<PAGE> 1
3,650,000 SHARES
BRANTLEY CAPITAL CORPORATION
COMMON STOCK
------------------
All of the 3,650,000 shares of common stock, $.01 par value (the "Common
Stock"), offered hereby are being offered by Brantley Capital Corporation, a
newly organized Maryland corporation (the "Company"). The Company is a
closed-end, non-diversified investment company which has elected to be treated
as a business development company (a "Business Development Company") under the
Investment Company Act of 1940 (the "Investment Company Act"). Brantley Capital
Management, L.L.C. (the "Investment Adviser"), a registered investment adviser
under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), will
act as adviser to the Company.
The Company's investment objective is the realization of long-term capital
appreciation in the value of its investments. To achieve this objective, the
Company intends to invest primarily in private equity securities and, to a
lesser extent, in post-venture small-cap public securities. In addition,
whenever feasible in light of market conditions and the cash flow
characteristics of its portfolio companies, the Company will seek to provide an
element of current income primarily from interest, dividends and fees paid by
portfolio companies. See "Investment Objectives and Policies."
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON
STOCK, AND THERE CAN BE NO ASSURANCE THAT ANY SUCH MARKET WILL DEVELOP. THE
COMPANY HAS APPLIED FOR QUOTATION OF THE COMMON STOCK ON THE NASDAQ SMALLCAP
MARKET SYSTEM UNDER THE SYMBOL "BBDC." THE SECURITIES OFFERED HEREBY INVOLVE A
HIGH DEGREE OF RISK, INCLUDING THE COMPANY'S LACK OF PRIOR OPERATING HISTORY,
THE ILLIQUID NATURE OF A SUBSTANTIAL MAJORITY OF THE COMPANY'S INVESTMENTS, AND
UNCERTAINTY REGARDING THE VALUE OF THE COMPANY'S INVESTMENTS. COMMON STOCK OF
CLOSED-END INVESTMENT COMPANIES HAS IN THE PAST FREQUENTLY TRADED AT DISCOUNTS
FROM ITS NET ASSET VALUE AND INITIAL OFFERING PRICE. THE RISK OF LOSS ASSOCIATED
WITH THIS CHARACTERISTIC OF CLOSED-END INVESTMENT COMPANIES MAY BE GREATER FOR
INVESTORS EXPECTING TO SELL COMMON STOCK PURCHASED IN THIS OFFERING SOON AFTER
THE COMPLETION OF THIS OFFERING. THE COMPANY PRESENTLY DOES NOT INTEND TO USE
BORROWED FUNDS TO MAKE INVESTMENTS; HOWEVER, IT RESERVES THE RIGHT TO DO SO. SEE
"RISK FACTORS."
This Prospectus sets forth concisely the information about the Company that
a prospective investor ought to know before investing and should be retained for
future reference. Additional information has been filed with the Securities and
Exchange Commission and is available from the Company upon written or oral
request and without charge. See "Additional Information."
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
===============================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Per Share(3).................................. $10.00 -- $10.00
- ---------------------------------------------------------------------------------------------------------------
Total (4)..................................... $36,500,000 -- $36,500,000
===============================================================================================================
</TABLE>
(Footnotes on following page)
The Common Stock is offered severally by the Underwriters named herein,
subject to prior sale, when, as and if received and accepted by them, subject to
their right to reject orders, in whole or in part, and to certain other
conditions. It is expected that delivery of the certificates representing the
Common Stock will be made on or about December 3, 1996.
------------------
EVEREN SECURITIES, INC. MCDONALD & COMPANY MORGAN KEEGAN & COMPANY, INC.
SECURITIES, INC.
NEEDHAM & COMPANY, INC. STIFEL, NICOLAUS & COMPANY
INCORPORATED
FIRST OF MICHIGAN CORPORATION NATCITY INVESTMENTS,
INC.
November 26, 1996
<PAGE> 2
(1) The Company and the Investment Adviser have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933 (the "Securities Act"). The Investment Adviser (not
the Company) will pay the Underwriting Discounts and Commissions in the
amount of 7.0% of the aggregate initial public offering price of Common
Stock in connection with sales of Common Stock in this Offering. In
addition, the Investment Adviser will pay the Principal Underwriter a
one-time structuring fee of $150,000 at the close of the Offering. See "The
Investment Advisory Agreement" and "Underwriting."
(2) Before deducting organizational expenses and expenses of the Offering
estimated to be $633,150.
(3) Each investor must purchase a minimum of 500 shares in this offering (except
that an individual retirement account (an "IRA") must purchase a minimum of
200 shares in this offering). Any shares in excess of the applicable minimum
must be purchased in 100 share increments.
(4) The Underwriters have been granted a 45-day option to purchase up to an
aggregate of 547,500 additional shares of Common Stock from the Company
solely to cover over-allotments, if any. If the option is exercised in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $41,975,000, $0 and $41,975,000, respectively
(before deducting the amount set forth in footnote (2) above). See
"Underwriting."
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form N-2 (the "Registration
Statement") under the Investment Company Act and the Securities Act with respect
to the Common Stock offered by this Prospectus. This Prospectus, which is a part
of the Registration Statement, does not contain all of the information set forth
in the Registration Statement or the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is made
to the Registration Statement, including the exhibits and schedules thereto.
The Registration Statement and the exhibits and schedules thereto filed
with the Commission may be inspected, without charge, at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
located at Seven World Trade Center, New York, New York 10048, and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company will furnish to its stockholders annual reports containing
audited financial statements, quarterly unaudited statements for the first three
calendar quarters of each year and such other periodic reports as it may
determine to furnish or as may be required by law.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 3
PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS
PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
APPEARING ELSEWHERE HEREIN. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS
PROSPECTUS IN ITS ENTIRETY.
THE COMPANY
Brantley Capital Corporation (the "Company") has been formed to invest
primarily in the equity securities and equity-linked debt securities of private
companies. In addition, the Company intends to invest a portion of its assets in
equity securities of post-venture small-cap public companies. The Company's
investment objective is the realization of long-term capital appreciation in the
value of its investments. In addition, whenever feasible in light of market
conditions and the cash flow characteristics of its portfolio companies, the
Company will seek to provide an element of current income primarily from
interest, dividends and fees paid by companies in which the Company invests
(sometimes referred to herein as "portfolio companies"). See "The Company --
General."
With respect to its investments in private companies, the Company
anticipates that a principal focus will be on industries that it considers to be
good candidates for successful consolidation. The Company also will favor
investments in private companies that it believes can achieve the necessary
size, profitability and management depth and sophistication to become public
companies or become attractive merger or acquisition candidates. The Company
intends to be a partner in the growth of its private portfolio companies, rather
than merely a financial participant. The Company will offer managerial
assistance to its private portfolio companies and expects that its
representatives will play a role in setting their corporate strategies and will
advise such companies regarding important decisions affecting their businesses,
including potential acquisitions, recruiting key managers, and securing equity
and debt financing.
With respect to its investments in post-venture small-cap public companies,
the Company anticipates that its primary focus will be on companies that the
Investment Adviser believes to have significant potential for growth in sales
and earnings. A post-venture company is a company that has received venture
capital or private equity financing either (a) during the early stages of the
company's business or the early stages of the development of a new product or
service, or (b) as part of a restructuring or recapitalization of the company.
The Company intends to limit its post-venture investments to companies which
within the prior 10 years have received an investment of venture or private
equity capital, have sold or distributed securities to venture or private equity
capital investors, or have completed an initial public offering of equity
securities.
The Company anticipates that, as a general rule, most of its investments
will be in small- to medium-sized companies with total assets or annual sales
under $500,000,000. Many of these companies may have very limited operating
histories. The Company's Investment Adviser will seek to identify investment
opportunities from a variety of sources, including referrals from finance and
other professionals, business executives and entrepreneurs known to the
Company's management from prior business, investment and professional
relationships. See "The Company."
The Company's main criterion for the selection of portfolio companies is
the potential for above average long-term growth in sales and earnings. The
Company will consider a number of factors in evaluating prospective investments
in portfolio companies including, among others, the quality, depth and
experience of management; the existence of potentially large unfulfilled markets
for the portfolio companies' products and services; the nature of the portfolio
companies' products and services; the structure, price and terms of investments
in the portfolio companies; and, with respect to post-venture small-cap
companies, the identity of, and amount and terms of securities owned by, venture
or private equity capital investors who are stockholders in the company. See
"Investment Objectives and Policies."
3
<PAGE> 4
The Company is a closed-end, non-diversified investment company which has
elected to be treated as a Business Development Company under the Investment
Company Act. As such, the Company will be generally required to invest at least
70% of its total assets in certain prescribed "Eligible Assets," including
securities of privately held companies and cash items, government securities and
high-quality short-term debt. See "Regulation" for the statutory definition of
"Eligible Assets."
The Company intends to qualify as a regulated investment company for
federal income tax purposes in order to qualify for pass-through tax treatment.
Therefore, the Company expects to distribute substantially all of its investment
company taxable income (net investment income from interest and dividends and
net short-term capital gains) to stockholders on an annual basis. The Company
may choose to distribute net realized long-term capital gains, or to retain such
gains, net of applicable taxes that would be payable by the Company, to
supplement equity capital and to support growth in its portfolio. See "Federal
Income Tax Matters."
Brantley Capital Management, L.L.C. (the "Investment Adviser"), based in
Cleveland, Ohio, will act as adviser to the Company. It will be responsible, on
a day-to-day basis, for the selection and supervision of portfolio investments.
The Company will pay the Investment Adviser an annual management fee of 2.85% of
the Company's net assets, determined at the end of each calendar quarter, and
payable quarterly in arrears throughout the term of the Investment Advisory
Agreement. State Street Bank and Trust Company will serve as the Company's
administrator. For its services, the administrator shall be paid an annual fee
based on the Company's average assets on a graduated declining basis beginning
at an annual rate of 0.10%, subject to a minimum annual fee of $95,000 (which at
$36,500,000 of average assets is 0.26%). See "Management," "Prior Experience of
Principals of the Investment Adviser," "The Investment Advisory Agreement" and
"Description of Capital Stock -- Administration."
4
<PAGE> 5
THE OFFERING
Common Stock offered by the
Company.................. The Company is offering 3,650,000 shares of its
Common Stock at the initial public offering price
of $10.00 per share. The Underwriters have been
granted a 45-day option to purchase up to an
aggregate of 547,500 additional shares to cover
over-allotments, if any. See "Underwriting."
Investment per investor.... Minimum of 500 shares of Common Stock (200 shares
for IRAs). Shares in excess of the applicable
minimum must be purchased in 100 share increments.
Common Stock to be
outstanding after the
Offering................. 3,650,000 shares. See "Description of Capital
Stock."
Proposed Nasdaq SmallCap
Market System symbol..... BBDC
Use of proceeds............ To make investments in accordance with the
Company's investment policies and objectives. See
"Use of Proceeds."
Distributions.............. The Company intends to pay quarterly dividends from
net investment income. See "Federal Income Tax
Matters."
Dividend Reinvestment and
Cash Purchase Plan......... All cash distributions to stockholders will be
reinvested automatically under the Company's
Dividend Reinvestment and Cash Purchase Plan in
additional whole and fractional shares of Common
Stock unless a stockholder or its representative
elects to receive cash. See "Dividend Reinvestment
and Cash Purchase Plan" and "Federal Income Tax
Matters."
Leverage and borrowing..... The Company presently does not intend to use
borrowed funds to make investments, however, it
reserves the right to do so. The Company from time
to time may borrow on a short-term basis against
maturities of its investments for purposes of
meeting short-term cash needs. Also, it may borrow
funds from time to time and at quarter end in order
(i) to maintain sufficient cash assets necessary to
meet the requirements for qualification as a
Business Development Company and the
diversification requirements to qualify as a
regulated investment company for federal income tax
purposes, and (ii) to make distributions necessary
to qualify as a regulated investment company for
federal income tax purposes. All borrowings by the
Company will be subject to the percentage limits
permitted by the Investment Company Act and any
other applicable federal or state laws. See "Risk
Factors -- Use of Leverage" and "Investment
Objectives and Policies."
Stock options.............. The Company has adopted a stock option plan and,
subject to approval by the Commission, has adopted
a disinterested director option plan, pursuant to
which plans, 1,250,000 shares of Common Stock have
been reserved for future issuance upon the exercise
of options that may be granted to directors,
officers and employees of the Company. See
"Management -- Stock Options."
5
<PAGE> 6
Risk factors............... The securities offered hereby involve a high degree
of risk including, but not limited to, the
Company's lack of prior operating history;
dependence upon its Investment Adviser; investments
in privately-owned companies; investments in
small-cap public companies; the illiquid nature of
many of the Company's investments; dependence on
the state of the public offering market or
availability of strategic buyers; risks relating to
potential conflicts of interest; potential delays
in investing Offering proceeds and making
distributions; possible borrowing by the Company;
competition for investments; potential need for
follow-on investments in portfolio companies;
unspecified use of investment proceeds; possible
portfolio valuation problems; lack of
diversification; possible loss of pass-through tax
treatment; and a potentially limited public market
for, or discounted trading of, the Common Stock of
the Company. See "Risk Factors."
Anti-takeover provisions... The Board of Directors of the Company is divided
into three classes of directors serving staggered
three-year terms. This structure is intended to
provide a greater likelihood of continuity of
management for the Company because such continuity
may be necessary for the Company to realize the
full value of its investments. A staggered Board of
Directors may serve to deter hostile takeovers of
the Company, as may certain other measures adopted
by the Company, including high voting provisions
which must be met in order for stockholders to
remove directors or to convert the Company to an
open-end investment company. See "Description of
Capital Stock -- Anti-Takeover Provisions."
6
<PAGE> 7
FEES AND EXPENSES
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Company
will bear directly or indirectly.
STOCKHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales load (as a percentage of offering price)........................... None (1)
Dividend Reinvestment and Cash Purchase Plan fees........................ None (2)
ANNUAL EXPENSES (as a percentage of net asset value) (3)
Management fees........................................................ 2.85% (4)
Interest payments on borrowed funds.................................... None (5)
Other expenses (estimated)............................................. 1.15% (6)
Total Annual Expenses (estimated)........................................ 4.00%
</TABLE>
- ---------------
(1) Not including the organizational expenses and expenses of this Offering,
which are estimated to be $633,150. In addition, the Company and the
Investment Adviser have agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act. The
Investment Adviser (not the Company) will pay the Underwriters a commission
in the amount of 7.0% of the aggregate initial public offering price of
Common Stock in connection with sales of Common Stock in this Offering. In
addition, the Investment Adviser will pay the Principal Underwriter a
one-time structuring fee of $150,000 at the close of the Offering. See "The
Investment Advisory Agreement."
(2) The expenses of the Dividend Reinvestment and Cash Purchase Plan are
included in stock record expenses, a component of "Other expenses." The
participants in the Dividend Reinvestment and Cash Purchase Plan will bear a
pro rata share of brokerage commissions incurred with respect to open market
purchases.
(3) Assumes a net asset value of $36,500,000 based on the sale of 3,650,000
shares in the Offering.
(4) Payable to the Investment Adviser.
(5) Assumes no leverage.
(6) Includes estimated accounting, legal, administrative, stockholder relations,
transfer agent, stock record and custodian expenses.
EXAMPLE
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Company. These amounts assume no leverage and
are based upon payment by the Company of operating expenses at the levels set
forth in the table above.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming a 5.0% annual return................................ $ 42 $ 127 $ 213 $435
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF THE FUTURE EXPENSES OF
THE COMPANY, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
Moreover, while the example assumes (as required by the Commission) a 5.0%
annual return, the Company's performance will vary and may result in a return
greater or less than 5.0%. In addition, while the example assumes reinvestment
of all dividends and distributions at net asset value, participants in the
Dividend Reinvestment and Cash Purchase Plan may receive shares purchased by the
administrator of the Dividend Reinvestment and Cash Purchase Plan at the market
price in effect at the time, which may be at, above or below net asset value.
See "Dividend Reinvestment and Cash Purchase Plan."
7
<PAGE> 8
RISK FACTORS
THE PURCHASE OF THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS
INVOLVES A NUMBER OF SIGNIFICANT RISKS. AS A RESULT, THERE CAN BE NO ASSURANCE
THAT THE COMPANY WILL ACHIEVE ITS INVESTMENT OBJECTIVES. IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS
SHOULD BE CAREFULLY CONSIDERED IN EVALUATING AN INVESTMENT IN THE COMMON STOCK.
LACK OF OPERATING HISTORY; DEPENDENCE UPON INVESTMENT ADVISER
The Company has recently been organized to make investments in portfolio
companies selected by the Investment Adviser. Investors will have no right or
power to take part in the management of the Company and will not receive the
detailed financial information made available by portfolio companies to the
Investment Adviser in connection with the review of possible purchases for the
Company's portfolio. Accordingly, investors must be willing to entrust all
management aspects of the Company to the Investment Adviser. While Robert P.
Pinkas, Chairman, Chief Executive Officer, Chief Financial Officer, Treasurer
and a director, and Michael J. Finn, President and a director of the Investment
Adviser, have a prior record of making and managing investments similar to those
to be made by the Company, the Company and the Investment Adviser themselves
have no operating history. The Company is dependent for the selection,
structuring, closing and monitoring of its investments upon the diligence and
skill of the Investment Adviser and Messrs. Pinkas and Finn, the loss of whose
services could have a material adverse effect on the operations of the Company.
The Investment Adviser does not have written employment agreements with Messrs.
Pinkas or Finn. See "The Company -- Investment Adviser," "The
Company -- Operations," "Management," "Prior Experience of Principals of the
Investment Adviser" and "The Investment Advisory Agreement."
INVESTMENTS IN PRIVATELY-OWNED COMPANIES
The portfolio of the Company is expected to consist primarily of
investments in small- to medium-sized privately-owned businesses. There is
generally no publicly available information about such companies, and the
Company must rely on the diligence of its Investment Adviser to obtain
information in connection with the Company's investment decisions. Typically,
such companies depend for their success on the management talents and efforts of
one person or a small group of persons, and the death, disability or resignation
of one or more of these persons could have a material adverse impact on their
company. Moreover, such companies frequently have less diverse product lines and
market shares than their competition. These companies may be more vulnerable to
economic downturns and often need substantial additional capital to expand or
compete. Such companies may also experience substantial variations in operating
results. Therefore, investment in small- to medium-sized privately-owned
businesses involves a high degree of business and financial risk, which can
result in substantial losses. See "Investment Objectives and Policies."
