<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 23, 1996
1933 Act File No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/ / Pre-Effective Amendment No. _____
/ / Post-Effective Amendment No. _____
/ / REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/ / Amendment No. _____
BRANTLEY CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
20600 Chagrin Boulevard
Suite 1150
Cleveland, Ohio 44122
(Address of Principal Executive Offices)(Zip Code)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (216) 283-4800)
MICHAEL J. FINN
BRANTLEY CAPITAL MANAGEMENT, LTD.
20600 CHAGRIN BOULEVARD
SUITE 1150
CLEVELAND, OHIO 44122
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
Maryann A. Waryjas David A. Sturms
Jenner & Block Vedder, Price, Kaufman & Kammholz
One IBM Plaza 222 North LaSalle Street
Chicago, Illinois 60611 Chicago, Illinois 60601
------------------------------------
Approximate date of proposed public offering: As soon as possible after
this registration statement becomes effective.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. / /
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
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PROPOSED PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING MAXIMUM AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED (F1) OFFERING PRICE OFFERING PRICE (F1) REGISTRATION FEE
PER SHARE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value per
share.............................. 11,500,000 $10.00 $115,000,000.00 $39,655.17
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<FN>
(F1) Includes 1,500,000 shares subject to the Underwriters' over-allotment
option.
</TABLE>
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 2
BRANTLEY CAPITAL CORPORATION
Form N-2
Cross-Reference Sheet
<TABLE>
<CAPTION>
PART A
ITEM NUMBER CAPTION PROSPECTUS CAPTION
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<S> <C> <C>
1 Outside Front Cover Outside Front Cover of Prospectus
2 Inside Front and Outside Inside Front Cover and Outside Back Cover
Back Cover Page Page of Prospectus
3 Fee Table and Synopsis Fee Table
4 Financial Highlights Not Applicable
5 Underwriting Outside Front Cover; Underwriting
6 Selling Stockholders Not Applicable
7 Use of Proceeds Use of Proceeds; Investment Objectives and
Policies; Risk Factors
8 General Description of Registrant The Company; Investment Objectives and
Policies; Risk Factors
9 Management Management; Prior Experience of Principals of
the Investment Adviser
10 Capital Stock, Long-Term Description of Capital Stock
Debt and Other Securities
11 Defaults and Arrears on Senior Securities Not Applicable
12 Legal Proceedings Not Applicable
13 Table of Contents of the Statement of Not Applicable
Additional Information
<CAPTION>
PART B
ITEM NUMBER CAPTION PROSPECTUS CAPTION
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<S> <C> <C>
14 Cover Page Not Applicable
15 Table of Contents Not Applicable
16 General Information and History The Company
17 Investment Objectives and Policies Investment Objectives and Policies
18 Management Management; Prior Experience of Principals of
the Investment Adviser
19 Control Persons and Principal Holders of The Company
Securities
20 Investment Advisory and Other Services Prior Experience of Principals of the Investment
Adviser; The Investment Advisory Agreement
21 Brokerage Allocation and Other Practices The Company
22 Tax Status Federal Income Tax Matters
23 Financial Statements Financial Statements
</TABLE>
<PAGE> 3
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED AUGUST 23, 1996
10,000,000 SHARES
BRANTLEY CAPITAL CORPORATION
COMMON STOCK
All of the 10,000,000 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, Ltd. (the "Investment Adviser"), a registered
investment adviser under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), will act as administrator and adviser to the Company.
The Company's principal objective is the realization of long-term
capital appreciation in the value of its net assets by investing primarily in
private equity securities and, to a lesser extent, in post-venture small-cap
public securities. 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 NATIONAL
MARKET SYSTEM UNDER THE SYMBOL "____." 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>
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Price to Proceeds to
Public Sales Load (1) (2) Company (2)
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<S> <C> <C> <C>
Per Share....................... $ 10.00 $0.00 $ 10.00
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Total (3) ...................... $100,000,000.00 $0.00 $100,000,000.00
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</TABLE>
(Footnotes on following page)
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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 _________________________, 1996.
