UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000
Commission File No. 000-30509
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
-----------------------------
None
Former Name, Former Address and Former Fiscal Year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Page 1 of 29
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Belcrest Capital Fund LLC
Index to Form 10Q
PART I - FINANCIAL INFORMATION
Page
Item 1. Consolidated Financial Statements 3
Consolidated Statements of Assets and Liabilities
as of September 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Operations For the Three
Months Ended September 30, 2000 and 1999 (unaudited)
for the Nine Months Ended September 30, 2000 and 1999
(unaudited) 4
Consolidated Statements of Changes in Net Assets For
the Nine Months Ended September 30, 2000 and 1999
(unaudited) 6
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 (unaudited) 7
Notes to Financial Statements as of September 30, 2000
(unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
2
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
<TABLE>
BELCREST CAPITAL FUND LLC
Consolidated Statements of Assets and Liabilities
September 30,
2000 December 31,
(Unaudited) 1999
------------------- ------------------
<S> <C> <C>
Assets:
Investment in Belvedere Capital LLC $4,186,403,622 $4,080,817,015
Investment in real estate partnership preference units 753,364,321 947,934,345
Investment in other real estate 696,068,672 -
------------------- ------------------
Total Investments $5,635,836,615 $5,028,751,360
Cash 14,742,234 5,028,304
Cash - security deposits 814,275 -
Receivable for open swap contracts 13,621,838 31,185,750
Dividends receivable 13,524 1,516,719
Prepaid and deferred expenses 9,611,371 -
Escrow deposits - restricted 11,285,473 -
Swap interest receivable 321,162 327,250
Other assets 1,431,978 -
------------------- ------------------
Total Assets $5,687,678,470 $5,066,809,383
------------------- ------------------
Liabilities:
Loan payable $994,250,000 $1,130,000,000
Mortgage payable 536,107,759 -
Minority interest in controlled subsidiaries 68,952,579 208,000
Special distributions payable 1,493,324 -
Security deposits 2,386,424 -
Payable for Fund shares redeemed - 2,479,636
Payable to affiliate for distribution fees - 312,417
Accrued Expenses
Interest expense 13,475,183 13,009,314
Accrued property taxes 6,826,099 -
Other accrued expenses 4,264,685 187,485
------------------- ------------------
Total Liabilities $1,627,756,053 $1,146,196,852
------------------- ------------------
Net assets $4,059,922,417 $3,920,612,531
=================== ==================
Shareholders' Capital
------------------- ------------------
Shareholders' capital $4,059,922,417 $3,920,612,531
------------------- ------------------
------------------- ------------------
Shares Outstanding 31,851,040 33,007,386
------------------- ------------------
------------------- ------------------
Net Asset Value and Redemption Price Per Share $127.47 $118.78
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</TABLE>
3
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<TABLE>
BELCREST CAPITAL FUND LLC
Consolidated Statements of Operations
(Unaudited) Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends allocated from Belvedere Capital $8,500,554 $5,565,444 $26,664,593 $11,269,223
(net of foreign taxes of $49,520, $792,
$213,808 and $109,313, respectively)
Interest allocated from Belvedere Capital 3,498,253 1,690,896 7,347,860 3,083,391
Expenses allocated from Belvedere Capital (6,296,448) (3,587,175) (18,632,704) (7,296,608)
----------------- ------------------ ------------------ -----------------
Net investment income allocated from
Belvedere Capital $5,702,359 $3,669,165 $15,379,749 $7,056,006
Dividends from partnership preference units 5,211,617 15,435,448 48,196,390 30,533,455
Rental income 27,778,822 - 53,631,381 -
Interest 191,237 16,584 706,173 83,656
----------------- ------------------ ------------------ -----------------
Total investment income $38,884,035 $19,121,197 $117,913,693 $37,673,117
----------------- ------------------ ------------------ -----------------
Expenses:
Investment advisor and administrative fees $3,516,720 $1,946,128 $10,173,462 $3,920,436
Property management fees 1,052,265 - 2,027,534 -
Distribution and servicing fees 1,442,746 847,220 4,302,055 1,725,250
Interest expense on credit facility 18,070,651 10,520,199 55,221,789 20,855,656
Interest expense on mortgages 10,732,211 - 20,911,211 -
Interest expense (income) on swap contracts (961,331) 1,246,365 961,216 2,726,686
Depreciation and amortization 6,598,196 - 13,111,664 352,266
Property taxes and insurance 2,878,678 - 5,579,871 -
Property and maintenance expenses 8,973,931 - 16,973,293 -
Organizational expense - - 150,496 -
Custodian and transfer agent fees 20,420 17,063 71,479 50,854
Legal and accounting services 341,576 507,630 973,212 747,267
Printing and postage 3,478 71,933 8,736 79,919
Miscellaneous 270,328 44,110 530,788 49,134
----------------- ------------------ ------------------ -----------------
Total expenses $52,939,869 $15,200,648 $130,996,806 $30,507,468
Preliminary reduction of investment
advisor and administrative fees (1,010,375) (574,111) (2,982,078) (1,162,373)