INVESTMENTS IN SMALL-CAP PUBLIC COMPANIES
Investing in securities of small-cap public companies may involve greater
risks than investments in other public companies because these securities may
have limited marketability and, thus, may be more volatile. Because small-cap
public companies often have fewer shares outstanding than larger companies, it
may be more difficult for the Company to buy or sell significant amounts of such
shares without an unfavorable impact on prevailing prices. In addition,
small-cap companies are typically subject to a greater degree of change in
earnings and business prospects than are larger, more established public
companies. There is typically less publicly available information concerning
small-cap companies than for larger, more established ones. Securities of
issuers in "special situations" also may be more volatile, since the market
value of these securities may decline in value if the anticipated benefits do
not materialize. Companies in "special situations" include, but are not limited
to, companies involved in an acquisition or consolidation; reorganization;
recapitalization; merger, liquidation or distribution of cash, securities or
other assets; a tender or exchange offer; a breakup or workout of a holding
company; or litigation which, if resolved favorably, would improve the value of
the companies' securities. Although investing in securities of small-cap public
companies or special situations offers potential for above-average returns if
the companies are successful, the risk exists that the companies will not
succeed and the prices of the companies' shares could significantly decline in
value.
8
<PAGE> 9
Therefore, an investment in the Company may involve a greater degree of risk
than an investment in other companies or funds that seek capital appreciation by
investing in better-known, larger companies. See "Investment Objectives and
Policies."
ILLIQUIDITY OF PORTFOLIO INVESTMENTS
Most of the investments of the Company will be securities acquired directly
from small, privately-owned companies. The Company's portfolio securities will
usually be subject to restrictions on resale or otherwise have no established
trading market. The illiquidity of most of the Company's portfolio securities
may adversely affect the ability of the Company to dispose of such securities in
a timely manner and at a fair price at times when the Company deems it necessary
or advantageous.
DEPENDENCE ON PUBLIC OFFERING MARKET OR AVAILABILITY OF STRATEGIC BUYERS
The success of the investment strategy of the Company will be affected in
large part by the state of the securities markets in general and the market for
public financings in particular. Changes in the securities markets and general
economic conditions, including economic downturns, fluctuations in interest
rates, the availability of credit, inflation and other factors, may affect the
value of the Company's investments. The market for initial public offerings is
cyclical in nature and, accordingly, there can be no assurance that the
securities markets will be receptive to initial public offerings, particularly
those of small-cap companies. Any adverse change in the market for public
offerings could have a material adverse effect on the Company and could severely
limit the Company's ability to realize its investment objectives. The
availability of strategic buyers for the companies in which the Company invests
may also fluctuate from time to time. Such availability will also be affected by
the state of the securities markets and general economic conditions.
CONFLICTS OF INTEREST
Robert P. Pinkas, Chairman, Chief Executive Officer, Chief Financial
Officer, Treasurer and a director, Michael J. Finn, President and a director,
Paul H. Cascio, Vice President and Secretary and James R. Bergman, Vice
President of the Investment Adviser, serve as general partners of the general
partners of certain venture capital investment partnerships and, as such, may
encounter conflicts of interest regarding the selection of investment
opportunities and the allocation of management time. Messrs. Pinkas, Finn and
Cascio serve as general partners of the general partners of Brantley Venture
Partners II, L.P. ("BVP II") and Brantley Venture Partners III, L.P. ("BVP
III"), and Mr. Bergman serves as a general partner of the general partner of BVP
III. Mr. Pinkas serves as general partner of the general partner of Brantley
Venture Partners, L.P. ("BVP I"). In addition, Messrs. Pinkas and Finn may from
time to time organize subsequent investment companies or private funds. As of
the date of this Prospectus, BVP I and BVP II are fully invested, while BVP III
is less than 40% invested.
The principals of the Investment Adviser intend to select investments for
the Company, for BVP III and for other future affiliates separately, considering
in each case only the investment objectives, investment position, available
funds and other pertinent factors applicable to that particular investment fund.
However, the Company is seeking an exemptive order from the Commission relieving
the Company, subject to certain terms and conditions, from certain of the
provisions of the Investment Company Act to permit co-investments by the Company
with certain private equity funds managed by affiliates of the Investment
Adviser. Assuming receipt of a favorable exemptive order from the Commission,
the Company anticipates that, subject to certain terms and conditions, BVP III
and other future affiliates may frequently invest in the same portfolio
companies due to similarities in certain of their investment strategies, with
each of the Company, BVP III and other future affiliates taking a position in
the portfolio company.
In addition, the Company and the Investment Adviser intend to seek
exemptive relief from certain provisions of the Investment Company Act to permit
the Company to invest in portfolio companies in an offering by an issuer in
which BVP I, BVP II or BVP III is an existing investor and the Company is not an
existing investor. To the knowledge of the Company or the Investment Adviser,
exemptive relief of this type has not been granted previously by the Commission.
Accordingly, there can be no assurance that the
9
<PAGE> 10
application for such exemptive relief will be granted, and, therefore, there can
be no assurance that the Company will be permitted to invest in portfolio
companies in which BVP I, BVP II or BVP III is an existing investor and the
Company is not an existing investor. The Company anticipates that the
application for exemptive relief will include conditions, among others,
requiring that before such an investment would be made: (i) the investment be of
a type that has preferences and terms that are the same or better than those of
the investment owned by BVP I, BVP II or BVP III, (ii) a majority of the
Company's directors who have no financial interest in the investment and a
majority of the Company's disinterested directors approve the investment, and
(iii) the Company and Company affiliates purchase in the aggregate less than a
majority of the investment offered, such that unaffiliated institutional
investors are likely to be establishing the pricing of such investment
opportunities. See "The Company -- Selection of Investments," "Investment
Objectives and Policies" and "Management."
POTENTIAL DELAYS IN INVESTING PROCEEDS OF OFFERING AND MAKING DISTRIBUTIONS
The Company intends to invest at least 50% of its total assets in "eligible
portfolio companies" within two years after the completion of this Offering.
Such a delay is common for Business Development Companies because of the level
of due diligence, level of documentation and time of negotiation necessary for
investments in entities that meet the requirements for "Eligible Assets." For a
summary definition of eligible portfolio company and Eligible Assets, see "The
Company -- Eligible Portfolio Companies" and "Regulation." Further, although the
Company intends to seek investments that will reach a state of maturity at which
disposition can be considered within 18 months to three years from the date of
initial investment, investments in Eligible Assets may typically take from four
to seven years to reach such a stage. In light of the foregoing, a significant
distribution of proceeds from the disposition of Eligible Assets may likely not
be made until the later years of the Company's existence. Furthermore, no
assurances can be given that the Company will achieve investment results that
will permit any specified level of cash distributions. See "Distributions."
USE OF LEVERAGE
The Company presently does not intend to use borrowed funds to make
investments, however, it reserves the right to do so. The Company may borrow
from time to time on a short-term basis against maturities of its investments
for purposes of meeting short-term cash needs. Also, the Company may borrow
funds from time to time and at quarter end in order (i) to maintain sufficient
cash assets necessary to satisfy the requirements for qualification as a
Business Development Company and the diversification requirements to qualify as
a regulated investment company for federal income tax purposes, and (ii) to make
distributions necessary to qualify as a regulated investment company for federal
income tax purposes. Any such borrowing by the Company will be subject to the
requirements of Section 18 of the Investment Company Act, as modified by Section
61 of the Investment Company Act, including the requirement that any amount
borrowed must have asset coverage of at least 200% of the amount borrowed. Such
borrowing by the Company could increase the investment risk and the volatility
of the price of the Company's Common Stock because (i) leverage exaggerates any
increase or decrease in the value of the Company's portfolio, (ii) the costs of
borrowing may exceed the income from the portfolio assets mortgaged or pledged
to secure the borrowing, (iii) a decline in net asset value results if the
investment performance of the portfolio assets mortgaged or pledged to secure
the borrowing fails to cover the repayment of the borrowing together with
interest and other costs associated with the borrowing, (iv) a decline in net
asset value could affect the ability of the Company to make dividend payments or
distributions with respect to the Common Stock, (v) a failure to pay dividends
or make distributions could affect the ability of the Company to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"), and (vi) if the asset coverage for the debt securities issued to
effect the borrowing declines to less than 200% (as a result of market
fluctuations or otherwise), the Company may be required to sell a portion of its
investments when it may be disadvantageous to do so. The directors and officers
of the Company will seek to manage the Company's borrowings in such a manner to
mitigate or avoid these risks, but there is no assurance that they will be
successful in this regard. See "Regulation" and "Federal Income Tax Matters."
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COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES
A large number of entities and individuals compete for the types of
investments to be made by the Company. Many of these entities and individuals
have greater financial resources than the Company. As a result of this
competition, the Company from time to time may be precluded from entering into
attractive transactions. There can be no assurance that the Company will be able
to identify and complete investments that satisfy the Company's investment
objectives or that it will be able to fully invest its available capital.
POTENTIAL NEED FOR FOLLOW-ON INVESTMENTS IN PORTFOLIO COMPANIES
Following its initial investments in portfolio companies, the Company
anticipates that it may be called upon to provide additional funds to portfolio
companies or have the opportunity to increase investments in successful
operations. There is no assurance that the Company will make follow-on
investments or that the Company will have sufficient funds to make such
investments. Any decision by the Company not to make follow-on investments or
its inability to make them may have a substantial impact on portfolio companies
in need of such an investment, may result in a diminution of any rights or
privileges granted by a portfolio company in connection with the Company's
earlier investment, or may result in a missed opportunity for the Company to
increase its participation in a successful operation.
UNSPECIFIED USE OF PROCEEDS
The Company has not identified the particular portfolio investments to be
made from the net proceeds from this Offering. Therefore, prospective investors
must rely on the ability of the Investment Adviser to identify and make
portfolio investments consistent with the Company's investment objectives.
Investors will not have the opportunity to evaluate personally the relevant
economic, financial and other information which will be utilized by the
Investment Adviser in deciding whether to make a particular investment or to
dispose of any investment. See "Use of Proceeds."
VALUATION OF PORTFOLIO
There is typically no public market for the securities of small- to
medium-sized, privately-owned companies. As a result, the valuation of such
securities in the Company's portfolio is subject to the good faith determination
of the Company's Board of Directors. There can be no assurance that the values
so determined reflect the amounts that will ultimately be realized on these
investments. See "Valuation of Portfolio Securities."
LACK OF DIVERSIFICATION
Based on the amount of funds to be realized from this Offering, it is
unlikely that the Company will be able to commit its funds to the acquisition of
securities of a large number of companies or to direct its investments to
diverse areas. Although the Company intends to elect Subchapter M status under
the Code, and will, therefore, be required to meet certain diversification
requirements thereunder, the Company intends to operate as a non-diversified
investment company within the meaning of the Investment Company Act and,
therefore, the Company's investments are likely to not be substantially
diversified.
POSSIBLE LOSS OF PASS-THROUGH TAX TREATMENT
The Company intends to qualify for and elect to be treated as a regulated
investment company under Subchapter M of the Code. To qualify, the Company must
meet certain income distribution and diversification requirements. In any year
in which the Company so qualifies, it generally will not be subjected to federal
income tax on net investment income and net short-term capital gains distributed
to its stockholders. If the Company were to fail to qualify under Subchapter M
and its income became fully taxable, a substantial reduction in the amount of
income available for distribution to the Company's stockholders could result. In
addition, if the Company does not distribute in a timely manner (or treat as
"deemed distributed") 98% of its capital gain net income for each one-year
period ending on December 31, or distribute 98% of its ordinary
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income for each calendar year (as well as any income not distributed in prior
years), it will be subject to the 4% nondeductible federal excise tax on certain
undistributed income of regulated investment companies. See "Federal Income Tax
Matters."
LIMITED PUBLIC MARKET FOR COMMON STOCK; TRADING BELOW NET ASSET VALUE
The Company has applied for listing on the Nasdaq SmallCap Market System.
There has been no prior trading market for the Common Stock and there can be no
assurance that a regular trading market will develop, or that, if developed, it
will be sustained. In addition, shares of closed-end investment companies, such
as the Company, often trade below their net asset value. The net asset value of
the Common Stock immediately following this Offering may be less than the
initial offering price.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be approximately $36,500,000 or $41,975,000 if the
Underwriters' over-allotment is exercised in full (before deduction of
organizational expenses and expenses of the Offering estimated to be $633,150).
No portion of the net proceeds of the Offering has been allocated to any
particular investment. The proceeds will be used to invest in portfolio
companies and for working capital and general corporate purposes. Pending such
uses, the Company will invest its cash in cash items, government securities or
high quality debt securities maturing in one year or less from the time of
investment in such high quality debt securities ("Short-Term Investments"). The
Company intends to be fully invested in accordance with its investment
objectives and policies within three years of the Offering. The Company expects
to maintain approximately one percent of its total assets in Short-Term
Investments in order to pay for operating expenses and to meet contingencies.
The Investment Company Act limits the type of assets that a Business Development
Company may acquire to certain prescribed Eligible Assets unless, at the time
the acquisition is made, Eligible Assets represent at least 70% of the Business
Development Company's total assets (other than non-investment assets necessary
or appropriate to its operations as a Business Development Company). Short-Term
Investments will qualify as Eligible Assets for this purpose.
DISTRIBUTIONS
The Company intends to make quarterly distributions to its stockholders of
substantially all of its investment company taxable income (net investment
income from interest and dividends and net short-term capital gains) and to
declare and pay the first distribution in January, 1997. The Company may choose
to distribute net realized long-term capital gains, or to retain such gains, net
of applicable taxes that would be payable by the Company, to supplement the
Company's equity capital and support growth in its portfolio. If the Company
does not distribute in a timely manner (or treat as "deemed distributed") 98% of
its capital gain net income for each one-year period ending on December 31, or
distribute 98% of its ordinary income for each calendar year (as well as any
income not distributed in prior years), it will be subject to the 4%
nondeductible federal excise tax on certain undistributed income of regulated
investment companies. See "Federal Income Tax Matters." Pursuant to the
Company's Dividend Reinvestment and Cash Purchase Plan, a stockholder whose
Common Stock is registered in such stockholder's own name will have all
distributions reinvested automatically in additional shares of Common Stock by
the Company's transfer agent, State Street Bank and Trust Company, as
administrator of the Dividend Reinvestment and Cash Purchase Plan, unless the
stockholder elects, by letter to the Company received prior to the corresponding
record date, to receive cash. No assurances can be given that the Company will
achieve investment results that will permit any specified level of cash
distributions. Because investments in Eligible Assets may take from four to
seven years to reach a state of maturity at which disposition can be considered,
a significant distribution of proceeds from the disposition of Eligible Assets
may likely not be made (if at all) until the later years of the Company's
existence. See "Risk Factors -- Illiquidity of Portfolio Investments," "Risk
Factors -- Potential Delays in Investing Proceeds of Offering and Making
Distributions," "Risk Factors -- Possible Loss of Pass-Through Tax Treatment,"
"Federal Income Tax Matters" and "Dividend Reinvestment and Cash Purchase Plan."
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THE COMPANY
GENERAL
The Company has been formed to invest primarily in the equity securities
(for example, common stock, preferred stock, convertible preferred stock, or
options, warrants or rights to acquire stock) and equity-linked debt securities
(for example, convertible debt or indebtedness accompanied by warrants, options
or rights to acquire stock) of private companies.
The Company is a newly organized, closed-end, non-diversified investment
company incorporated on August 1, 1996 under the General Corporation Law of the
State of Maryland, which has elected to be treated as a Business Development
Company under the Investment Company Act. As such, the Company will be generally
required to invest at least 70% of its total assets in certain prescribed
"Eligible Assets," including securities of privately held companies and cash
items, government securities and high-quality short-term debt. The Company
intends that, within two years, at least 50% of its total assets will be
invested in private companies to which the Company makes available significant
managerial assistance. See "The Company -- Eligible Portfolio Companies,"
"Regulation" and "Risk Factors -- Potential Delays in Investing Proceeds of
Offering and Making Distributions."
The Company also intends to invest a portion of its assets in post-venture
small-cap public companies. The Company's investment objective is the
realization of long-term capital appreciation in the value of its investments.
In addition, whenever feasible in light of market conditions and the cash flow
characteristics of its portfolio companies, the Company will seek to provide an
element of current income primarily from interest, dividends and fees paid by
its portfolio companies.
With respect to its investments in private companies, the Company
anticipates that a principal focus will be on industries that it considers to be
good candidates for successful consolidation. The Company also will favor
investments in private companies that it believes can achieve the necessary
size, profitability and management depth and sophistication to become public
companies or become attractive merger or acquisition candidates. The Company
seeks to enable its stockholders to participate in investments not typically
available to the public due to the private nature of a substantial majority of
the Company's portfolio companies, the size of the financial commitment often
required in order to participate in such investments, or the experience, skill
and time commitment required to identify and take advantage of these investment
opportunities. See "Risk Factors."
The Company intends to be a partner in the growth of its private portfolio
companies, rather than merely a financial participant. The Company will offer
managerial assistance to its private portfolio companies and expects that its
representatives will play a role in setting their corporate strategies and will
advise such companies regarding important decisions affecting their businesses,
including potential acquisitions, recruiting key managers, and securing equity
and debt financing.
With respect to its investments in post-venture small-cap public companies,
the Company anticipates that its primary focus will be on companies that the
Investment Adviser believes to have significant potential for growth in sales
and earnings. A post-venture company is a company that has received venture
capital or private equity financing either (a) during the early stages of the
company's business or the early stages of the development of a new product or
service, or (b) as part of a restructuring or recapitalization of the company.
The Company intends to limit its post-venture investments to companies which
within the prior 10 years have received an investment of venture or private
equity capital, have sold or distributed securities to venture or private equity
capital investors, or have completed an initial public offering of equity
securities.
The Company anticipates that its position as an investor in both private
companies and post-venture small-cap public companies will be of benefit to its
ultimate returns on its investments. This benefit will be derived from historic
and future knowledge that the Company and its managers have and will gain
regarding companies, technologies, management, markets and pricing in both
public and private markets. For example, knowledge of emerging technologies and
companies in the private markets can be beneficial in selecting small-cap public
stocks. Conversely, knowledge of public companies and market performance can be
beneficial in pricing and structuring private investments. See "Investment
Objectives and Policies."
INVESTMENT ADVISER
Brantley Capital Management, L.L.C., 20600 Chagrin Boulevard, Suite 1150,
Cleveland, Ohio 44122, will serve as the Investment Adviser to the Company. The
Investment Adviser will be responsible, on a day-to-day basis, for the selection
and supervision of portfolio investments and for management oversight of the
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Company's records and financial reporting requirements. The Company will pay the
Investment Adviser an annual management fee of 2.85% of the Company's net
assets, determined at the end of each calendar quarter, and payable quarterly in
arrears throughout the term of the Investment Advisory Agreement.
