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 March 31, 2000
Commission File No. 000-30509
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Belcrest Capital Fund LLC
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3453080
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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 26
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Belcrest Capital Fund LLC
Index to Form 10Q
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PART I - FINANCIAL INFORMATION
Page
Item 1. Consolidated Financial Statements 3
Consolidated Statements of Assets and Liabilities as of
March 31, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Operations For the Three Months Ended
March 31, 2000 and 1999 (unaudited) 4
Consolidated Statements of Changes in Net Assets For the Three
Months Ended March 31, 2000 and 1999 (unaudited) 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 (unaudited) 6
Notes to Financial Statements as of March 31, 2000 (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 24
SIGNATURES 25
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
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BELCREST CAPITAL FUND LLC
Consolidated Statements of Assets and Liabilities
March 31,
2000 December 31,
(Unaudited) 1999
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Assets:
Investment in Belvedere Capital LLC $4,243,029,573 $4,080,817,015
Investment in real estate partnership preference units 840,776,766 947,934,345
Investment in other real estate 560,019,544 -
Short-term investments 16,387,281 -
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Total Investments $5,660,213,164 $5,028,751,360
Cash 5,475,850
5,028,304
Receivable for open swap contracts 41,661,488 31,185,750
Dividends receivable 13,728,348 1,516,719
Prepaid and deferred expenses 9,388,753 -
Escrow deposits - restricted 4,886,512 -
Swap interest receivable - 327,250
Other receivables 942,042
-
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Total Assets $5,736,296,157 $5,066,809,383
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Liabilities:
Loan payable $1,134,150,000 $1,130,000,000
Mortgage payable 430,338,982 -
Minority interest in controlled real estate subsidiaries 60,141,569 208,000
Special distributions payable 3,971,842 -
Deferred income 3,063,983 -
Security deposits 2,108,852
Payable for Fund shares redeemed 22,896 2,479,636
Payable to affiliate for distribution fees - 312,417
Payable to affiliate for investment advisory fees 18,789 -
Accrued Expenses
Interest expense 11,569,453 13,009,314
Accrued property taxes 1,648,319 -
Other accrued expenses 645,160
187,485
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Total Liabilities $1,647,679,845 $1,146,196,852
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Net assets $4,088,616,312 $3,920,612,531
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Shareholders' Capital
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Shareholders' capital $4,088,616,312 $3,920,612,531
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Shares Outstanding 32,612,066 33,007,386
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Net Asset Value and Redemption Price Per Share $125.37 $118.78
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BELCREST CAPITAL FUND LLC
Consolidated Statements of Operations (unaudited)
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Three months Three months
ended ended
March 31, March 31,
2000 1999
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Investment Income:
Dividends allocated from Belvedere Capital (net of foreign taxes of
$73,904 and $29,620 for March 31, 2000 and 1999, respectively) $9,197,270 $2,043,750
Interest allocated from Belvedere Capital 1,538,993 510,515
Expenses allocated from Belvedere Capital (6,088,691) (1,290,282)
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Net investment income allocated from Belvedere Capital $4,647,572 $1,263,983
Dividends from partnership preference units 22,605,095 4,357,206
Interest 102,834 10,712
Rental Income 337,500 -
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Total investment income $27,693,001 $5,631,901
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Expenses:
Investment advisory and administrative fee $3,245,779 $662,384
Distribution and servicing fees 1,429,282 304,059
Interest expense on credit facility 18,684,030 3,542,305
Interest expense on swap contracts 1,699,755 440,493
Interest expense on mortgages 515,881 -
Legal and accounting services 1,059,140 40,720
Amortization of offering expenses - 105,548
Organizational Expense 155,000 58,038
Depreciation expense 111,532 -
Custodian and transfer agent fees 18,980 22,883
Printing and postage 3,478 1,912
Miscellaneous 6,557 27,543
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Total expenses $26,929,414 $5,205,885
Reduction of investment adviser and administrative fee (979,413) (202,010)
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Net expenses $25,950,001 $5,003,875
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Net investment income $1,743,000 $628,026
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Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions from Belvedere Capital (identified cost basis) $60,132,746 $4,288,668
Investment transactions in partnership preference units (identified cost basis) (31,900,810) -
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Net realized gain $28,231,936 $4,288,668
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Change in unrealized appreciation (depreciation) -
Investment in Belvedere Capital (identified cost basis) $172,922,121 $15,985,373
Investments in partnership preference units (identified cost basis) 7,271,329 (2,149,220)
Interest rate swap contracts 10,475,738 3,169,994