----------------- ------------------ ------------------ -----------------
Net expenses $51,929,494 $14,626,537 $128,014,728 $29,345,095
----------------- ------------------ ------------------ -----------------
Net investment income (loss) before minority interest
in share of net loss of controlled subsidiaries $(13,045,459) $4,494,660 $(10,101,035) $8,328,022
Minority interest net loss of controlled
subsidiaries 903,798 - 2,027,549 -
----------------- ------------------ ------------------ -----------------
Net investment income (loss) $(12,141,661) $4,494,660 $(8,073,486) $8,328,022
----------------- ------------------ ------------------ -----------------
4
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Consolidated Statements of Operations (Con't)
(Unaudited) Three months Three months Nine months Nine months
ended ended Ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
----------------- ------------------ ----------------- ------------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions from Belvedere
Capital $(32,583,581) $1,303,325 $58,180,407 $4,800,344
Investment transactions in partnership
preference units (8,832,131) - (61,969,027) -
Termination of interest rate swap contracts 3,174,000 - 6,372,900 -
----------------- ------------------ ----------------- ------------------
Net realized gain (loss) $(38,241,712) $1,303,325 $2,584,280 $4,800,344
----------------- ------------------ ----------------- ------------------
Change in unrealized appreciation (depreciation)
Investment in Belvedere Capital $81,973,064 $(204,160,402) $194,102,030 $(113,265,014)
Investments in partnership preference units 80,102,146 (17,248,468) 116,558,681 (37,580,967)
Interest rate swap contracts (21,411,283) 11,698 (17,563,912) 16,688,388
----------------- ------------------ ----------------- ------------------
Net change in unrealized
appreciation (depreciation) $140,663,927 $(221,397,172) $293,096,799 $(134,157,593)
----------------- ------------------ ----------------- ------------------
Net realized and unrealized gain (loss) $102,422,215 $(220,093,847) $295,681,079 $(129,357,249)
----------------- ------------------ ----------------- ------------------
Net increase (decrease) in net assets from
operations $90,280,554 $(215,599,187) $287,607,593 $(121,029,227)
================= ================== ================= ==================
</TABLE>
5
<PAGE>
<TABLE>
BELCREST CAPITAL FUND LLC
Consolidated Statements of Changes in Net Assets (Unaudited)
Nine Months Nine Months
ended ended
September 30, September 30,
2000 1999
------------------- ------------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
Net investment income (loss) $( 8,073,486) $ 8,328,022
Net realized gain from investment transactions 2,584,280 4,800,344
Net change in unrealized appreciation (depreciation) of
investments 293,096,799 (134,157,593)
------------------- ------------------
Net increase in net assets from operations $287,607,593 $(121,029,227)
------------------- ------------------
Transactions in Fund shares -
Investment securities contributed $ - $3,011,092,599
Less - selling commissions - (11,382,122)
------------------- ------------------
Net contributions $ - $2,999,710,477
Net asset value of shares redeemed (143,869,717) (26,253,492)
------------------- ------------------
Net increase (decrease) in net assets from Fund shares
transactions $ (143,869,717) $2,973,456,985
------------------- ------------------
Distributions to shareholders -
Special distributions to Shareholders
Belair Capital Fund $ (4,427,990) $ -
------------------- ------------------
Total distributions $ (4,427,990) $ -
------------------- ------------------
Net increase in net assets $ 139,309,886 $2,852,427,758
Net assets:
Beginning of period 3,920,612,531 544,202,835
------------------- ------------------
End of period $ 4,059,922,417 $3,396,630,593
=================== ==================
</TABLE>
6
<PAGE>
<TABLE>
BELCREST CAPITAL FUND LLC
Consolidated Statements of Cash Flows (Unaudited)
Nine months Nine months
Ended Ended
September 30, September 30,
2000 1999
------------------ ------------------
<S> <C> <C>
Cash flows from (for) Operating Activities -
Net investment income(loss) $ (8,073,486) $ 8,328,022
Adjustments to reconcile net investment income (loss) to net
cash flows used for operating activity -
Depreciation and amortization 13,111,664 352,266
Net investment income allocated from Belvedere Capital (15,379,749) (7,056,006)
Payment of organization and offering expenses - (326,898)
Decrease (increase) in dividends receivable 1,503,195 (9,332,004)
Increase in deferred costs (3,749,328) -
Decrease in prepaid expenses 1,016,155 -
Increase in interest payable for open swap contract - 455,061
Decrease in interest receivable for open swap contracts 6,088 -
Increase in escrow deposits (3,848,836) -
Increase in other assets (314,461) -
Increase in accrued property taxes 5,177,780 -
Increase (decrease) in accrued interest and operating expenses (48,295) 5,753,367
Purchases of partnership preference units (113,469,200) (899,486,052)
Payments for investments in other real property (106,592,527) -
Improvements to real estate (2,275,347)
Sales of partnership preference units 362,628,878 -
Proceeds from terminated interest rate swap contracts 6,372,900 -
Net decrease in investment in Belvedere Capital 42,639,314 13,753,137
