UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10Q Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2000 Belair Capital Fund LLC (the "Fund") ------------------------------------------------------ (Exact name of registrant as specified in its charter) Massachusetts 04-3404037 ------------- ---------- (State of organization) (I.R.S. Employer Identification No.) The Eaton Vance Building 255 State Street, Boston, Massachusetts 02109 - ---------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number: 617-482-8260 ----------------- 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 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 --- ---- Belair Capital Fund LLC Index to Form 10Q PART I - FINANCIAL INFORMATION Page Item 1. Consolidated Financial Statements 2 Consolidated Statements of Assets and Liabilities as of March 31, 2000 (unaudited) and December 31, 1999 2 Consolidated Statements of Operations For the Three Months Ended March 31, 2000 and 1999 (unaudited) 3 Consolidated Statements of Changes in Net Assets For the Three Months Ended March 31, 2000 and 1999 (unaudited) 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999 (unaudited) 5 Notes to Financial Statements as of March 31, 2000 (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II - OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS BELAIR CAPITAL FUND LLC Consolidated Statements of Assets and Liabilities March 31, 2000 December 31, (Unaudited) 1999 -------------------- ------------------- Assets: Total investments, at value (identified cost, $2,297,012,033 at March 31, 2000 and $2,247,696,059 at December 31, 1999) $2,860,246,389 $ 2,731,072,954 Cash 1,203,109 3,802,594 Receivable for open swap contracts 28,410,216 23,158,186 Dividends receivable 8,746,171 608,281 Deferred organization expenses 311,313 338,678 Swap interest receivable - 24,814 -------------------- ------------------- Total Assets $2,898,917,198 $ 2,759,005,507 -------------------- ------------------- Liabilities: Loan payable $ 745,000,000 $ 655,000,000 Distributions Payable 5,230,561 - Payable for Fund shares redeemed 480,179 1,072,380 Accrued Expenses Interest expense 7,377,535 8,156,260 Other accrued expenses 122,968 199,114 Minority interest 367,500 208,000 -------------------- ------------------- Total Liabilities $ 758,578,743 $ 664,635,754 -------------------- ------------------- Net assets $2,140,338,455 $ 2,094,369,753 ==================== =================== Shareholders' Capital -------------------- ------------------- Shareholders' capital $2,140,338,455 $ 2,094,369,753 -------------------- ------------------- -------------------- ------------------- Shares Outstanding 15,413,877 15,900,744 -------------------- ------------------- -------------------- ------------------- Net Asset Value and Redemption Price Per Share $138.86 $131.72 -------------------- ------------------- BELAIR CAPITAL FUND LLC Consolidated Statements of Operations (Unaudited) Three Months Three Months ended ended March 31, March 31, 2000 1999 ------------------ ------------------ Investment Income: Dividends allocated from Belvedere Capital (net of foreign taxes of $39,890 and $46,659 for March 31, 2000 and 1999, respectively) $ 4,988,137 $ 4,618,526 Interest allocated from Belvedere Capital 835,716 1,253,833 Expenses allocated from Belvedere Capital (3,302,893) (3,146,321) ------------------ ------------------ Net investment income allocated from Belvedere Capital $ 2,520,960 $ 2,726,038 Dividends from partnership preference units 13,688,594 11,722,048 Interest 78,742 40,434 ------------------ ------------------ Total investment income $ 16,288,296 $14,488,520 ------------------ ------------------ Expenses: Investment advisor fees $ 1,717,539 $ 1,521,637 Service fees 220,311 230,289 Interest expense 11,036,243 8,344,620 Interest expense on swap contracts 271,780 1,663,492 Legal and accounting services 139,664 32,363 Amortization of organization expenses 27,365 30,614 Custodian and transfer agent fees 14,244 17,469 Printing and postage 2,493 1,229 Miscellaneous 32,800 6,906 ------------------ ------------------ Total expenses $ 13,462,439 $11,848,619 ------------------ ------------------ Net investment income $ 2,825,857 $ 2,639,901 ------------------ ------------------ Realized and Unrealized Gain (Loss) Net realized gain (loss) - Investment transactions from Belvedere Capital (identified cost basis) $ 31,852,646 $ 5,206,357 Investment transactions in partnership preference units (identified cost basis) (2,897,594) (5,300,756) ------------------ ------------------ Net realized gain (loss) $ 28,955,052 $ (94,399) ------------------ ------------------ Change in unrealized appreciation (depreciation) - Investment in Belvedere Capital (identified cost basis) $ 93,538,225 $51,330,957 Investments in partnership preference units (identified cost basis) (13,680,764) 5,531,522 Interest rate swap contracts 5,252,030 11,380,494 ------------------ ------------------ Net change in unrealized appreciation $ 85,109,491 $68,242,973 Net realized and unrealized gain $114,064,543 $68,148,574 ------------------ ------------------ Net increase in net assets from operations $116,890,400 $70,788,475 ================== ================== 3 BELAIR CAPITAL FUND LLC Consolidated Statements of Changes in Net Assets (Unaudited) Three Months Three Months Ended ended March 31, 2000 March 31, 1999 ------------------ ------------------ Increase (Decrease) in Net Assets: Net investment income $ 2,825,857 $ 2,639,901 Net realized gain (loss) 28,955,052 (94,399) Net change in unrealized appreciation (depreciation) 85,109,491 68,242,973 ------------------ ------------------ Net increase in net assets from operations $ 116,890,400 $ 70,788,475 ------------------ ------------------ Transactions in Fund shares - Net asset value of shares redeemed $ (65,691,137) $ (16,620,904) ------------------ ------------------ Net decrease in net assets from Fund share transactions $ (65,691,137) $ (16,620,904) ------------------ ------------------ Distributions - Special and supplemental distributions $ (5,230,561) $ - ------------------ ------------------ Total distributions $ (5,230,561) $ - ------------------ ------------------ Net increase in net assets $ 45,968,702 $ 54,167,571 Net assets: Beginning of period $2,094,369,753 $1,932,848,372 ------------------ ------------------ End of period $2,140,338,455 $1,987,015,943 ================== ================== 4 BELAIR CAPITAL FUND LLC Consolidated Statements of Cash Flows (Unaudited) Three months Three months ended ended March 31, 2000 March 31, 1999 ----------------- ------------------ Cash flows from (for) Operating Activities - Net investment income $ 2,825,857 $ 2,639,901 Adjustments to reconcile net investment income to net cash flows from (used for) operating activities Amortization of organization expense 27,365 30,614 Net investment income allocated from Belvedere Capital (2,520,960) (2,726,038) Increase in dividends receivable (8,137,890) (1,584,599) Increase in short-term investments (7,450,400) - Increase in interest payable for open swap contracts 224,030 520,185 Decrease in accrued interest and operating expenses (1,054,087) (525,868) Increase in minority interest 159,500 208,000 Purchases of partnership preference units (101,895,368) (139,000,000) Sales of partnership preference units 12,795,445 104,049,244 Net decrease in investment in Belvedere Capital 12,867,396 8,168,879 ----------------- ------------------ Net cash flows used for operating activities $ (92,159,112) $ (28,219,682) Cash Flows From Financing Activities - Proceeds from loan $ 90,000,000 $ 35,000,000 Payments for Fund shares redeemed (440,373) (1,600,957) ----------------- ------------------ Net cash flows from financing activities $ 89,559,627 $ 33,399,043 Net increase (decrease) in cash $ (2,599,485) $ 5,179,361 Cash beginning of period $ 3,802,594 $ 2,711,580 ----------------- ------------------ Cash end of period $ 1,203,109 $ 7,890,941 ================= ================== Supplemental Disclosure and Non-cash Investing and Financing Activities Unrealized appreciation of investments and open swap contracts $ 591,644,572 $ 281,603,168 Interest paid for loan $ 12,014,184 $ 8,606,909 Interest paid for swap contracts $ 47,750 $ 1,143,307 Market value of securities distributed in payment of redemptions $ 65,842,965 $ 13,939,027 5 BELAIR CAPITAL FUND LLC as of March 31, 2000 NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1 Significant Accounting Policies Belair Capital Fund LLC (Belair Capital) is a Massachusetts limited liability company established to offer diversification and tax-sensitive investment management to persons holding large and concentrated positions in equity securities of selected publicly-traded companies. The investment objective of Belair Capital is to achieve long-term, after-tax returns for shareholders. Belair Capital pursues this objective primarily by investing indirectly in Tax-Managed Growth Portfolio (the Portfolio), a diversified, open-end management investment company registered under the Investment Company Act of 1940, as amended. The Portfolio is organized as a trust under the laws of the state of New York. Belair Capital maintains its investment in the Portfolio by investing in Belvedere Capital Fund Company LLC (Belvedere Capital), a separate Massachusetts limited liability company that invests exclusively in the Portfolio. The performance of Belair Capital and Belvedere Capital is directly and substantially affected by the performance of the Portfolio. Separate from its investment in the Portfolio through Belvedere Capital, Belair Capital invests indirectly in income-producing, preferred equity interests in real estate operating partnerships (partnership preference units) affiliated with publicly-traded real estate investment trusts (REITs). Belair Capital's investment in partnership preference units is achieved through its investment in Belair Real Estate Corporation (BREC). BREC is a Delaware