------------------------------ --------------------- ------------------- -------------------- NET (DECREASE) INCREASE IN NET ASSETS FROM OPERATIONS OF REPORTABLE SEGMENTS $ (436,455,772) $ 8,119,889 $(428,335,883) ------------------------------------------------------ --------------------- ------------------- -------------------- 14 TAX-MANAGED GROWTH REAL AT SEPTEMBER 30, 2003 PORTFOLIO* ESTATE TOTAL ------------------------------------------------------ --------------------- ------------------- -------------------- Segment assets $ 1,458,096,610 $ 514,884,480 $1,972,981,090 Segment liabilities - 584,842,546 584,842,546 ------------------------------------------------------ --------------------- ------------------- -------------------- NET ASSETS OF REPORTABLE SEGMENTS $ 1,458,096,610 $ (69,958,066) $1,388,138,544 ------------------------------------------------------ --------------------- ------------------- -------------------- AT DECEMBER 31, 2002 ------------------------------------------------------ --------------------- ------------------- -------------------- Segment assets $ 1,366,368,248 $ 558,359,888 $1,924,728,136 Segment liabilities - 673,833,607 673,833,607 ------------------------------------------------------ --------------------- ------------------- -------------------- NET ASSETS OF REPORTABLE SEGMENTS $ 1,366,368,248 $(115,473,719) $1,250,894,529 ------------------------------------------------------ --------------------- ------------------- --------------------

* 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 NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2003 2002 ----------------- ------------------ ------------------ ----------------- Revenue: Revenue from reportable segments $ 16,277,842 $ 17,707,975 $ 52,831,987 $ 59,959,052 Unallocated revenue 32,163 1,076 61,976 26,066 ----------------- ------------------ ------------------ ----------------- TOTAL REVENUE $ 16,310,005 $ 17,709,051 $ 52,893,963 $ 59,985,118 ----------------- ------------------ ------------------ ----------------- Net increase (decrease) in net assets from operations: Net increase (decrease) in net assets from operations of reportable segments $ 41,322,375 $(226,027,094) $188,487,157 $(428,335,883) Unallocated revenue 32,163 1,076 61,976 26,066 Unallocated expenses ** (331,089) (250,372) (880,757) (893,356) ----------------- ------------------ ------------------ ----------------- TOTAL NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 41,023,449 $(226,276,390) $187,668,376 $(429,203,173) ----------------- ------------------ ------------------ -----------------

** Unallocated expenses include Belair Capital's cost to operate the Fund such as servicing fees, as well as other miscellaneous and administrative costs of Belair Capital. SEPTEMBER 30, DECEMBER 31, 2003 2002 ----------------------------------------- Net assets: Net assets of reportable segments $ 1,388,138,544 $ 1,250,894,529 Unallocated cash 1,253,825 14,074,693 Short-term investments 45,026,476 (1) 3,426,881 Other assets - 9,100 Loan payable - Credit Facility (53,576,352)(1) (22,499,768) Other liabilities (126,184) (97,779) ------------------------------------------- TOTAL NET ASSETS $ 1,380,716,309 $ 1,245,807,656 -------------------------------------------

(1) During October 2003, $31,000,000 of short-term investments was used to repay amounts outstanding under the Credit Facility. 15 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 SEPTEMBER 30, 2003 COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2002 PERFORMANCE OF THE FUND.1 The Fund's total return was 3.05% for the quarter ended September 30, 2003. This return reflects an increase in the Fund's net asset value per share from $102.92 to $106.06 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 2.65% over the same period. The performance of the Fund exceeded that of Tax-Managed Growth Portfolio (the Portfolio) by approximately 0.7% during the period. Last year, the Fund had a total return performance of -15.84% for the quarter ended September 30, 2002. This return reflected a decrease in the Fund's net asset value per share from $103.00 to $86.69 during the period. For comparison, the S&P 500 had a total return of -17.27% over the same period. The performance of the Fund trailed that of the Portfolio by approximately 0.7% during that period. PERFORMANCE OF THE PORTFOLIO. The total return of the Portfolio for the quarter ended September 30, 2003 was 2.35% compared to the 2.65% return achieved by the S&P 500 over the same period. The modest gain posted by the S&P 500 during the quarter is in sharp contrast to the worst broad market quarterly decline in this decade that was experienced in the quarter ended September 30, 2002. The Portfolio's total return for the quarter ended September 30, 2002 was -15.11%. The encouraging fiscal and monetary policies, resilient consumer spending and positive earnings momentum experienced through the first half of 2003 continued during the third quarter and contributed to the market's strength during the quarter, extending its gains for the year. The performance of the Portfolio slightly trailed the performance of the S&P 500 during the quarter ended September 30, 2003 primarily due to the Portfolio's relatively more defensive tilt and its continued underweighting of the information technology sector. Unlike a year ago when it was the worst performing sector, information technology was by far the best performing sector of the market during the quarter ended September 30, 2003. During the quarter ended September 30, 2003, the