Robert P. Pinkas, Chairman, Chief Executive Officer, Chief Financial
Officer, Treasurer and a manager, and Michael J. Finn, President and a manager
of the Investment Adviser, have substantial experience in identifying,
evaluating, selecting, negotiating and closing investments similar to those
being sought by the Company. See "Risk Factors -- Lack of Operating History;
Dependence Upon Investment Adviser," "Risk Factors -- Conflicts of Interest,"
"Management," "Prior Experience of Principals of the Investment Adviser" and
"The Investment Advisory Agreement."
NATURE OF INVESTMENTS IN PORTFOLIO COMPANIES
The Company's investments in portfolio companies may be in the form of
equity or some combination of debt with equity, but will always include some
equity feature through which the Company can participate in the growth in the
value of the underlying businesses. The Company's investment in a given
portfolio company may consist of common stock, preferred stock (which may or may
not be convertible into common stock), debentures (which may or may not be
convertible into common stock and may or may not be subordinated), warrants to
purchase common stock, or some combination thereof. The Company anticipates that
its investments in privately-owned portfolio companies will generally be
structured with the intention of having the investments achieve liquidity within
18 months to three years from the respective dates of the investments, although
there can be no assurance that such time frame will be met and situations may
arise in which the Company may hold securities for a longer period. See "Risk
Factors -- Investments in Privately-Owned Companies," "Risk
Factors -- Investments in Small-Cap Public Companies," "Risk
Factors -- Illiquidity of Portfolio Investments" and "Risk Factors -- Potential
Delays in Investing Proceeds of Offering and Making Distributions."
TEMPORARY INVESTMENTS
Pending investments in the types of securities described above, the Company
will invest its cash in cash items, government securities or high quality debt
securities maturing in one year or less from the time of investment in such high
quality debt securities. See "Use of Proceeds."
OPERATIONS
The Investment Adviser expects to locate potential investment opportunities
primarily by making use of an extensive network of investment bankers,
commercial bankers, accountants and other finance professionals; venture
capitalists and other investment professionals; attorneys; business executives;
and entrepreneurs.
The investment process includes the identification, evaluation,
negotiation, documentation and closing of the investment. Robert P. Pinkas,
Chairman, Chief Executive Officer, Chief Financial Officer, Treasurer and a
manager, and Michael J. Finn, President and a manager of the Investment Adviser,
have extensive experience in all phases of the investment process. The
evaluation of a potential investment includes due diligence, which includes
review of historical and prospective financial information, and which,
particularly in the case of a privately-owned company, usually involves on-site
visits; interviews with management, employees, customers and vendors of the
potential portfolio company; and background checks and research relating to its
management, markets, products and services.
Upon the completion of due diligence and a decision to proceed with an
investment in a private company, the Investment Adviser will create an
investment memorandum containing information pertinent to the investment for
presentation to the Company's Board of Directors, which must approve the
investment. Additional due diligence with respect to any investment by the
Company may be conducted by the Company's attorneys and independent accountants
prior to the closing of the investment. See "Risk Factors -- Lack of Operating
History; Dependence Upon Investment Adviser" and "Risk Factors -- Conflicts of
Interest."
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SELECTION OF INVESTMENTS
The Company anticipates that, as a general rule, most of its investments
will be in small- to medium-sized companies with total assets or annual sales
under $500,000,000. Many of these companies may have very limited operating
histories. The Company's main criterion for the selection of investments in
portfolio companies is the potential for substantial growth in sales and
earnings. The Company will seek to identify companies which have extraordinary
opportunities in the markets they serve or that have devised innovative
products, services or ways of doing business that afford them a distinct
competitive advantage. Such companies might achieve growth either internally or
by acquisition. In addition, the Company intends to invest in companies seeking
to consolidate fragmented industries. Often, such consolidations can improve
performance by bringing experienced management, economies of scale and greater
capital resources to bear on businesses that might have lacked such management,
economies and resources in the past.
In evaluating potential portfolio companies, the Company will pay
particular attention to the following characteristics:
MANAGEMENT. The Company will favor investments in companies whose
management teams consist of talented individuals of high integrity with
significant experience. The Company intends to pay particular attention to the
depth of the management team and the extent to which key managers have an
ownership interest in the company.
OPPORTUNITY FOR SIGNIFICANT INFLUENCE. The Company will favor investments
in companies in which it has the opportunity to become a partner in the building
of the companies, rather than being merely a financial participant. In addition,
the Company will favor investments in which its representatives will play a role
in setting corporate strategies for the portfolio companies, and will advise
such companies regarding important decisions affecting their businesses,
including acquisitions for such companies, recruiting key managers, and securing
equity and debt financing.
MARKET DYNAMICS. The Company will favor investments in companies that are
addressing a large, unfulfilled market demand with long-term high-growth
prospects and that can reasonably expect to achieve and maintain a significant
market share through proprietary products and services. The Company will also
favor investments in companies that deliver products and services with
significant performance and cost advantages and for which there exist
significant barriers to effective competition by others. In addition, with
respect to its investments in private companies, the Company will favor
industries that it considers to be good candidates for successful consolidation.
See "Risk Factors -- Competitive Market for Investment Opportunities."
ABILITY TO ACHIEVE LIQUIDITY. With respect to its investments in private
companies, the Company will consider the potential and likely means for
achieving the liquidity that would ultimately enable the Company to achieve cash
value for its equity investments. Possible ways of achieving liquidity include
an initial public offering of the portfolio company, a sale of the portfolio
company or a purchase by the portfolio company of the Company's equity interest
in the portfolio company. See "Risk Factors -- Investments in Privately-Owned
Companies," "Risk Factors -- Illiquidity of Portfolio Investments" and "Risk
Factors -- Potential Delays in Investing Proceeds of Offering and Making
Distributions."
GROWTH AT A REASONABLE PRICE. With respect to investments in post-venture
small-cap public companies, the Company will target companies whose current and
projected price/earnings ("P/E") ratios are less than their respective growth
rates. This growth at a reasonable price discipline is anticipated to result in
attractive stock appreciation as a result of both earnings growth and P/E
multiple expansion. The majority of these post-venture public investments are
expected to be in companies with prior financial support from professional
venture capitalists and private equity funds, as these companies often have
stronger management teams, better financial controls and significant competitive
advantages. See "Risk Factors -- Investments in Small-Cap Private Companies."
POTENTIAL CO-INVESTMENTS
The Company anticipates "co-investing" with BVP III, an affiliate of the
Company and the Investment Adviser, as well as with other future affiliates, in
specified amounts and on terms and conditions that are the
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same in all material respects, subject to the availability of capital for
investment on the part of the Company and each such affiliate and certain other
conditions. The Company intends to submit an application to the Commission to
seek an exemptive order, subject to certain terms and conditions, to relieve the
Company from certain provisions of the Investment Company Act to permit such
co-investments. In addition, the Company and the Investment Adviser intend to
seek exemptive relief from certain provisions of the Investment Company Act to
permit the Company to invest in portfolio companies in an offering by an issuer
in which BVP I, BVP II or BVP III is an existing investor and the Company is not
an existing investor. To the knowledge of the Company or the Investment Adviser,
exemptive relief of this type has not been granted previously by the Commission.
Accordingly, there can be no assurance that the application for such exemptive
relief will be granted, and therefore, there can be no assurance that the
Company will be permitted to invest in portfolio companies in which BVP I, BVP
II or BVP III is an existing investor and the Company is not an existing
investor. The Company anticipates that the application for exemptive relief will
include conditions, among others, requiring that before such an investment would
be made: (i) the investment be of a type that has preferences and terms that are
the same or better than those of the investment owned by BVP I, BVP II or BVP
III, (ii) a majority of the Company's directors who have no financial interest
in the investment and a majority of the Company's disinterested directors
approve the investment, and (iii) the Company and Company affiliates purchase in
the aggregate less than a majority of the investment offered, such that
unaffiliated institutional investors are likely to be establishing the pricing
of such investment opportunities. See "Risk Factors -- Conflicts of Interest."
ELIGIBLE PORTFOLIO COMPANIES
The Company, as a Business Development Company, may not acquire any asset
other than "Eligible Assets" unless, at the time the acquisition is made,
Eligible Assets represent at least 70% of the Company's total assets (other than
certain assets necessary for its operation, such as office furniture, equipment
and facilities). "Eligible Assets" are described in Section 55(a) of the
Investment Company Act. The principal categories of Eligible Assets relevant to
the proposed business of the Company are the following:
(1) Securities purchased in transactions not involving any public
offering from the issuer of such securities, which issuer is an eligible
portfolio company. An "eligible portfolio company" is defined in the
Investment Company Act as any issuer which:
(a) is organized under the laws of, and has its principal place of
business in, the United States;
(b) is not an investment company other than a small business
investment company wholly-owned by the Business Development
Company; and
(c) (i) does not have any class of securities with respect to which
a broker or dealer may extend margin credit;
(ii) is actively controlled by a Business Development Company
and has an affiliate of a Business Development Company on
its board of trustees or directors; or
(iii) meets other such criteria as may be established by the
Commission.
(2) Securities of any eligible portfolio company which is controlled
by the Business Development Company.
(3) Securities received in exchange for or distributed on or with
respect to securities described in (1) or (2) above, or pursuant to the
exercise of options, warrants or rights relating to such securities.
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, the Business Development Company must have been organized (and
have its principal place of business) in the United States for the purpose of
making investments in the types of securities described in (1) or (2) above.
Moreover, in order for securities of portfolio companies to constitute Eligible
Assets for the purpose of the 70% test, the Company must make available to the
issuer of the securities significant
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managerial assistance; except that, where the Company purchases such securities
in conjunction with one or more other persons acting together, one of the other
persons in the group may make available such managerial assistance.
The Company may invest up to 30% of its assets in other portfolio
investments. The Company intends that this portion of its portfolio shall
consist primarily of investments in post-venture small-cap public companies. See
"Use of Proceeds" and "The Company -- Temporary Investments."
COMPETITION
The Company's primary competitors include financial institutions, venture
capital and private equity firms, mutual funds concentrating on post-venture
small-cap companies, and other nontraditional investors. Many of these entities
have greater financial and managerial resources than the Company. The Company
believes that it will compete with such entities primarily on the basis of the
quality of its services, the reputations of Messrs. Pinkas and Finn as well as
the investment entities they have managed, the Company's investment analysis and
decision-making processes, and on the investment terms the Company offers on the
securities to be issued by its portfolio companies. See "Risk
Factors -- Competitive Market for Investment Opportunities."
EXPENSES OF THE COMPANY
In addition to the fees paid to the Investment Adviser, the Company will
pay all of its own expenses, including directors' fees; taxes; fees and expenses
of the Company's legal counsel, independent accountants and transfer agent;
custodial and administrative services fees; expenses of printing and mailing
share certificates, stockholder reports, notices to stockholders and proxy
statements, and reports to governmental offices; brokerage and other expenses in
connection with the execution, recording and settlement of portfolio security
transactions; expenses of stockholder meetings; Commission and state blue sky
registration fees; and the Company's other business and operating expenses not
covered in the Investment Advisory Agreement. See "The Investment Advisory
Agreement."
On the basis of the anticipated size of the Company immediately following
the closing of the Offering assuming sale of 3,650,000 shares of Common Stock in
the Offering, it is estimated that the Company's annual operating expenses,
including the Management Fee paid to the Investment Adviser, will be
approximately $1,460,000 (approximately 4.0% of the net proceeds of this
Offering). While the foregoing estimate has been made in good faith, there can
be no assurance that actual annual expenses will not be substantially greater
than such estimate as a result of increases in costs, such as costs of transfer
agent, stock record, custodian and stockholder relations activities and
professional and similar services, that cannot be predicted and are beyond the
control of the Company. See "The Investment Advisory Agreement."
Organizational expenses and expenses of the Offering payable by the Company
are estimated to be approximately $633,150. Offering expenses, estimated to be
$453,150, excluding the underwriting commissions to be paid by the Investment
Adviser and any non-accountable expense allowance, will be charged to capital at
the time of issuance of the Common Stock.
BROKER ALLOCATION AND OTHER PRACTICES
The Investment Adviser will place the orders for the purchase and sale of
the Company's publicly traded portfolio securities and any publicly traded
options or other derivatives which the Investment Adviser determines are
appropriate investments for the Company in accordance with the investment
guidelines established by the Company's Board of Directors. The Investment
Adviser's overriding objective in effecting such portfolio transactions will be
to seek to obtain the best combination of price and execution. The best net
price, giving effect to brokerage commissions, if any, and other transaction
costs, normally is an important factor in this decision, but a number of other
judgmental factors may also enter into the decisions. These include: the
Investment Adviser's knowledge of negotiated commission rates currently
available and other current transaction costs, the nature of the security being
traded, the size of the transaction, the desired timing of the trade, the
activity existing and expected in the market for the particular security,
confidentiality, the execution, clearance and settlement capabilities of the
broker or dealer selected and others which are
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considered, the Investment Adviser's knowledge of the financial stability of the
broker or dealer selected and such other brokers or dealers, and the Investment
Adviser's knowledge of actual or apparent operational problems of any broker or
dealer. Recognizing the value of these factors, the Company may pay a brokerage
commission in excess of that which another broker or dealer may have charged for
effecting the same transaction. Evaluations of the reasonableness of brokerage
commissions, based on the foregoing factors, are made on an ongoing basis by the
Investment Adviser's staff while effecting portfolio transactions. The general
level of brokerage commissions paid will be reviewed by the Investment Adviser,
and reports will be made annually to the Company's Board of Directors.
With respect to issues of securities involving brokerage commissions, when
more than one broker or dealer is believed to be capable of providing the best
combination of price and execution with respect to a particular portfolio
transaction for the Company, the Investment Adviser may often select a broker or
dealer that has furnished it with research products or services such as research
reports, subscriptions to financial publications and research compilations,
compilations of securities prices, earnings, dividends and similar data, and
computer data bases, quotation equipment and services, research-oriented
computer software and services, and services of economic and other consultants.
Selection of brokers or dealers is not made pursuant to an agreement or
understanding with any of the brokers or dealers; however, the Investment
Adviser will use an internal allocation procedure to identify those brokers or
dealers who provide it with research products or services and the amount of
research products or services they provide, and endeavors to direct sufficient
commissions generated by its clients' accounts in the aggregate, including the
Company, to such brokers or dealers to ensure the continued receipt of research
products or services the Investment Adviser feels are useful. In certain
instances, the Investment Adviser may receive from brokers and dealers products
or services that are used both as investment research and for administrative,
marketing, or other non-research purposes. In such instances, the Investment
Adviser will make a good faith effort to determine the relative proportions of
such products or services which may be considered as investment research. The
portion of the costs of such products or services attributable to research usage
may be defrayed by the Investment Adviser (without prior agreement or
understanding, as noted above) through brokerage commissions generated by
transactions by clients (including the Company), while the portions of the costs
attributable to non-research usage of such products or services is paid by the
Investment Adviser in cash. No person acting on behalf of the Company is
authorized, in recognition of the value of research products or services, to pay
a commission in excess of that which another broker or dealer might have charged
for effecting the same transaction. Research products or services furnished by
brokers and dealers may be used in servicing any or all of the clients of the
Investment Adviser and not all such research products or services are used in
connection with the management of the Company.
With respect to the Company's purchases and sales of portfolio securities
transacted with a broker or dealer on a net basis, the Investment Adviser may
also consider the part, if any, played by the broker or dealer in bringing the
security involved to the Investment Adviser's attention, including investment
research related to the security and provided to the Company.
INVESTMENT OBJECTIVES AND POLICIES
The Company's investment objective is the realization of long-term capital
appreciation in the value of its investments. In addition, whenever feasible in
light of market conditions and the cash flow characteristics of its portfolio
companies, the Company will seek to provide an element of current income
primarily from interest, dividends and fees paid by its portfolio companies. The
planned investment strategy of the Company will be to invest in a portfolio of
private companies and post-venture small-cap public companies. In accordance
with the Company's qualification as a Business Development Company, most of the
portfolio companies, at the time of investment, are likely to be private
companies. The Company will focus its investment activity on private companies
and post-venture small-cap public companies, in most cases not technology
intensive, which in the judgment of the Investment Adviser can provide superior
investment returns, either because they are presented with extraordinary
opportunities to which they are especially well-suited to respond, or because
they have devised innovative products, services, or ways of doing business which
afford them distinct, defensible, competitive advantages.
18
<PAGE> 19
In addition to the growth investment opportunities described above, the
Company will look for investments in companies seeking to consolidate fragmented
industries. In many instances, such consolidations can improve performance by
bringing excellent, professional management, economies of scale, and adequate
capital resources to bear on businesses which have lacked these resources. Also,
in industry consolidations, often a company can be built through a series of
acquisitions at a relatively low multiple of earnings, then sold or taken public
at a higher price-earnings ratio.
Although technology is not an area of emphasis for the Company, the Company
will consider investments in companies having innovative, technology-based
products which satisfy large, unfulfilled market needs. The Company will also
consider investments in "classic" leveraged acquisitions of companies which can
be acquired for attractive prices, although the Company does not anticipate that
this will be an area of emphasis. The Company has chosen not to emphasize this
area because of the large amount of investment funds already devoted to
leveraged buyouts and because the Company believes that the talent of its
management can be more effectively employed in building companies than in
financial engineering.
The Investment Adviser believes that maintaining a high level of
involvement and influence in portfolio companies is an important factor in
achieving the desired result. This control is accomplished through a significant
ownership position, presence on the board of directors, and close working
relationships with portfolio company management. The Company intends to be a
partner in building companies, rather than merely a financial participant. With
respect to the Company's investments in private companies, the Company
anticipates that its representatives will play an active role in setting
corporate strategies for such portfolio companies, and will advise such
companies regarding important decisions affecting their businesses, including
acquisitions for such companies, recruiting key managers, and securing equity
and debt financing.
In making investments and managing its portfolio, the Company will adhere
to the following policies (which, except for retaining its status as a Business
Development Company, may be changed by a majority vote of the Board of Directors
without stockholder approval). The percentage restrictions set forth below, as
well as those contained elsewhere in this Prospectus, apply at the time a
transaction is effected, and a subsequent change in a percentage resulting from
market fluctuations or any other cause other than an action by the Company will
not require the Company to dispose of portfolio securities or to take other
action to satisfy the percentage restriction.
The Company will at all times conduct its business so as to retain its
status as a Business Development Company. The Company may not change the nature
of its business so as to cease to be, or withdraw its election as, a Business
Development Company without the approval of the holders of a majority of its
outstanding Common Stock (as defined under the Investment Company Act). In order
to retain this status, the Company may not acquire any assets which do not
qualify as, Eligible Assets if, after giving effect to such acquisition, the
value of its Eligible Assets amounts to less than 70% of the value of its total
assets (other than non-investment assets necessary and appropriate to its
operations as a Business Development Company). For a summary definition of
Eligible Assets, see "The Company -- Eligible Portfolio Companies" and
"Regulation." The Company believes that the securities it proposes to acquire in
private companies, as well as its Short-Term Investments, will generally be
Eligible Assets. Securities of public companies, on the other hand, are
generally not Eligible Assets unless they were acquired in a distribution in
exchange for, or upon the exercise of, a right relating to securities that were
Eligible Assets. Thus, investments in post-venture small-cap public companies,
or other public companies, generally may not exceed 30% of the Company's total
assets.
