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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, 2002
Commission File No. 000-30509
Belcrest Capital Fund LLC
-------------------------
(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
----
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 [ ]
1
Belcrest Capital Fund LLC
Index to Form 10Q
PART I - FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Statements of Assets and Liabilities
as of September 30, 2002 (Unaudited) and December 31, 2001 3
Condensed Consolidated Statements of Operations (Unaudited) for
the Three Months Ended September 30, 2002 and 2001 and for the
Nine Months Ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Changes in Net Assets
(Unaudited) for the Nine Months Ended September 30, 2002 and 2001 6
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the Nine Months Ended September 30, 2002 and 2001 7
Financial Highlights (Unaudited) for the Nine Months Ended
September 30, 2002 9
Notes to Condensed Consolidated Financial Statements as of
September 30, 2002 (Unaudited) 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports 18
SIGNATURES 19
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Assets and Liabilities
September 30,
2002 December 31,
(Unaudited) 2001
------------- ------------
Assets:
Investment in Belvedere Capital Fund
Company LLC $2,420,307,851 $3,417,745,020
Investment in Partnership Preference Units 568,810,559 570,711,688
Investment in other real estate 816,729,842 1,042,486,780
Short-term investments 1,302,000 5,719,717
-------------- --------------
Total Investments $3,807,150,252 $5,036,663,205
Cash 12,659,088 12,170,155
Escrow deposits - restricted 14,328,551 15,248,666
Interest and dividends receivable 8,961,287 5,180,619
Other assets 7,819,832 11,314,657
-------------- --------------
Total assets $3,850,919,010 $5,080,577,302
-------------- --------------
Liabilities:
Loan payable on Credit Facility $ 817,350,000 $ 884,350,000
Mortgages payable 663,129,647 773,645,268
Payable for Fund Shares redeemed 10,630,850 1,395,000
Open interest rate swap contracts, at value 67,564,096 49,830,356
Security deposits 2,665,936 2,894,109
Swap interest payable 4,707,524 4,338,728
Accrued expenses:
Interest expense 6,760,694 8,294,748
Property taxes 8,651,869 10,181,155
Other expenses and liabilities 7,429,614 7,415,556
Minority interests in controlled subsidiaries 33,427,028 84,242,013
-------------- --------------
Total liabilities $1,622,317,258 $1,826,586,933
-------------- --------------
Net assets $2,228,601,752 $3,253,990,369
-------------- --------------
Shareholders' Capital
-------------- --------------
Shareholders' capital $2,228,601,752 $3,253,990,369
-------------- --------------
Shares Outstanding 28,488,333 30,417,292
-------------- --------------
Net Asset Value and Redemption Price Per Share $ 78.23 $ 106.98
-------------- --------------
See notes to condensed consolidated financial statements
3
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Investment Income:
Dividends allocated from Belvedere Capital
(net of foreign taxes of $78,530, $82,385,
$300,567, $195,786, respectively) $ 8,746,923 $ 9,064,457 $ 27,223,566 $ 26,399,752
Interest allocated from Belvedere Capital 200,459 567,236 720,348 2,596,274
Expenses allocated from Belvedere Capital (4,046,391) (5,155,659) (13,849,800) (16,262,030)
------------- ------------- ------------- -------------
Net investment income allocated from
Belvedere Capital $ 4,900,991 $ 4,476,034 $ 14,094,114 $ 12,733,996
Dividends from Partnership Preference Units 13,092,134 17,523,861 39,294,777 40,262,292
Rental income 33,903,937 44,335,109 105,717,460 124,603,977
Interest 23,215 278,927 135,290 1,032,992
------------- ------------- ------------- -------------
Total investment income $ 51,920,277 $ 66,613,931 $159,241,641 $178,633,257
------------- ------------- ------------- -------------
Expenses:
Investment advisory and administrative fees $ 2,765,589 $ 3,579,227 $ 9,082,455 $ 10,721,817
Property management fees 1,304,217 1,744,999 4,097,178 4,879,015
Distribution and servicing fees 829,002 1,137,895 3,016,826 3,721,486
Interest expense on mortgages 12,863,705 16,840,811 39,939,765 47,395,534
Interest expense on Credit Facility 4,996,571 11,628,667 15,433,995 42,675,481
Interest expense on swap contracts 11,680,481 6,368,314 33,650,608 11,348,093
Property and maintenance expense 11,188,827 13,974,632 32,718,127 38,133,679
Property taxes and insurance 4,531,834 4,953,156 13,794,187 13,576,838
Miscellaneous 330,422 587,227 1,190,409 2,656,114
------------- ------------- ------------- -------------
Total expenses $ 50,490,648 $ 60,814,928 $152,923,550 $175,108,057
Deduct:
Reduction of investment advisory
and administrative fees 610,857 809,186 2,145,019 2,585,527
------------- ------------- ------------- -------------
Net expenses $ 49,879,791 $ 60,005,742 $150,778,531 $172,522,530
-------------- -------------- -------------- -------------
Net investment income before minority
interests in net income of controlled
subsidiaries $ 2,040,486 $ 6,608,189 $ 8,463,110 $ 6,110,727
Minority interests in net income
of controlled subsidiaries (535,236) (1,492,556) (2,992,585) (5,148,605)
------------- ------------- ------------- -------------
Net investment income $ 1,505,250 $ 5,115,633 $ 5,470,525 $ 962,122
------------- ------------- ------------- -------------