Minority interest in share of net investments loss of controlled
subsidiaries (2,027,549) -
--------------------------------------
Net cash flows from (used for) operating activities $ 176,677,196 $ (887,559,107)
Cash Flows from (for) Financing Activities -
Proceeds from/(repayment of) Credit Facility $ (135,750,000) $ 905,000,000
Capital contributed to majority owned subsidiary by
minority shareholder 1,031,890
Payments on behalf of investors (selling commissions) - (11,382,122)
Payment on mortgages (1,636,377) -
Payment of special distributions (2,934,666) -
Payments for Fund shares redeemed (26,859,838) (2,126,645)
--------------------------------------
Net cash flows from (used for) financing activities $ (166,148,991) $891,491,233
Net increase in cash 10,528,205 3,932,126
Cash at beginning of period 5,028,304 377,275
------------------ ------------------
Cash at end of period $15,556,509 $ 4,309,401
================== ==================
7
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Supplemental Disclosure and Non-cash Investing and
Financing Activities-
Securities contributed by Shareholders, invested in Belvedere Capital $ - $ 3,011,092,599
Unrealized appreciation of investments and open swap contracts $ 674,510,419 $ (103,745,263)
Interest paid for loan from Credit Facility $ 58,179,501 $ 15,114,291
Interest paid for mortgages $ 17,487,630 -
Interest paid for swap contracts $ 955,128 $ 2,271,625
Market value of securities distributed in payment of redemptions $ 119,489,515 $ 24,126,847
Market value real of property and other assets, net of current
liabilities, contributed to Fund $ 659,900,672 $ -
Mortgages assumed in conjunction with acquisitions of real property $ 537,744,135 $ -
</TABLE>
8
<PAGE>
BELCREST CAPITAL FUND LLC as of September 30, 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), Bel Alliance Properties LLC (Bel Alliance) and Bel
Apartment Properties Trust (Bel Apartment).
BRC - BRC invests directly in partnership preference units and also holds a 100%
interest in BSA and a majority interest in Bel Alliance and Bel Apartment. At
September 30, 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 Bel Alliance
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 Alliance minority shareholder) owns 100% of the Class
B units, representing 45% of the equity interests in Bel Alliance. The Class B
9
<PAGE>
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 holders of the Class B units.
Bel Apartment- Bel Apartment, a majority owned subsidiary of BRC, indirectly
owns ten multi-family residential properties (collectively, the Bel Apartment
properties) located in seven states (Texas, Arizona, Georgia, North Carolina,
Washington, Tennessee and Florida). BRC owns Class A units of Bel Apartment,
representing a 75% equity interest in Bel Apartment, and a minority shareholder
(the Bel Apartment minority shareholder) owns Class B units, representing a 25%
equity interest in Bel Apartment. The equity interest of the Bel Apartment
minority shareholder is recorded as a minority interest on the Statement of
Assets and Liabilities. The primary distinction between the two classes of
shares is the distribution priority and voting rights. BRC has priority in
distributions and has greater voting rights than the holder of Class B units.
The accompanying consolidated financial statements include the accounts of
Belcrest Capital, BRC, BSA, Bel Alliance and Bel Apartment (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 of the real estate investments 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 8). The valuation policy followed by the Fund, Belvedere
Capital and the Portfolio for all assets, other than real property, is as
follows:
10
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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 by the Portfolio for which
valuations or market quotations are unavailable are valued at fair value using
methods determined in good faith by or at the direction of the Trustees.
Interest rate swap contracts are valued by obtaining dealer or counterparty
quotes.
The value of the Fund's real estate assets is determined in good faith by Boston
Management and Research (BMR), 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 upon
independent valuations. Detailed investment valuations, which include the
discounted cash flow method of appraisal, are performed annually and reviewed
periodically and adjusted if there has been a significant change in economic
circumstances since the previous valuation. The discounted cash flow method of
appraisal projects future cash inflows and outflows, and presumes a sales price
at the end of a holding period. Such amounts are discounted at an appropriate
rate of return that a prudent buyer would currently require to purchase the real
estate assets. The valuation of investments assumes the orderly disposition of
all assets.
C Escrow Accounts--The escrow accounts related to Bel Alliance and Bel Apartment
consist of deposits for real estate taxes, insurance, environmental, renovation,
reserve for replacements and capital repairs required under mortgage agreements,
debt service, and security deposit accounts. Bel Alliance and Bel Apartment have
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
9).