EVEREN SECURITIES, INC.
The date of this Prospectus is , 1996
<PAGE> 4
(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 Underwriters a commission in the
aggregate amount of 7.0% of the initial public offering price per share
of Common Stock in connection with sales of Common Stock in this
Offering. The Investment Adviser will borrow funds (the "Sales Load
Loan") to pay such commissions to the Underwriters. However, under
certain circumstances the Company may become liable for, and be required
to make payments in connection with, any unamortized portion of the
Sales Load Loan. See "Risk Factors -- Use of Leverage; Contingent
Liability for Sales Load Loan" and "The Investment Advisory Agreement."
(2) Before deducting organizational and other expenses of the offering
estimated to be $__________ and a one-time structuring fee payable to
the Principal Underwriter in the amount of $500,000.
(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 1,500,000 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, Sales Load and Proceeds to
Company will be $115,000,000, $0 and $115,000,000, respectively. See
"Underwriting."
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE> 6
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 Securities Act and the Investment Company 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 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.
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<PAGE> 7
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 and equity-linked debt securities of private companies.
With respect to its investments in private companies, the Company anticipates
that a principal focus will be on industries that it considers likely to undergo
consolidation in situations offering the potential for investor returns. 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.
In addition, the Company anticipates investing a portion of its assets
in public companies. With respect to its investments in public companies, the
Company anticipates that a primary focus will be on the equity securities of
post-venture small-cap public companies. 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 primarily will consider investments in common stock,
preferred stock, equity-linked debt securities, warrants and options issued by
private companies and small-cap post-venture companies. 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
principal objective is the realization of long-term capital appreciation on its
investments in portfolio companies. 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. 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. See "Investment Objectives and
Policies."
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<PAGE> 8
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. 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). "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. 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; or (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. See "Regulation."
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 must distribute 90% 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, Ltd., based in Cleveland, Ohio, will serve
as the Company's Investment Adviser. It will be responsible, on a day-to-day
basis, for the selection and supervision of portfolio investments and for
management of the 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 asset value, payable quarterly. This fee may be higher than fees
paid by most other investment companies. See "Management," "Prior Experience of
Principals of the Investment Adviser," and "The Investment Advisory Agreement."
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<PAGE> 9
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered
by the Company.......................... The Company is offering 10,000,000 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 1,500,000 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...................... 10,000,000 shares. See "Description of Capital Stock."
Proposed Nasdaq National Market
Symbol.................................. [_____].
Use of Proceeds......................... To make investments in accordance with the Company's
investment policies and objectives. See "Use of Proceeds." 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, as
described in this Prospectus under "The Company -- Selection of
Investments" and "Investment Objectives and Policies." See
"Risk Factors -- Conflicts of Interest."
Distributions........................... The Company intends to distribute quarterly to its stockholders
90% of its investment company taxable income (net investment
income from interest and dividends and net short-term capital
gains). 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
</TABLE>
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<PAGE> 10
<TABLE>
<S> <C>
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;
Contingent Liability for Sales Load Loan" and "Investment
Objectives and Policies."
Stock Options........................... The Company has adopted a stock option plan pursuant to which
1,250,000 Shares of Common Stock have been reserved for future
issuance upon the exercise of options that may be granted to
directors and officers of the Company or the Investment Adviser.
See "Management -- Stock Options."
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; contingent liability for the Sales Load Loan;
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."
</TABLE>
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<PAGE> 11
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> <C>
Sales load (as a percentage of offering price)............ None (F1)
Dividend Reinvestment and Cash Purchase Plan fees......... None (F2)
ANNUAL EXPENSES (as a percentage of net asset value) (F3)
Management fees........................................... 2.85% (F4)
Interest payments on borrowed funds....................... None (F5), (F1)
Other expenses (estimated)................................ _.__% (F6)
Total Annual Expenses (estimated)........................... _.__%
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<FN>
(F1) Not including a one-time structuring fee payable to the Principal
Underwriter in the amount of $500,000 and the organizational and other
expenses of this Offering, which are estimated to be $_________. 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
aggregate amount of 7.0% of the initial public offering price per share
of Common Stock in connection with sales of Common Stock in this
Offering. The Investment Adviser will borrow funds to pay such
commissions to the Underwriters. However, under certain circumstances
the Company may become liable for, and be required to make payments in
connection with, any unamortized portion of the Sales Load Loan. See
"Risk Factors -- Use of Leverage; Contingent Liability for Sales Load
Loan" and "The Investment Advisory Agreement."