corporation that has been organized and intends to operate in such a manner as to qualify for taxation as a REIT under the Internal Revenue Code. At March 31, 2000, Belair Capital owned 100% of the common stock issued by BREC and intends to hold all of BREC's common stock at all times. On November 24, 1998 (the date BREC commenced operations), Belair Capital acquired 2,100 shares of Class A preferred stock (the "preferred stock") issued by BREC. For BREC to qualify as a REIT, it must be beneficially owned in the aggregate by 100 or more persons. BREC has satisfied this requirement as a result of Belair Capital donating 20 shares of BREC preferred stock to each of approximately 105 charitable organizations. The charitable organizations' interest in the preferred stock has been recorded as a minority interest on the Statement of Assets and Liabilities. The preferred stock has a par value of $.01 per share and is redeemable by BREC at a redemption price of $100 after the occurrence of certain tax events or after December 31, 2004. Dividends on the preferred stock will be cumulative and will be payable annually in arrears on December 30 of each year (or the immediately preceding business day) equal to $8 per share per annum (representing an annual dividend yield of 8%). The accompanying consolidated financial statements include the accounts of Belair Capital and BREC (collectively, the Fund). All material intercompany accounts and transactions have been eliminated. For informational purposes, a summary of the Portfolio's operations is included with these consolidated financial statements (see Note 8). 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. 6 A Investment Security Costs -- The Fund's investment assets were principally acquired on February 6, 1998, April 20, 1998 and June 25, 1998 through contributions of common stock by shareholders in exchange for Shares of the Fund and in purchases of partnership preference units, copper and aluminum (held as temporary assets until replaced by additional purchases of partnership preference units). The Fund 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 are carried on the books and in the financial statements is the value of the contributed securities as of the close of business on the day prior to their contribution to the Fund and, in the case of purchased securities, the acquisition price thereof. 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 basis of securities purchased by the Fund is the purchase cost. B Investment Valuations -- The Fund's investments consist of partnership preference units and shares of Belvedere Capital. Belvedere Capital's exclusive investment is an interest in the Portfolio, the value of which is derived from a proportional interest therein. Additionally, the Fund has entered into interest rate swap contracts (see Note 7). The valuation policy that follows is applicable to the assets of the Fund, Belvedere Capital and the Portfolio. 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, will normally be 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. Investments held by the Fund for which valuations or market quotations are unavailable are valued at fair value using methods determined in good faith by the Investment Adviser. Interest rate swap contracts are valued by obtaining dealer or counterparty quotes. C Income -- Dividend income is recorded on the ex-dividend date and interest income is recorded on the accrual basis. Belvedere Capital's net investment income or loss consists of Belvedere Capital's pro-rata share of the net investment income of the Portfolio, less all actual or accrued expenses of Belvedere Capital, determined in accordance with generally accepted accounting principles. The Fund's net investment income or loss consists of the Fund's pro-rata share of the net investment income of Belvedere Capital, plus all income earned on the Fund's direct investments, less all actual and accrued expenses of the Fund determined in accordance with generally accepted accounting principles. D Income Taxes -- Belair Capital, Belvedere Capital and the Portfolio are treated as partnerships for federal income tax purposes. As a result, Belair Capital, Belvedere Capital and the Portfolio do not incur federal income tax liability, and the shareholders and partners thereof are individually responsible for taxes on items of partnership income, gain, loss, and deduction. BREC's policy is to comply with the Internal Revenue Code applicable to REITs. BREC will 7 generally not be subject to federal income tax to the extent that it distributes its earnings to its shareholders and maintains its qualification as a REIT. E Deferred Organization Expenses -- Costs incurred by Belair Capital in connection with its organization are being amortized on a straight-line basis over five years. Costs incurred in connection with the organization of BREC have been expensed as incurred. F 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. However, the Fund does