As a general rule, the Company will not concentrate its investments in any
particular industry or particular group of industries, although it reserves the
right to do so.
The Company will not (i) purchase securities on margin, except such
short-term credits as are necessary for the clearance of transactions, (ii)
acquire the voting stock of, or invest in any securities issued by any other
investment company if immediately after such acquisition, the Company and any
affiliates of the Company own in the aggregate (A) more than 3% of the total
outstanding voting stock of the acquired company, (B) securities having an
aggregate value greater than 5% of the value of the total assets of the Company,
or (C) securities of the acquired company and all other investment companies
(other than treasury stock of the Company) having an aggregate value greater
than 10% of the Company, or (iii) engage in the purchase or sale
19
<PAGE> 20
of commodities or commodity contracts, including futures contracts (except where
necessary in working out distressed loan or investment situations). See the
Appendix to this Prospectus for additional information regarding certain
financial instruments in which the Company may from time to time invest.
The Company may make selective bridge loans to public and private
companies. These bridge loans may be either secured or unsecured and convertible
into common stock of the issuer or issued together with warrants for equity
participation, or both. These loans will generally be designed to carry the
portfolio company to a private placement, an initial or secondary public
offering, a merger and acquisition transaction, or other financing within three
years from the date of investment. Bridge loans carry the risk that the event to
which the loan is intended to bridge may not occur. The Company intends to
minimize such risk whenever practicable, but necessarily acknowledges that it
will be present. In addition to equity participation, the Company may receive
fees in connection with providing bridge financings.
The Company may invest as "other portfolio investments" in marketable
securities of public companies which the Company's management believes have
significant potential for price appreciation. Investments in such other
portfolio companies may be made in the form of common stock, preferred stock or
securities convertible into or exchangeable for common stock or preferred stock.
The Company presently does not intend to use borrowed funds to make
investments, however, it reserves the right to do so. The Company may borrow
from time to time on a short-term basis against maturities of its investments
for purposes of meeting short-term cash needs. Generally, such investments will
have a maturity of less than one year. Also, the Company may borrow funds from
time to time and at quarter end in order (i) to maintain sufficient cash assets
necessary to meet the requirements for qualification as a Business Development
Company and the diversification requirements to qualify as a regulated
investment company for federal income tax purposes, and (ii) to make
distributions necessary to qualify as a regulated investment company for federal
income tax purposes. All borrowings by the Company will be subject to the
percentage limits permitted by the Investment Company Act and any other
applicable federal or state laws. See "Risk Factors -- Use of Leverage," "Risk
Factors -- Possible Loss of Pass-Through Tax Treatment," "Regulation" and
"Federal Income Tax Matters."
The Company intends to seek an exemptive order from the Commission
relieving the Company, subject to certain terms and conditions, from certain
provisions of the Investment Company Act to permit co-investments by the Company
with BVP III, which is an affiliate of the Company and the Investment Adviser,
and subsequent companies or funds that may be organized as affiliates of the
Company or the Investment Adviser. Such co-investments will be in specified
amounts and on terms and conditions that are the same in all material respects,
subject to the availability of capital for investment on the part of the Company
and each such affiliate and certain other considerations. There can be no
assurance that such affiliates will have capital available to co-invest with the
Company.
In addition, the Company and the Investment Adviser intend to submit an
application to the Commission for exemptive relief from certain provisions of
the Investment Company Act to permit the Company to invest in portfolio
companies in an offering by an issuer in which BVP I, BVP II or BVP III is an
existing investor and the Company is not an existing investor. To the knowledge
of the Company or the Investment Adviser, exemptive relief of this type has not
been granted previously by the Commission. Accordingly, there can be no
assurance that the application for such exemptive relief will be granted, and
therefore, there can be no assurance that the Company will be permitted to
invest in portfolio companies in which BVP I, BVP II or BVP III is an existing
investor and the Company is not an existing investor. The Company anticipates
that the application for exemptive relief will include conditions, among others,
requiring that before such an investment would be made: (i) the investment be of
a type that has preferences and terms that are the same or better than those of
the investment owned by BVP I, BVP II or BVP III, (ii) a majority of the
Company's directors who have no financial interest in the investment and a
majority of the Company's disinterested directors approve the investment, and
(iii) the Company and Company affiliates purchase in the aggregate less than a
majority of the investment offered, such that unaffiliated institutional
investors are likely to be establishing the pricing of such investment
opportunities.
20
<PAGE> 21
MANAGEMENT
The business and affairs of the Company are managed under the direction of
its Board of Directors. Directors generally will hold office for staggered terms
of three years as more fully described in the Company's Articles of Amendment
and Restatement of the Charter and its Bylaws. Annual stockholder meetings will
be held for the purpose of electing directors upon the expiration of the initial
terms of service and for the transaction of such other business as may properly
be brought before the meeting. The Board of Directors elects the Company's
officers who serve at the pleasure of the Board of Directors.
DIRECTORS AND OFFICERS
The following table sets forth certain information regarding the directors
and officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ ---- ----------------------------------------------------
<S> <C> <C>
Robert P. Pinkas(1)........... 42 Chairman of the Board, Chief Executive
Officer, Chief Financial Officer, Treasurer and
Director
Michael J. Finn(1)............ 47 President and Director
Paul H. Cascio................ 35 Vice President and Secretary
James R. Bergman.............. 54 Vice President
L. Patrick Bales.............. 54 Director
Benjamin F. Bryan............. 43 Director
Richard Moodie................ 47 Director
</TABLE>
- ------------------
(1) Director who is an "interested person" as defined in Section 2(a)(19) of the
Investment Company Act.
Robert P. Pinkas is Chairman of the Board, Chief Executive Officer, Chief
Financial Officer, Treasurer and a director of the Company and Chairman of the
Board, Chief Executive Officer, Chief Financial Officer, Treasurer and a manager
of Brantley Capital Management, L.L.C., which serves as the Investment Adviser
to the Company. Mr. Pinkas was the founding partner of BVP I, a venture capital
fund started in 1987. Mr. Pinkas led the formation of BVP II and BVP III and
serves as a general partner of the general partners of BVP I, BVP II and BVP
III. BVP I, BVP II and BVP III have made venture capital investments similar to
the investments to be made by the Company in private companies. From 1981 to
1987, Mr. Pinkas was active in venture capital management and financing as a
founding director and investor in seven early-stage companies. He serves on the
boards of directors of several portfolio companies in which BVP I, BVP II and
BVP III have invested, including Gliatech, Inc., Pediatric Services of America,
Inc., Medirisk, Inc. and Quad Systems Corporation. He earned A.B. and A.M.
degrees from Harvard University and a J.D. from the University of Pennsylvania.
Michael J. Finn is President and a director of the Company and is President
and a manager of the Investment Adviser. Mr. Finn also serves as a general
partner of the general partners of BVP II and BVP III. From 1987 to 1995, Mr.
Finn served as portfolio manager and vice president of the Venture Capital Group
of Sears Investment Management Company ("SIMCO") in Chicago. In this capacity,
Mr. Finn managed the development of a $150 million portfolio of private equity
investments, including the investment of over $24 million directly in 25
operating companies. From 1983 to 1987, he led the development of a $250 million
venture capital program for the State of Michigan Department of Treasury as its
deputy director. In 1982, Mr. Finn founded and served as president of the
Michigan Certified Development Corporation, a small business development
corporation which financed over $50 million of investments in six companies in
Michigan during the period 1982 to 1984. In 1976, he launched the Forward
Development Corporation, an entity sponsored by the U.S. Small Business
Administration for small business financing. He currently serves on the boards
of directors of Rhomas Group, Inc., Medirisk, Inc., Pediatric Services of
America, Inc. and Silvon Software, Inc. He earned B.S. and M.S. degrees from
Michigan State University.
Paul H. Cascio serves as Vice President and Secretary of the Company and as
Vice President and Secretary of the Investment Adviser. Mr. Cascio also serves
as a general partner of the general partners of BVP II and BVP III. Prior to
joining BVP II and BVP III in May 1996, Mr. Cascio was a managing director and
head of the industrial manufacturing and services group in the corporate finance
department at Dean
21
<PAGE> 22
Witter Reynolds Inc. Before joining Dean Witter in December 1987, Mr. Cascio was
employed in the corporate finance department at E.F. Hutton & Company, Inc. Mr.
Cascio has a B.A. from Colgate University and an M.B.A. from the New York
University Graduate School of Business Administration.
James R. Bergman is Vice President of the Company and Vice President of the
Investment Adviser. Mr. Bergman also serves as a general partner of the general
partner of BVP III. Mr. Bergman is a Founder and General Partner of DSV Partners
III and IV and their predecessors. The DSV entities provide capital management
assistance to emerging companies whose focus is primarily in technologies
associated with electronics, communications, biotechnology and health care. Over
the past 27 years Mr. Bergman has served DSV in several capacities. He was Vice
President and Treasurer of Data Science Ventures and later a co-founder and
General Partner of DSV Associates, DSV Partners III and DSV Partners IV. He has
been involved in the early funding of a number of technology companies, led
investments in data communications, semiconductors, computer peripherals, and
advanced technology areas, and most recently, focused on investments involving
consolidation strategies in various technology-based industries. Mr. Bergman has
served on the Boards of more than 30 companies, including Quad Systems and Maxim
Integrated Products. He was also a director of the National Venture Capital
Association from 1985 to 1990. Mr. Bergman attended UCLA, where he graduated
with honors with a B.S. in Engineering and received his M.B.A. with distinction.
L. Patrick Bales, a director of the Company, is a partner with the firm of
Donahue/Bales Associates, an executive search consulting firm that services
smaller growth companies as well as major corporations in both the private and
public sector. The firm conducts executive search assignments both domestically
and internationally and has affiliate offices in London and Tokyo. Previously
Mr. Bales was employed with Paul R. Ray & Company from 1981 to 1983 in their
Chicago office and was on the professional staff of two other search firms in
the Chicago area from 1975 to 1981. He spent five years with Weber Marking
Systems prior to embarking upon his career in executive search. He earned his
B.S. degree from St. Ambrose University.
Benjamin F. Bryan, a director of the Company, is Executive Vice President
of the Tower Properties Company, a Kansas City, Missouri based developer, owner
and manager of real estate. Mr. Bryan functions as chief operating officer and
is directly responsible for acquisitions. Tower Properties is a publicly owned
corporation specializing in commercial office, multi-family, parking and
industrial properties. Mr. Bryan joined Tower Properties in 1991 and has served
as a director since 1993. He also serves as Vice President and Director of the
Downtown Redevelopment Company, a subsidiary of Tower Properties. From 1980 to
1991, Mr. Bryan held a series of public policy and public administration
positions, including Executive Assistant to the Mayor of Cleveland, Public
Affairs Manager with the Denver Chamber of Commerce and Executive Director of
the Metro Denver Transportation Development Commission. Mr. Bryan earned an A.B.
degree from Harvard College.
Richard Moodie, a director of the Company, is the Founder, President and
Chief Executive Officer of KraftMaid Cabinetry, Inc. He has over 27 years
experience in growing and managing a manufacturing and marketing business. Mr.
Moodie founded KraftMaid Cabinetry in 1969, thereafter growing the business
until it was the largest semi-custom kitchen-at-a-time manufacturer in the
United States. KraftMaid is the second largest cabinet manufacturer in the
country. In 1990, Mr. Moodie sold his majority interest to Masco Corporation of
Taylor, Michigan, a $5 billion home furnishing and building materials company.
Mr. Moodie holds a limited partnership interest in BVP III.
The Company's Articles of Amendment and Restatement of the Charter provide,
among other things, for a Board of Directors divided into three classes,
designated Class I, Class II and Class III. Directors serve for staggered terms
of three years each, except that initially the Class I director will serve until
the Company's 1997 annual meeting of stockholders, the Class II directors until
the 1998 annual meeting of stockholders and the Class III directors until the
1999 annual meeting of stockholders. The Class I director is Mr. Moodie, the
Class II directors are Messrs. Bales and Bryan, and the Class III directors are
Messrs. Pinkas and Finn.
Except for stock options to be granted by the Company, the Company
anticipates that the officers of the Company otherwise will be compensated
solely by the Investment Adviser. Directors who are not officers or employees of
the Company will each receive a monthly fee of $500 for serving on the Board of
Directors and
22
<PAGE> 23
will receive an additional $1,000 for each meeting of the Board of Directors or
a committee thereof that he or she attends.
The following table sets forth the estimated amounts the Company
anticipates paying during its first full fiscal year of operations to its
directors and executive officers. The Company does not have a pension plan or
other retirement benefits:
<TABLE>
<CAPTION>
AGGREGATE
NAME OF PERSON POSITION COMPENSATION
- ------------------------------ -------------------------------------------- --------------
<S> <C> <C>
Robert P. Pinkas.............. Chairman of the Board, Chief Executive None (1)
Officer, Chief Financial Officer, Treasurer
and Director
Michael J. Finn............... President and Director None (1)
Paul H. Cascio................ Vice President and Secretary None (1)
James R. Bergman.............. Vice President None (1)
L. Patrick Bales.............. Director $10,000 (1)
Benjamin F. Bryan............. Director $10,000 (1)
Richard Moodie................ Director $10,000 (1)
</TABLE>
- ---------------
(1) Does not include equity-based compensation. See "Stock Options."
INDEMNIFICATION AGREEMENTS
The Company intends to enter into indemnification agreements with each of
its directors and officers upon the closing of this Offering. Pursuant to these
agreements, the Company will, to the extent permitted under applicable law,
indemnify these persons against all expenses, judgments, fines and penalties
incurred in connection with the defense or settlement of any actions brought
against them by reason of the fact that they are or were directors or officers
of the Company or that they assumed certain responsibilities at the direction or
upon the request of the Company, except in the case of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of their respective offices. In addition, the Company's Articles of
Amendment and Restatement of the Charter and its Bylaws provide for certain
limitations on director liability.
STOCK OPTIONS
For the purpose of providing officers and employees who have substantial
responsibility for the management of the Company with additional incentives to
exert their best efforts on behalf of the Company, to increase their proprietary
interest in the success of the Company, to reward outstanding performance and to
attract and retain executive personnel of outstanding ability, the Company has
adopted the 1996 Stock Option Plan (the "Stock Option Plan").
The Stock Option Plan authorizes the issuance of options to purchase up to
1,175,000 shares of Common Stock to officers and employees of the Company, with
the maximum amount that any one officer or employee may be awarded in any given
fiscal year to be fixed at options for 400,000 shares of Common Stock (subject
to certain adjustments). The Stock Option Plan will be administered by a
committee of the Board of Directors consisting of at least two directors (the
"Committee") who will not be eligible for grants or awards of options or other
equity securities under the Stock Option Plan. The Committee will determine the
executive and other officers and employees of the Company who are eligible to
participate in the Stock Option Plan and the terms and conditions, including the
number of shares of Common Stock for which options may be granted. Messrs.
Pinkas, Finn, Cascio and Bergman are currently eligible to participate in the
Stock Option Plan.
Options granted under the Stock Option Plan will be exercisable at a price
not less than the greater of (i) the current market value (as defined in the
Stock Option Plan) on the date of option grant and (ii) the current net asset
value of the shares of Common Stock. No option may be exercised more than 10
years after the date on which it is granted. Options are not transferable except
for disposition by will or intestacy. The number of shares of Common Stock
available for options, the number of shares of Common Stock subject to
outstanding
23
<PAGE> 24
options and related exercise prices will be adjusted for changes in outstanding
shares of Common Stock such as stock splits or combinations of shares of Common
Stock.
Shares of Common Stock purchased upon exercise of options (the "Option
Shares") must be paid for in cash or by delivery of a number of shares of Common
Stock with an aggregate fair market value equal to the aggregate exercise price
of the Option Shares, or any combination thereof. In order to facilitate the
purchase of Option Shares, the Company may make arms-length loans to
participants in the Stock Option Plan in accordance with Sections 57(j)(2) and
62(1) of the Investment Company Act under the following terms. Each such loan
must: (i) have a term of not more than 10 years; (ii) become due within a
reasonable time, not to exceed 60 days, after the termination of such
participant's employment or service; (iii) bear interest at no less than the
prevailing rate applicable to 90-day U.S. Treasury bills at the time such loan
is made; (iv) at all times be fully collateralized (such collateral may include
any securities issued by the Company); and (v) be approved by a majority of the
disinterested directors of the Company on the basis that such loan is in the
best interests of the Company and its stockholders.
Upon the closing of this Offering, options to purchase 225,000, 75,000,
25,000 and 25,000 shares of Common Stock at $10.00 per share will be granted to
Messrs. Pinkas, Finn, Cascio and Bergman, respectively. These options will
become exercisable as to one-third of the Option Shares on the first anniversary
of the closing of this Offering, as to an additional one-third of the Option
Shares on the second anniversary of the closing of this Offering and as to the
remaining one-third of the Option Shares on the third anniversary of the closing
of this Offering.
In addition, the Company has adopted a stock option plan solely for the
disinterested directors of the Company (the "Disinterested Director Option
Plan"), subject to receipt of an order of the Commission approving the
Disinterested Director Option Plan as fair and reasonable, and not involving
overreaching of the Company or its stockholders. The following discussion
summarizes the relevant terms of the Disinterested Director Option Plan and is
qualified in its entirety by any amendments or modifications which may be
required by the Commission as conditions to receipt of an exemptive order.
Subject to the Commission's approval of the Disinterested Director Option
Plan, there will be available 75,000 shares of Common Stock for issuance to the
disinterested directors of the Company. Each of the disinterested directors will
be automatically granted options to purchase 2,000 shares of Common Stock of the
Company at the later of the closing of the Offering and the date on which the
Company's request for an order by the Commission approving the Disinterested
Director Option Plan is granted by the Commission. Throughout the term of the
Disinterested Director Option Plan, following each annual meeting of
stockholders of the Company, each disinterested director then serving on the
Board of Directors shall automatically be granted options to purchase 2,000
shares of Common Stock. The exercise price of any options granted pursuant to
the Disinterested Director Option Plan will be the greater of (i) the current
market value (as defined in the Disinterested Director Option Plan) on the date
of option grant and (ii) the current net asset value of the shares of Common
Stock. No option may be exercised more than 10 years after the date on which it
is granted. Options will not be transferable except for disposition by will or
intestacy. The number of shares of Common Stock available for options, the
number of shares of Common Stock subject to outstanding options and related
exercise prices will be adjusted for changes in outstanding shares of Common
Stock such as stock splits or combinations of shares of Common Stock.