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Net change in unrealized appreciation (depreciation) $190,669,188 $17,006,147
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Net realized and unrealized gain $218,901,124 $21,294,815
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Net increase in net assets from operations $220,644,124 $21,922,841
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BELCREST CAPITAL FUND LLC
Consolidated Statements of Changes in Net Assets (unaudited)
Three Months Three Months
ended ended
March 31, 2000 March 31, 1999
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Increase (Decrease) in Net Assets:
Net investment income $ 1,743,000 $ 628,026
Net realized gain (loss) from investment transactions 28,231,936 4,288,668
Net change in unrealized appreciation (depreciation) of
investments 190,669,188 17,006,147
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Net increase in net assets from operations $ 220,644,124 $ 21,922,841
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Transactions in Fund shares -
Investment securities contributed $ - $ 668,374,856
Less - selling commissions (2,168,528)
-
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Net contributions $ - $ 666,206,328
Net asset value of shares redeemed (48,668,501) (2,017,004)
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Net increase in net assets from Fund share transactions $ (48,668,501) $664,189,324
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Distributions to shareholders -
Special distributions to Shareholders $ (3,971,842) $ -
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Total distributions $ (3,971,842) $ -
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Net increase in net assets $ 168,003,781 $686,112,165
Net assets:
Beginning of period 3,920,612,531 544,202,835
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End of period $4,088,616,312 $1,230,315,000
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BELCREST CAPITAL FUND LLC
Consolidated Statements of Cash Flows (unaudited)
Three months Three months
ended ended
March 31, 2000 March 31,
1999
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Cash flows from (for) Operating Activities -
Net investment income $ 1,743,000 $ 628,026
Adjustments to reconcile net investment income to net
Cash flows used for operating activity -
Amortization of offering expense - 105,548
Depreciation expense 111,532 -
Net investment income allocated from Belvedere Capital (4,647,572) (1,263,983)
Payment of organization and offering expenses - (213,639)
Increase in dividends receivable (12,211,629) (1,253,381)
Increase in deferred costs (7,873,111) -
Increase in interest payable for open swap contracts 838,738 267,347
Increase in other receivables (392,680) -
Increase (decrease) in accrued interest and operating expenses (1,785,303) 1,506,430
Purchases of partnership preference units (102,500,000) (215,049,244)
Payments for investments in real property (69,955,217) -
Sales of partnership preference units 185,028,100 -
Net (increase) decrease in investment in Belvedere Capital 24,786,725 (811,666)
Increase in short-term investments (16,387,281) (1,199,034)
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Net cash flows used for operating activities $ (3,244,698) $ (217,283,596)
Cash Flows From (for) Financing Activities -
Proceeds from loan $ 4,150,000 $ 220,000,000
Payment on mortgage (35,670)
Payments on behalf of investors (selling commissions) - (2,168,528)
Payments for Fund shares redeemed (422,086) (328,694)
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Net cash flows from financing activities $ 3,692,244 $ 217,502,778
Net increase in cash 447,546 219,182
Cash at beginning of period 5,028,304 377,275
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Cash at end of period $ 5,475,850 $ 596,457
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Supplemental Disclosure and Non-cash Investing and
Financing Activities-
Securities contributed by Shareholders, invested in Belvedere Capital $ - $ 668,374,856
Unrealized appreciation of investments and open swap contracts $572,082,809 $ 47,418,477
Interest paid for loan and mortgage $ 20,849,429 $ 2,403,500
Interest paid for swap contracts $ 861,017 $ 173,146
Market value of securities distributed in payment of redemptions $ 50,703,156 $ 1,609,857
Market value of real property and other assets, net of current
liabilities, contributed to Fund $511,878,233 -
Mortgages assumed in conjunction with acquisitions of real property $430,374,652 -
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BELCREST CAPITAL FUND LLC as of March 31, 2000
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1 Organization
A Investment Objective--Belcrest Capital Fund LLC (Belcrest 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 Belcrest Capital is to achieve long-term, after-tax
returns for shareholders. Belcrest 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. Belcrest 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 Belcrest 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, Belcrest 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--Belcrest Capital invests in real estate through its subsidiary
Belcrest Realty Corporation (BRC). BRC invests directly in partnership
preference units and indirectly in real property through controlled subsidiaries
Bel Santa Ana LLC (BSA) and Bel Alliance Properties, LLC (Bel Alliance).
BRC - BRC invests directly in partnership preference units and also holds a 100%
interest in BSA and a majority interest in Bel Alliance. At March 31, 2000,
Belcrest Capital owned 100% of the common stock issued by BRC and intends to
hold all of BRC's common stock at all times. Approximately 105 charitable
organizations own preferred stock of BRC 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 BRC 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.