D Interest Rate Swaps--The Fund has entered into interest rate swap agreements
with respect to its borrowings and investments in fixed-rate partnership
preference units. Pursuant to these agreements, the Fund makes quarterly
payments to the counterparty at predetermined fixed rates, in exchange for
floating-rate payments from the counterparty at a predetermined spread to
three-month LIBOR, based on notional values approximately equal to the Fund's
acquisition cost for the fixed-rate partnership preference units. During the
terms of the outstanding swap agreements, changes in the underlying values of
the swaps are recorded as unrealized gains or losses. The Fund is exposed to
credit loss in the event of non-performance by the swap counterparty.
E Written Options--The Portfolio and the Fund may write listed and
over-the-counter call options on individual securities, on baskets of securities
and on stock market indices. Upon the writing of a call option, an amount equal
to the premium received by the Portfolio or Fund is included in the Statement of
11
<PAGE>
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 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 apartment units held indirectly by Bel Apartment are leased to
residents generally for a term of one year renewable upon consent of both
parties on a year-to-year or month-to-month basis. The 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 and indirect
investments (including partnership preference units and other real property),
less all actual and accrued expenses of the Fund determined in accordance with
generally accepted accounting principles.
I Rental Property and Depreciation--Costs incurred in connection with
acquisitions of properties have been capitalized. Significant betterments and
improvements are capitalized as part of the building and improvements.
Depreciation of buildings and improvements is computed using the straight line
and accelerated methods over the estimated useful lives of the related assets,
which range up to 39 years for buildings, up to fifteen years for personal
property and up to ten years for building and land improvements.
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
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offering period. Deferred costs of Bel Alliance and Bel Apartment 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 are individually
responsible for taxes on items of partnership income, gain, loss, and deduction.
The policy of BRC, Bel Alliance and Bel Apartment is to comply with the Internal
Revenue Code applicable to REITs. BRC, Bel Alliance and Bel Apartment 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
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
September 30, 2000 and for the nine months then ended have not been audited by
independent certified public accountants, but in the opinion of the Fund's
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial statements.
3 Distributions to Shareholders
The Fund intends to distribute each year all of its net investment income for
the year, if any, and approximately 22% of its net realized capital gains for
such year, if any, other than precontribution gains allocated to a shareholder
in connection with a tender offer or other extraordinary corporate event with
respect to a security contributed by such shareholder, for which no capital gain
distribution is made. In addition, whenever a distribution in respect to a
precontribution gain is made, the Fund makes a special distribution to
compensate shareholders receiving such distributions for taxes that may be due
in connection with the precontribution gain and supplemental distributions.
Special distributions accrued for or paid during the nine month period ended
September 30, 2000 totaled $4,427,990.
4 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:
13
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Nine Months Nine Months
Ended Ended
September 30, Septebmer 30,
2000 1999
------------------------------------
Issued at Fund closings - 27,242,741
Redemptions (1,156,346) (21,198)
------------------------------------
Increase (decrease) (1,156,346) 27,021,543
Redemptions of shares held less than three years are generally subject to a
redemption fee of 1% of the net asset value of shares redeemed. The redemption
fee is paid to Eaton Vance Distributors, Inc. (EVD) by the Fund on behalf of the
redeeming shareholder. No charge is levied on redemptions of shares acquired
through the reinvestment of distributions, shares redeemed in connection with a
tender offer or other extraordinary corporate event with respect to a
contributed security or shares redeemed following the death of all of the
initial holders of the shares redeemed. In addition, no fee applies to
redemptions by shareholders, who, during any 12-month period, redeems less than
8% of the total number of shares held by the shareholder as of the beginning of
the 12-month period. For the nine months ended September 30, 2000, and September
30, 1999, EVD received $1,174,577 and $246,499, respectively, in redemption
fees.
In connection with the offering of shares, 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.
5 Investment Transactions
Increases and decreases of the Fund's investment in Belvedere Capital for the
nine months ended September 30, 2000 aggregated $86,130,626 and $248,206,205,
respectively, and for the nine months ended September 30, 1999 aggregated
$3,044,289,816 and $71,055,936, respectively. Purchases and sales of partnership
preference units aggregated $113,469,200 and $362,628,878 for the nine months
ended September 30, 2000, and $899,486,052 and $0 for the nine months ended
September 30, 1999. For the nine months ended September 30, 2000, acquisitions
of other real property, through purchases and contributions, totaled
$706,381,076. There were no acquisitions of real property other than partnership
preference units for the nine months ended September 30, 1999.
Purchases and sales of partnership preference units for the periods ended
September 30, 2000 and 1999, include amounts purchased from and sold to other
funds sponsored by Eaton Vance Management.