See notes to condensed consolidated financial statements
4
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Operations
(Unaudited) (Continued)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Realized and Unrealized Gain (Loss)
Net realized gain loss -
Investment transactions from Belvedere Capital
(identified cost basis) $ (54,420,240) $ (42,065,190) $(203,300,931) $ (44,404,461)
Investment transactions in Partnership
Preference Units (identified cost basis) - 3,068,006 374,360 3,068,006
Investment transactions in other real estate
investments - - (1,532,128) -
-------------- -------------- -------------- --------------
Net realized loss $ (54,420,240) $ (38,997,184) $(204,458,699) $ (41,336,455)
-------------- -------------- -------------- --------------
Change in unrealized appreciation(depreciation)-
Investment in Belvedere Capital
(identified cost basis) $(388,020,095) $(465,250,043) $(615,592,266) $(724,608,864)
Investments in Partnership Preference Units
(identified cost basis) 18,049,461 (19,678,834) 33,098,871 49,916,648
Investment in other real estate (net of
minority interests in unrealized loss of
controlled subsidiaries of $5,548,478,
$6,996,356, $41,445,190 and
$24,044,095, respectively) (1,769,838) 6,996,356 (40,756,598) 11,685,509
Interest rate swap contracts (12,548,231) (38,377,516) (17,733,740) (49,907,305)
------------- -------------- --------------- --------------
Net change in unnrealized appreciation
(depreciation) $(384,288,703) $(516,310,037) $(640,983,733) $(712,914,012)
-------------- -------------- -------------- --------------
Net realized and unrealized loss $(438,708,943) $(555,307,221) $(845,442,432) $(754,250,467)
-------------- -------------- -------------- --------------
Net decrease in net assets from operations $(437,203,693) $(550,191,588) $(839,971,907) $(753,288,345)
============== ============== ============== ==============
See notes to condensed consolidated financial statements
5
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Changes in Net Assets (Unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2002 2001
--------------- ---------------
Increase (Decrease) in Net Assets:
Net investment income (loss) $ 5,470,525 $ 962,122
Net realized loss on investment transactions (204,458,699) (41,336,455)
Net change in unrealized appreciation
(depreciation) of investments (640,983,733) (712,914,012)
--------------- ---------------
Net decrease in net assets from operations $ (839,971,907) $ (753,288,345)
--------------- ---------------
Transactions in Fund Shares -
Net asset value of Shares redeemed $ (185,416,710) $ (101,624,721)
-------------- ---------------
Net decrease in net assets from Fund
Share transactions $ (185,416,710) $ (101,624,721)
-------------- --------------
Net decrease in net assets $(1,025,388,617) $ (854,913,066)
Net assets:
Beginning of period $ 3,253,990,369 $3,807,101,131
---------------- ---------------
End of period $ 2,228,601,752 $2,952,188,065
================ ===============
See notes to condensed consolidated financial statements
6
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2002 2001
----------------- -----------------
Cash Flows From (For) Operating Activities -
Net decrease in net assets from operations $(839,971,907) $(753,288,345)
Adjustments to reconcile net decrease in net assets from operations to net
cash flows from (for) operating activities -
Amortization of debt issuance costs 596,483 672,974
Net investment income allocated from Belvedere Capital (14,094,114) (12,733,996)
(Increase) decrease in interest and dividends receivable (3,780,668) 12,288,687
Increase in escrow deposits (528,515) (4,807,983)
Decrease in other assets 1,793,922 2,436,734
Increase in interest payable for open swap contracts 368,796 3,311,035
Increase (decrease) in accrued property taxes (851,580) 1,516,599
Decrease in security deposits, accrued interest and accrued other expenses
and liabilities (239,401) (4,224,552)
Increase in minority interest - 216,000
Improvements to rental property (5,788,406) (7,814,097)
Payments for investments in other real estate - (75,156,301)
Proceeds from sale of investment in other real estate 31,588,186 -
Decrease in cash due to sale of majority interest in controlled subsidiary (1,195,835) -
Sales of Partnership Preference Units 35,374,360 80,940,000
Net decrease (increase) in investment in Belvedere Capital 19,977,702 (53,700,085)
Decrease in short-term investments 4,417,717 22,880,111
Minority interests in net income of controlled subsidiaries 2,992,585 5,148,605
Net realized loss on investment transactions 204,458,699 41,336,455
Net change in unrealized (appreciation) depreciation of investments 640,983,733 712,914,012
-------------- -------------------
Net cash flows from (for) operating activities $ 76,101,757 $ (28,064,147)
Cash Flows From (For) Financing Activities -
Proceeds from (repayment of) Credit Facility $ (67,000,000) $ 41,600,000
Payments on mortgages (3,146,138) (2,803,391)
Payments for Fund Shares redeemed (3,520,473) (5,202,104)
Distributions paid to minority shareholders (1,946,213) (2,734,525)
-------------- --------------
Net cash flows from (for) financing activities $ (75,612,824) $ 30,859,980
Net increase in cash $ 488,933 $ 2,795,833
Cash at beginning of period $ 12,170,155 $ 10,419,784
-------------- --------------
Cash at end of period $ 12,659,088 $ 13,215,617