BSA- BSA, a wholly owned subsidiary of BRC, owns two suburban office buildings
located in California. The property is leased to a single investment-grade rated
tenant under a triple-net lease.
Bel Alliance- Bel Alliance, a majority owned subsidiary of BRC, indirectly owns
forty-one multi-family residential properties (collectively, the Properties)
located in seven states (Texas, Virginia, Maryland, Georgia, Alabama, North
Carolina and Florida). BRC owns 100% of the Class A units of Bel Alliance,
representing 55% of the equity interests in Bel Alliance, and a minority
shareholder (the minority shareholder) owns 100% of the Class B units,
representing
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45% of the equity interests in Bel Alliance. 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. BRC has priority in distributions and has greater
voting rights than the holder of the Class B units.
The accompanying consolidated financial statements include the accounts of
Belcrest Capital, BRC, BSA and Bel Alliance (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 Belcrest
Capital, in private purchases of partnership preference units and real estate
investments and through contributions of real estate investments in exchange for
minority interests in controlled subsidiaries. Upon receipt of common stock from
shareholders Belcrest 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 on contribution date. The initial tax basis of real estate
investments contributed to the Fund is the market value on the date of
contribution, the contributor's tax basis at the time of contribution or a
combination thereof 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 7). 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
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
8
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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. Investments held by the Fund for which valuations or
market quotations are unavailable are valued at fair value using methods
determined in good faith by the Investment Adviser. 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 Eaton
Vance as Manager of BRC, 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 on 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 Alliance consist of
deposits for real estate taxes, insurance, environmental, renovation, debt
service, and security deposit accounts. Bel Alliance has no access to these
funds once deposited into the escrow accounts. Amounts are held by the
respective financial institutions and controlled by the lender (Note 8).
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
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
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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 Alliance are
leased to residents for terms of one year or less, with monthly payments due in
advance. The office property held by BSA is leased for a remaining term of
approximately 15 years with options to extend such lease for two additional
six-year periods.
H Income--Dividend income is recorded on the ex-dividend date and interest and
rental income is 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 direct 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 the
acquisition of the properties have been capitalized. Significant betterments and
improvements are capitalized as part of the building and improvements.
Depreciation of the building and improvements is computed using the straight
line and accelerated methods over the estimated useful lives of the related
assets, which range up to 39 years for buildings and up to fifteen years for
personal property.
J Organization Costs and Deferred Expenses--Costs incurred by the Fund in
connection with its organization have been expensed as incurred. Costs incurred
by the Fund in connection with its offering were amortized over the Fund's
offering period. Deferred costs of Bel Alliance consist of deferred mortgage
origination expenses which are amortized over the terms of the loans.
K Income Taxes--Belcrest Capital, Belvedere Capital and the Portfolio are
treated as partnerships for federal income tax purposes. As a result, Belcrest
Capital, Belvedere Capital and the Portfolio do not incur federal income tax
liability, and the shareholders and partners thereof
10
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are individually responsible for taxes on items of partnership income, gain,
loss, and deduction. BRC's and Bel Alliance's policy is to comply with the
Internal Revenue Code applicable to REITs. BRC and Bel Alliance 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. BSA is a single member limited liability company which is treated as a
pass-through entity for federal tax purposes.
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
March 31, 2000 and for the three 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.
2 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 with 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 three-month period ended
March 31, 2000 totaled $3,971,842.
3 Shareholder Transactions
The Fund may issue an unlimited number of full and fractional shares.
Transactions in Fund shares, including contributions of securities and cash in
exchange for shares of the Fund, were as follows:
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
-------------------- -------------------
Issued at Fund closings - 6,122,656
Redemptions (395,320) (18,245)
)
-------------------- -------------------
Net increase (decrease) (395,320) 6,104,411
-------------------- -------------------
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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 the Investment Adviser by the Fund on behalf of the redeeming
shareholder. No charge is levied on redemptions of shares acquired through the
reinvestment of distributions, shares redeemed in connection with a Tender
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 three months ended March 31, 2000 and March 31, 1999, the Investment Adviser
received $422,086 and $16,248, respectively, in redemption fees.
In connection with the offering of shares, Eaton Vance Distributors, Inc. (EVD),
the Placement Agent, received $14,432,389 in selling commissions paid by the
Fund on behalf of shareholders, since inception of the Fund. EVD, in turn, paid
this amount to the applicable subagent on behalf of shareholders investing in
the Fund through such subagent. In addition, EVD made payments to subagents from
its own resources totaling $36,433,844 equal to 1.0% of the value of investments
in the Fund made through subagents since inception of the Fund.