6 Indirect Investment in Portfolio
Belvedere Capital's interest in the Portfolio at September 30, 2000 was
$9,826,270,245, representing 53.8% of the Portfolio's net assets, and at
September 30, 1999 was $6,567,348,215, representing 51.5% of the Portfolio's net
14
<PAGE>
assets. The Fund's investment in Belvedere Capital at September 30, 2000 was
$4,186,403,622, representing 42.6% of Belvedere Capital's net assets, and at
September 30, 1999 was $3,423,024,224, representing 52.1% of Belvedere Capital's
net assets. Investment income allocated to Belvedere Capital from the Portfolio
for the nine months ended September 30, 2000 totaled $70,963,408, of which
$34,012,453 was allocated to the Fund. Investment income allocated to Belvedere
Capital from the Portfolio for the nine months ended September 30, 1999 totaled
$43,288,145, of which $14,352,614 was allocated to the Fund. Expenses allocated
to Belvedere Capital from the Portfolio for the nine months ended September 30,
2000 totaled $28,888,244, of which $13,870,896 was allocated to the Fund.
Expenses allocated to Belvedere Capital from the Portfolio for the nine months
ended September 30, 1999 totaled $16,940,614, of which $5,454,348 was allocated
to the Fund. Belvedere Capital allocated additional expenses to the Fund of
$4,761,808 for the nine months ended September 30, 2000, representing $133,165
of operating expenses and $4,628,643 of service fees. Belvedere Capital
allocated additional expenses to the Fund of $1,842,260 for the nine months
ended September 30, 1999, representing $72,296 of operating expenses and
$1,769,964 of service fees (see Note 10).
A summary of the Portfolio's Statement of Assets and Liabilities, at September
30, 2000, December 31, 1999 and September 30, 1999 and its operations for the
nine months ended September 30, 2000, the year ended December 31, 1999 and the
nine months ended September 30, 1999 follows:
<TABLE>
September 30, December 31, September 30,
2000 1999 1999
-------------------- ------------------------ ---------------------
<S> <C> <C> <C>
Investments, at value $18,195,602,562 $15,009,514,121 $12,750,511,786
Other Assets 279,625,633 105,404,490 11,587,842
----------------------------------- -------------------- ------------------------ ---------------------
Total Assets $18,475,228,195 $15,114,918,611 $12,762,099,628
Total Liabilities 215,812,049 269,652 174,903
----------------------------------- -------------------- ------------------------ ---------------------
Net Assets $18,259,416,146 $15,114,648,959 $12,761,924,725
=================================== ==================== ======================== =====================
Dividends and interest $135,806,873 $135,795,086 $94,362,172
Investment adviser fee 53,698,628 51,368,943 36,125,499
Other expenses 1,603,375 1,599,875 1,022,728
----------------------------------- -------------------- ------------------------ ---------------------
Total expenses $55,302,003 $52,968,818 $37,148,227
----------------------------------- -------------------- ------------------------ ---------------------
Net investment income $80,504,870 $82,826,268 $57,213,945
Net realized gains 203,183,788 19,281,587 46,838,127
Net unrealized gains (losses) 787,635,595 1,954,982,313 (205,241,641)
----------------------------------- -------------------- ------------------------ ---------------------
Net increase (decrease) in net
assets from operations $1,071,324,253 $2,057,090,168 $(101,189,569)
----------------------------------- -------------------- ------------------------ ---------------------
</TABLE>
7 Rental Property
The average occupancy rate for real property held by Bel Alliance, consisting of
13,833 residential units, was approximately 94% at September 30, 2000. The
average occupancy rate for real property held by Bel Apartment, consisting of
2,530 residential units, was approximately 96% at September 30, 2000. The real
property held by BSA, consisting of two suburban office buildings, was 100%
occupied at September 30, 2000. The carrying value of real property owned by the
Fund through BSA, Bel Alliance and Bel Apartment at September 30, 2000 is as
follows:
15
<PAGE>
Land $134,662,027
Buildings, improvements and other depreciable assets 604,635,930
Accumulated depreciation (43,229,285)
-------------
Carrying value $696,068,672
-------------
8 Cancelable Interest Rate Swap Agreements
The Fund may enter into cancelable interest rate swap agreements in connection
with its investments in partnership preference units and the associated
borrowings. Under such agreements, the Fund has agreed to make periodic payments
at fixed rates in exchange for payments at floating rates. The notional or
contractual amounts of these instruments may not necessarily represent the
amounts potentially subject to risk. The measurement of the risks associated
with these investments is meaningful only when considered in conjunction with
all related assets, liabilities and agreements. As of September 30, 2000, the
Fund has entered into cancelable interest rate swap agreements with Merrill
Lynch Capital Services, Inc. (MLCS) with respect to each of its holdings of
partnership preference units and the associated borrowings. The Fund has the
right to terminate the interest rate swap agreements beginning in the first half
of 2003, at dates corresponding approximately to the initial call dates of the
partnership preference units held by the Fund.