============== ==============
See notes to condensed consolidated financial statements
7
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2002 2001
------------ ------------
Supplemental Disclosure of Non-cash Investing and
Financing Activities-
Interest paid for loan-Credit Facility $ 15,920,432 $ 47,516,781
Interest paid for swap contracts $ 33,281,812 $ 8,037,058
Interest paid for mortgages $ 39,435,437 $ 45,616,385
Market value of securities distributed in
payment of redemptions $172,660,387 $ 96,078,975
Market value of real property and other assets,
net of current liabilities, assumed in
conjunction with acquisition of real estate
investments $ - $ 312,541,047
Mortgage assumed in conjunction with acquisition
of real estate investments $ - $ 217,307,500
Market value of real property and other assets,
net of current liabilities, disposed of in
conjunction with sale of real estate investment
in Bel Apartment $148,197,322 $ -
Mortgage disposed of in conjunction with sale
of real estate investment in Bel Apartment $107,369,483 $ -
See notes to condensed consolidated financial statements
8
BELCREST CAPITAL FUND LLC
Financial Highlights (Unaudited)
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net asset value - Beginning of period $ 106.980
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
- --------------------------------------------------------------------------------
Net investment income (6) $ 0.185
Net realized and unrealized loss (28.935)
- --------------------------------------------------------------------------------
TOTAL LOSS FROM OPERATIONS $ (28.750)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET ASSET VALUE - END OF PERIOD $ 78.230
- --------------------------------------------------------------------------------
TOTAL RETURN (1) (26.87)%
- --------------------------------------------------------------------------------
As a Percentage As a Percentage
of Average Net of Average Gross
RATIOS Assets (5) Assets (4)(5)
- --------------------------------------------------------------------------------
Expenses of Consolidated Real
Property Subsidiaries
Interest and other borrowing costs (3) 1.51% (9) 1.02% (9)
Operating expenses (3) 1.89% (9) 1.28% (9)
Belcrest Capital Fund LLC Expenses
Interest and other borrowing costs (2) 2.29% (9) 1.55% (9)
Investment advisory and administrative fees,
servicing fees and other Fund operating
expenses (2)(7) 1.14% (9) 0.77% (9)
------------------------------------
Total expenses 6.83% (9) 4.62% (9)
Net investment income 0.26% (9) 0.18% (9)
- --------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 2,288,602
Portfolio Turnover of Tax-Managed Growth Portfolio 16%
- --------------------------------------------------------------------------------
(1) Total return is calculated assuming a purchase at the net asset value on
the first day and a sale at the net asset value on the last day of the
period. Distributions, if any, are assumed reinvested at the net asset
value on the reinvestment date.
(2) Ratio includes the expenses of Belcrest Capital Fund LLC and Belcrest
Realty Corporation (BRC), for which Belcrest Capital Fund LLC owns 100% of
the outstanding common stock. The ratio does not include expenses of other
real estate subsidiaries.
(3) Ratio includes BRC's proportional share of expenses incurred by its
majority-owned subsidiaries.
(4) Average Gross Assets is defined as the average daily amount of all assets
of Belcrest Capital Fund LLC (not including its investment in BRC) plus all
assets of BRC minus the sum of their 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.
(5) For the purpose of calculating ratios, the income and expenses of BRC's
controlled subsidiaries are reduced by the proportionate interests therein
of investors other than BRC.
(6) Calculated using average shares outstanding.
(7) Ratio includes Belcrest Capital Fund LLC's share of Belvedere Capital's
allocated expenses, including those expenses allocated from the Portfolio.
(8) The expenses reflect a reduction of the investment advisory and
administrative fees. Had such action not been taken, the ratios of total
expenses to average net assets and average gross assets would have been
6.93% and 4.69%, respectively, and the ratios of net investment income to
average net assets and average gross assets would have been 0.16% and
0.11%, respectively.
(9) Annualized.
See notes to condensed consolidated financial statements
9
BELCREST CAPITAL FUND LLC as of September 30, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1 Basis of Presentation
The condensed consolidated interim financial statements of Belcrest Capital Fund
LLC (Belcrest Capital) and its subsidiaries (collectively, the Fund) have been
prepared by the Fund, without audit, in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted as permitted by such rules and regulations. All adjustments, consisting
of normal recurring adjustments, have been included. Management believes that
the disclosures are adequate to present fairly the financial position, results
of operations, cash flows and financial highlights at the dates and for the
periods presented. It is suggested that these interim financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Fund's latest annual report on Form 10-K. Results for interim periods are
not necessarily indicative of those to be expected for the full fiscal year.