(F2) 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.
(F3) Assumes a net asset value of $100,000,000 based on the sale of
10,000,000 shares in the Offering, which will be the Company's
stockholders' equity upon completion of the Offering, assuming no
exercise of the Underwriter's over-allotment option.
(F4) Payable to the Investment Adviser.
(F5) Assumes no leverage; but see footnote 1.
(F6) Includes estimated accounting, legal, stockholder relations, transfer
agent, share record and custodian expenses.
</TABLE>
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
no obligation of the Company for any portion of the Sales Load Loan, 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
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<S> <C> <C> <C> <C>
You would pay the following
expenses on a $1,000 investment,
assuming a 5.0% annual return.......... $___ $___ $___ $___
</TABLE>
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<PAGE> 12
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."
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<PAGE> 13
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 and Chief Financial Officer, and
Michael J. Finn, President 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. 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. Therefore, an
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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 and Chief
Financial Officer, Michael J. Finn, President, and Paul H. Cascio, 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. 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 25% 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, 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 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. If such exemptive relief is granted, it is expected that it would be
granted only upon the conditions, among others, that before such an investment
is 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
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majority of the Company's independent 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
portfolio companies within the earlier of (i) two years after the completion of
this offering or (ii) two and one-half years after the effective date of
this Prospectus. 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 Assets, see "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; CONTINGENT LIABILITY FOR SALES LOAD LOAN
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." If the Company were to terminate the Investment
Adviser (except for willful malfeasance, embezzlement or misappropriation of
Company funds on the part of the Investment Adviser), the Company would be
liable for, and to the extent requested by the Investment Adviser, would
reimburse the Investment Adviser for, the unamortized obligations of the
Investment Adviser under the Sales Load Loan. See "The Investment Advisory
Agreement."
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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. See "Federal Income Tax Matters."
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
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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 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
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 will be less
than the initial offering price. In addition, if the Company were to become
liable for any portion of the obligations of the Investment Adviser under the
Sales Load Loan, the net asset value of the Common Stock would likely be
negatively impacted.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock
offered hereby are estimated to be approximately $100,000,000 ($115,000,000 if
the Underwriters' over-allotment is exercised in full). 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 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 90% of its investment company taxable income (net investment income from
interest and dividends and net short-term capital gains) and to declare the
first distribution during the period ending ___________ 31, 199_, which shall be
payable shortly thereafter. 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, [_____________________], 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
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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."
THE COMPANY
GENERAL
The Company is a newly organized, closed-end, non-diversified
investment company which has elected to be treated as a Business Development
Company under the Investment Company Act. The Company intends to invest
primarily in the equity and equity-linked debt securities, including common
stock, preferred stock, convertible debt securities, warrants, and options, of
private companies and post-venture small-cap public companies that the
Investment Adviser believes to have significant potential for growth in sales
and earnings. 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). 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. 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. See "Regulation."
The Company's principal objective is the realization of long-term
capital appreciation on its net investments in portfolio companies. 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 -- Investments in Privately-Owned Companies,"
"Risk Factors -- Investments in Small-Cap Public Companies," "Risk Factors --
Conflicts of Interest," "Risk Factors -- Illiquidity of Portfolio Investments,"
"Risk Factors -- Dependence on Public Offering Market or Availability of
Strategic Buyers," "Risk Factors -- Competitive Market for Investment
Opportunities" and "Investment Objectives and Policies."
INVESTMENT ADVISER
Brantley Capital Management, Ltd., 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 of the Company's
records and financial reporting requirements. The Company will pay the
Investment Adviser an annual management fee of 2.85% of net asset value, payable
quarterly.