<TABLE>
Unrealized Unrealized
Notional Initial Appreciation Appreciation
Amount Optional Final (Depreciation) (Depreciation)
Effective (000's Fixed Floating Termination Termination At September 30, At December 31,
Date omitted) Rate Rate Date Date 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
11/98 $ 20,645 6.330% Libor+.45% 2/03 11/05 $ - $ 1,265,451
11/98 68,750 6.225% Libor+.45% 11/03 11/05 3,152,165 4,445,740
11/98 24,528 6.295% Libor+.45% 5/03 11/05 1,079,661 1,526,923
11/98 41,368 6.310% Libor+.45% 2/03 11/05 1,811,885 2,562,785
02/99 40,035 6.545% Libor+.45% 2/03 11/05 - 2,079,543
02/99 9,030 6.505% Libor+.45% 3/03 11/05 333,568 483,072
02/99 21,996 6.497% Libor+.45% 4/03 11/05 812,720 1,174,226
02/99 12,971 6.495% Libor+.45% 6/03 11/05 - 688,760
02/99 20,018 6.439% Libor+.45% 11/03 11/05 755,203 1,094,309
02/99 111,000 6.407% Libor+.45% 2/04 11/05 4,240,741 6,182,680
04/99 80,000 6.555% Libor+.45% 4/04 11/05 2,534,156 3,868,250
04/99 16,468 6.720% Libor+.45% 2/03 11/05 485,978 731,149
04/99 4,018 6.716% Libor+.45% 3/03 11/05 - 178,049
04/99 7,845 6.700% Libor+.45% 4/03 11/05 - 350,225
04/99 8,702 6.692% Libor+.45% 6/03 11/05 - 387,326
04/99 12,671 6.618% Libor+.45% 11/03 11/05 390,998 590,442
04/99 15,105 6.590% Libor+.45% 2/04 11/05 469,856 713,143
07/99 26,516 7.308% Libor+.45% 11/03 11/05 153,468 420,202
07/99 40,193 7.301% Libor+.45% 2/04 11/05 184,913 602,342
07/99 10,109 7.237% Libor+.45% 4/04 11/05 60,080 171,715
07/99 155,000 7.231% Libor+.45% 7/04 11/05 739,956 2,501,920
07/99 13,200 7.442% Libor+.45% 4/03 11/05 - 174,318
07/99 5,081 7.349% Libor+.45% 6/03 11/05 - 81,759
09/99 17,674 7.700% Libor+.45% 2/04 11/05 (171,426) (45,650)
09/99 9,833 7.635% Libor+.45% 7/04 11/05 (103,982) (23,163)
09/99 5,062 7.840% Libor+.45% 6/03 11/05 - (20,784)
16
<PAGE>
09/99 43,000 7.6525% Libor+.45% 9/04 11/05 (525,049) (169,629)
09/99 35,024 7.644% Libor+.45% 7/04 11/05 (380,934) (96,962)
09/99 20,010 7.885% Libor+.45% 6/03 11/05 - (118,788)
09/99 5,020 7.915% Libor+.45% 4/03 11/05 - (29,122)
09/99 212,000 7.6224% Libor+.45% 9/04 11/05 (2,389,599) (587,812)
09/99 1,907 7.580% Libor+.45% 4/04 11/05 (12,520) 3,331
------------------------------------
Total $ 13,621,838 $ 31,185,750
------------------------------------
</TABLE>
9 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 September 30, 2000 are as follows:
Annual Principal and Balance at
Interest Interest September 30,
Maturity Date Rate Payment 2000
------------- -------- ------------- -------------
April 1, 2010 8.560% $213,139 $27,445,544
January 1, 2028 7.143% 418,459 60,264,139
July 1, 2009 7.740% 235,286 32,593,316
April 1, 2010 8.640% 308,577 39,530,476
April 1, 2010 8.640% 236,624 30,311,354
April 1, 2010 8.560% 224,163 28,944,008
April 1, 2010 8.560% 173,885 22,476,955
May 1, 2009 7.250% 36,155 5,240,772
February 1, 2009 7.220% 313,618 45,460,754
February 1, 2009 7.220% 332,517 48,200,108
July 1, 2009 7.830% 277,228 38,079,920
--------------- ----------------
$2,769,651 $378,547,346
=============== ================
Real property held by Bel Apartment is financed through a loan secured by
cross-collateralized first mortgage liens on such real property. The balance at
September 30, 2000 is as follows:
Annual Monthly
Interest Interest Balance at
Maturity Date Rate Payment* September 30,2000
------------- -------- -------- -----------------
May 1, 2010 8.330% $745,323 $107,369,483
*Mortgage provides for monthly payments of interest only through May 1, 2010,
with the entire principal balance due on May 1, 2010.
Real property held by BSA is financed through a loan collateralized by its real
property. The balance at September 30, 2000 is as follows:
Monthly
Annual Principal and
Interest Interest Balance at
Maturity Date Rate Payment** September 30, 2000
------------- -------- ------------- ------------------
July 10, 2015 7.180% $337,500 $50,190,930
**Amount indicates current monthly loan payment. Amount increases as rental
payments under lease agreement with property tenant increases.