The balance sheet at December 31, 2001, has been derived from the December 31,
2001 audited financial statements but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements as permitted by the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Certain amounts in the prior period's condensed consolidated financial
statements have been reclassified to conform with the current period
presentation.
2 Investment Transactions
Increases and decreases of the Fund's investment in Belvedere Capital Fund
Company LLC (Belvedere Capital) for the nine months ended September 30, 2002
aggregated $106,910,691 and $299,548,777 respectively, and for the nine months
ended September 30, 2001 aggregated $160,782,329 and $203,117,273, respectively.
For the nine months ended September 30, 2002, sales of Partnership Preference
Units aggregated $35,374,360. For the nine months ended September 30, 2001,
sales of Partnership Preference Units aggregated $80,940,000. There were no
purchases of Partnership Preference Units during the nine months ended September
30, 2002 and for the nine months ended September 30, 2001. For the nine months
ended September 30, 2002, acquisitions and sales of other real estate
investments aggregated $0 and $31,588,186, respectively. For the nine months
ended September 30, 2001, acquisitions and sales of other real estate
investments aggregated $75,156,301 and $0, respectively.
For the nine months ended September 30, 2001, sales of Partnership Preference
Units include amounts sold to other funds sponsored by Eaton Vance Management
(EVM), for which a gain of $663,006 was recognized.
During the nine months ended September 30, 2002, Belcrest Realty Corporation
(BRC) sold its majority interest in Bel Apartment Properties Trust (Bel
Apartment) to another fund sponsored by EVM, for which a loss of $1,532,128 was
recognized.
10
In October 2002, BRC sold its majority interest in Bel Communities Property
Trust to another fund sponsored by EVM, for which a gain of $3,872,661 was
recognized.
3 Indirect Investment in Portfolio
Belvedere Capital's interest in Tax-Managed Growth Portfolio (the Portfolio) at
September 30, 2002 was $8,043,904,602 representing 58.6% of the Portfolio's net
assets and at September 30, 2001 was $8,914,385,448 representing 55.5% of the
Portfolio's net assets. The Fund's investment in Belvedere Capital at September
30, 2002 was $2,420,307,851 representing 30.1% of Belvedere Capital's net assets
and at September 30, 2001 was $3,157,064,666, representing 35.4% of Belvedere
Capital's net assets. Investment income allocated to Belvedere Capital from the
Portfolio for the nine months ended September 30, 2002 totaled $88,799,143, of
which $27,943,914 was allocated to the Fund. Investment income allocated to
Belvedere Capital from the Portfolio for the nine months ended September 30,
2001 totaled $77,460,677, of which $28,996,026 was allocated to the Fund.
Expenses allocated to Belvedere Capital from the Portfolio for the nine months
ended September 30, 2002 totaled $32,657,939, of which $10,325,859 was allocated
to the Fund. Expenses allocated to Belvedere Capital from the Portfolio for the
nine months ended September 30, 2001 totaled $32,264,414, of which $12,085,263
was allocated to the Fund. Belvedere Capital allocated additional expenses to
the Fund of $3,523,941 for the nine months ended September 30, 2002,
representing $93,179 of operating expenses and $3,430,762 of service fees.
Belvedere Capital allocated additional expenses to the Fund of $4,176,767 for
the nine months ended September 30, 2001, representing $98,523 of operating
expenses and $4,078,244 of service fees.
A summary of the Portfolio's Statement of Assets and Liabilities, at September
30, 2002, December 31, 2001 and September 30, 2001 and its operations for the
nine months ended September 30, 2002, the year ended December 31, 2001 and the
nine months ended September 30, 2001 follows:
September 30, December 31, September 30,
2002 2001 2001
--------------- ---------------- ----------------
Investments, at value $13,713,440,772 $18,312,992,768 $15,879,363,685
Other Assets 59,906,476 23,229,223 247,862,763
- --------------------------------------------------------------------------------
Total Assets $13,773,347,248 $18,336,221,991 $16,127,226,448
Total Liabilities 35,785,860 357,011 63,436,483
- --------------------------------------------------------------------------------
Net Assets $13,737,561,388 $18,335,864,980 $16,063,789,965
================================================================================
Dividends and interest $ 155,639,717 $ 192,367,081 $ 141,895,798
- --------------------------------------------------------------------------------
Investment adviser fee $ 55,373,624 $ 76,812,367 $ 57,512,662
Other expenses 1,956,361 2,161,015 1,602,705
- --------------------------------------------------------------------------------
Total expenses $ 57,329,985 $ 78,973,382 $ 59,115,367
- --------------------------------------------------------------------------------
Net investment income $ 98,309,732 $ 113,393,699 $ 82,780,431
Net realized losses (503,906,340) (360,120,300) (226,406,730)
Net change in unrealized
appreciation
(depreciation) (4,125,048,140) (1,605,211,090) (3,614,091,583)
- --------------------------------------------------------------------------------
Net decrease in
net assets from
operations $(4,530,644,748) $(1,851,937,691) $(3,757,717,882)
- --------------------------------------------------------------------------------
11
4 Cancelable Interest Rate Swap Agreements
Belcrest Capital has entered into cancelable interest rate swap agreements in
connection with its real estate investments and the associated borrowings. Under
such agreements, Belcrest Capital has agreed to make periodic payments at fixed
rates in exchange for payments at floating rates.