Robert P. Pinkas, Chairman, Chief Executive Officer and Chief Financial
Officer, and Michael J. Finn, President 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,"
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"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 and Chief Financial Officer, and Michael J.
Finn, President 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. The Board of Directors will establish guidelines for investments in
post-venture small-cap companies and will delegate to the Investment Adviser the
authority to make such investments in accordance with the guidelines. Potential
investments in post-venture small-cap public companies which do not comply with
the guidelines must be presented by the Investment Adviser to the Board of
Directors for approval. 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'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.
Synergy. It is expected that the position of the Company as an investor
in both private companies and small-cap public companies will be of benefit to
the ultimate returns of the Company. This synergistic 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 "Risk
Factors -- Investments in Privately-Owned Companies" and "Risk Factors --
Investments in Small-Cap Public Companies."
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.
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. 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."
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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 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 seek an exemptive order from the
Commission, 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 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. If such exemptive relief
is granted, it is expected that it would be granted only upon the conditions,
among others, that before such an investment is 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 independent 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) does not have any class of securities with respect to
which a broker or dealer may extend margin credit.
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(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 to constitute Eligible Assets for the purpose
of the 70% test, the Company must either control the issuer of the securities or
must make available to the issuer of the securities significant 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; 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 10,000,000 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 $__________ (approximately ____% of the net proceeds of
this Offering assuming no obligation of the Company for any portion of the Sales
Load Loan). While the foregoing estimates have been made in good faith, there
can be no assurance that (i) actual annual expenses will not be substantially
greater than such estimates as a result of increases in costs, such as costs of
transfer agent, share record, custodian and stockholder relations activities and
professional and similar services, that cannot be predicted and are beyond the
control of the Company, or (ii) that the Company will not become liable for any
obligations of the Investment Adviser under the Sales Load Loan. See "Risk
Factors -- Use of Leverage; Contingent Liability for Sales Load Loan" and "The
Investment Advisory Agreement."
-19-
<PAGE> 23
Organizational and other expenses of the Offering are estimated to be
approximately $_______, including a one-time structuring fee of $500,000 payable
to the Principal Underwriter, and will be paid by the Company. Offering
expenses, excluding the structuring fee payable to the Principal Underwriter 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 futures contracts 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 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.
-20-
<PAGE> 24
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 principal objective is the realization of long-term
capital appreciation on its net investments in 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 which have the potential
for rapid growth in sales and earnings. 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.
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. In the past, the executive officers of the
Investment Adviser have achieved particularly successful results for the
respective entities they have managed when they directed investments structured
as a substantial, preferably lead, investor with a high degree of control over a
portfolio company's investment management and company building processes. 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. Except for the fundamental policies
described below, the Company's investment objectives and investment strategies
may be changed by a majority vote of its Board of Directors.
In making investments and managing its portfolio, the Company will
adhere to the following fundamental policies, which policies may not be changed
without the approval of the holders of a majority (as defined in the Investment
Company Act) of the outstanding Common Stock. 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
-21-
<PAGE> 25
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. In order to retain that 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.
The Company will not (i) purchase securities on margin, except such
short-term credits as are necessary for the clearance of transactions, or (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. 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;
Contingent Liability for Sales Load Loan," "Risk Factors -- Possible Loss of
Pass-Through Tax Treatment," "Regulation" and "Federal Income Tax Matters."
-22-
<PAGE> 26
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. If such exemptive relief
is granted, it is expected that it would be granted only upon the conditions,
among others, that before such an investment is 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 independent 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.
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 Amended and
Restated Articles of Incorporation and Bylaws. No stockholder meetings will be
held for the purpose of electing directors unless otherwise required. 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(F1) 42 Chairman of the Board, Chief Executive
Officer, Chief Financial Officer and Director
Michael J. Finn(F1) 47 President and Director
_______________ __ Director
_______________ __ Director
_______________ __ Director
- -----------------------------
<FN>
(F1) "Interested person" as defined in Section 2(a)(19) of the Investment Company
Act.