not anticipate non-performance by the counterparty. G Written Options -- The Portfolio and the Fund may write listed and over-the-counter call options on individual securities, on baskets of securities and on stock market indices. Upon the writing of a call option, an amount equal to the premium received by the Portfolio or Fund is included in the Statement of Assets and Liabilities 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 which expire are treated as realized gains. Premiums received from writing options which 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. H 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 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. I Other -- Investment transactions are accounted for on a trade date basis. J 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. 8 K Interim Financial Statements -- The interim financial statements relating to March 31, 2000 and March 31, 1999 and for the periods 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 presentation of the financial statements. 2 Distributions to Shareholders The Fund intends to distributed at the end of each year all of its net investment income for the year, if any, and approximately 22% of its net realized capital gains for such year, if any, other than precontribution gains allocated to a shareholder in connection with a tender offer or other extraordinary corporate event with respect to a security contributed by such shareholder, for which no capital gain distribution is made. In addition, whenever a distribution with respect to a precontribution gain is made, the Fund makes a supplemental distribution to compensate shareholders receiving such distributions for taxes that may be due in connection with the precontribution gain and supplemental distributions. 3 Shareholder Transactions The Fund may issue an unlimited number of full and fractional shares. Transactions in Fund shares were as follows: Three Months Ended Three Months Ended March 31, 2000 March 31, 1999 -------------------- -------------------- Redemptions (486,867) (139,373) -------------------- -------------------- Net decrease (486,867) (139,373) -------------------- -------------------- Redemptions of shares held less than three years are generally subject to a redemption fee of 1% of the net asset value of shares redeemed. The redemption fee is paid to the Investment Adviser by the Fund on behalf of the redeeming shareholder. No charge is levied on redemptions of shares acquired through the reinvestment of distributions, shares redeemed in connection with a Tender Security or shares redeemed following the death of all of the initial holders of the shares redeemed. In addition, no fee applies to redemptions by shareholders, who, during any 12-month period, redeem less than 8% of the total number of shares held by the shareholder as of the beginning of the 12-month period. For the three months ended March 31, 2000 and ended March 31, 1999, the Investment Adviser received $440,373 and $137,968, respectively, in redemption fees. 4 Investment Transactions Increases and decreases of the Fund's investment in Belvedere Capital for the three months ended March 31, 2000 aggregated $886,263 and $79,596,624, respectively, and for the period ended March 31, 1999 aggregated $4,443,702 and $26,551,608, respectively. Purchases and sales of other investments (partnership preference units) aggregated $101,895,368 and 9 $12,795,445, respectively, for the three months ended March 31, 2000, and $139,000,000 and $104,049,244, respectively, for the period ended March 31, 1999. 5 Management Fee and Other Transactions With Affiliates The Fund and the Portfolio have engaged Boston Management and Research (BMR), a wholly-owned subsidiary of Eaton Vance Management (EVM) as investment adviser. Under the terms of the advisory agreement with the Portfolio, BMR receives a monthly fee of 5/96 of 1% (0.625% annually) of the average daily net assets of the Portfolio up to $500,000,000 and at reduced rates as daily net assets exceed that level. For the three months ended March 31, 2000, and March 31, 1999 the advisory fee applicable to the Portfolio was 0.44% (annualized) and 0.46% (annualized), respectively, of average daily net assets. Belvedere Capital's allocated portion of the advisory fee amounted to $8,455,108 of which $2,389,163 was allocated to the Fund, for the three months ended March 31, 2000, and $4,640,720, of which $2,296,510 was allocated to the Fund, for the three months ended March 31, 1999. In addition, Belair Capital pays BMR a monthly advisory and administrative fee of 1/20 of 1% (0.60% annually) of the average daily gross investment assets of Belair Capital (including the value of all assets of Belair Capital other than Belair Capital's investment in BREC, minus the sum of Belair Capital's liabilities other than the principal amount of money borrowed) and BREC pays BMR a monthly management fee at a rate of 1/20th of 1% (equivalent to 0.60% annually) of its