17
<PAGE>
The maturities of mortgages for the five years subsequent to September 30, 2000
are as follows:
Years Ending September 30, Amount
-------------------------- ------
2001 $ 3,735,731
2002 4,036,341
2003 4,344,873
2004 5,065,792
2005 5,735,083
Thereafter 513,189,939
--------------
$536,107,759
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, Bel Alliance and Bel
Apartment. 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 September 30, 2000 and December 31, 1999
amounts outstanding under the Credit Facility totaled $994,250,000 and
$1,130,000,000, respectively.
10 Management Fee and Other Transactions with Affiliates
The Fund and the Portfolio have engaged Boston Management and Research (BMR), a
wholly-owned subsidiary of Eaton Vance Management (EVM) as investment adviser.
Under the terms of the advisory agreement with the Portfolio, BMR receives a
monthly fee of 5/96 of 1% (0.625% annually) of the average daily net assets of
the Portfolio up to $500,000,000 and at reduced rates as daily net assets exceed
that level. For the nine months ended September 30, 2000 and September 30, 1999
the advisory fee applicable to the Portfolio was 0.43% (annualized) and 0.45%
(annualized), respectively, of average daily net assets for such periods.
Belvedere Capital's allocated portion of the advisory fee was $28,049,372, of
which $13,509,488 was allocated to the Fund for the nine months ended September
30, 2000 and $16,474,285, of which $5,257,280 was allocated to the Fund for the
nine months ended September 30, 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 nine months ended September 30, 2000 and
18
<PAGE>
September 30, 1999 the advisory and administrative fee payable to BMR by the
Fund, less the Fund's allocated share of the Portfolio's advisory fee, totaled
$10,173,462 and $3,920,436 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 EVD, Belvedere
Capital pays a servicing fee to EVD for providing certain services and
information to shareholders. The servicing fee is paid on a quarterly basis at
an annual rate of 0.15% of Belvedere Capital's average daily net assets and
totaled $9,645,180 and $5,476,924 for the nine months ended September 30, 2000
and September 30, 1999, respectively, of which $4,628,643 and $1,769,964, 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 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 nine months ended
September 30, 2000 and September 30, 1999 the servicing fee paid or accrued
directly by Belcrest Capital totaled $1,319,977 and $562,877, respectively. Of
the amounts allocated to and incurred by the Fund, for the nine months ended
September 30, 2000, $2,456,063 was paid to subagents. No service fee payments
were made to subagents for the period ended September 30, 1999.
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 nine months ended September 30, 2000 and
September 30, 1999, Belcrest Capital's distribution fees paid or accrued to EVD
totaled $2,982,078 and $1,162,373, 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 nine months ended September 30, 2000
and September 30, 1999, BMR has waived $2,982,078 and $1,162,373, 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 Alliance minority shareholder (Note 1B), for periods ranging from 3 to 10
years. If neither BRC nor the Alliance minority shareholder gives notice to
terminate, the agreement automatically renews from year to year. The management
agreements provide for a management fee in the amount of 4% of gross collections
and allows for reimbursement to the manager for all direct expenses incurred by
the manager for managing the Bel Alliance properties. For the period from
inception, March 17, 2000, though September 30, 2000, Bel Alliance paid or
accrued management fees to Alliance Residential Management, LLC, amounting to
$1,815,493.
Equity Residential Properties Management Corp. (ERPM) an affiliate of the Bel
Apartment minority holder, provides day to day management of Bel Apartment
pursuant to a management agreement which expires June 30, 2010 (Note 1B). The
19
<PAGE>
management agreement provides for a management fee in the amount of 4% of gross
collections and allows for reimbursement to ERPM of payroll expenses incurred by
ERPM. For the period from inception, June 30, 2000, to September 30, 2000, Bel
Apartment paid or accrued management fees and payroll expenses to ERPM amounting
to $212,041 and $523,597, respectively.
20
<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,
Bel Alliance and Bel Apartment. 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. The Portfolio is registered as a diversified management investment
company under the Investment Company Act of 1940, as amended, and makes filings
with the Securities and Exchange Commission that include information about its
investment holdings. Through the impact of interest rates on the valuation of
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 September 30, 2000 and the Nine
Months Ended September 30, 2000
The Fund achieved total return performance of 2.2% for the quarter ended
September 30, 2000. This return reflects an increase in the Fund's net asset
value per share from $124.68 to $127.47. For comparison, the S&P 500, an
unmanaged index of large capitalization stocks commonly used as a benchmark for
the U.S. equity market, had a total return of -1.0% over the same period. The
Fund had a total return of -8.4% for the quarter ended September 30, 1999.
During the third quarter of 2000, U.S. equity market leadership was concentrated
in defensive sectors such as utilities, financial services, aerospace/defense
and energy. Stocks viewed as particularly vulnerable to a slowing
economy--including most retail and basic industries stocks--were generally weak.