4 Investment Transactions
Increases and decreases of the Fund's investment in Belvedere Capital for the
three months ended March 31, 2000 aggregated $330,915 and $75,820,796,
respectively, and for the three months ended March 31, 1999 aggregated
$6,463,862 and $7,262,053, respectively. Purchases and sales of partnership
preference units aggregated $102,500,000 and $185,028,100 for the three months
ended March 31, 2000, and $215,049,244 and $0 for the three months ended March
31, 1999. For the three months ended March 31, 2000, acquisitions of other real
property, through purchases and contributions, totaled $560,131,076.
5 Indirect Investment in Portfolio
Belvedere Capital's interest in the Portfolio at March 31, 2000 was
$8,634,584,697, representing 52.1% of the Portfolio's net assets, and at March
31, 1999 was $4,529,834,947, representing 44.9% of the Portfolio's assets. The
Fund's investment in Belvedere Capital at March 31, 2000 was $4,243,029,573,
representing 49.1% of Belvedere Capital's net assets, and at March 31, 1999 was
$1,240,313,661, representing 27.4% of Belvedere Capital's net assets. Investment
income allocated to Belvedere Capital from the Portfolio for the three months
ended March 31, 2000 totaled $20,402,874, of which $10,736,263 was allocated to
the Fund. Investment income allocated to Belvedere Capital from the portfolio
for the three months ended March 31, 1999 totaled $12,010,208, of which
$2,554,265 was allocated to the Fund. Expenses allocated to Belvedere Capital
from the Portfolio for the three months ended March 31, 2000 totaled $8,688,745,
of which $4,547,358 was allocated to the Fund. Expenses allocated to Belvedere
Capital from the Portfolio for the three months ended March 31, 1999 totaled
$4,771,888, of which $969,486 was allocated to the Fund. Belvedere Capital
allocated additional expenses to the Fund of $1,541,333 for the three months
ended March 31, 2000, representing $36,486 of
12
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operating expenses and $1,504,847 of service fees. Belvedere Capital allocated
additional expenses to the Fund of $320,796 for the three months ended March 31,
1999, representing $13,499 of operating expenses and $307,297 of service fees
(see Note 9).
A summary of the Portfolio's Statement of Assets and Liabilities, at March 31,
2000, December 31, 1999 and March 31, 1999 and its operations for the three
months ended March 31, 2000, the year ended December 31, 1999 and the three
months ended March 31, 1999 follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
March 31, December 31, March 31,
2000 1999 1999
-------------------- ------------------------ ---------------------
Investments, at value $16,564,812,965 $15,009,514,121 $10,118,166,710
Other Assets 18,352,819 105,404,490 11,801,799
----------------------------------- -------------------- ------------------------ ---------------------
Total Assets $16,583,165,784 $ 15,114,918,611 $10,129,968,509
Total Liabilities 2,651,935 269,652 44,583,965
----------------------------------- -------------------- ------------------------ ---------------------
Net Assets $16,580,513,849 $ 15,114,648,959 $10,085,384,544
=================================== ==================== ======================== =====================
Dividends and interest $40,223,600 $ 135,795,086 $ 27,230,271
Investment adviser fee 16,618,292 51,368,943 10,581,529
Other expenses 459,694 1,599,875 297,623
----------------------------------- -------------------- ------------------------ ---------------------
Total expenses $17,077,986 $ 52,968,818 $ 10,879,152
----------------------------------- -------------------- ------------------------ ---------------------
Net investment income $23,145,614 $ 82,826,268 $ 16,351,119
Net realized gains (losses) 224,041,217 19,281,587 18,042,697
Net unrealized gains 597,012,900 1,954,982,313 265,622,128
----------------------------------- -------------------- ------------------------ ---------------------
Net increase in net assets from
operations $844,199,731 $ 2,057,090,168 $ 300,015,944
----------------------------------- -------------------- ------------------------ ---------------------
</TABLE>
6 Rental Property
The average occupancy rate for real property held by Bel Alliance, consisting of
13,833 residential units, was approximately 94% at March 31, 2000. The real
property held by BSA, consisting of two suburban office buildings, was 100%
occupied at March 31, 2000. The carrying value of real property owned by the