Portfolio's sector allocation remained very similar to last year's positioning relative to the market, with no major sector or industry shifts. Near the end of the quarter there was some pause in the strong momentum of higher beta stocks, helping the Portfolio's relative performance. The Portfolio's stock selection and underweighting of the telecommunication and health care sectors were particularly beneficial during the quarter ended September 30, 2003, but were not sufficient to offset the impact of the Portfolio's underweighting of information technology stocks. Boston Management and Research (Boston Management), the Portfolio's investment adviser, remained cautious in the information technology and telecommunications sectors, a comparable underweight allocation from the same period a year ago. PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate investments are held through Belair Real Estate Corporation (Belair Real Estate), a controlled subsidiary of the Fund. Real estate investments include a portfolio of income-producing preferred equity interests in operating partnerships (the Partnership Preference Units) that are affiliated with real estate investment trusts and an interest in a real estate joint venture (the Real Estate Joint Venture) that is majority-owned by Belair Real Estate. 1 Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that Fund 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. 16 During the quarter ended September 30, 2003, Belair Real Estate sold (or experienced scheduled redemptions of) certain Partnership Preference Units, recognizing gains of $0.4 million on the transactions (including sales to another investment fund advised by Boston Management). There were no gains or losses recognized during the quarter ended September 30, 2002. At September 30, 2003, the estimated fair value of the Fund's Partnership Preference Units totaled $344.7 million compared to $411.0 million at September 30, 2002, a decrease of $66.3 million or 16%. The decrease in value was principally due to fewer Partnership Preference Units held at September 30, 2003. The per unit value of the remaining Partnership Preference Units also declined slightly during the quarter. The Fund saw unrealized depreciation of the estimated fair value in its Partnership Preference Units of approximately $1.3 million during the quarter ended September 30, 2003 compared to unrealized appreciation of approximately $14.0 million for the quarter ended September 30, 2002. Dividends received from Partnership Preference Units for the quarter ended September 30, 2003 totaled $7.8 million compared to $9.4 million for the quarter ended September 30, 2002, a decrease of $1.6 million or 17%. The decrease was due to fewer Partnership Preference Units being held during the quarter ended September 30, 2003. During the quarter ended September 30, 2003, real estate operations continued to be impacted by weak multifamily market fundamentals. Rental income from real estate operations fell to $5.4 million for the quarter ended September 30, 2003 from $5.6 million for the quarter ended September 30, 2002, a decrease of $0.2 million or 4%. This decrease in rental income was principally due to increased rent concessions or reduced apartment rental rates and lower occupancy levels at properties owned by Belair Real Estate's Real Estate Joint Venture, a trend that has continued from 2002. Property operating expenses totaled $2.5 million and $2.6 million for the quarters ended September 30, 2003 and 2002, respectively, a decrease of $0.1 million or 4% (property operating expenses are before certain operating expenses of Belair Real Estate of approximately $0.9 million for both the quarter ended September 30, 2003 and the quarter ended September 30, 2002). While overall property operating expenses decreased slightly, property and maintenance expenses increased 6% and property taxes and insurance expense decreased 26%. Even though the U.S. economy showed signs of improvement during the quarter ended September 30, 2003, significant employment growth has not occurred in most markets and low interest rates have contributed to continued development of new properties. As a result, Boston Management, Belair Real Estate's manager, expects that real estate operating results for Belair Real Estate's Real Estate Joint Venture in 2003 will continue to be modestly below the levels of 2002. At September 30, 2003, the estimated fair value of the real properties held through Belair Real Estate was $159.4 million compared to $156.8 million at September 30, 2002, an increase of $2.6 million or 2%. The modest increase in estimated real property values at September 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 the Real Estate Joint Venture) of approximately $3.8 million during the quarter ended September 30, 2003 compared to approximately $0.2 million of unrealized depreciation for the quarter ended September 30, 2002. PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the quarter ended September 30, 2003, interest rate swap agreement values appreciated by approximately $2.4 million due to a slight increase in swap rates and a shortening of effective maturities as the Fund's interest rate swap agreements approached their initial optional termination dates. For the quarter ended September 30, 2002, the value of interest rate swap agreements declined slightly due to a decline in swap rates. On October 1, 2003, new interest rate swap agreements were entered into to fix the cost of a portion of Fund borrowings under the Credit Facility established on July 15, 2003. At the same time, the Fund made payments of approximately $8.5 million to terminate all interest rate swaps outstanding as of September 30, 2003, realizing a loss in that amount on the transactions. The realized loss approximated the value of the positions on the books of the Fund. See "Liquidity and Capital Resources" below for a description of the Credit Facility and interest rate swap agreements. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2002 PERFORMANCE OF THE FUND. The Fund's total return was 15.40% for the nine months ended September 30, 2003. This return reflects an increase in the Fund's net asset value per share from $92.38 to $106.06 and a distribution of $0.49 per share during the period. For comparison, the S&P 500 had a total return of 14.71% over the same period. The performance of the Fund exceeded that of the Portfolio by approximately 4.7% during the period. Last year, the Fund had a total return performance of -26.15% for the nine months ended September 30, 17 2002. This return reflected a decrease in the Fund's net asset value per share from $117.39 to $86.69. For comparison, the S&P 500 had a total return of -28.15% over the same period. The performance of the Fund trailed that of the Portfolio by approximately 1.8% for the nine months ended September 30, 2002. PERFORMANCE OF THE PORTFOLIO. The total return of the Portfolio for the nine months ended September 30, 2003 was 10.74% compared to the 14.71% return achieved by the S&P 500 over the same period. The total return of the Portfolio for the nine months ended September 30, 2002 was -24.40%. The first nine months of 2003 remained volatile, but markets proved to be resilient achieving impressive returns. War angst, a 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. While the first nine months of 2003 also witnessed reduced geopolitical concerns, higher consumer confidence and a strong housing market, concerns about inflation and unemployment developed over the summer and early fall of 2003 and kept the market and various sectors quite volatile. The Portfolio's performance trailed the overall market in the first nine months of 2003, mostly due to a lower exposure to higher beta and lower quality issues that were the strongest price performers during this period. The Portfolio maintained a pro-cyclical stance emphasizing the consumer discretionary and consumer staples sectors, as it did in the first nine months of 2002. Boston Management continued to de-emphasize health care investments, a directional move initiated last year which was positive for the Portfolio's relative returns. During the first nine months of 2003, Boston Management continued to emphasize industrial company investments, especially in the airfreight logistics and aerospace defense areas. Airfreight logistics and aerospace defense investments have been helpful to the Portfolio's longer-term record, but detracted from results during the nine months ended September 30, 2003. Lack of earnings visibility reinforced the Portfolio's cautious weighting in the telecommunications and information technology sectors. Both of the aforementioned sectors were de-emphasized during the first nine months of last year as well. The Portfolio's underweight of the telecommunication services sector during the nine months ended September 30, 2003 continued to be positive for the Portfolio. Boston Management continued to underweight the Portfolio's investments in the materials and utilities sectors during the period, a similar stance to last year's allocation. PERFORMANCE OF REAL ESTATE INVESTMENTS. During the nine months ended September 30, 2003 and September 30, 2002, Belair Real Estate sold (or experienced scheduled redemptions of) certain Partnership Preference Units, recognizing gains of $0.4 million and losses of $0.6 million, respectively, on the transactions (including sales to another investment fund advised by Boston Management). At September 30, 2003, the estimated fair value of the Fund's Partnership Preference Units totaled $344.7 million compared to $411.0 million at September 30, 2002, a decrease of $66.3 million or 16%. The decrease in value was principally due to fewer Partnership Preference Units held at September 30, 2003, offset in part by increases in the per unit value of the remaining Partnership Preference Units held by Belair Real Estate. This appreciation in per unit value resulted from declining interest rates and tighter spreads on real estate securities during the nine months ended September 30, 2003. The Fund saw unrealized appreciation in the estimated fair value of its Partnership Preference Units of approximately $25.9 million during the nine months ended September 30, 2003, compared to approximately $23.4 million during the nine months ended September 30, 2002. Dividends received from Partnership Preference Units for the nine months ended September 30, 2003 totaled $27.1 million compared to $27.5 million for the nine months ended September 30, 2002, a decrease of $0.4 million or 1%. The decrease was due to fewer Partnership Preference Units being held during the nine months ended September 30, 2003. Belair Real Estate'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 nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. Rental income from real estate operations decreased to $16.5 million for the nine months ended September 30, 2003 from $24.8 million for the nine months ended September 30, 2002, a decrease of $8.3 million or 33%. Property operating expenses decreased to $7.6 million for the nine months ended September 30, 2003 from $10.3 million for the nine months ended September 30, 2002, a decrease of $2.7 million or 26% (property operating expenses are before certain operating expenses of Belair Real Estate of approximately $2.6 million for the nine months ended September 30, 2003 and approximately $2.9 million for the nine months ended September 30, 2002). While these decreases were principally due to the May 2002 sale of Belair Real Estate's interest in Katahdin, weak 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 of Belair Real Estate's remaining Real Estate Joint Venture. 