</TABLE>
-23-
<PAGE> 27
Robert P. Pinkas is Chairman of the Board, Chief Executive Officer,
Chief Financial Officer and a director of the Company and Chairman of the Board,
Chief Executive Officer, Chief Financial Officer and a director of Brantley
Capital Management, Ltd., 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 director of Brantley Capital Management, Ltd., which serves as
the Investment Adviser to the Company. 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.
[INFORMATION ABOUT REMAINING DIRECTORS TO COME.]
The Company's Amended and Restated Articles of Incorporation 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. Pinkas, the
Class II directors are _______ and _______, and the Class III directors are Mr.
Finn and _______.
It is currently anticipated that the officers of the Company will be
compensated solely by the Investment Adviser. Non-interested directors will each
receive a monthly fee of $500 for serving on the Board of Directors and will
receive an additional $1,000 for each meeting of the Board of Directors or a
committee thereof that he or she attends.
-24-
<PAGE> 28
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 (F1)
Officer, Chief Financial Officer and Director
Michael J. Finn President and Director None (F1)
________________ Director $10,000(F1)
________________ Director $10,000(F1)
________________ Director $10,000(F1)
- ----------------------------
<FN>
(F1) Does not include equity-based compensation. See "Stock Options".
</TABLE>
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. In addition, the Company's
Amended and Restated Articles of Incorporation and Bylaws provide for certain
limitations on director liability.
STOCK OPTIONS
For the purpose of providing officers who have substantial
responsibility for the management of the Company or the Investment Adviser 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 up to 1,250,000 shares
of Common Stock to officers of the Company or the Investment Adviser. 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 of
the Company or the Investment Adviser 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 and
Cascio 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 fair market value (as defined in the Stock Option Plan)
of the shares of Common Stock on the date of option grant. No option may be
exercised more than 10 years after the date on which it is granted. 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.
-25-
<PAGE> 29
Shares of Common Stock purchased upon exercise of options (the "Option
Shares") must be paid for in cash or by delivery of or attestation to, 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
the case of delivery by attestation, the number of Option Shares to be delivered
to the grantee upon exercise of the Option shall be equal to the excess of the
number of shares which would otherwise be issuable upon such exercise over the
number of shares to which ownership is attested.
At the date of this Prospectus, options to purchase 225,000, 75,000 and
25,000 shares of Common Stock at $10.00 per share have been granted to Messrs.
Pinkas, Finn and Cascio, respectively. These options 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, each of the disinterested directors shall automatically
be granted options to purchase 2,000 shares of Common Stock of the Company at
$10.00 per share at the closing of this Offering (the "Disinterested Director
Option Plan"). 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 of
the Company at a price per share equal to the fair market value of such shares
on the date of the annual meeting.
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. With
respect to investments in private companies, the most recent activity of this
type in which these persons have been engaged is BVP II, an investment
partnership formed in 1990 with committed capital of approximately $30 million
from 14 corporate and public pension funds and which is fully invested, and BVP
III, an investment partnership formed in 1995 with committed capital of
approximately $65 million from 16 corporate and public pension funds and which
as of the date of this Prospectus is less than 25% invested. To date, BVP II's
funds have been invested in 15 portfolio companies, and BVP III's funds have
been invested in four portfolio companies. Messrs. Pinkas and Finn are general
partners of the general partners of BVP II and BVP III, and Mr. Pinkas is a
general partner of the general partner of BVP I, an investment partnership
similar to BVP II which was established in 1987 with committed capital of $12.5
million, and which is fully invested. Between 1987 and June 1996, BVP I, BVP II
and BVP III made 29 investments in small businesses with $1 million 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 16 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.
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<PAGE> 30
In addition to Messrs. Pinkas and Finn, the only other executive
officer of the Investment Adviser is:
Paul H. Cascio: Mr. Cascio serves as Vice President 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 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.
During the period from 1987 to the present, Messrs. Pinkas and Finn, on
behalf of BVP I, BVP II and BVP III, managed investments in a total of 36
companies.