Fund through Bel Alliance and BSA at March 31, 2000 is as follows:
Land $112,748,138
Buildings, improvements and other depreciable assets 478,024,473
Accumulated depreciation (30,753,067)
--------------
Carrying value $560,019,544
-------------
7 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
13
<PAGE>
associated with these investments is meaningful only when considered in
conjunction with all related assets, liabilities and agreements. As of March 31,
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Unrealized Unrealized
Notional Initial Appreciation/ Appreciation/
Amount Optional (Depreciation) (Depreciation)
Effective (000's Fixed Floating Termination Maturity At March 31, 2000 At December 31,
Date omitted) Rate Rate Date Date 1999
-------------------------------------------------------------------------------------------------------------------------
11/98 $ 20,644,750 6.330% Libor+.45% 2/03 11/05 $ 1,394,120 $ 1,265,451
11/98 68,750,000 6.225% Libor+.45% 11/03 11/05 4,878,329 4,445,740
11/98 24,528,000 6.295% Libor+.45% 5/03 11/05 1,682,320 1,526,923
11/98 41,368,190 6.310% Libor+.45% 2/03 11/05 2,821,371 2,562,785
02/99 40,035,410 6.545% Libor+.45% 2/03 11/05 2,079,543
02/99 9,029,600 6.505% Libor+.45% 3/03 11/05 544,490 483,072
02/99 21,995,694 6.497% Libor+.45% 4/03 11/05 1,330,576 1,174,226
02/99 12,970,800 6.495% Libor+.45% 6/03 11/05 782,133 688,760
02/99 20,017,740 6.439% Libor+.45% 11/03 11/05 1,239,511 1,094,309
02/99 111,000,000 6.407% Libor+.45% 2/04 11/05 6,969,523 6,182,680
04/99 80,000,000 6.555% Libor+.45% 4/04 11/05 4,487,589 3,868,250
04/99 16,467,960 6.720% Libor+.45% 2/03 11/05 854,700 731,149
04/99 4,018,230 6.716% Libor+.45% 3/03 11/05 208,646 178,049
04/99 7,844,872 6.700% Libor+.45% 4/03 11/05 410,132 350,225
04/99 8,701,751 6.692% Libor+.45% 6/03 11/05 454,180 387,326
04/99 12,671,063 6.618% Libor+.45% 11/03 11/05 688,750 590,442
04/99 15,105,450 6.590% Libor+.45% 2/04 11/05 830,470 713,143
07/99 26,516,250 7.308% Libor+.45% 11/03 11/05 695,385 420,202
07/99 40,193,165 7.301% Libor+.45% 2/04 11/05 1,024,610 602,342
07/99 10,108,570 7.237% Libor+.45% 4/04 11/05 277,034 171,715
07/99 155,000,000 7.231% Libor+.45% 7/04 11/05 4,129,894 2,501,920
07/99 13,199,520 7.442% Libor+.45% 4/03 11/05 309,965 174,318
07/99 5,080,903 7.349% Libor+.45% 6/03 11/05 133,120 81,759
09/99 17,673,796 7.700% Libor+.45% 2/04 11/05 167,708 (45,650)
09/99 9,833,200 7.635% Libor+.45% 7/04 11/05 95,864 (23,163)
09/99 5,062,185 7.840% Libor+.45% 6/03 11/05 39,660 (20,784)
09/99 43,000,000 7.6525% Libor+.45% 9/04 11/05 356,282 (169,629)
09/99 35,023,620 7.644% Libor+.45% 7/04 11/05 328,020 (96,962)
09/99 20,009,642 7.885% Libor+.45% 6/03 11/05 124,249 (118,788)
09/99 5,019,578 7.915% Libor+.45% 4/03 11/05 30,990 (29,122)
09/99 212,000,000 7.6224% Libor+.45% 9/04 11/05 1,990,485 (587,812)
09/99 1,907,052 7.580% Libor+.45% 4/04 11/05 24,999 3,331
-------------------------------------
Total $ 41,661,488 $ 31,185,750
======================================
</TABLE>
14
<PAGE>
8 Debt
A Mortgages--Real property held by Bel Alliance is financed through loans
collateralized by its real estate assets, mortgage loan deposit accounts,
including all sub-accounts thereunder, and an assignment of certain leases and
rents. Balances at March 31, 2000 are as follows:
Monthly
Annual Principal and
Interest Interest Balance at
Maturity Date Rate Payment March 31,2000
------------- ---- ------- -------------
April 1, 2010 8.560% $213,139 $27,566,869
January 1, 2028 7.143% 418,459 60,615,209
July 1, 2009 7.740% 235,286 32,712,918
April 1, 2010 8.640% 308,577 39,619,141
April 1, 2010 8.640% 236,624 30,380,859
April 1, 2010 8.560% 224,163 28,992,791
April 1, 2010 8.560% 173,885 22,489,897
May 1, 2009 7.250% 36,155 5,263,028
February 1, 2009 7.220% 313,618 45,660,537
February 1, 2009 7.220% 332,517 48,412,064
July 1, 2009 7.830% 277,228 38,216,193
--------------- ----------------
$2,769,651 $379,929,506
=============== ================
Real property held by BSA is financed through a loan collateralized by its real
property. The balance at March 31, 2000 is as follows:
Monthly
Annual Principal and
Interest Interest Balance at
Maturity Date Rate Payment* March 31,2000
------------- ---- -------- -------------
July 10, 2015 7.18% $337,500 $50,409,476
*Amount indicates current monthly loan payment. Amount increases as rental
payments under lease agreement with property tenant increases.