18 At September 30, 2003, the estimated fair value of the real properties held through Belair Real Estate was $159.4 million compared to $156.8 million at September 30, 2002, an increase of $2.6 million or 2%. The modest increase in estimated values at September 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 of approximately $4.0 million during the nine months ended September 30, 2003, compared to approximately $2.9 million of unrealized depreciation during the nine months ended September 30, 2002. During the nine months ended September 30, 2002, Belair Real Estate sold its interest in Katahdin to another fund advised by Boston Management and realized a loss of $9.5 million on the transaction. PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the nine months ended September 30, 2003, interest rate swap agreement values appreciated by approximately $12.9 million compared to appreciation of approximately $2.1 million for the nine months ended September 30, 2002. The appreciation is primarily due to a shortening of effective maturities as the Fund's interest rate swap agreements approached their initial optional termination dates. Swap rates declined during the nine months ended September 30, 2002 and did not change significantly during the nine months ended September 30, 2003. LIQUIDITY AND CAPITAL RESOURCES Effective July 15, 2003, the Fund refinanced its then existing 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 Credit Facility) which together total $615.0 million. The 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 Credit Facility will expire in June 2010. The Credit Facility is primarily used to finance the Fund's equity in real estate investments and will continue to be used for such purpose in the future. The 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 Credit Facility and the amount of outstanding borrowings thereunder for these purposes. The Credit Facility includes a $515.0 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 September 30, 2003, outstanding borrowings under the DrKW credit arrangement totaled $503.0 million. The Credit Facility also includes a $100 million credit arrangement with MLMC, including up to $10.0 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 September 30, 2003, there were no outstanding borrowings under the MLMC arrangement. There was $1.5 million outstanding under a letter of credit at September 30, 2003. The unused loan commitment amount totaled approximately $98.5 million. A commitment fee of 0.10% per annum is paid on the unused commitment amount. The Fund pays all fees associated with issuing the letters of credit. The Fund has entered into interest rate swap agreements with respect to its real estate investments and associated borrowings. Pursuant to these agreements, the Fund makes periodic payments to the counterparty at predetermined fixed rates, in exchange for floating-rate payments at a predetermined spread plus three-month LIBOR. During the terms of the outstanding interest rate swap agreements, changes in the underlying values of the agreements are recorded as unrealized gains or losses. On October 1, 2003, new interest rate swap agreements were entered into to fix a portion of the cost of Fund borrowings under the Credit Facility established on July 15, 2003. At the same time, all interest rate swap agreements outstanding on September 30, 2003 were terminated. Under the new interest rate swap agreements the Fund makes periodic payments to the counterparty at predetermined fixed rates, in exchange for floating-rate payments at a predetermined spread plus one-month LIBOR. As of September 30, 2003 and September 30, 2002, the unrealized depreciation related to the interest rate swap agreements was approximately $8.5 million and $27.8 million, respectively. 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 19 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 fair 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. The fair value of an investment represents the amount at which Boston Management believes the investment could be sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. In estimating the fair value of Belair Real Estate's investment in Partnership Preference Units, Boston Management takes into account all relevant factors, data and information, including 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. With respect to Belair Real Estate's other real estate investments, detailed investment valuations are based on independent valuations that 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. In determining the fair value of interest rate swap agreements, Boston Management may consider, among other things, dealer and counterparty quotes and pricing models. Given that the valuation of real estate investments and interest rate swap agreements includes many assumptions, including but not limited to the assumption that the investment could be sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale, values may differ from amounts ultimately realized. 