Option Shares under the Disinterested Director Option Plan must be paid for
in cash or by delivery of a number of shares of Common Stock with an aggregate
fair market value equal to the aggregate exercise price of the Option Shares, or
any combination thereof. The Disinterested Director Option Plan will be
administered by a committee of the Board of Directors.
In order to facilitate the purchase of Option Shares under the
Disinterested Director Option Plan, the Company may make arms-length loans to
participants in the Disinterested Director Option Plan in accordance with
Sections 57(j)(2) and 62(1) of the Investment Company Act under the following
terms. Each such loan must: (i) have a term of not more than 10 years; (ii)
become due within a reasonable time, not to exceed 60 days, after the
termination of such participant's employment or service; (iii) bear interest at
no less than the prevailing rate applicable to 90-day U.S. Treasury bills at the
time such loan is made; (iv) at all times be fully
24
<PAGE> 25
collateralized (such collateral may include any securities issued by the
Company); and (v) be approved by order of the Commission, upon application, on
the basis that the terms of the loan are fair and reasonable and do not involve
overreaching of the Company or its stockholders.
With respect to the Stock Option and Disinterested Director Option Plans,
if the amount of voting securities that would result from the exercise of all
outstanding options issued to the Company's directors, officers and employees
pursuant to the Stock Option Plan and the Disinterested Director Option Plan
would, at the time of issuance, exceed 15% of the outstanding voting securities
of the Company, then the total amount of voting securities that would result
from the exercise of these and any other outstanding warrants, options and
rights at the time of issuance shall not exceed 20% of the outstanding voting
securities of the Company. These limitations are imposed by the current
provisions of the Investment Company Act and are subject to change.
PRIOR EXPERIENCE OF PRINCIPALS OF
THE INVESTMENT ADVISER
As indicated above, Robert P. Pinkas and Michael J. Finn have substantial
experience managing partnerships and other entities which have made investments
similar to the investments which will be made by the Company. Mr. Pinkas has
over 15 years experience in venture capital investing. In 1981, Mr. Pinkas
founded Brantley Partners ("BP"), and from 1981 to 1987 Mr. Pinkas was active in
venture capital management and financing as a founding director and investor in
seven early-stage companies. In 1987 he founded the investment partnership BVP
I, acting as general partner, with committed capital of $12.5 million which has
been fully invested. In 1990 Mr. Pinkas formed the investment partnership BVP
II, with committed capital of approximately $30 million from 14 corporate and
public pension funds, which has also been fully invested, and in 1995, he formed
the investment partnership BVP III with committed capital of approximately $60
million from 16 corporate and public pension funds and which, as of the date of
this Prospectus, is less than 40% invested. BVP II's funds have been invested in
15 portfolio companies, and to date, BVP III's funds have been invested in seven
portfolio companies. During the period from 1981 to the present, BP, BVP I, BVP
II and BVP III, in the aggregate, made investments in 39 small businesses with
up to $20 million in revenue, either as part of early-stage financings,
expansion financings, acquisition or buyout financings or special situations.
Mr. Finn has over 20 years of investment experience working with small- to
medium-sized companies. Since 1976 Mr. Finn has directed investment activities
in small emerging private companies. In 1976 Mr. Finn founded the Forward
Development Corporation ("FDC"), a small business development corporation
licensed by the U.S. Small Business Administration (the "SBA") to operate under
Section 503 of the Small Business Investment Act of 1958 ("an SBA licensed 503
corporation"). During the period from 1976 to 1982, while Mr. Finn served as its
president, FDC was involved in funding 11 companies with $70 million of
investment/subordinated debt capital. In 1982, Mr. Finn founded and served as
president of the State of Michigan Certified Development Corporation ("MCDC"),
an SBA licensed 503 corporation targeting investments in Michigan. During the
period 1982 to 1984, under Mr. Finn's direction, MCDC provided over $50 million
of investments to six companies. From 1984 to 1987, under Mr. Finn's direction,
the venture capital investment group of the State of Michigan Department of
Treasury, Bureau of Investments, invested over $350 million in direct
investments and limited partnerships. This portfolio included 40 direct
investments totaling $89 million and 23 private equity partnerships totaling
$284 million. From 1987 to 1995, Mr. Finn directed SIMCO in the investment of
over $24 million directly in 25 operating companies and over $58 million in 15
investments in a variety of private equity partnerships.
Messrs. Pinkas and Finn are both general partners of the general partners
of BVP II and BVP III. Prior to Mr. Finn's joining the Brantley organization in
1995, Messrs. Pinkas and Finn had co-invested in five companies through BVP II
and SIMCO over the years 1989 to 1995. Together at Brantley, they have invested
over $10 million in five companies through BVP II and BVP III.
25
<PAGE> 26
The following table provides information about the stage of development and
number of portfolio companies in which Messrs. Pinkas and Finn have been
principal investors during the periods described above:
<TABLE>
<CAPTION>
BVP III
BP BVP I BVP II (FINN/ SIMCO
(PINKAS) (PINKAS) (PINKAS) PINKAS) (FINN)(1) TOTAL
------- -------- -------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Stage of Enterprise Development:
Early-Stage Financings (2)............. 5 5 6 0 4 20
Expansion Financings (3)............... 2 2 1 1 17 23
Acquisition/Buyout Financings (4)...... 0 3 8 6 10 27
-- -- -- -- -- --
Total.................................. 7 10 15 7 31 70
== == == == == ==
</TABLE>
- ---------------
(1) Mr. Finn was one of three members of the investment team at SIMCO that made
the investments listed in the SIMCO column above.
(2) These companies are at an early-stage of product and market development, but
are run by qualified management. Accordingly, the highest priority will be
given to companies with management teams with established records of
technical and managerial achievements in closely related fields. Such firms
will have launched operations or will have assembled key management,
prepared a business plan, have a product ready for market, effected market
studies, and be generally well set to do business.
(3) These companies have already created a product or service they are marketing
with some success. They need further funds to finance the growth of their
businesses and to achieve profitability. In addition, companies in this
category may be established and profitable, but still need expansion capital
to fuel further growth.
(4) Acquisition financing provides funds to a company to finance its acquisition
of another enterprise. Buyout financing usually comprises two categories:
(a) large divisions or subsidiaries of diversified corporations being
divested because of a poor strategic fit; or (b) privately-owned companies
available because the owner desires liquidity for various reasons, including
estate planning. In both cases members of existing management will
participate in the company's ownership and ongoing operation. These are
usually mature enterprises with stable earnings histories and positive cash
flows.
The Company's investment strategy will build on the investment philosophy
and valuation methods, as well as the network of business and professional
relationships developed by the management team of BVP I, BVP II and BVP III
(sometimes referred to hereinafter collectively as "BVP"). Of course, investors
in the Company are not acquiring an interest in BVP I, BVP II, BVP III or any
other entity in which Messrs. Pinkas or Finn are involved. The past performance
of BVP or of Messrs. Pinkas and Finn is no guaranty of future performance.
The following list includes all companies in which BP and BVP invested in
the past as well as all SIMCO private equity investments with respect to which
Mr. Finn was a principal. The list includes some companies whose securities are
no longer held by BP, BVP or SIMCO. Some of the investments made in the
companies included in the list have a current value that is less than the
initial cost. The list is included to illustrate the types of companies with
which the principals of the Investment Adviser have had direct investment
experience.
The BP and BVP portfolio companies involved in the investments listed in
the above table are as follows:
- - Aronex Pharmaceuticals, Inc.
Pharmaceuticals for treating cancer and infectious diseases
- - Automation Systems and Products, Inc.
PC based software for industrial control applications
- - Barrier Systems, Inc.
Specialty chemicals for treatment of asbestos-related problems
26
<PAGE> 27
- - Direct Marketing Solutions, Inc.
Direct mail business
- - Collaborative Clinical Research, Inc.
Multi-site clinical research for drug and medical device companies
- - Continental Recycling, Inc.
Environmental holding company focusing on materials recycling
- - Criterion Technology, Inc.
PC peripheral company
- - DeCrane Aircraft Holdings, Inc.
Aircraft components and avionic systems manufacturer
- - Campus Convenience Stores, Inc.
College campus convenience stores
- - The Earth Technology Corporation
Environmental services company
- - Financial Integration, Inc.
Financial services company marketing mortgage, annuity and insurance
products.
- - Gliatech, Inc.
Pharmaceuticals and devices for post-surgical scar inhibition, and
Alzheimer's treatments
- - Health Care Solutions, Inc.
Home infusion therapy services in secondary markets
- - Impact Resources, Inc.
Proprietary database for market research
- - Implex plc
High density, high performance memory modules and multi-chip electronics
packaging
- - International Laser Machines, Inc.
Industrial lasers for cutting, drilling and marking
- - Kapok International, Inc.
Development and marketing of unique seafood species and fruit pulps and
powders for its distribution network
- - Macronex, Inc.
Biotechnology company focusing on regulating macrophage activity
- - Medirisk, Inc.
Medical database firm selling physician cost, quality and outcomes data
- - Momentum Software Corporation
Software tools for client/server systems
- - Ohmicron Corporation
Biosensor products for detection of pesticides, microbiologicals, and
clinical applications
- - Osteo-Technology, Inc.
Ultrasound technology for the measuring of bone density
- - OXIS International, Inc.
Development of anti-oxidants and free radical scavenger technology to
diagnose and treat diseases associated with oxidative stress
- - Pediatric Services of America, Inc.
Home health care company focusing on full-service pediatric care
- - PPA, Inc.
Pediatric physician practice management company
- - Protect America, Inc.
Manufacturing, packaging, and marketing of spill containment kits, personal
protective kits, and absorbents
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<PAGE> 28
- - Quad Systems Corporation
Surface-mount assemblers for the electronic industry
- - RF Micro Devices, Inc.
Radio frequency integrated circuits for cellular radio and digital wireless
communication systems
- - Rhomas Group, Inc.
Specialty packaging company focusing on folding carton niche
- - Sparkle Parts, Inc.
Parts washing machines for the automotive industry
- - Stamford Systems, Inc.
Mainframe software for enterprise evaluation
- - Summation, Inc.
PC-based instrumentation
- - SysteMed, Inc.
Mail-order pharmaceuticals and prescription drug benefit management company
- - TBN Holdings Inc.
Environmental holding company focusing on resource recovery and recycling
- - Therox Pharmaceuticals, Inc.
Pharmaceutical company developing free radical scavengers and anti-oxidants
- - Transglobal Wireless Communications, Inc.
Wireless communications
- - Transmodal Corporation
Intermodal transportation of hazardous waste
- - Vectra Banking Corporation
Bank holding company focusing on Denver area banks
- - Waterlink, Inc.
Industrial waste water treatment
The SIMCO portfolio companies involved in the investments listed in the
table on page 26 above, are as follows:
- - AMSCO International
Institutional health care product company
- - Auto Parts Club
Retail chain selling auto parts and supplies at wholesale prices
- - BCI Corp.
Private cable company
- - Christiaens International B.V.
Manufacturer of branded over the counter and generic drugs
- - Classic Cable Holdings L.P.
Rural cable franchise operator
- - Comdata Holdings Corporation
Fund transfers and other trucking industry services
- - Community Rehab Centers
Rehabilitation physical therapy roll-up
- - Eager Enterprises, Inc.
Proprietary database of active resumes
- - EDS Holdings Corp.
Industrial holding company
28
<PAGE> 29
- - FL Industries, Inc.
Industrial conglomerate
- - Goal Systems International Inc.
Systems software for IBM mainframes and compatibles
- - Gulf South Medical Supply, Inc.
Medical supply distributor to convalescent homes
- - Health Care Solutions, Inc.
Home infusion therapy services in secondary markets
- - Home Diagnostics, Inc.
Complete line of diabetic-related diagnostic products
- - Impact Resources, Inc.
Proprietary database for market research
- - Interactive Financial
Third party processors for income tax preparers
- - Medirisk, Inc.
Medical database firm selling fee schedule information
- - Meridian Data Inc.
CD ROM publisher with related products
- - Mizar Inc.
Design and manufacture of electronic boards and systems
- - Pediatric Services of America, Inc.
Home health care company focusing on full-service pediatric care
- - Pharmaceutical Marketing
Proprietary database information company in pharmaceutical industry
- - Progress Software Corporation
Advanced application development tools
- - RAXCO, Inc.
Applications, systems and security software
- - Shugart Corporation
Reseller of used equipment
- - Silvon Software, Inc.
Software for AS400 and client/server applications
- - Sterling Healthcare Corp.
Psychiatric hospital facilities management
- - Strato Medical
Vascular-related medical supplies
- - Three-Five Systems, Inc.
Electronic components including custom displays
- - Tricord Systems, Inc.
Manufacturing of high-end file servers
- - Triplex Pharmaceutical
(Merged with two other companies to form Aronex Pharmaceuticals, Inc.)
- - Walsh International Inc.
Target marketing information company to the pharmaceutical industry
29
<PAGE> 30
THE INVESTMENT ADVISORY AGREEMENT
Pursuant to the Investment Advisory Agreement, Brantley Capital Management,
L.L.C., 20600 Chagrin Boulevard, Suite 1150, Cleveland, Ohio 44122, will serve
as investment adviser to the Company. The Investment Adviser will, subject to
the overall supervision of the Company's Board of Directors, administer the
Company's business affairs and furnish the Company with office facilities and
clerical, bookkeeping and record keeping services at such facilities. See
"Management."
The Investment Adviser will be responsible for oversight of the
administrator responsible for the financial records required to be maintained by
the Company and will assist in the preparation of financial information for
reports to stockholders and reports filed with the Commission. In addition, the
Investment Adviser will assist the Company in determining and publishing the
Company's net asset value, oversee both the preparation and filing of the
Company's tax returns, the printing and dissemination of stockholder reports,
and generally oversee the payment of the Company's expenses and the performance
of administrative and professional services rendered to the Company by others.
In return for the Investment Adviser's services, the Company will pay to
the Investment Adviser an annual management fee of 2.85% of the Company's net
assets, determined at the end of each calendar quarter, and payable quarterly in
arrears, throughout the term of the Investment Advisory Agreement.
The Company and the Investment Adviser have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act. In addition, the Investment Adviser (not the Company) will pay
the Underwriters a commission in the amount of 7.0% of the aggregate initial
public offering price of Common Stock in connection with sales of Common Stock
in this Offering and will pay the Principal Underwriter a one-time structuring
fee of $150,000 at the close of the Offering. See "Underwriting."
The Investment Adviser will be responsible for the salaries and expenses of
its own personnel and any costs of office space, and local telephone and
administrative support to be provided to the Company by the Investment Adviser.
The Company will be responsible for all other expenses, including those relating
to calculating and publishing the Company's net asset value, all other expenses
incurred by either the Investment Adviser or the Company in connection with
administering the ordinary course of the Company's business, the registration
and organizational expenses described earlier, and direct costs such as
printing, mail, long distance telephone, staff, independent accountants and
outside legal costs.
The Investment Adviser, from its own funds, has agreed to make payments to
the Principal Underwriter for consultation and statistical and factual
information with respect to the Company's market performance and general
economic and business conditions. The Principal Underwriter will have no
responsibility or authority with respect to the Company's investments. See
"Underwriting."
The Investment Advisory Agreement was approved by the Board of Directors on
October 29, 1996 and is effective for an initial term of two years from the date
of this Prospectus and may be continued thereafter, from year to year provided
that its continuance is approved annually by the Company's Board of Directors or
by vote of the holders of a majority of the Company's outstanding shares of
Common Stock, including, in either case, approval by the directors of the
Company who are not interested persons. The Investment Advisory Agreement may be
terminated by either party without penalty upon at least 60 days' notice to the
other. See "Risk Factors -- Lack of Operating History; Dependence Upon
Investment Adviser."
REGULATION
After filing its election to be treated as a Business Development Company
under the Investment Company Act, a company may not withdraw its election
without first obtaining the approval of holders of a majority of its outstanding
voting securities (as defined under the Investment Company Act). The following
is a brief description of the Investment Company Act and is qualified in its
entirety by reference to the full text of the Investment Company Act and the
rules thereunder.
Generally, to be eligible to elect Business Development Company status, a
company must engage in the business of furnishing capital and offering
significant managerial assistance to companies that do not have ready access to
capital through conventional financial channels. Such portfolio companies are
termed "eligible portfolio companies." More specifically, in order to qualify as
a Business Development Company, a company
30
<PAGE> 31
must (i) be a domestic company; (ii) have registered a class of its securities
or have filed a registration statement with the Commission pursuant to Section
12 of the Securities Exchange Act of 1934; (iii) operate for the purpose of
investing in the securities of certain types of eligible portfolio companies,
namely less seasoned or emerging companies and businesses suffering or just
recovering from financial distress; (iv) offer to extend significant managerial
assistance to such eligible portfolio companies; (v) have a majority of
directors who are not "interested persons" (as defined in the Investment Company
Act); and (vi) file (or under certain circumstances, intend to file) a proper
notice of election with the Commission.
An eligible portfolio company generally is a United States company that is
not an investment company and that (i) does not have a class of securities
registered on an exchange or included in the Federal Reserve Board's
over-the-counter margin list; (ii) is actively controlled by a Business
Development Company and has an affiliate of a Business Development Company on
its board of trustees or directors; or (iii) meets such other criteria as may be
established by the Commission. Control under the Investment Company Act is
presumed to exist where a Business Development Company owns more than 25% of the
outstanding voting securities of the eligible portfolio company.
Making available significant managerial assistance by a Business
Development Company means any arrangement whereby a Business Development
Company, through its directors, trustees, officers or employees, offers to
provide, and, if accepted, does so provide, significant guidance and counsel
concerning the management, operations, or business objectives and policies of a
portfolio company. It is expected that one of the officers or employees of the
Company will offer to serve on the board of directors of each private company in
which the Company invests and, if such offer is not accepted, will offer to
enter into a consulting contract with the management of each such private
portfolio company. In such capacity, such person will offer his or her
substantial experience in strategic management and, if requested, will lend his
or her assistance in arranging financings, managing relationships with financing
sources, recruiting management personnel, and evaluating acquisition and
divestiture opportunities. Such person will be able to call on the experience of
the other directors and officers of the Company or the Investment Adviser, as
well, if needed.
The Investment Company Act prohibits or restricts companies subject to the
Investment Company Act from investing in other investment companies. Moreover,
the Investment Company Act limits the type of assets that a Business Development
Company may acquire to certain prescribed Eligible Assets unless, at the time
the acquisition is made, Eligible Assets represent at least 70% of the value of
the Business Development Company's total assets (other than non-investment
assets necessary or appropriate to its operations as a Business Development
Company). "Eligible Assets" include (i) privately acquired securities of
companies that were eligible portfolio companies at the time the Business
Development Company acquired the securities; (ii) securities of bankrupt or
insolvent companies; (iii) securities of eligible portfolio companies controlled
by a Business Development Company; (iv) securities received in exchange for or
distributed in or with respect to any of the foregoing; and (v) cash items,
government securities and high-quality short-term debt. The Investment Company
Act also places restrictions on the nature of the transactions in which, and the
persons from whom, securities can be purchased in order for the securities to be
considered Eligible Assets. Such restrictions include limiting purchases to
transactions not involving a public offering and the requirement that securities
be acquired directly from either the portfolio company or its officers,
directors or affiliates.