The notional or contractual amounts of these instruments may not necessarily
represent the amounts potentially subject to risk. The measurement of the risks
associated with these investments is meaningful only when considered in
conjunction with all related assets, liabilities and agreements. As of September
30, 2002 and December 31, 2001, Belcrest Capital has entered into cancelable
interest rate swap agreements with Merrill Lynch Capital Services, Inc., as
listed below.
Notional Initial Unrealized Unrealized
Amount Optional Final Depreciation Depreciation
Effective (000's Fixed Floating Termination Termination At September 30, At December 31,
Date omitted) Rate Rate Rate Date 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
11/98 $ 68,750 6.2250% Libor + 0.45% 11/24/03 11/24/05 $ 3,034,275 $ 1,781,035
11/98 24,528 6.2950% Libor + 0.45% 05/24/03 11/24/05 730,581 603,624
11/98 41,368 6.3100% Libor + 0.45% 02/24/03 11/24/05 935,963 958,841
02/99 9,030 6.5050% Libor + 0.45% 03/04/03 11/24/05 165,485 235,750
02/99 21,996 6.4970% Libor + 0.45% 04/20/03 11/24/05 525,028 605,921
02/99 20,018 6.4390% Libor + 0.45% 11/24/03 11/24/05 940,472 635,733
02/99 111,000 6.4068% Libor + 0.45% 02/23/04 11/24/05 6,091,947 3,623,059
04/99 80,000 6.5550% Libor + 0.45% 04/28/04 11/24/05 5,050,889 3,058,399
04/99 16,468 6.7195% Libor + 0.45% 02/06/03 11/24/05 254,527 480,383
04/99 12,671 6.6176% Libor + 0.45% 11/24/03 11/24/05 623,720 462,881
04/99 15,105 6.5903% Libor + 0.45% 02/23/04 11/24/05 871,134 571,060
07/99 26,516 7.3080% Libor + 0.45% 11/24/03 11/24/05 1,524,855 1,430,877
07/99 40,193 7.3010% Libor + 0.45% 02/23/04 11/24/05 2,734,694 2,286,386
07/99 10,109 7.2370% Libor + 0.45% 04/29/04 11/24/05 752,761 580,387
07/99 155,000 7.2310% Libor + 0.45% 07/28/04 11/24/05 12,960,274 9,298,744
09/99 17,674 7.7000% Libor + 0.45% 02/23/04 11/24/05 1,303,986 1,184,451
09/99 9,833 7.6350% Libor + 0.45% 07/28/04 11/24/05 896,518 702,968
09/99 43,000 7.6525% Libor + 0.45% 09/17/04 11/24/05 4,164,111 3,168,606
09/99 35,024 7.6440% Libor + 0.45% 07/28/04 11/24/05 3,199,061 2,512,664
09/99 212,000 7.6224% Libor + 0.45% 09/28/04 11/24/05 20,651,130 15,521,494
09/99 1,907 7.5800% Libor + 0.45% 04/29/04 11/24/05 152,685 127,093
- ------------------------------------------------------------------------------------------------------------------------------------
Total $67,564,096 $49,830,356
- ------------------------------------------------------------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2002, COMPARED TO THE
QUARTER ENDED SEPTEMBER 30, 2001
The total return of Belcrest Capital Fund LLC and its subsidiaries
(collectively, the Fund) was -16.18% for the quarter ended September 30, 2002.
This return reflects a decrease in the Fund's net asset value per share from
$93.33 to $78.23 during the period. For comparison, the Standard & Poor's 500
Index (the S&P 500), an unmanaged index of large capitalization stocks commonly
used as a benchmark for the U.S. equity market, had a total return of -17.27%
over the same period. Investors cannot invest directly in an Index. For the
quarter ended September 30, 2001, the Fund's total return was -15.67%. This
12
return reflected a decrease in the Fund's net asset value per share from $113.89
to $96.04. For comparison, the S&P 500 had a total return of -14.67% over the
same period.