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 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 swap agreements may be subject to wide swings in valuation caused principally by changes in interest rates. Interest rate swap agreements 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 that may be 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 that may be 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 that may be 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 Fund's Credit Facility are reset at regular intervals based on a fixed and predetermined premium to LIBOR for short-term extensions of credit. The Fund has entered into cancellable interest rate swap agreements to fix the cost of its borrowings under the Credit Facility and to attempt 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 short- term 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. 20 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 and Note 5 to the Fund's unaudited condensed consolidated financial statements in Item 1 above. Interest Rate Sensitivity Cost, Principal (Notional) Amount by Contractual Maturity For the Twelve Months Ended September 30, Estimated 2004-2008 Thereafter Total Fair Vaue --------------------------------------------------------------------------------------------- Rate sensitive liabilities: ------------------------ Long-term debt: ------------------------ Fixed-rate mortgages $112,630,517 $112,630,517 $136,000,000 Average interest rate 8.33% 8.33% ------------------------ Variable-rate Credit Facility $503,000,000 $503,000,000 $503,000,000 Average interest rate 1.42% 1.42% ----------------------------------------------------------------------------------------------- Rate sensitive derivative financial instruments: ------------------------ Pay fixed/ receive variable interest rate swap agreements (1) $378,782,000 $378,782,000 $ - Average pay rate (1) 4.75% 4.75% Average receive rate(1) 1.42% 1.42% (1) The terms disclosed are those of the interest rate swap agreements entered into that are effective on October 1, 2003. See Note 4 to the Fund's unaudited condensed consolidated financial statements in Item 1 above for the terms of the interest rate swap agreements in effect on September 30, 2003 and terminated on October 1, 2003 as well as the loss realized as a result of such termination. ----------------------------------------------------------------------------------------------- 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: 8.83% $ 22,521,852 $ 22,521,852 $ 25,717,841 Camden Operating, L.P., 8.50% Series B Cumulative Redeemable Perpetual Preferred Units, Callable 2/23/04, Current Yield: 8.39% $ 27,384,494 $ 27,384,494 $ 27,852,000 Colonial Realty Limited Partnership, 8.875% Series B Cumulative Redeemable Perpetual Preferred Units, Callable 2/23/04, Current Yield: 8.76% $ 44,807,072 $ 44,807,072 $ 49,111,100 Kilroy Realty, L.P., 8.075% Series A Cumulative Redeemable Preferred Units, Callable 2/06/03, Current Yield: 8.75% $ 20,000,000 $ 20,000,000 $ 18,453,880 Liberty Property L.P., 9.25% Series B Cumulative Redeemable Preferred Units, Callable 7/28/04, Current Yield: 8.99% $ 30,875,000 $ 30,875,000 $ 31,764,200 21 Estimated 2004-2008 Thereafter Total Fair Vaue --------------------------------------------------------------------------------------------- MHC Operating Limited Partnership, 9% Series D Cumulative Redeemable Perpetual Preference Units, Callable 9/29/04, Current Yield: 9.01% $ 50,000,000 $ 50,000,000 $ 49,920,000 National Golf Operating Partnership, L.P., 9.30% Series A Cumulative Redeemable Preferred Units, Callable 2/6/03, Current Yield: 9.80% $ 31,454,184 $ 31,454,184 $ 31,351,561 National Golf Operating Partnership, L.P., 9.30% Series B Cumulative Redeemable Preferred Units, Callable 2/6/03, Current Yield: 9.80% $ 5,000,000 $ 5,000,000 $ 4,746,000 PSA Institutional Partners, L.P., 9.50% Series N Cumulative Redeemable Perpetual Preferred Units, Callable 3/17/05, Current Yield: 9.09% $ 48,250,000 $ 48,250,000 $ 50,411,600 Price Development Company, L.P., 8.95% Series B Cumulative Redeemable Preferred Partnership Interests, Callable 7/28/04, Current Yield: 9.25% $ 30,625,000 $ 30,625,000 $ 29,620,500 Urban Shopping Centers, L.P., 9.45% Series D Cumulative Redeemable Perpetual Preferred Units, Callable 10/01/04, $ 25,000,000 $ 25,000,000 $ 25,727,400 Current Yield: 9.18% ------------------------ Note Receivable: ------------------------ Fixed-rate note receivable, 8% $ 2,070,580 $ 2,070,580 $ 2,070,580

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. 22 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 September 30, 2003. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) The following is a list of all exhibits filed as part of this Form 10-Q: 4.1 Loan and Security Agreement between Belair Capital Fund LLC and DrKW Holdings, Inc., as Lender 4.2 Loan and Security Agreement among Belair Capital Fund LLC, Merrill Lynch Mortgage Capital, Inc., as Agent, the Lenders referred to therein and Merrill Lynch Capital Services, Inc. 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 November 10, 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 ------------- 4.1 Loan and Security Agreement between Belair Capital Fund LLC and DrKW Holdings, Inc., as Lender 4.2 Loan and Security Agreement among Belair Capital Fund LLC, Merrill Lynch Mortgage Capital, Inc., as Agent, the Lenders referred to therein and Merrill Lynch Capital Services, Inc. 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