The maturities of mortgages for the five years subsequent to March 31, 2000 are
as follows:
Years Ending December 31, Amount
------------------------- ------
2000 $ 2,522,331
2001 3,797,246
2002 4,100,969
2003 4,429,160
2004 5,284,740
Thereafter 410,204,536
-----------
$430,338,982
============
B Credit Facility--Belcrest Capital has obtained a $1,150,000,000 Credit
Facility with a term of seven years from Merrill Lynch International Bank
Limited. Belcrest Capital's obligations under the Credit Facility are secured by
a pledge of its assets, excluding the assets of BSA and Bel
15
<PAGE>
Alliance. Interest on borrowed funds is based on the prevailing LIBOR rate for
the respective interest period plus a spread of 0.45% per annum. Belcrest
Capital may borrow for interest periods of one month to five years. In addition,
Belcrest 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
Belcrest Capital. Additional borrowings under the Credit Facility may be made in
the future for these purposes. At March 31, 2000 and December 31, 1999, amounts
outstanding under the Credit Facility totaled $1,134,150,000 and $1,130,000,000,
respectively.
9 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 three months ended March 31, 2000, and March 31, 1999 the
advisory fee applicable to the Portfolio was 0.44% (annualized) and 0.46%
(annualized), respectively, of average daily net assets for such periods.
Belvedere Capital's allocated portion of the advisory fee was $8,455,108, of
which $4,404,142 was allocated to the Fund, for the three months ended March 31,
2000, and $4,640,720, of which $933,882 was allocated to the Fund, for the three
months ended March 31, 1999. In addition, Belcrest 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 Belcrest Capital (including the value of all
assets of Belcrest Capital other than Belcrest Capital's investment in BRC,
minus the sum of Belcrest Capital's liabilities other than the principal amount
of money borrowed) and BRC 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 BRC (which consist of all assets of BRC minus the sum of BRC's
liabilities other than the principal amount of money borrowed. For this purpose,
the assets and liabilities of BRC's controlled subsidiaries are reduced by the
proportionate interests therein of investors other than BRC.). The advisory fee
payable by the Portfolio in respect of Belcrest Capital's indirect investment in
the Portfolio is credited toward The Fund's advisory and administrative fee
payment. For the three months ended March 31, 2000 and March 31, 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 $3,245,779 and
$662,384, respectively.
Eaton Vance Management (EVM) serves as manager of Belcrest Capital and receives
no separate compensation for services provided in such capacity.
Pursuant to a servicing agreement between Belvedere Capital and Eaton Vance
Distributors, Inc. (EVD), Belvedere Capital pays a servicing fee to EVD for
providing certain services and information to shareholders. The servicing fee is
paid on a quarterly basis at an annual rate of 0.15% of Belvedere Capital's
average daily net assets and totaled $2,876,452 and $1,506,207 for the three
months ended March 31, 2000 and March 31, 1999, respectively, of which
$1,504,847 and $307,297 was allocated to Belcrest Capital for the respective
periods. Pursuant to a servicing agreement between Belcrest Capital and EVD,
Belcrest Capital pays a servicing fee to
16
<PAGE>
EVD on a quarterly basis at an annual rate of 0.20% of Belcrest Capital's
average daily net assets, less Belcrest Capital's allocated share of the
servicing fee payable by Belvedere Capital. For the three months ended March 31,
2000 and March 31, 1999, the servicing fee paid directly by Belcrest Capital
totaled $449,869 and $102,049, respectively. Of the amounts allocated to and
incurred by the Fund, for the three months ended March 31, 2000 and March 31,
1999, $438,683 and $0, respectively, were paid to subagents.