A multitude of factors contributed to the disconnect between the economic
recovery and the dismal performance of the equity markets. A combination of
geopolitical uncertainties, negative investor sentiment, and fears of double dip
recession pressured equity returns. The third quarter of 2002 marked the worst
broad market decline, as measured by the S&P 500 since the fourth quarter of
1987. Looking back a year ago during the same period, the U.S. equity market
fell sharply as well, but mostly in response to the tragic events of September
11th coupled with deteriorating domestic economic conditions. Every major
domestic benchmark experienced negative returns during the September 2002
quarter, and none of the S&P 500 sectors or industry groups had gains. A subtle
change in leadership to growth and large caps emerged, but volatility and the
pace of sector rotation remained at high levels.
The best performing sector during the period of the S&P 500 was health care,
while information technology and telecommunications services continued to trail
the benchmark. Market leading groups in the third quarter of 2002 included
casinos and gaming stocks, agricultural equipment, as well as defensive plays
such as household products, generic pharmaceuticals and utilities. Defensive
leadership was evident during the third quarter of 2001 as well, resulting from
cautious investor sentiment due to September 11th. Last year's leading
industries included consumer products, pharmaceuticals, packaged foods and
utilities groups. Higher beta and more aggressive groups were the worst
performers for the quarter ending in September 2002, a continued theme from the
same period in 2001. Weaker group performers included semiconductors, airlines,
entertainment, catalog retail and steel stocks .
In this challenging environment, the performance of Tax-Managed Growth Portfolio
(the Portfolio) surpassed that of the overall market. The Portfolio maintained
an overweight position in the industrials and consumer staples sectors, a slight
directional increase from the levels held at the end of the third quarter of
2001. The Portfolio's emphasis in the areas of food and drug products,
airfreight logistics, machinery and defense sub-groups contributed positively to
its performance. The Portfolio's neutral weight in the energy group, a relative
increase from last year, particularly in the oil and gas industry, proved to be
constructive for the overall returns. The Portfolio's underweight in health care
and an overweight of the consumer discretionary stocks detracted from returns.
While the Portfolio had gradually reduced its position in the financial sector
from last year's level, this sector was overweighted, weakening absolute
returns, mainly due to insurance and bank industry holdings. Lack of earnings
visibility and fundamental uncertainty resulted in the Portfolio's de-emphasis
of information technology and telecommunications, which were the worst
performing sectors in the quarter ended September 30, 2002.
The combined impact on performance of the Fund's investment activities outside
of the Portfolio was modestly negative for the quarters ended September 30, 2002
and 2001. The performance of the Fund trailed that of the Portfolio by
approximately -1.1% and -1.0% for the quarters ended September 30, 2002 and
2001, respectively. The Fund's investments in real estate Partnership Preference
Units generally benefited from declining interest rates and tightening spreads
in income-oriented securities, particularly in real estate-related securities,
for the quarter ended September 30, 2002, but suffered modestly from rising
credit spreads impacting the value of the Fund's real estate investments during
the quarter ended September 30, 2001. The Fund's investments in real estate
joint ventures experienced weakness in multifamily fundamentals in many U.S.
13
markets, which resulted in declines in value during 2002. For the quarter ended
September 30, 2001, the real estate joint ventures performed modestly well,
despite weakness in operating fundamentals. For the quarters ended September 30,
2002 and 2001, interest rate swap valuations declined as interest rates fell.
During both periods, dividends received from the Fund's Partnership Preference
Units and real estate joint venture investments modestly added to performance.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2001
The Fund's total return for the nine months ended September 30, 2002 was
- -26.87%. This return reflects a decrease in the Fund's net asset value per share
from $106.98 to $78.23 during the period. For comparison, the S&P 500 had a
total return of -28.15% over the same period. For the nine months ended
September 30, 2001, the Fund's total return was -20.17%. This return reflected a
decrease in the Fund's net asset value per share from $120.30 to $96.04. For
comparison, the S&P 500 had a total return of -20.38% over the same period.
Investors awaiting earnings and economic solidification were troubled by
political uncertainties, possibility of a double dip recession, lackluster
corporate growth prospects, and weakening consumer resilience. Heightened risk
sensitivity translated into negative investor sentiment, which has prolonged the
bear market. The first nine months of 2002 repeated another volatile market
pattern seen during the same period in 2001, rising gradually through mid-March
and retreating to the lowest levels of the year at the end of September.
Investors' behavior however proved different during 2002 in that U.S. equity
fund net outflows were at peak levels, sharply contrasting net inflow activity
seen during the first nine months of 2001. Most major indices posted multi-year
lows, with none achieving positive returns year-to-date in 2002. All ten of the
S&P 500 sectors declined during this period. The best performing sectors during
these nine months included consumer staples, materials, and energy. The weakest
performing groups included fiber optics, semiconductor equipment, unregulated
power producers and information technology consulting and services groups.