Many of the transactions involving an investment company and its affiliates
(as well as affiliates of those affiliates) which would otherwise be prohibited
without the prior approval of the Commission under the Investment Company Act
are permissible for Business Development Companies. However, certain
transactions involving certain persons related to the Company, including its
directors, officers and employees, may still require the prior approval of the
Commission. In general, (i) any person who owns, controls or holds power to vote
more than 5% of the Company's outstanding shares of Common Stock; (ii) any
director, executive officer or general partner of that person; and (iii) any
person who directly or indirectly controls, is controlled by, or is under common
control with, that person, must obtain the prior approval of a majority of the
Company's disinterested directors and, in some situations, the prior approval of
the Commission, before engaging in certain transactions involving the Company or
any company controlled by the Company. The Investment Company Act generally does
not restrict transactions between the Company and its eligible portfolio
companies.
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<PAGE> 32
While a Business Development Company may change the nature of its business
so as to cease being a Business Development Company (and in connection therewith
withdraw its election to be treated as a Business Development Company) only if
authorized to do so by a majority vote (as defined in the Investment Company
Act) of its outstanding voting securities, changes in other investment policies
of a Business Development Company do not require stockholder approval (in
contrast to the general Investment Company Act requirement which requires
stockholder approval for a change in any fundamental investment policy). The
Company is entitled to change its non-diversification status without stockholder
approval. The Company, in the future, may seek to become exempt from Investment
Company Act regulation.
The Investment Company Act prohibits an investment company such as the
Company from knowingly participating in a joint transaction with an affiliate of
any director or investment adviser to the investment company. Accordingly, the
Company may not, without exemptive relief from the Commission, participate in a
joint transaction with BVP or a subsequent company or companies, fund or funds
which may be affiliates of the Company or the Investment Adviser, or any other
entity managed by the persons who are the principals of the Investment Adviser
(collectively, "Company Affiliates"). The Company and the Investment Adviser
intend to submit an application to the Commission to permit such co-investment.
The Investment Adviser believes that it will be advantageous for the Company to
co-invest with BVP where such investment is consistent with the investment
objectives, investment positions, investment policies, investment strategies,
investment restrictions, regulatory requirements and other pertinent factors
applicable to the Company. The Investment Adviser believes that co-investment by
the Company and any Company Affiliates will afford the Company the ability to
achieve greater diversification and, together with any Company Affiliates, the
opportunity to exercise greater influence on the portfolio companies in which
the Company and any Company Affiliates invest together. Accordingly, the
application will seek an exemptive order permitting the Company and any Company
Affiliates to invest together in the same portfolio companies where such is
consistent with investment objectives, investment positions, investment
policies, investment strategies, investment restrictions, regulatory
requirements and other pertinent factors applicable to the Company. Although the
Investment Adviser intends to select investments for the Company and for Company
Affiliates separately, considering in each case only the investment objectives,
investment position, available funds and other pertinent factors of the
particular investment Company or fund, it is expected that if the application
for exemptive relief is granted, the Company and any Company Affiliates may
frequently invest in the same portfolio companies, with each of the Company and
any Company Affiliates taking a position in the portfolio company. If the
exemptive relief is granted, it is expected that the Company and any Company
Affiliates will invest together in proportion to their respective amounts of
capital available for investment where such is consistent with their respective
investment objectives, investment positions, investment policies, investment
strategies, investment restrictions, regulatory requirements and other pertinent
factors. There is no assurance, however, that any such joint investments will in
fact be in proportion to their respective amounts of capital available for
investment. It is expected that exemptive relief permitting co-investment will
be granted only upon the conditions, among others, that before a co-investment
transaction is effected, the Investment Adviser will make a written investment
presentation regarding the proposed co-investment to the independent directors
of the Company and the independent directors of the Company will review the
Investment Adviser's recommendation. It is expected that prior to committing to
a co-investment, a "required majority" (as defined in Section 57(o) of the
Investment Company Act) of the independent directors of the Company will
conclude that (i) the terms of the proposed transaction are reasonable and fair
to the Company and its stockholders and do not involve overreaching of the
Company and its stockholders on the part of any person concerned; (ii) the
transaction is consistent with the interests of the stockholders of the Company
and is consistent with the investment objectives and policies of the Company;
and (iii) the investment by the Company Affiliate co-investor would not
disadvantage the Company in making its investment, maintaining its investment
position, or disposing of such investment and that participation by the Company
would not be on a basis different from or less advantageous than that of the
Company Affiliate co-investor. There is no assurance that the application for
exemptive relief will be granted by the Commission. Accordingly, there is no
assurance that the Company will be permitted to co-invest with any Company
Affiliates.
In addition, in the application the Company and the Investment Adviser also
intend to seek exemptive relief to permit the Company to invest in portfolio
companies in an offering by an issuer in which BVP I, BVP II or BVP III is an
existing investor and the Company is not an existing investor. To the knowledge
of
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<PAGE> 33
the Company and the Investment Adviser, exemptive relief of this type has not
been granted previously by the Commission. Accordingly, there can be no
assurance that the application for such exemptive relief will be granted, and
therefore, there can be no assurance that the Company will be permitted to
invest in portfolio companies in which BVP I, BVP II or BVP III is an existing
investor and the Company is not an existing investor. The Company anticipates
that the application for exemptive relief will include conditions, among others,
requiring that before such an investment would be made: (i) the investment be of
a type that has preferences and terms that are the same or better than those of
the investment owned by BVP I, BVP II or BVP III, (ii) a majority of the
Company's directors who have no financial interest in the investment and a
majority of the Company's disinterested directors approve the investment, and
(iii) the Company and Company affiliates purchase in the aggregate less than a
majority of the investment offered, such that unaffiliated institutional
investors are likely to be establishing the pricing of such investment
opportunities. See "Risk Factors -- Conflicts of Interest."
VALUATION OF PORTFOLIO SECURITIES
On a quarterly basis, and at such other times as deemed appropriate under
the circumstances, the Company's Board of Directors will prepare a valuation of
the assets of the Company using the methods described below.
As a general principle, the current "fair value" of an investment being
valued by the Company's Board of Directors would be the amount which the Company
might reasonably expect to receive for it upon its current sale. There is a
range of values that are reasonable for such investments at any particular time.
Generally, pursuant to procedures established by the Company's Board of
Directors, the fair value of each such investment initially will be based
primarily upon its original cost to the Company. Cost will be the primary factor
used to determine fair value until significant developments or other factors
affecting the portfolio company (such as results of operations, changes in
general market conditions, subsequent financings or the availability of market
quotations) provide a basis for value other than a cost valuation.
The Company anticipates that many future investments made in securities for
which a public market exists may be "restricted securities" by virtue of the
Securities Act. Generally, in such instances, the Company will negotiate for
securities registration rights necessary for a public offering thereof on
specified terms whenever deemed to be reasonably feasible by management. The
value for restricted stock investments for which no public market exists cannot
be precisely determined. Generally, such investments will be valued on a "going
concern" basis without giving effect to any disposition costs. There is likely
to be a range of values that is reasonable for such investments at any
particular time.
Portfolio investments for which market quotations are readily available and
which are freely transferable will be valued as follows: (i) securities traded
on a securities exchange or the Nasdaq National Market System will be valued at
the closing price on the last trading day prior to the date of valuation; and
(ii) securities traded in the over-the-counter market (pink sheets) will be
valued at the average of the closing bid and asked prices for the last trading
day prior to the date of valuation. Securities for which market quotations are
readily available but are restricted from free trading in the public securities
markets (such as Rule 144 stock) will be valued by discounting the closing price
or the closing bid and asked prices, as the case may be, for the last trading
day prior to the date of valuation to reflect the illiquidity caused by such
restrictions, but taking into consideration the existence, or lack thereof, of
any contractual right to have the securities registered and freed from such
trading restrictions. For this purpose, an investment that is exercisable for or
convertible into a security for which market quotations are readily available or
otherwise contains the right to acquire such a security will be deemed to be an
investment for which market quotations are readily available, but the value of
any such security will be reduced by any consideration to be paid by the Company
in connection with the exercise or conversion of such security.
Debt securities with maturities of 60 days or less remaining will be valued
under the amortized cost method. The amount to be amortized will be the value on
the 61st day if the security was obtained with more than 60 days remaining to
maturity. Securities with maturities of more than 60 days remaining for which
there is a market and which are freely transferable will be valued at the most
recent bid price or yield equivalent as
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<PAGE> 34
obtained from dealers that make markets in such securities. Certificates of
deposit purchased by the Company generally will be valued at their face value,
plus interest accrued to the date of valuation.
The fair value of investments for which no market exists and for which the
Board of Directors has determined that the original cost of the investment is no
longer an appropriate valuation will be determined on the basis of appraisal
procedures established in good faith by the Company's Board of Directors.
Appraisal valuations will be based upon such factors as the portfolio company's
earnings and net worth, the market prices for similar securities of comparable
companies and an assessment of the company's future financial prospects. In the
case of unsuccessful operations, the appraisal may be based upon liquidation
value. Appraisal valuations are necessarily subjective.
The Company may also use, when available, third-party transactions in a
portfolio company's securities as the basis of valuation (the "private market
method"). The private market method will be used only with respect to completed
transactions or firm offers made by sophisticated, independent investors.
Securities with legal, contractual or practical restrictions on transfer may be
valued at a discount from their value determined by the foregoing methods to
reflect such restrictions.
The Company's Board of Directors will review the Company's valuation
policies from time to time to determine their appropriateness. The Company's
Board of Directors may also hire independent firms to review the Investment
Adviser's methodology of valuation or to conduct a valuation, which shall be
binding and conclusive.
In order to determine the net asset value per share of the Common Stock,
(i) the value of the assets of the Company, including its portfolio securities,
will be determined by the Company's Board of Directors; (ii) the Company's
liabilities, if any, will be subtracted therefrom; and (iii) the difference will
be divided by the number of outstanding shares of Common Stock. However, there
can be no assurance that such value will represent the return that might
ultimately be realized by the Company from the investments or that stockholders
might ultimately realize on their holdings.
The value of portfolio securities may be very difficult to ascertain.
Valuation of portfolio securities by the Board of Directors is, by necessity,
subjective and may not be indicative of the price at which such securities may
ultimately be sold. The net asset value, as determined by the Board of
Directors, may not be reflective of the price at which an investor could sell
his, her or its shares of Common Stock in the open market. See "Risk
Factors -- Valuation of Portfolio."
FEDERAL INCOME TAX MATTERS
THE FOLLOWING DISCUSSION IS A GENERAL SUMMARY OF THE MATERIAL UNITED STATES
FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO THE COMPANY AND TO AN INVESTMENT
IN THE COMMON STOCK AND DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF THE TAX
CONSIDERATIONS APPLICABLE TO SUCH AN INVESTMENT. PROSPECTIVE STOCKHOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSIDERATIONS WHICH
PERTAIN TO THEIR PURCHASE OF THE COMMON STOCK. THIS SUMMARY DOES NOT DISCUSS ALL
ASPECTS OF FEDERAL INCOME TAXATION RELEVANT TO HOLDERS OF THE COMPANY'S COMMON
STOCK IN LIGHT OF THEIR PERSONAL CIRCUMSTANCES, OR TO CERTAIN TYPES OF HOLDERS
SUBJECT TO SPECIAL TREATMENT UNDER FEDERAL INCOME TAX LAWS, INCLUDING FOREIGN
TAXPAYERS. THIS SUMMARY DOES NOT DISCUSS ANY ASPECTS OF FOREIGN, STATE OR LOCAL
TAX LAWS.
The Company intends to qualify for treatment as a "regulated investment
company" under Subchapter M of the Code. If the Company qualifies as a regulated
investment company and distributes to stockholders each year in a timely manner
at least 90% of its "investment company taxable income" as defined in the Code
(i.e., net investment income from interest and dividends and net short-term
capital gains), it will not be subject to federal income tax on the portion of
its taxable income and gains it distributes to stockholders. In addition, if the
Company distributes in a timely manner (or treats as "deemed distributed" as
described below) 98% of its capital gain net income for each one year period
ending on December 31, and distributes 98% of its ordinary income for each
calendar year (as well as any income not distributed in prior years), it will
not be subject to the 4% nondeductible federal excise tax on certain
undistributed income of regulated investment companies. The Company would be
subject to regular corporate income tax (currently at rates up to 35%) on any
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undistributed net investment income and any undistributed net capital gain. The
Company would also be subject to alternative minimum tax, but any tax preference
items would be apportioned between the Company and its stockholders in the same
proportion that dividends (other than capital gain dividends) paid to each
stockholder bear to the taxable income of the Company determined without regard
to the dividends paid deduction. See "Risk Factors -- Possible Loss of
Pass-Through Tax Treatment."
In order to qualify as a regulated investment company for federal income
tax purposes, the Company must elect to be treated as a regulated investment
company and, among other things, (a) derive in each taxable year at least 90% of
its gross income from dividends, interest, payments with respect to securities,
loans, gains from the sale or other disposition of stock or securities or other
income derived with respect to its business of investing in such stock or
securities; (b) derive in each taxable year less than 30% of its gross income
from the sale of stock or securities held for less than three months; (c)
diversify its holdings so that at the end of each quarter of the taxable year
(i) at least 50% of the value of the Company's assets consists of cash, cash
items, government securities, the securities of other regulated investment
companies and other securities if such other securities of any one issuer do not
represent more than 5% of the Company's total assets and 10% of the outstanding
voting securities of the issuer and (ii) no more than 25% of the value of the
Company's total assets are invested in the securities of one issuer (other than
U.S. government securities or the securities of other regulated investment
companies), or of two or more issuers than are controlled by the Company and are
engaged in the same or similar or related trades or businesses; and (d)
distribute at least 90% of its investment company taxable income each taxable
year.
However, the diversification requirements outlined above are liberalized in
the case of certain investment companies. In particular, if the Company, as a
Business Development Company, meets certain requirements described below, the
50% diversification requirement is modified so that the Company may include in
its 50% pool of investments, the value of the securities of any corporate issuer
(even if the Company holds more than 10% of the corporate issuer's voting
securities) so long as at the time of the latest investment in the applicable
corporate issuer's security the tax basis which the Company has in all
securities issued by the corporate issuer does not exceed 5% of the total value
of all the Company's assets. For example, if the Company purchased a corporate
issuer's stock for a total cost of $3,000,000 at a time when the Company's total
assets equaled $100,000,000 the investment would qualify under the
diversification test since the Company's tax basis in the investment comprised
only 3% of its total assets ($3,000,000/$100,000,000). This would be true
irrespective of whether the $3,000,000 investment in the corporate issuer
constituted ownership of more than 10% of the corporate issuer. Continuing the
example, if the Company's assets appreciated to $150,000,000 and the original
$3,000,000 investment in the corporate issuer appreciated in value to $3,750,000
and the Company made an additional $4,000,000 investment in the corporate
issuer, the investment would still qualify under the modified diversification
rules. Thus, although the total value of the investment in the corporate issuer
($7,750,000 (the $4,000,000 additional investment plus the $3,000,000 initial
investment which has appreciated to $3,750,000)) exceeds 5% of the Company's
total asset value, the Company's tax basis ($7,000,000 (the $4,000,000
additional investment plus the $3,000,000 initial investment)) does not exceed
5% of the total value. This exception does not apply if the Company has
continuously held any securities of the applicable corporate issuer for a period
of 10 years.
In order for the modified diversification rule to apply, the Commission
must determine and certify to the Internal Revenue Service (the "IRS") no more
than 60 days prior to the close of a tax year that the Company is principally
engaged in furnishing capital to corporations which corporations are themselves
principally engaged in the development or exploitation of inventions,
technological improvements, new processes, or products not previously available.
For purposes of these determinations, a corporation shall be considered
principally engaged in the development or exploitation of inventions,
technological improvements, new processes, or products not previously available
for at least 10 years after the first acquisition of any security in such
corporation by the Company if, at the date of the original acquisition, the
issuer corporation was principally so engaged. In addition, the Company shall be
considered at any date to be furnishing capital to any corporation whose
securities it holds, if within 10 years before such date, it had acquired
securities in the applicable corporate issuer.
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<PAGE> 36
The diversification exception described in this section does not apply to
any quarter if, in that quarter, more than 25% of the total assets of the
Company are comprised of securities of corporate issuers, with respect to each
of which (i) the Company holds more than 10% of the outstanding voting
securities of such issuer; and (ii) the Company has continuously held such
security for more than 10 years.
If the Company acquires debt obligations that were originally issued at a
discount, or that bear interest rates that are not fixed (or certain "qualified
variable rates") or payable at regular intervals over the life of the
obligation, it will be required to include in taxable income each year a portion
of the "original issue discount" that accrues over the life of the obligation,
regardless of whether the income is received by the Company, and may be required
to make distributions in order to continue to qualify as a regulated investment
company or to avoid the 4% excise tax on certain undistributed income. In this
event, the Company may borrow funds or sell temporary investments or other
assets to meet the distribution requirements. See "Investment Objectives and
Policies."
For any period during which the Company qualifies as a regulated investment
company for federal income tax purposes, distributions to stockholders
attributable to the Company's ordinary income (including dividends, interest and
original issue discount) and net short-term capital gains generally will be
taxable as ordinary income to stockholders to the extent of the Company's
current or accumulated earnings and profits. Distributions in excess of the
Company's earnings and profits will first be treated as a return of capital
which reduces the stockholder's adjusted basis in his, her or its shares of
Common Stock and then as gain from the sale of shares of Common Stock.
Distributions of the Company's net long-term capital gains (designated by the
Company as capital gain dividends) will be taxable to stockholders as long-term
capital gains regardless of the stockholder's holding period in his, her or its
Common Stock. Corporate stockholders are generally eligible for the 70%
dividends received deduction with respect to ordinary income (but not capital
gain) dividends to the extent such amount designated by the Company does not
exceed the dividends received by the Company from domestic corporations. Any
dividend declared by the Company in October, November or December of any
calendar year, payable to stockholders of record on a specified date in such a
month and actually paid during January of the following year, will be treated as
if it were paid by the Company and received by the stockholders on December 31
of the previous year. In addition, the Company may elect to relate a dividend
back to the prior taxable year for the purposes of (i) determining whether the
90% distribution requirement is satisfied, (ii) computing investment company
taxable income and (iii) determining the amount of capital gain dividends paid
during the prior taxable year if the Company makes such election prior to filing
its return for the taxable year and distributes the amount in the 12 month
period following the close of the taxable year. Any such election will not alter
the general rule that a stockholder will be treated as receiving a dividend in
the taxable year in which the distribution is made.