As compensation for its services as placement agent, Belcrest Capital pays EVD a
monthly distribution fee at an annual rate of 0.10% of the average daily net
assets of Belcrest Capital. For the three months ended March 31, 2000 and March
31, 1999, Belcrest Capital's distribution fees paid or accrued to EVD totaled
$979,413 and $202,010, respectively. BMR has agreed to waive a portion of the
monthly advisory and administrative fee payable by Belcrest Capital to the
extent that such fee, together with the monthly distribution fee to EVD, exceeds
an annual rate of 0.60% of the average daily gross investment assets of Belcrest
Capital (other than Belcrest Capital's investment in BRC), reduced by that
portion of the monthly advisory fee for such month payable by the Portfolio
which is attributable to the value of Belcrest Capital's investment in Belvedere
Capital. For the three months ended March 31, 2000 and March 31, 1999, BMR has
waived $979,413 and $202,010, respectively, of the advisory and administrative
fee of Belcrest Capital.
Bel Alliance indirectly holds real property through eleven operating
partnerships. Each operating partnership has entered into or assumed a
management agreement with Alliance Residential Management, LLC, an affiliate of
the minority shareholder (Note 1B), for periods ranging from 3 to 10 years. If
neither BRC nor the 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 Properties.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Increases and decreases in Belcrest Capital's net asset value per share are
derived from net investment income, and realized and unrealized gains and losses
on Belcrest Capital's interest (through Belvedere Capital) in the Portfolio,
real estate investments held through BRC and any direct investments of Belcrest
Capital. Expenses of Belcrest 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 Belcrest Capital and BRC, including its subsidiaries BSA and
Bel Alliance. Belcrest Capital's most significant expense is interest incurred
on borrowings incurred in connection with its real estate investments. Belcrest
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 BRC. The realized and
unrealized gains and losses on investments have the most significant impact on
Belcrest 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 holdings of the Portfolio
are broadly diversified, the performance of the Portfolio cannot be attributed
to one particular stock or one particular industry or market sector. The
performance of the Portfolio and Belcrest 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. Through the impact of
interest rates on the valuation of Belcrest Capital's investments in Partnership
Preference Units through BRC and its positions in interest rate swap agreements,
the performance of Belcrest Capital is also affected by movements in interest
rates, and particularly, changes in credit spread relationships. On a combined
basis, Belcrest 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 March 31, 2000
----------------------------------------------------------
Belcrest Capital achieved total return performance of 5.6% for the
quarter ended March 31, 2000. This return reflects an increase in Belcrest
Capital's net asset value per share from $118.78 to $125.37. 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 2.3% over the same
period. Belcrest Capital had a total return of 3.3% for the quarter ended March
31, 1999.
During the first quarter of 2000, U.S. equity market leadership was
concentrated in the technology sector, continuing the trend of recent quarters.
Strongly performing industry groups in the first quarter included semiconductors
and semiconductor equipment, computer networking, cellular telecom services,
biotechnology, investment banking, and oil and gas services and equipment.
Growth stocks generally outperformed value stocks and small-cap stocks generally
bested big-cap stocks. Large cap technology bellwethers such as Cisco
18
<PAGE>
Systems, Intel, and Oracle accounted for most of the gains in the S&P 500. Large
holdings of all three of these stocks contributed to the outperformance of
Belcrest Capital in the first quarter. Belcrest Capital also benefited from
holdings of several smaller cap technology and biotech stocks that were standout
performers in the quarter.
In the fixed income markets, the first quarter saw a rally in long-term treasury
bonds, rising yields (and falling prices) for shorter-term treasury instruments
and flattish prices and yields on corporate debt obligations. The market for
REIT preferred stocks (used as a benchmark for pricing BRC's holdings of
partnership preference units) improved somewhat from the depressed levels of
late 1999. Despite strong real estate market conditions, prices of REIT-issued
perpetual preferred stocks continue to reflect a general oversupply of perpetual
preferred paper. On balance, the leveraging of Belcrest Capital to invest in
real estate qualifying assets was a modest drag on performance for the quarter.
Liquidity and Capital Resources
-------------------------------
As of March 31, 2000, Belcrest Capital had outstanding borrowings of $1,134.15
million under the Credit Facility established with Merrill Lynch International
Bank Limited, the term of which extends until November 24, 2005. Belcrest
Capital has available under the Credit Facility $15.85 million in unused loan
commitments to meet short-term liquidity needs and for other purposes.