For the first nine months of 2002, the performance of the Portfolio was above
that of the overall market. The outperformance relative to the benchmark can be
attributed to the Portfolio's sector allocation and stock selection. The most
important decision was to underweight information technology and telecom
services groups, a continued theme from 2001. The Portfolio underweighted
computers, semiconductor equipment, and diversified and wireless services. The
Portfolio's positioning in the banks, insurance, food products, and defense
sub-groups was also beneficial. The Portfolio gradually reduced holdings in the
health care sector, a directional shift from the same period last year, but
participation in the pharmaceutical and biotechnology names nevertheless hurt
returns. The only other notable difference in the Portfolio's current
composition relative to last year was evident in the reduced underweight in the
energy and utilities sectors.
The combined impact on performance of the Fund's investments and activities
outside of the Portfolio was modestly negative for the nine months ended
September 30, 2002 and 2001. The performance of the Fund trailed that of the
Portfolio by approximately -2.5% and -1.2% for the nine months ended September
30, 2002 and 2001, respectively. During both periods, the Fund's investments in
real estate Partnership Preference Units generally benefited from declining
interest rates and tightening spreads in income-oriented securities,
particularly in real estate-related securities. The Fund's investments in real
estate joint ventures experienced weakness in multifamily fundamentals in many
U.S. markets, which resulted in declines in value during 2002. For the nine
months ended September 30, 2001, the real estate joint ventures performed
14
modestly well, despite weakness in operating fundamentals. During the nine
months ended September 30, 2002 and 2001, interest rate swap valuations declined
as interest rates fell. During both periods, dividends received from the Fund's
Partnership Preference Units and real estate joint venture investments modestly
added to performance.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Fund has entered into interest rate swap agreements with respect to its
borrowings and real estate investments. Pursuant to these agreements, the Fund
makes quarterly payments to the counterparty at predetermined fixed rates, in
exchange for floating-rate payments from the counterparty at a predetermined
spread to three-month LIBOR. During the terms of the outstanding swap
agreements, changes in the underlying values of the swaps are recorded as
unrealized gains or losses.
As of September 30, 2002 and 2001, the unrealized depreciation related to the
interest rate swap agreements was $67,564,096 and $62,737,162, respectively.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Fund's discussion and analysis of its financial condition and results of
operations are based upon the Fund's condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Fund to make estimates, judgments and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. The Fund bases these estimates, judgments and assumptions on
historical experience and on other various factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
The Fund's critical accounting policies affect the Fund's more significant
estimates and assumptions used in valuing the Fund's real estate investments and
interest rate swap contracts. Prices are not readily available for these types
of investments and therefore are valued on an ongoing basis by Boston Management
and Research ("BMR), in its capacity as Manager of Belcrest Realty Corporation
(BRC), in the case of the real estate investments, and in its capacity as the
Fund's investment adviser, in the case of the interest rate swap contracts.
In estimating the value of the Fund's investments in real estate, BMR takes into
account relevant factors, data and information, including with respect to
investments in Partnership Preference Units, information from dealers and
similar firms with knowledge of such issues and the prices of comparable
preferred equity securities and other fixed or adjustable rate instruments
having similar investment characteristics. Real estate investments other than
Partnership Preference Units are generally stated at estimated market values
based upon independent valuations assuming an orderly disposition of assets.
Detailed investment valuations are performed at least annually and reviewed
periodically. Interim valuations for the real estate joint ventures, reflect
results of operations and distributions, and may be adjusted if there has been a
significant change in economic circumstances since the most recent independent
valuation. Given that such valuations include many assumptions, including but
not limited to an orderly disposition of assets, values may differ from amounts
ultimately realized. BMR, as the Fund's investment adviser, determines the value
of interest rate swaps, and, in doing so, may consider among other things,
dealer and counter-party quotes and pricing models.
15
The policies for valuing real estate investments involve significant judgments
that are based upon, without limitation, general economic conditions, the supply
and demand for different types of real properties, the financial health of
tenants, the timing of lease expirations and terminations, fluctuations in
rental rates and operating costs, exposure to adverse environmental conditions
and losses from casualty or condemnation, interest rates, availability of
financing, managerial performance and government rules and regulations. The
valuations of Partnership Preference Units held by the Fund through its
investment in BRC fluctuate over time to reflect, among other factors, changes
in interest rates, changes in perceived riskiness of such units (including call
risk), changes in the perceived riskiness of comparable or similar securities
trading in the public market and the relationship between supply and demand for
comparable or similar securities trading in the public market. The value of
interest rate swaps may be subject to wide swings in valuation caused by changes
in interest rates and in the prices of the underlying instrument and the
interest rate swap may be difficult to value since such instrument may be
considered illiquid. Fluctuations in the value of Partnership Preference Units
derived from changes in general interest rates can be expected to be offset in
part (but not entirely) by changes in the value of interest rate swap agreements
or other interest rate hedges entered into by the Fund with respect to its
borrowings. Fluctuations in the value of real estate investments derived from
other factors besides general interest rate movements (including issuer-specific
and sector-specific credit concerns, property-specific concerns and changes in
interest rate spread relationships) will not be offset by changes in the value
of interest rate swap agreements or other interest rate hedges entered into by
the Fund. Changes in the valuation of Partnership Preference Units not offset by
changes in the valuation of interest rate swap agreements or other interest rate
hedges entered into by the Fund and changes in the value of other real estate
investments will cause the performance of the Fund to deviate from the
performance of the Portfolio.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
The Fund's primary exposure to interest rate risk arises from investments in
real estate that are financed using floating rate bank borrowings under a
revolving credit facility (the Credit Facility). The interest rate on borrowings
under the Fund's Credit Facility is reset at regular intervals based on a fixed
and predetermined premium to LIBOR for short-term extensions of credit. The Fund
utilizes cancelable interest rate swap agreements to fix the cost of its
borrowings under the Credit Facility and to mitigate the impact of interest rate
changes on the Fund's net asset value. Under the terms of the interest rate swap
agreements, the Fund makes cash payments at fixed rates in exchange for floating
rate payments that fluctuate with three-month LIBOR. The interest rate swap
agreements are valued on an ongoing basis by BMR, in its capacity as the Fund's
investment adviser. In the future, the Fund may use other interest rate hedging
arrangements (such as caps, floors and collars) to fix or limit borrowing costs.