Technology stocks were also generally weak, as a number of leading technology
companies reported slowdowns or disappointment in their business results and
21
<PAGE>
investors became more sensitized to valuation and risk considerations. A number
of speculative technology and Internet-related stocks saw their stock prices
plunge during the third quarter. In this more cautious environment the Fund
benefited from Tax-Managed Growth Portfolio's valuation-sensitive investment
approach and broad diversification. In the fixed income markets, the third
quarter saw declining interest rates on benchmark long-term government bonds.
Spreads versus Treasuries for long-term corporate bonds widened to reflect
credit concerns in a weakening economy. Real estate fixed income securities were
relatively strong performers. The performance of the Fund during the quarter was
favorably impacted by changes in valuation of its holdings of real estate
partnership preference units.
The Fund achieved total return performance of 7.3% for the nine months ended
September 30, 2000. This return reflects an increase in the Fund's net asset
value per share from $118.78 to $127.47. For comparison, the S&P 500, an
unmanaged index of large capitalization stocks commonly used as a benchmark for
U.S. stocks, had a total return of -1.4% over the same period. The Fund had a
total return of -0.1% for the nine months ended September 30, 1999.
During the nine months ended September 30, 2000, the U.S. equity markets were
lead by health care, financial services, utilities and energy stocks. Value
stocks outperformed growth stocks. Retail stocks and basic industry stocks were
hurt by increased concerns about a slowing economy. After a very strong start to
the year, technology stocks generally turned weaker. Particularly during the
third quarter, a number of leading technology companies reported business
slowdowns or disclosed reduced expectations for future growth. As the year has
progressed, stock investors have become more risk averse. A large number of
speculative technology and Internet-related stocks saw plunging stock prices in
the second and third quarters. In this more cautious environment the Fund
benefited from Tax-Managed Growth Portfolio's valuation-sensitive investment
approach and broad diversification.
In the fixed income markets, the first nine months of 2000 saw declining
interest rates on benchmark long-term government bonds. Credit spreads for
corporate issues widened appreciably to reflect increased concerns about credit
issues in a weakening economy. Real estate fixed income securities were strong
performers compared to fixed income issues in general. The Fund's investments in
real estate partnership preference units and associated borrowings had a
positive impact on the Fund's performance during the first nine months of 2000.
Liquidity and Capital Resources
As of September 30, 2000, Belcrest Capital had outstanding borrowings of $994.25
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 $155.75 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
September 30, 2000, the Portfolio had cash and short-term investments totaling
$767.6 million. The Portfolio participates in a $150 million multi-fund
unsecured line of credit agreement with a group of banks. The Portfolio may
22
<PAGE>
temporarily borrow from the line of credit to satisfy redemption requests in
cash or to settle investment transactions. The Portfolio had no outstanding
borrowings under the $150 million line of credit at September 30, 2000, and, as
of that date, the net assets of the Portfolio totaled $18,259.4 million. To
ensure liquidity for investors in the Portfolio, the Portfolio may not invest
more than 15% of its net assets in illiquid assets. As of September 30, 2000,
restricted securities, which are considered illiquid, constituted 2.3% of the
net assets of the Portfolio.
The Partnership Preference Units held by 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 and Bel Apartment similarly are
considered illiquid, and have 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 respective minority shareholders.
Redemptions of Fund shares are met primarily by distributing securities drawn
from the Portfolio, although cash may also be distributed. Shareholders
generally do not have the right to receive the proceeds of Fund redemptions in
cash.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The value of Fund shares may not increase or may decline. The performance of
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
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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 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
24
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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.
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. As described in Note 7 to the
Fund's consolidated financial statements, the Fund has entered into interest
rate swap contracts to hedge interest rate risks. Fluctuation in the value of
Partnership Preference Units derived from changes in general interest rates can
be expected to be offset in part (but not entirely) by changes in the value of
interest rate swap agreements or other interest rate hedges entered into by
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
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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,
Bel Apartment and BSA will reduce overall portfolio risk and volatility and
contribute to 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 and Bel
Apartment (collectively, the Residential REITs), the performance of BRC's
investment may be influenced by decisions which Residential REITs' respective
minority shareholders may make on behalf of Residential REITs, and potential
changes in the submarkets in which Residential REITs' buildings are located. The
debt of Bel Alliance, Bel Apartment and BSA 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.
26
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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. Exhibits and Reports on Form 8-K:
(a) Exhibits
21 List of Subsidiaries
27 Financial Data Schedules
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned officer of its Manager, Eaton Vance Management, thereunto duly
authorized on November 14, 2000.
BELCREST CAPITAL FUND LLC
(Registrant)
By: EATON VANCE MANAGEMENT,
its Manager
By: /s/ James L. O'Connor
-----------------------------
James L. O'Connor
Vice President
By: /s/ William M. Steul
-----------------------------
William M. Steul
Chief Financial Officer
28
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EXHIBIT INDEX
21 List of Subsidiaries
27 Financial Data Schedules
29