Belcrest 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
March 31, 2000, the Portfolio had cash and short-term investments totaling
$390.1 million. The Portfolio participates in a $150 million multi-fund
unsecured line of credit agreement with a group of banks. The Portfolio may
temporarily borrow from the line of credit to satisfy redemption requests in
cash or to settle investment transactions. The Portfolio had no outstanding
borrowings under the $150 million line of credit at March 31, 2000, and, as of
that date, the net assets of the Portfolio totaled $16,580.5 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 March 31, 2000, restricted
securities, which are considered illiquid, constituted 4.3% of the net assets of
the Portfolio.
The Partnership Preference Units held by BRC are not registered under the
Securities Act and are subject to substantial restrictions on transfer. As such,
they are considered illiquid.
BRC's investments in real estate apart from Partnership Preference Units are
also considered illiquid. The lease and mortgage structures of BSA's office
properties limit the pool of potential acquirors of these assets, and it is not
anticipated that these properties will be widely marketable until the expiration
of both the current lease and that lease's renewal options (which expire in
2027). BRC's investment in Bel Alliance similarly is considered illiquid, and
has been structured as an investment of at least ten years (until 2010), at
which time a buy/sell mechanism offers liquidity to both BRC and its minority
shareholder.
19
<PAGE>
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
Belcrest Capital fluctuates. There can be no assurance that the performance of
Belcrest 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 Belcrest
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 Belcrest
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
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. Belcrest Capital utilizes interest rate swap agreements to fix the
cost of its borrowings over the term of the Credit Facility. In the future,
Belcrest 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 Belcrest 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. Belcrest 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
20
<PAGE>
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
Belcrest 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 Belcrest Capital or the Portfolio fail to
meet these requirements, the counterparty or broker may liquidate positions of
Belcrest 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 Belcrest
Capital or the Portfolio. Belcrest 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, Belcrest 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 BRC exposes Belcrest 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
Belcrest Capital to buy such assets will therefore diminish the returns to be
achieved by Belcrest Capital as a whole. In addition, there is a risk that the
availability of financing will be interrupted at some future time, requiring
Belcrest Capital to sell assets to repay outstanding borrowings or a portion
thereof. It may be necessary to make such sales at unfavorable prices. Belcrest
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 Belcrest 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, Belcrest 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, Belcrest
Capital would not be able to honor redemption requests or make cash
distributions.
21
<PAGE>
The Partnership Preference Units held by Belcrest Capital through its investment
in BRC 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 BRC holds.
Accordingly, BRC's investments in Partnership Preference Units are illiquid. The
success of BRC'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 BRC'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 Belcrest Capital through
its investment in BRC 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. 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
Belcrest 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 Belcrest 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 Belcrest Capital will cause the performance of Belcrest
Capital to deviate from the performance of the Portfolio.
While Belcrest Capital's manager intends that BRC's investments in Bel Alliance
and BSA will reduce overall portfolio risk and volatility and raise returns over
time, these investments expose Belcrest Capital to certain additional risks as
well. In the case of BSA, the risks include the possible deterioration in the
credit quality of its buildings' tenant, the timing of this tenant's lease
expiration and potential changes in the submarket in which its buildings are
located. In the case of Bel Alliance, the performance of BRC's investment may be
influenced by decisions which
22
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Bel Alliance's minority shareholder may make on behalf of Bel Alliance, and
potential changes in the submarkets in which Bel Alliance's buildings are
located. The debt of both BSA and Bel Alliance is fixed-rate, secured by the
underlying properties and with limited recourse to BRC. 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 BRC's
equity interests. Other factors bearing on the value of BRC'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 BRC's real estate investments will be an
economic success.
Over time, the performance of Belcrest Capital can be expected to be more
volatile than the performance of the Portfolio.
23
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
----------------------------
There are no material pending legal proceedings to which the Fund or BRC is a
party or to which their assets are subject.
Item 2. Changes in Securities and Use of Proceeds.
---------------------------------------------------
None.
Item 3. Defaults Upon Senior Securities.
-----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
-------------------------------------------------------------
None
Item 5. Other Information.
---------------------------
None.
Item 6. The following is a list of all exhibits filed as part of this Form 10Q:
--------------------------------------------------------------------------------
10 (2) (a) Amendment No. 1 dated as of December 28, 1999 to Management
Agreement
27 Financial Data Schedules
24
<PAGE>
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 August 11 2000.
BELCREST CAPITAL FUND LLC
(Registrant)
By: EATON VANCE MANAGEMENT,
its Manager
By: ________________________________
James L. O'Connor
Vice President
By: ________________________________
William M. Steul
Chief Financial Officer
25
<PAGE>
EXHIBIT INDEX
10 (2) (a) Amendment No. 1 dated as of December 28, 1999 to Management Agreement
27 Financial Data Schedules
26