The use of interest rate hedging arrangements is a specialized activity that may
be considered speculative and which can expose the Fund to significant loss.
The following table summarizes the contractual maturities and weighted-average
interest rates associated with the Fund's significant non-trading financial
instruments. The Fund has no market risk sensitive instruments held for trading
purposes. This information should be read in conjunction with Note 4 to the
condensed consolidated financial statements.
16
Interest Rate Sensitivity
Principal (Notional) Amount by Contractual Maturity
For the Twelve Months Ended September 30,
2003-2005 2006 2007 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive
liabilities:
- ---------------------
Long term debt
variable rate
Credit Facility $817,350,000 $817,350,000 $817,350,000
Average interest
rate 2.24% 2.24%
Rate sensitive
derivative financial
instruments:
- ---------------------
Pay fixed/receive
variable interest rate
swap contracts $972,190,000 $972,190,000 $(67,564,096)
Average pay rate 7.02% 7.02%
Average receive rate 2.24% 2.24%
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
Eaton Vance Management, as the Fund's Manager ("Eaton Vance"), and the Fund's
Chief Executive Officer and Chief Financial Officer have conducted an evaluation
of the effectiveness of disclosure controls and procedures pursuant to Rule
13a-14 under the Securities Exchange Act of 1934. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this quarterly report has been made known to
them in a timely fashion. There have been no significant changes in internal
controls, or in factors that could significantly affect internal controls,
subsequent to the date the Chief Executive Officer and Chief Financial Officer
completed their evaluation.
The complete and entire management, control and operation of the Fund are vested
in the Fund's Manager, Eaton Vance. The Fund's organizational structure does not
provide for a board of directors or a board audit committee. As such, the Fund's
Chief Executive Officer and Chief Financial Officer intend to report any
significant deficiency in the design or operation of internal controls which
could adversely affect the Fund's ability to record, process, summarize and
report financial data, and any fraud, whether or not material, that involves
management or other employees who have a significant role in the Fund's internal
controls, to Eaton Vance.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- --------------------------
Although in the ordinary course of business, the Fund, BRC or the real estate
investments in which BRC has equity interests may become involved in legal
proceedings, the Fund is not aware of any material pending legal proceedings to
which the Fund or BRC is a party or of which any of BRC's real estate
investments is the 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.
- --------------------------
On October 16, 2002, Eaton Vance, as the Fund's Manager, elected Thomas E. Faust
Jr. and Michelle A. Alexander as the Fund's Chief Executive Officer and Chief
Financial Officer, respectively. Mr. Faust is Executive Vice President of Eaton
Vance and BMR and their corporate parent and trustee, Eaton Vance Corp. and
Eaton Vance Inc. He is also the Chief Investment Officer of Eaton Vance and BMR,
and a Director of Eaton Vance Corp. Ms. Alexander is a Vice President of Eaton
Vance and BMR. Mr. Faust and Ms. Alexander also serve as officers of various
investment companies managed or advised by Eaton Vance or BMR.
ITEM 6. THE FOLLOWING IS A LIST OF ALL EXHIBITS FILED AS PART OF THIS FORM 10Q:
- --------------------------------------------------------------------------------
(a) Exhibits
21 List of subsidiaries
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
18
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 duly authorized officer on November 14, 2002.
BELCREST CAPITAL FUND LLC
(Registrant)
By: /s/ Michelle A. Alexander
-------------------------
Michelle A. Alexander
Duly Authorized Officer and
Principal Accounting Officer
19
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Thomas E. Faust Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Belcrest Capital Fund
LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Thomas E. Faust Jr.
-----------------------
Thomas E. Faust Jr.
Chief Executive Officer
20
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Michelle A. Alexander, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Belcrest Capital Fund
LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Michelle A. Alexander
-------------------------
Michelle A. Alexander
Chief Financial Officer
21
EXHIBIT INDEX
21 List of subsidiaries
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
22