To the extent that the Company retains any capital gains, it may designate
them as "deemed distributions" and pay a tax thereon for the benefit of its
stockholders. In that event, the stockholders report their share of retained
realized capital gains on their individual tax returns as if it had been
received, and report a credit for the tax paid thereon by the Company. The
amount of the deemed distribution net of such tax is then added to the
stockholder's cost basis for his, her or its Common Stock. Since the Company
expects to pay tax on capital gains at the regular corporate tax rate of 34% and
the maximum rate payable by individuals on such gains is 28%, the amount of
credit that individual stockholders may report will exceed the amount of tax
that they would be required to pay on capital gains. Stockholders who are not
subject to federal income tax or tax on capital gains should be able to file a
return on the appropriate form or a claim for refund that allows them to recover
the taxes paid on their behalf.
Section 1202 of the Code permits the exclusion, for federal income tax
purposes, of 50% of any gain (subject to certain limitations) realized upon the
sale or exchange of "qualified small business stock" held for more than five
years. Generally, qualified small business stock is stock of a small business
corporation acquired directly from the issuing corporation, which must at the
time of issuance and immediately thereafter have assets of not more than $50
million and be actively engaged in the conduct of a trade or business not
excluded by law. If the Company acquires "qualified small business stock," holds
such stock for five years and disposes of such stock at a profit, a stockholder
who held his, her or its Common Stock in the Company at the time the Company
purchased the qualified small business stock and at all times thereafter until
disposition of the stock
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<PAGE> 37
by the Company would be entitled to exclude from such stockholder's taxable
income 50% of such stockholder's share of such gain. One half of any amount so
excluded would be treated as a preference item for alternative minimum tax
purposes.
If at least 50% of the value of the total assets of a regulated investment
company at the close of each quarter of the taxable year consists of tax exempt
obligations, the regulated investment company may designate all or a portion of
any dividend (other than a capital gain dividend) as an exempt interest dividend
to the extent of the regulated investment company's net income from tax exempt
obligations. An exempt interest dividend would be treated by a stockholder of
the Company as excludable from gross income under Section 103(a) of the Code,
but would also be treated as a preference item by the stockholder for
alternative minimum tax purposes.
A stockholder may recognize taxable gain or loss if the stockholder sells
or exchanges such stockholder's shares of Common Stock. Any gain arising from
the sale or exchange of Common Stock generally will be treated as a capital gain
or loss except in the case of a dealer or a financial institution, and will be
treated as a long-term capital gain or loss if the stockholder has held his, her
or its shares of Common Stock for more than one year. However any capital loss
arising from a sale or exchange of shares of Common Stock held for six months or
less will be treated as a long-term capital loss to the extent of the amount of
capital gain dividends (or undistributed capital gain) received with respect to
such shares of Common Stock.
The Company may be required to withhold U.S. federal income tax at the rate
of 31% of all taxable distributions payable to stockholders who fail to provide
the Company with their correct taxpayer identification number or a certificate
that the stockholder is exempt from backup withholding, or the IRS notifies the
Company that the stockholder is subject to backup withholding. Any amounts
withheld may be credited against a stockholder's U.S. federal income tax
liability.
Federal withholding taxes at a 30% rate (or a lesser treaty rate) may apply
to distributions to stockholders that are nonresident aliens or foreign
partnerships, trusts or corporations. Foreign stockholders should consult their
tax advisers with respect to the possible U.S. federal, state and local and
foreign tax consequences of an investment in the Company.
The Company will mail to each stockholder, as promptly as possible after
the end of each fiscal year, a notice detailing, on a per distribution basis,
the amounts includable in such stockholder's taxable income for such year as net
investment income, as net realized capital gains (if applicable), as "deemed"
distributions of capital gains and as taxes paid by the Company with respect
thereto. In addition, the federal tax status of each year's distributions will
be reported to the IRS. Distributions may also be subject to additional state,
local and foreign taxes depending on each stockholder's particular situation.
Stockholders should consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Company.
Under the Company's Dividend Reinvestment and Cash Purchase Plan, all cash
distributions to stockholders will be automatically reinvested in additional
whole and fractional shares of Common Stock unless a stockholder or its
representative elects to receive cash. Such distributions that are invested in
additional shares of Common Stock are considered to be constructively received
by the stockholder for federal income tax purposes and are included in the
stockholder's income to the extent such constructive distribution otherwise
represents a taxable dividend for the year in which such distribution is
credited to the stockholder's account. The amount of the distribution is the
value of the shares of Common Stock acquired through the Dividend Reinvestment
and Cash Purchase Plan. See "Dividend Reinvestment and Cash Purchase Plan."
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Company's Dividend Reinvestment and Cash Purchase Plan, any
stockholders whose shares of Common Stock are registered in their own names will
be deemed to have elected to have all cash dividends and cash distributions
automatically reinvested by State Street Bank and Trust Company (the "Plan
Agent") in shares of Common Stock pursuant to the Dividend Reinvestment and Cash
Purchase Plan unless and except for each such stockholder who individually
elects to receive such on a current basis in lieu of reinvestment. In the case
of stockholders such as banks, brokers or nominees that hold Common Stock for
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<PAGE> 38
others who are beneficial owners ("Nominee Stockholders"), the Plan Agent will
administer the Dividend Reinvestment and Cash Purchase Plan on the basis of the
number of shares of Common Stock certified by such Nominee Stockholders as
registered for stockholders that have not elected to receive dividends and
distributions in cash. Investors that own shares of Common Stock registered in
the name of a Nominee Stockholder should consult with such nominee as to
participation or withdrawal from the Dividend Reinvestment and Cash Purchase
Plan.
The Plan Agent serves as agent for the stockholders in administering the
Dividend Reinvestment and Cash Purchase Plan. When the Company declares a
dividend or distribution payable in cash or in shares of Common Stock, the
non-participants will receive cash and the participants will receive the
equivalent of the amount of the dividend or distribution in shares of Common
Stock to be issued by the Company or purchased by the Plan Agent in the open
market. If the market value per share of Common Stock on the record date equals
or exceeds the net asset value per share of Common Stock on that date, the
Company will issue new shares at the net asset value. If the net asset value
exceeds the market price, the Plan Agent will, as agent for the participant, buy
shares of Common Stock in the open market or in private transactions as soon as
practicable after such date. If before the Plan Agent has completed the
purchases the market price exceeds the net asset value, the Plan Agent may
suspend purchasing in the market and the Company will issue new shares at net
asset value to fulfill the purchase requirements. See "Valuation of Portfolio
Securities" and "Federal Income Tax Matters."
In connection with dividends and distributions, the Plan Agent will make an
initial determination of the market value per share of Common Stock by taking
the higher of the average of the closing sales prices, as reported in The Wall
Street Journal, at which shares of Common Stock of the Company were traded on
the last five days on which trading in the shares of Common Stock was reported
to have taken place on the Nasdaq SmallCap Market System prior to the payment
date of the dividend or distribution, and 95% of the opening sales price on the
payment date, which may be up to three months after the date as of which the net
asset value of the shares of Common Stock was last determined.
Participants also have the option commencing on January 1 of each year, of
making additional annual cash payments to the Dividend Reinvestment and Cash
Purchase Plan in any amount of $1,000 or more up to $10,000. Larger amounts may
be accepted with the prior approval of the Plan Agent. The Plan Agent will use
all funds received from participants to purchase shares of Common Stock in the
open market on or about February 28. Any voluntary funds must be received no
later than 10 days prior to such date and any prior deposit may be withdrawn if
written request for withdrawal is received by the Plan Agent no later than 10
days prior to such date.
The Plan Agent will maintain all stockholder accounts in the Dividend
Reinvestment and Cash Purchase Plan and furnish written confirmation of all
transactions in an account. Common Stock in the Dividend Reinvestment and Cash
Purchase Plan will be held in the name of the participant and each stockholder's
proxy will include any Dividend Reinvestment and Cash Purchase Plan holdings.
There is no charge to the participants for reinvesting dividends and
distributions or for voluntary cash payments. The Plan Agent's fees will be paid
by the Company. There will be no brokerage charges with respect to shares of
Common Stock issued directly by the Company for participants in the Dividend
Reinvestment and Cash Purchase Plan. However, each participant will pay a pro
rata share of brokerage charges for shares purchased in the market.
The Company and the Plan Agent reserve the right to terminate the Dividend
Reinvestment and Cash Purchase Plan. Further, the Dividend Reinvestment and Cash
Purchase Plan may be amended by agreement between the Company and the Plan Agent
upon 30 days notice to participants. A participant may withdraw from the
Dividend Reinvestment and Cash Purchase Plan upon written request to the Plan
Agent, in which event, no further Common Stock purchases will be made for such
withdrawing participant and all shares of Common Stock and funds held for such
participant will be forwarded to the participant or to the Participant's order.
All communications regarding the Dividend Reinvestment and Cash Purchase Plan
should be directed to State Street Bank and Trust Company as Plan Agent.
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DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue 25,000,000 shares of Common Stock, par
value $.01 per share. As of October 30, 1996, all of the outstanding capital
stock of the Company was owned and controlled by Robert P. Pinkas and Michael J.
Finn. However, following the Offering, Messrs. Pinkas and Finn will not own or
control a majority of the outstanding capital stock of the Company. The holders
of Common Stock are entitled to one vote per share on all matters submitted for
action by the stockholders. There is no provision for cumulative voting rights
with respect to the election of directors. Accordingly, the holders of more than
50% of the outstanding Common Stock will have the power to elect all of the
directors. The holders of Common Stock are entitled to receive dividends when,
as and if declared by the Board of Directors out of funds legally available
therefor. In the event of liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to share ratably in all assets
remaining available for distribution to them after payment of liabilities and
after provision has been made for each class of securities, if any, having
preference over the Common Stock. Holders of Common Stock, as such, have no
conversion, preemptive or other subscription rights and there are no redemption
provisions applicable to the Common Stock. All of the outstanding shares of
Common Stock are, and the shares of Common Stock offered hereby, when issued
against the consideration set forth in this Prospectus, will be, fully-paid and
non-assessable. Certificates evidencing the number of shares of Common Stock
owned by each stockholder of record will be available upon request by such
stockholder.
ANTI-TAKEOVER PROVISIONS
The Company's Articles of Amendment and Restatement of the Charter and its
Bylaws provide for the Board of Directors to be divided into three classes of
directors serving staggered three-year terms. This provision has been included
in the Articles of Amendment and Restatement of the Charter and the Bylaws to
provide greater likelihood of continuity of management for the Company since the
nature of the Company's investments is such that continuity of management for a
substantial period may be necessary to realize the full value of the investments
made by the Company. A staggered Board of Directors may serve to deter hostile
takeovers of the Company. The Board of Directors has considered this provision
and determined that it is in the best interests of the stockholders.
Under the Maryland General Corporation Law, a Maryland corporation may not
engage in any business combination with any "interested stockholder" or any
affiliate of the interested stockholder for a period of five years following the
date on which the interested stockholder became an interested stockholder except
under certain specified conditions. An "interested stockholder" for this purpose
is any holder or affiliate of any holder of 10% or more of the corporation's
stock. The law also restricts the voting rights of "control shares" acquired in
a "control share acquisition," as defined in the law. As permitted by the law,
the Company's Articles of Amendment and Restatement of the Charter exempt from
the application of these provisions any shares of the Company that may now or in
the future be owned by an employee stock ownership or similar plan.
In addition, the Company's Articles of Amendment and Restatement of the
Charter contain certain special voting provisions. First, a director may be
removed by the stockholders only for cause and then only by a vote of the
holders of at least 75% of the shares entitled to be cast on the matter. Second,
in order to convert the Company from a closed-end to an open-end investment
company, the affirmative vote of at least 75% of the Continuing Directors (as
defined below) and by the holders of at least 75% of the shares entitled to be
cast on the matter. A "Continuing Director" for these purposes is any member of
the Board of Directors of the Company who (i) is not a person or affiliate of a
person who enters or proposes to enter into a business combination, as defined
in the Maryland General Corporation Law, with the Company (an "Interested
Party") and (ii) who has been a member of the Board of Directors of the Company
for a period of at least 12 months, or is a successor of a Continuing Director
who is unaffiliated with an Interested Party and has been recommended to succeed
a Continuing Director by a majority of the Continuing Directors then on the
Board of Directors of the Company. In addition, the Company's Bylaws provide
that a meeting of the stockholders
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that is not called by the Chairman and Chief Executive Officer, the President or
a majority of the Board of Directors may be called only by the holders of a
majority of the shares entitled to be cast on the matter.
The effect and intention of these provisions of law and of the Company's
Articles of Amendment and Restatement of the Charter and its Bylaws is to make a
takeover of the Company more difficult than it might be in the absence of such
provisions. The percentages required by the above voting provisions are in
excess of those required by Federal law and by the General Corporation Law of
the State of Maryland. The Board of Directors of the Company has determined that
such provisions are in the best interests of the stockholders of the Company.
ANNUAL MEETINGS
Pursuant to the Company's Bylaws, an annual meeting of the stockholders of
the Company shall be held on such date and at such hour as may from time to time
be designated by the Board of Directors and stated in the notice of such meeting
for the purpose of electing directors and for the transaction of such other
business as may be properly brought before the meeting.
TRANSFER AND DIVIDEND PAYING AGENT AND CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts, 02110 will act as the Company's transfer and dividend paying
agent and registrar (the "Transfer Agent") and as the Company's custodian.
ADMINISTRATION
State Street Bank and Trust Company will also serve as the Company's
administrator and, subject to appropriate review and approval by the Board of
Directors or officers of the Company, will (i) oversee the determination and
publication of the Company's net asset value; (ii) oversee the maintenance by
the Company's custodian of certain books and records of the Company; (iii)
prepare income tax returns for review by the Company's independent auditors;
(iv) review and arrange for payment of Company expenses; (v) prepare financial
information to be submitted to Company stockholders and arrange for the printing
and dissemination of reports and communications to stockholders; (vi) prepare
periodic financial information required to be filed with the Commission; (vii)
prepare certain reports relating to the business and affairs of the Company, and
upon request, make recommendations to the Board of Directors concerning the
performance of the independent auditors or the performance and fees of the
custodian and Transfer Agent; (viii) oversee calculations of fees paid to the
Investment Adviser, custodian and Transfer Agent; (ix) provide periodic testing
of portfolios to assist the Company's Investment Adviser in complying with the
Code, the requirements of the Investment Company Act and the limitations in the
Prospectus; and (x) provide such other services as shall be necessary to
administer the ordinary course of the Company's business. For its services, the
administrator shall be paid an annual fee based on the Company's average assets
of (a) 0.10% of the first $100 million, (b) 0.08% of the next $100 million, and
(c) 0.06% of average assets in excess of $200 million, subject to a minimum
annual fee of $95,000 (which at $36,500,000 of average assets is 0.26%). An
additional annual fee of $10,000 will be applied if the Company engages in
leverage transactions other than temporary borrowings. The Company will also
reimburse the administrator for its out-of-pocket expenses.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") between the Company and EVEREN Securities, Inc.
(formerly, Kemper Securities, Inc.) (the "Principal Underwriter") and McDonald &
Company Securities, Inc., Morgan Keegan & Company, Inc., Needham & Company,
Inc., Stifel, Nicolaus & Company, Incorporated, First of Michigan Corporation
and NatCity Investments, Inc. (collectively with the Principal Underwriter, the
"Underwriters"), the Underwriters have agreed to purchase from the Company and
the Company has agreed to sell to the Underwriters the number of shares of
Common Stock set forth opposite their respective names below at the public
offering price set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent, and that the Underwriters are committed to
purchase all of the shares of Common Stock if any are purchased.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
-------------------------------------------------------------------- ----------------
<S> <C>
EVEREN Securities, Inc. ............................................ 2,170,000
McDonald & Company Securities, Inc. ................................ 240,000
Morgan Keegan & Company, Inc. ...................................... 320,000
Needham & Company, Inc. ............................................ 100,000
Stifel, Nicolaus & Company, Incorporated............................ 235,000
First of Michigan Corporation....................................... 235,000
NatCity Investments, Inc. .......................................... 350,000
---------
Total..................................................... 3,650,000
=========
</TABLE>
The Underwriters have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. There is no underwriting discount or
commission charged to the investors on purchases of Common Stock in the
Offering. The Investment Adviser (not the Company) will pay the Underwriters a
commission in the amount of 7.0% of the aggregate initial public offering price
of Common Stock in connection with sales of Common Stock in this Offering and
will pay the Principal Underwriter a one-time structuring fee of $150,000 upon
the close of the Offering. See "The Investment Advisory Agreement."
The Underwriters may allow to selected dealers a concession of not more
than $0.40 per share of Common Stock; and the Underwriters may allow, and such
dealers may reallow, a concession of not more than $0.10 per share of Common
Stock to certain other dealers. The concession to selected dealers and
reallowances to other dealers may be changed by the Underwriters. The shares of
Common Stock are offered subject to receipt and acceptance by the Underwriters,
and to certain other conditions, including the right to reject orders in whole
or in part.
The Company has granted an option to the Underwriters, exercisable during
the 45-day period after the date of this Prospectus, to purchase up to a maximum
of 547,500 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial Common Stock to be purchased by the
Underwriters. To the extent the Underwriters exercise this option, each of the
Underwriters will be committed, subject to certain conditions, to purchase such
additional shares in approximately the same proportion as set forth in the above
table. The Underwriters may purchase such shares only to cover over-allotments
made in connection with this Offering.
The Principal Underwriter currently intends to act as a market maker with
respect to the shares of Common Stock. However, it is under no obligation to do
so and, if it chooses to do so, may cease such activities without notice.
The Investment Adviser, from its own funds, has agreed to make payments to
the Principal Underwriter for consultation and statistical and factual
information with respect to the Company's market performance and general
economic and business conditions. See "The Investment Advisory Agreement."
The Underwriting Agreement provides that the Company and the Investment
Adviser will indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act, or will contribute to
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<PAGE> 42
payments the Underwriters may be required to make in respect thereof. However,
such indemnification is subject to the provisions of Section 17(l) of the
Investment Company Act which provides, in part, that no agreement shall contain
a provision which protects or purports to protect an underwriter of an
investment company or Business Development Company against any liability to such
company or its security holders to which it would otherwise be subject due to
its misfeasance, bad faith or gross negligence in the performance of its duties,
or reckless disregard of its obligations and duties under such agreement.