average gross investment assets (including the value of all assets of BREC, minus the sum of BREC's liabilities other than any liability with respect to Belair Capital's Credit Facility). The advisory fee payable by the Portfolio in respect of Belair Capital's indirect investment in the Portfolio is credited toward Belair Capital's advisory and administrative fee payment. For the three months ended March 31, 2000 and March 31, 1999 the advisory and administrative fee payable to BMR by the Fund, less the Fund's allocated share of the Portfolio's advisory fee, totaled $1,717,539 and $1,521,637, respectively. Eaton Vance Management (EVM) serves as manager of Belair Capital and receives no separate compensation for services provided in such capacity. Pursuant to a servicing agreement between Belvedere Capital and Eaton Vance Distributors, Inc. (EVD), Belvedere Capital pays a servicing fee to EVD for providing certain services and information to shareholders. The servicing fee is paid on a quarterly basis at an annual rate of 0.15% of Belvedere Capital's average daily net assets and totaled $2,876,452, and $1,506,207 for the three months ended March 31, 2000, and March 31, 1999, respectively, of which $816,327 and $744,573 was allocated to the Belair Capital. Pursuant to a servicing agreement between Belair Capital and EVD, Belair Capital pays a servicing fee to EVD on a quarterly basis at an annual rate of 0.20% of Belair Capital's average daily net assets, less Belair Capital's allocated share of the servicing fee payable by Belvedere Capital. For the three months ended March 31, 2000 and March 31, 1999 the servicing fee paid directly by Belair Capital totaled $220,311 and $230,289, respectively. Of the amounts allocated to and incurred by the Fund, for the three months ended March 31, 2000, and March 31, 1999 $1,036,638, and $191,209, respectively were paid to subagents. 6 Credit Facility The Fund has obtained a $765,000,000 Credit Facility with a term of seven years from Merrill Lynch International Bank Limited. The Fund's obligations under the Credit Facility are secured 10 by a pledge of its assets. Interest on borrowed funds is based on the prevailing LIBOR rate for the respective interest period plus a spread of 0.45% per annum. The Fund may borrow for interest periods of one month to five years. In addition, the Fund pays a commitment fee at a rate of 0.10% per annum on the unused amount of the loan commitment. Initial borrowings have been used to purchase qualifying assets (partnership preference units, copper and aluminum) to pay selling commissions and organizational expenses, and to provide for the short-term liquidity needs of the Fund. Additional borrowings under the Credit Facility may be made in the future for these purposes. At March 31, 2000 and December 31, 1999, amounts outstanding under the Credit Facility totaled $745,000,000 and $655,000,000, respectively. 7 Cancelable Interest Rate Swap Agreements The Fund has entered into cancelable interest rate swap agreements with Merrill Lynch Capital Services, Inc., with respect to each of its holdings of 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. 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. Unrealized Unrealized Notional Initial Appreciation/ Appreciation/ Amount Optional (Depreciation) (Depreciation) Effective (000's Fixed Floating Termination Maturity At March 31, At December 31, Date omitted) Rate Rate Date Date 2000 1999 ------------------------------------------------------------------------------------------------------------------- 2/98 $60,000 6.72% Libor+.45% 2/03 2/05 $ 2,680,556 $ 2,190,325 2/98 120,000 6.715% Libor+.45% 2/03 2/05 5,383,263 4,404,500 4/98 50,000 6.84% Libor+.45% 2/03 2/05 2,015,630 1,579,937 4/98 150,000 6.835% Libor+.45% 4/03 4/05 6,208,829 4,983,531 6/98 20,000 6.67% Libor+.45% 6/03 2/05 911,435 747,192 6/98 75,000 6.68% Libor+.45% 6/03 2/05 3,390,945 2,768,906 6/98 80,000 6.595% Libor+.45% 6/03 2/05 3,869,242 3,236,267 11/98 14,709 6.13% Libor+.45% 11/03 2/05 960,274 871,658 2/99 34,951 6.34% Libor+.45% 2/04 2/05 1,983,664 1,732,927 4/99 5,191 6.49% Libor+.45% 2/04 2/05 264,568 223,114 7/99 24,902 7.077% Libor+.45% 7/04 2/05 668,635 396,636 9/99 10,471 7.37% Libor+.45% 9/04 2/05 153,182 23,193 3/00 19,149 7.89% Libor+.45% 2/04 2/05 (33,244) - 3/00 70,000 7.71% Libor+.45% - 2/05 (46,763) - --------------------------------------- Total $28,410,216 $23,158,186 ======================================= 11 8 Indirect Investment in Portfolio Belvedere Capital's interest in the Portfolio at March 31, 2000, was $8,634,584,697, representing 52.1% of the Portfolio's net assets, and at March 31, 1999 was $4,529,834,947, representing 44.9% of the Portfolio's assets. The Fund's investment in Belvedere Capital at March 31, 2000 was $2,277,261,355, representing 26.4% of Belvedere Capital's net assets, and at March 31, 1999 was $2,041,655,652, representing 45.1% of Belvedere Capital's net assets. Investment income allocated to Belvedere