The Company has agreed with the Underwriters not to issue any shares or
securities convertible into or exercisable or exchangeable for, or warrants,
options or rights to purchase or acquire, shares of the Company, or enter into
any agreement to do any of the foregoing for a period of 120 days after the date
of this Prospectus without the written consent of the Principal Underwriter,
other than pursuant to the Underwriting Agreement, the Dividend Reinvestment and
Cash Purchase Plan, the Stock Option Plan or the Disinterested Director Option
Plan as contemplated in this Prospectus.
The Principal Underwriter has from time to time provided investment banking
and financial advisory services to the Investment Adviser and its affiliates and
may continue to do so in the future.
The Company anticipates that the selling broker/dealers or their affiliates
may, from time to time, subject to the regulations set forth in the Investment
Company Act, act as brokers or dealers in connection with the execution of the
Company's investments after the Principal Underwriter ceases to be an
underwriter for this Offering. See "The Company -- Broker Allocation and Other
Practices."
Each investor must purchase a minimum of 500 shares of Common Stock in this
Offering (except that an IRA must purchase a minimum of 200 shares of Common
Stock in this Offering). Any shares in excess of the applicable minimum must be
purchased in 100 share increments.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Jenner & Block, Chicago, Illinois, who is also counsel
to the Investment Adviser. Certain matters will be passed upon for the
Underwriters by Vedder, Price, Kaufman & Kammholz, Chicago, Illinois.
EXPERTS
The Statement of Assets and Liabilities of Brantley Capital Corporation as
of October 29, 1996 appearing in this Prospectus and in the Registration
Statement has been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon, appearing elsewhere herein and in the
Registration Statement and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
Brantley Capital Corporation
We have audited the accompanying statement of assets and liabilities of Brantley
Capital Corporation (the "Company") as of October 29, 1996. The Statement of
Assets and Liabilities is the responsibility of the Company's management. Our
responsibility is to express an opinion on the Statement of Assets and
Liabilities based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets and liabilities is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in that financial statement. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the Statement of Assets and Liabilities referred to above,
presents fairly, in all material respects, the financial position of Brantley
Capital Corporation as of October 29, 1996, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Cleveland, Ohio
October 30, 1996
F-1
<PAGE> 44
BRANTLEY CAPITAL CORPORATION
Statement of Assets and Liabilities
October 29, 1996
<TABLE>
<CAPTION>
ASSETS
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<S> <C>
Cash.............................................................................. $ 50
Deferred organization costs....................................................... 180,000
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180,050
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LIABILITIES
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Liabilities:
Accrued organization costs...................................................... 74,700
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Net assets (25,000,000 shares of Common Stock authorized;
10,535 shares issued and outstanding)........................................... $105,350
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Net asset value per share......................................................... $ 10
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</TABLE>
See accompanying notes to statement of assets and liabilities.
F-2
<PAGE> 45
BRANTLEY CAPITAL CORPORATION
Notes to Statement of Assets and Liabilities
October 29, 1996
A. ORGANIZATION AND BUSINESS PURPOSES
Brantley Capital Corporation (the "Company"), a Maryland corporation, was
organized on August 1, 1996, and has had no operations to date other than
matters relating to its organization and registration as a closed-end,
non-diversified investment company organized as a business development company
under the Investment Company Act of 1940, and the sale and issuance to the
principal stockholders of Brantley Capital Management, L.L.C. (the "Investment
Adviser") of 10,350 shares of common stock (the "Common Stock") for an aggregate
purchase price of $105,350. The registration and offering of the Company's
Common Stock (the "Offering") is for 3,650,000 shares (not including the
underwriters' over-allotment option) at a proposed maximum offering price per
share of $10.00.
B. DEFERRED ORGANIZATION COSTS AND OFFERING COSTS
Deferred organization costs relating to the Company will be deferred and
amortized on a straight-line basis for a five-year period beginning at the
commencement of operations of the Company.
Offering costs payable by the Company will be charged to capital at the
time of issuance of Common Stock in the Offering. Underwriting commissions in
the amount of 7.0% of the aggregate initial public offering price of the Common
Stock, plus a one-time charge of $150,000 payable to the principal underwriter,
will be paid by the Investment Adviser.
C. INVESTMENT ADVISORY AGREEMENT
The Company will enter into an investment advisory agreement with the
Investment Adviser pursuant to which the Investment Adviser will, among other
things, provide investment advisory services to the Company and will be
responsible for the management of the Company's portfolio in accordance with the
Company's investment policies and for making decisions to buy, sell, or hold
particular securities.
D. STOCK OPTION PLANS
Concurrent with the initial public offering, a stock option plan has been
authorized, which reserves 1,175,000 shares of Common Stock and provides for
grants to officers and employees. Upon the closing of the Offering, options to
purchase 350,000 shares of Common Stock at $10.00 per share will be granted to
the Company's executive officers. These options will become exercisable as to
one-third of the Option Shares on the first anniversary of the closing of the
Offering, as to an additional one-third of the Option Shares on the second
anniversary of the closing of the Offering and as to the remaining one-third of
the Option Shares on the third anniversary of the closing of the Offering.
In addition, the Company has adopted a stock option plan relating to 75,000
shares of Common Stock and providing for option grants solely to the
disinterested directors of the Company (the "Disinterested Director Option
Plan"), subject to receipt of an order of the Securities and Exchange Commission
approving such Plan as fair and reasonable and not involving overreaching of the
Company or its stockholders.
F-3
<PAGE> 46
BRANTLEY CAPITAL CORPORATION
Appendix to Prospectus
As disclosed in the "Investment Objectives and Policies" section of the
attached Prospectus, Brantley Capital Corporation (the "Company") will have
certain latitude in conducting its investment activities. In doing so, the
Company will not: (i) purchase securities on margin, except such short-term
credits as are necessary for the clearance of transactions, (ii) acquire the
voting stock of, or invest in any securities issued by any other investment
company if immediately after such acquisition, the Company and any affiliates of
the Company own in the aggregate (A) more than 3% of the total outstanding
voting stock of the acquired company, (B) securities having an aggregate value
greater than 5% of the value of the total assets of the Company or (C)
securities of the acquired company and all other investment companies (other
than treasury stock of the Company) having an aggregate value greater than 10%
of the Company, or (iii) engage in the purchase or sale of commodities or
commodity contracts, including futures contracts (except where necessary in
working out distressed loan or investment situations). With respect to certain
investment activities in which it may engage, the Company discloses the
following information.
DERIVATIVES
Consistent with its objectives, the Company may invest up to 30% of its
total assets that are not required to be Eligible Assets in a broad array of
financial instruments and securities, including conventional exchange-traded and
non-exchange-traded options, securities collateralized by underlying pools of
mortgages or other receivables, floating rate instruments and other instruments
that securitize assets of various types (collectively, "Derivatives," and
individually, a "Derivative"). In each case, the value of the instrument or
security is "derived" from the performance of an underlying asset or a
"benchmark" such as a security index, an interest rate, or a currency.
Derivatives are most often used to manage investment risk or to create an
investment position indirectly because they are more efficient or less costly
than direct investments that cannot be readily established directly due to
portfolio size, cash availability, or other factors. Derivatives may also be
used in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Investment Adviser's
ability to correctly predict changes in the levels and directions of movements
in security prices, interest rates and other market factors affecting the
Derivatives themselves or the value of the underlying asset or benchmark. In
addition, correlations in the performance of an underlying asset to Derivatives
may not be well established. Finally, privately negotiated and over-the-counter
Derivatives may not be as well regulated and may be less marketable than
exchange-traded Derivatives.
The Company presently does not intend to invest more than 5% of its net
assets in any type of Derivative, except for options.
Some mortgage-backed debt securities are of the "modified pass-through
type," which means the interest and principal payments on mortgages in the pool
are "passed through" to investors. During periods of declining interest rates,
there is increased likelihood that mortgages will be prepaid, with a resulting
loss of the full-term benefit of any premium paid by the Company on purchase of
such securities; in addition, the proceeds of prepayment would likely be
invested at lower interest rates.
Mortgage-backed securities provide either a pro rata interest in underlying
mortgages or an interest in collateralized mortgage obligations ("CMOs") that
represent a right to interest and/or principal payments from an underlying
mortgage pool. CMOs are not guaranteed by either the U.S. government or by its
agencies or instrumentalities, and are usually issued in multiple classes each
of which has different payment rights, prepayment risks and yield
characteristics. Mortgage-backed securities involve the risk of prepayment on
the underlying mortgages at a faster or slower rate than the established
schedule. Prepayments generally increase with falling interest rates and
decrease with rising rates, but they also are influenced by economic, social,
and market factors. If mortgages are pre-paid during periods of declining
interest rates, there would be a resulting loss of the full-term benefit of any
premium paid by the Company on purchase of the CMO, and the proceeds of
prepayment would likely be invested at lower interest rates.
A-1
<PAGE> 47
Non-mortgage asset-backed securities usually have less prepayment risk than
mortgage-backed securities, but have the risk that the collateral will not be
available to support payments on the underlying loans that finance payments on
the securities themselves.
Floating rate instruments provide for periodic adjustments in coupon
interest rates that are automatically reset based on changes in amount and
direction of specified market interest rates. In addition, the adjusted duration
of some of these instruments may be materially shorter than their stated
maturities. To the extent such instruments are subject to lifetime or periodic
interest rate caps or floors, such instruments may experience greater price
volatility than debt instruments without such features. Adjusted duration is an
inverse relationship between market price and interest rates and refers to the
approximate percentage change in price for a 100 basis point change in yield.
For example, if interest rates decrease by 100 basis points, a market price of a
security with an adjusted duration of two would increase by approximately 2%.
OPTIONS ON SECURITIES AND INDEXES
The Company may purchase and sell put options and call options on
securities, indexes or foreign currencies in standardized contracts traded on
recognized securities exchanges, boards of trade, or similar entities. The
Company may purchase agreements, sometimes called cash puts, that may accompany
the purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the purchaser
(holder) of the option, in return for a premium, the right to buy from (call) or
sell to (put) the seller (writer) of the option the security underlying the
option (or the cash value of the index) at a specified exercise price at any
time during the term of the option (normally not exceeding nine months). The
writer of an option on an individual security or on a foreign currency has the
obligation upon exercise of the option to deliver the underlying security or
foreign currency upon payment of the exercise price or to pay the exercise price
upon delivery of the underlying security or foreign currency. Upon exercise, the
writer of an option on an index is obligated to pay the difference between the
cash value of the index and the exercise price multiplied by the specified
multiplier for the index option. (An index is designed to reflect specified
facets of a particular financial or securities market, a specific group of
financial instruments or securities, or certain economic indicators.)
The Company will write call options and put options only if they are
"covered." For example, in the case of a call option on a security, the option
is "covered" if the Company owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount are held in a segregated account by its Custodian)
upon conversion or exchange of other securities held in its portfolio.
If an option written by the Company expires, the Company realizes a capital
gain equal to the premium received at the time the option was written. If an
option purchased by the Company expires, the Company realizes a capital loss
equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Company desires.
The Company will realize a capital gain from a closing purchase transaction
if the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Company will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Company will realize a capital gain or, if it is
less, the Company will realize a capital loss. The principal factors affecting
the market value of a put or a call option include supply and demand, interest
rates, the current market price of the underlying security or index in relation
to the exercise price of the option, the volatility of the underlying security
or index, and the time remaining until the expiration date.
A put or call option purchased by the Company is an asset of the Company,
valued initially at the premium paid for the option. The premium received for an
option written by the Company is recorded as a deferred credit. The value of an
option purchased or written is marked-to-market daily and is valued at the
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<PAGE> 48
closing price on the exchange on which it is traded or, if not traded on an
exchange or no closing price is available, at the mean between the last bid and
asked prices.
Risks Associated With Options on Securities and Indexes. There are several
risks associated with transactions in options. For example, there are
significant differences between the securities markets, the currency markets,
and the options markets that could result in an imperfect correlation between
these markets, causing a given transaction not to achieve its objectives. A
decision as to whether, when and how to use options involves the exercise of
skill and judgment, and even a well-conceived transaction may be unsuccessful to
some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when the Company
seeks to close out an option position. If the Company were unable to close out
an option that it had purchased on a security, it would have to exercise the
option in order to realize any profit or the option would expire and become
worthless. If the Company were unable to close out a covered call option that it
had written on a security, it would not be able to sell the underlying security
until the option expired. As the writer of a covered call option on a security,
the Company forgoes, during the option's life, the opportunity to profit from
increases in the market value of the security covering the call option above the
sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased or written by the Company,
the Company would not be able to close out the option. If restrictions on
exercise were imposed, the Company might be unable to exercise an option it has
purchased.
TAXATION OF OPTIONS
If the Company exercises a call or put option that it holds, the premium
paid for the option is added to the cost basis of the security purchased (call)
or deducted from the proceeds of the security sold (put). For cash settlement
options exercised by the Company, the difference between the cash received at
exercise and the premium paid is a capital gain or loss.
If a call or put option written by the Company is exercised, the premium is
included in the proceeds of the sale of the underlying security (call) or
reduces the cost basis of the security purchased (put). For cash settlement
options written by the Company, the difference between the cash paid at exercise
and the premium received is a capital gain or loss.
Entry into a closing purchase transaction will result in capital gain or
loss. If an option written by the Company was in-the-money at the time it was
written and the security covering the option was held for more than the
long-term holding period prior to the writing of the option, any loss realized
as a result of a closing purchase transaction will be long-term. The holding
period of the securities covering an in-the-money option will not include the
period of time the option is outstanding.
If the Company writes an equity call option(1) other than a "qualified
covered call option," as defined in the Internal Revenue Code, any loss on such
option transaction, to the extent it does not exceed the unrealized gains on the
securities covering the option, may be subject to deferral until the securities
covering the option have been sold.
For federal income tax purposes, the Company generally is required to
recognize as income for each taxable year its net unrealized gains and losses as
of the end of the year on non-equity options positions ("year-end
mark-to-market"). Generally, any gain or loss recognized with respect to such
positions (either by year-end mark-to-market or by actual closing of the
positions) is considered to be 60% long-term and 40% short-term, without regard
to the holding periods of the contracts. However, in the case of positions
classified as part of a "mixed straddle," the recognition of losses on certain
positions (including options positions, the
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(1) An equity option is defined to mean any option to buy or sell stock, and any
other option the value of which is determined by reference to an index of
stocks of the type that is ineligible to be traded on a commodity futures
exchange (e.g., an option contract on a sub-index based on the price of
hotel-casino stocks). The definition of equity option excludes options on
broad-based stock indexes (such as the Standard & Poor's 500 index).
A-3
<PAGE> 49
related securities and certain successor positions thereto) may be deferred to a
later taxable year. Writing of call options or buying put options that are
intended to hedge against a change in the value of securities held by the
Company: (1) will affect the holding period of the hedged securities; and (2)
may cause unrealized gain or loss on such securities to be recognized upon entry
into the hedge.
If the Company were to enter into a short index option position and the
Company's portfolio were deemed to "mimic" the performance of the index
underlying such contract, the option contract position and the Company's stock
positions would be deemed to be positions in a mixed straddle, subject to the
above-mentioned loss deferral rules.
In order for the Company to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income (including but not limited to
gains from options). In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of the Company's annual gross income. In order to avoid realizing
excessive gains on securities held less than three months, the Company may be
required to defer the closing out of certain positions beyond the time when it
would otherwise be advantageous to do so.
The Company distributes to stockholders annually any net capital gains that
have been recognized for federal income tax purposes (including year-end
mark-to-market gains) on options transactions. Such distributions are combined
with distributions of capital gains realized on the Company's other investments,
and stockholders are advised of the nature of the payments.
A-4
<PAGE> 50
BRANTLEY CAPITAL CORPORATION
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Company has adopted a Dividend Reinvestment and Cash Purchase Plan (the
"Plan").
Please be aware that all dividends and distributions will be automatically
reinvested in shares of common stock, par value $.01 per share (the "Common
Stock"), of the Company at no cost to the stockholder.
Stockholders may make additional cash purchases of Common Stock in
accordance with the Plan. Acquisitions of shares of Common Stock for
reinvestment or cash purchases of shares of Common Stock will be made by the
Company from shares of Common Stock selling at a discount to the Company's net
asset value ("NAV") and, with respect to reinvestment, through the issuance of
new shares of Common Stock by the Company at NAV. Reinvested dividends and
distributions will be used by the Company for general investment and operating
purposes, including additional investments in portfolio companies.
Shares of Common Stock acquired by the Company in accordance with the Plan
will be held in the name of the Company in unissued form by the Company's
transfer agent and investors will receive a quarterly statement reflecting the
number of shares of Common Stock owned in the Plan. These shares can be issued
to the individual investor, or can be liquidated upon written instructions of
the registered investor.
If you wish to have your dividends sent to you instead of held for
reinvestment, please complete and execute the following section.
ELECTION TO RECEIVE DIVIDENDS AND NOT PARTICIPATE IN THE PLAN
The undersigned elects not to participate in the Dividend Reinvestment and
Cash Purchase Plan and requests all dividends and distributions to be forwarded
to the following address:
Name of Stockholder:
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Account Number for Deposit:
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Bank or Custodial Name:
- --------------------------------------------------------------------------------
Address for Dividend Mailing:
- --------------------------------------------------------------------------------
City State Zip
-------------------------------- ---------------- --------------
Phone ( ) - Fax ( ) -
----- ----- ------------ ----- ------ ----------
Date Signature of Registered Holder
---------------------- ---------------------
RETURN THIS ELECTION TO STATE STREET BANK AND TRUST COMPANY
AT
P.O. BOX 8200
BOSTON, MASSACHUSETTS 02266-8200
(800) 426-5523
<PAGE> 51
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information.................. 2
Prospectus Summary...................... 3
Risk Factors............................ 8
Use of Proceeds......................... 12
Distributions........................... 12
The Company............................. 13
Investment Objectives and Policies...... 18
Management.............................. 21
Prior Experience of Principals of the
Investment Adviser.................... 25
The Investment Advisory Agreement....... 30
Regulation.............................. 30
Valuation of Portfolio Securities....... 33
Federal Income Tax Matters.............. 34
Dividend Reinvestment and Cash Purchase
Plan.................................. 37
Description of Capital Stock............ 39
Underwriting............................ 41
Legal Matters........................... 42
Experts................................. 42
Independent Auditors' Report............ F-1
Appendix A.............................. A-1
</TABLE>
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Until December 21, 1996, (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
================================================================================
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3,650,000 SHARES
OF COMMON STOCK
BRANTLEY CAPITAL
CORPORATION
--------------------
PROSPECTUS
NOVEMBER 26, 1996
--------------------
EVEREN SECURITIES, INC.
MCDONALD & COMPANY
SECURITIES, INC.
MORGAN KEEGAN & COMPANY, INC.
NEEDHAM & COMPANY, INC.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
FIRST OF MICHIGAN CORPORATION
NATCITY INVESTMENTS, INC.
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