Capital from the Portfolio for the three months ended March 31, 2000 totaled $20,402,874, of which $5,823,853 was allocated to the Fund. Investment income allocated to Belvedere Capital from the Portfolio for the three months ended March 31, 1999 totaled $12,010,208, of which $5,872,359 was allocated to the Fund. Expenses allocated to Belvedere Capital from the Portfolio for the three months ended March 31, 2000 totaled $8,688,745, of which $2,466,773 was allocated to the Fund. Expenses allocated to Belvedere Capital from the Portfolio for the three months ended March 31, 1999 totaled $4,771,888, of which $2,361,466 was allocated to the Fund. Belvedere Capital allocated additional expenses to the Fund of $836,120 for the three months ended March 31, 2000, representing $19,793 of operating expenses and $816,327 of service fees. Belvedere Capital allocated additional expenses to the Fund of $784,855 for the three months ended March 31, 1999, representing $40,282 of operating expenses and $744,573 of service fees (see Note 5). A summary of the Portfolio's Statement of Assets and Liabilities, at March 31, 2000, December 31, 1999 and March 31, 1999 and its operations for the three months ended March 31, 2000, the year ended December 31, 1999 and the period ended March 31, 1999 follows: March 31, March 31, 2000 December 31, 1999 1999 -------------------- ------------------------ --------------------- Investments, at value $16,564,812,965 $15,009,514,121 $10,118,166,710 Other Assets 18,352,819 105,404,490 11,801,799 ----------------------------------- -------------------- ------------------------ --------------------- Total Assets $16,583,165,784 $ 15,114,918,611 $10,129,968,509 Total Liabilities 2,651,935 269,652 44,583,965 ----------------------------------- -------------------- ------------------------ --------------------- Net Assets $16,580,513,849 $ 15,114,648,959 $10,085,384,544 =================================== ==================== ======================== ===================== Dividends and interest $40,223,600 $ 135,795,086 $ 27,230,271 Investment adviser fee 16,618,292 51,368,943 10,581,529 Other expenses 459,694 1,599,875 297,623 ----------------------------------- -------------------- ------------------------ --------------------- Total expenses $17,077,986 $ 52,968,818 $ 10,879,152 ----------------------------------- -------------------- ------------------------ --------------------- Net investment income $23,145,614 $ 82,826,268 $ 16,351,119 Net realized gains (losses) 224,041,217 19,281,587 18,042,697 Net unrealized gains 597,012,900 1,954,982,313 265,622,128 ----------------------------------- -------------------- ------------------------ --------------------- Net increase in net assets from operations $844,199,731 $ 2,057,090,168 $ 300,015,944 ----------------------------------- -------------------- ------------------------ --------------------- 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Increases and decreases in the Fund's net asset value per share are derived from net investment income, and realized and unrealized gains and losses on interest (through the Company) in the Portfolio, real estate investments held through BREC and any direct investments of the Fund. Expenses of the Fund include its pro-rata share of the expenses of BREC, the Company, and indirectly the Portfolio, as well as the actual and accrued expenses of the Fund and BREC. The Fund's most significant expense is interest incurred on borrowings under the Credit Facility and, to a lesser degree, interest rate swap agreements. Fund borrowings are used primarily to finance the purchase of Partnership Preference Units through BREC. The interest paid on Fund borrowings is offset by the dividends earned from the Fund's indirect investment in Partnership Preference Units. The Fund's realized and unrealized gains and losses on investments are based on its allocated share of the realized and unrealized gains and losses of the Company, and indirectly, the Portfolio, as well as realized and unrealized gains and losses on investments in Partnership Preference Units through BREC. The realized and unrealized gains and losses on investments have the most significant impact on the Fund's net asset value per share and result from sales of such investments and changes in their underlying value. The investments of the Portfolio consist primarily of common stocks of domestic and foreign growth companies that are considered to be high in quality and attractive in their long-term investment prospects. Because the securities holding of the Portfolio are broadly diversified, the performance of the Portfolio cannot be attributed to one particular stock or one particular industry or market sector. The performance of the Portfolio and the Fund are substantially influenced by the overall performance of the United States stock market, as well as by the relative performance versus the overall market of specific stocks and classes of stocks in which the Portfolio maintains large positions. Through the impact of interest rates on the valuation of the Fund's investments in Partnership Preference Units through BREC and its positions in interest rate swap agreements, the performance of the Fund is also affected by movements in interest rates, and particularly, changes in credit spread relationships. On a combined basis, the Fund's Partnership Preference Units and interest rate swaps generally decline in value when credit spreads widen (as fixed income markets grow more risk-averse) and generally increase in value when credit spreads tighten. RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2000 The Fund achieved total return performance of 5.4% for the quarter ended March 31, 2000. This return reflects an increase in the Fund's net asset value per share from $131.72 to $138.86. For comparison, the S&P 500, an unmanaged index of large capitalization stocks commonly used as a benchmark for the U.S. equity market, had a total return of 2.3% over the same period. During the first quarter of 2000, U.S. equity market leadership was concentrated in the technology sector, continuing the trend of recent quarters. Strongly performing industry groups in the first quarter included semiconductor equipment, computer networking, cellular telecom services, biotechnology, investment banking, and oil and gas services and equipment. Growth 13 stocks generally outperformed value stocks and small-cap stocks generally bested big-cap stocks. Large cap technology bellwethers such as Cisco Systems, Intel, and Oracle accounted for most of the gains in the S&P 500. Large holdings of all three of these stocks contributed to the outperformance of the Fund in the first quarter. The Fund also benefited from holdings of several smaller cap technology and biotech stocks that were standout performers in the quarter. In the fixed income markets, the first quarter saw a rally in long-term treasury bonds, rising yields (and falling prices) for shorter-term treasury instruments and flattish prices and yields on corporate debt obligations. The market for REIT preferred stocks (used as a benchmark for pricing the Fund's holdings of partnership preference units) improved somewhat from depressed levels of late 1999. Despite strong real estate market conditions, prices of REIT preferreds continue to reflect concerns about possible financial restructurings in the REIT sector. On balance, the leveraging of the Fund to invest in real estate qualifying assets was a modest drag on performance for the quarter. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2000, the Fund had outstanding borrowings of $745 million and unused loan commitments of $20 million under the Credit Facility established with Merrill Lynch International Bank, Limited, the term of which extends until February 6, 2005. The Credit Facility is being used primarily to finance the Fund's investments in Partnership Preference Units and will continue to be used for such purposes in the future, as well as to provide for any short-term liquidity needs of the Fund. In the future, the Fund may increase the size of the Credit Facility (subject to lender consent) and the amount of outstanding borrowings thereunder for these purposes. The Fund may redeem shares of the Company at any time. Both the Company and the Portfolio follow the practice of normally meeting redemptions by distributing securities consisting, in the case of the Company, of securities drawn from the Portfolio. The Company and the Portfolio may also meet redemptions by distributing cash. As of March 31, 2000, the Portfolio had cash and short-term investments totaling $391.0 million. The Portfolio participates in a $150 million multi-fund unsecured line of credit agreement with a group of banks. The Portfolio may temporarily borrow from the line of credit to satisfy redemption requests in cash or to settle investment transactions. The Portfolio had no outstanding borrowings under the $150 million line of credit at March 31, 2000, and, as of that date, the net assets of the Portfolio totaled $16,580.5 million. To ensure liquidity for investors in the Portfolio, the Portfolio may not invest more than 15% of its net assets in illiquid assets. As of March 31, 2000, restricted securities, which are considered illiquid, constituted 4.3% of the net assets of the Portfolio. The Partnership Preference Units held by BREC are not registered under the Securities Act and are subject to substantial restrictions on transfer. As such, they are considered illiquid. 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. 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Fund is not aware of any pending legal proceedings to which the Fund is a party or to which of 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. Financial Data Schedules 15 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 thereunto duly authorized. BELAIR CAPITAL FUND LLC By: -------------------------------- James L. O'Connor Vice President and Treasurer 16