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>
Pre-BVP BVP
Brantley III
Partners BVP I BVP II (Finn/ SIMCO
(Pinkas) (Pinkas) (Pinkas) Pinkas) (Finn) (F1) Total
-------- -------- -------- ------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Stage of Enterprise Development:
Early-Stage Financings (F2).......... 5 5 6 0 4 20
Expansion Financings (F3)............ 2 2 1 1 17 23
Acquisition/Buyout Financings (F4)... 0 3 8 3 10 24
-- -- -- -- -- --
Total................................ 7 10 15 4 31 67
- -------------------------------
<FN>
(F1) Mr. Finn was one of three members of the investment team at SIMCO that
made the investments listed in the SIMCO column above.
(F2) 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.
(F3) 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.
(F4) 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 history and a positive cash flow.
</TABLE>
-27-
<PAGE> 31
The Company's investment strategy will build on the investment
philosophy and valuation methods, as well as the network of business and
professional relationships and the successful track record 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 BVP portfolio companies involved in the investments listed in the
above chart 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
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
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 neural tissue scar reduction, 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
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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
Protect America, Inc.
Manufacturing, packaging, and marketing of spill containment kits, personal
protective kits, and absorbents
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
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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
above chart 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
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
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<PAGE> 34
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
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THE INVESTMENT ADVISORY AGREEMENT
Pursuant to the Investment Advisory Agreement dated ____________, 1996,
Brantley Capital Management, Ltd., 20600 Chagrin Boulevard, Suite 1150,
Cleveland, Ohio 44122, serves 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 the financial records
required to be maintained by the Company and will prepare 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 and payable quarterly in arrears, throughout the term of the
Investment Advisory Agreement. This fee may be higher than fees paid by most
other investment companies.
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 aggregate amount of 7.0% of the initial
public offering price per share of Common Stock in connection with sales of
Common Stock in this Offering. The Investment Adviser will borrow funds to pay
such aggregate commissions to the Underwriters. If the Company were to terminate
the Investment Adviser (except for willful misfeasance, embezzlement or
misappropriation of funds on the part of the Investment Adviser), the Company
would be liable for, and to the extent requested by the Investment Adviser,
would reimburse the Investment Adviser for, the unamortized obligations of the
Investment Adviser under the Sales Load Loan. See "Risk Factors -- Use of
Leverage; Contingent Liability for Sales Load Loan," "Risk Factors -- Limited
Public Market for Common Stock; Trading Below Net Asset Value" and
"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, will 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 with
respect to the Company's investments. See "Underwriting."
The Investment Advisory Agreement was approved by the Board of
Directors on ____________, 1996 and is effective for an initial term of two
years and may be continued thereafter, from year to year pursuant to its terms.
The Investment Advisory Agreement may be terminated by either party upon at
least 60 days' notice to the other, provided that its continuance is approved
annually by the Company's Board of Directors or the holders of the Common Stock,
including, in either case, approval by the directors of the Company who are not
interested persons. See "Risk Factors -- Lack of Operating History; Dependence
Upon Investment Advisor."
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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 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 employees of the Investment
Adviser 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.
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<PAGE> 37
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.
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 fundamental
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 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 Company and the
Investment Adviser intend to submit an application to the Commission for
exemptive relief to permit 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 the application for
exemptive relief 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
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<PAGE> 38
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, 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. If such exemptive relief
is granted, it is expected that it would be granted only upon the conditions,
among others, that before such an investment is 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 independent 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 Stock Market 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
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<PAGE> 39
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 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 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."
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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
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 that 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
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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.
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 comprised of securities of a corporate issuer, 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
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<PAGE> 42
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 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.
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<PAGE> 43
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 [________________] (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 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 valuation 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 National Market System prior to the
payment date of the dividend or distribution, or 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.
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<PAGE> 44
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 [____________________] as Plan Agent.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue 25,000,000 shares of Common Stock,
par value $.01 per share. 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 can, if they choose to do so, elect all of the directors. In such event,
the holders of the remaining Common Stock will not be able to elect any
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.
ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Articles of Incorporation and 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
Amended and Restated Articles of Incorporation to provide greater likelihood of
continuity of management for the Company since the nature of the Company's
investments is such that
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<PAGE> 45
continuity of management for a substantial period may be necessary to realize
the full value of the investments made by the Company. The presence of this
provision may reduce the likelihood that stockholders would be able to sell
their shares of Common Stock at a premium in a takeover situation.
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 Amended and Restated Articles of Incorporation 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 Amended and Restated Articles of
Incorporation 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,
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 is required to convert the Company from a closed-end to an open-end
investment company. 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 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 at least a majority of the shares entitled to be
cast on the matter.
The effect of these provisions of law and of the Company's Amended and
Restated Articles of Incorporation and Bylaws is to make a takeover of the
Company more difficult than it might be in the absence of such provisions.
ANNUAL MEETINGS
The Company will hold annual meetings of stockholders for the election
of directors and other matters if required to do so under applicable laws or
rules of exchanges or other applicable regulatory agencies.
TRANSFER AND DIVIDEND PAYING AGENT
[___________________], will act as the Company's transfer and dividend
paying agent and registrar.
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
________________ (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.
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<PAGE> 46
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
EVEREN Securities, Inc. ..................
Total .......................... ___________
</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 sales load or
underwriting discount 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 aggregate amount of 7.0% of the initial public offering
price per share of Common Stock in connection with sales of Common Stock in this
Offering. Under certain circumstances the Company may become liable for, and be
required to make payments in connection with, any unamortized portion of the
Sales Load Loan. See "Risk Factors -- Use of Leverage; Contingent Liability for
Sales Load Loan" and "The Investment Advisory Agreement."
The Underwriters may allow to selected dealers a concession of not more
than $_______ per share of Common Stock; and the Underwriters may allow, and
such dealers may reallow, a concession of not more than $_______ 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; and after this
Offering, the offering price and other selling terms 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 1,500,000 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 may act as a market maker with respect to the
shares of Common Stock.
The Company has agreed to pay the Principal Underwriter upon
consummation of the Offering a one-time structuring fee of $500,000 for services
rendered in connection with the organization of the Company. See "The Company --
Expenses of the Company." In addition, the Investment Adviser, from its own
funds, will 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 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.
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<PAGE> 47
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.
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 the Company as of _______,
1996 has been included herein and in the Registration Statement in reliance upon
the report of Ernst & Young LLP, independent certified public accountants,
appearing elsewhere herein and upon the authority of the same firm as experts in
auditing and accounting.
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<PAGE> 48
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 ________, 1996. This financial
statement is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement 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 of a statement of assets and liabilities
includes examining, on a test basis, evidence supporting the amounts and
disclosures in that financial statement. An audit of a statement of assets and
liabilities 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 of the statement of
assets and liabilities 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 ________, 1996, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Cleveland, Ohio
__________, 1996
F-1
<PAGE> 49
BRANTLEY CAPITAL CORPORATION
Statement of Assets and Liabilities
________, 1996
<TABLE>
<CAPTION>
Assets
------
<S> <C>
Cash $
Organization expenses --------
--------
--------
Liabilities
-----------
Liabilities:
Accrued organization expenses
--------
Net Assets (25,000,000 shares of $.01 par value Common Stock
authorized; __________ shares issued and outstanding) $
--------
Net asset value per share $ 10.00
========
</TABLE>
See accompanying notes to statement of assets and liabilities.
F-2
<PAGE> 50
BRANTLEY CAPITAL CORPORATION
Notes to Statement of Assets and Liabilities
_________, 1996
(1) Organization and Business Purpose
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 Brantley Capital Management, Ltd. (the "Investment
Adviser") of ______ shares of common stock (the "Common Stock") for an
aggregate purchase price of $________. The registration and offering of
the Company's Common Stock is for 10,000,000 shares (not including the
Underwriters' over-allotment option) at a proposed maximum offering
price per share of $10.00.
(2) Organization Expenses
Organization expenses relating to the Company incurred and to be
incurred by the Investment Adviser will be reimbursed by the Company.
Such expenses 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, estimated at $_________, will be paid from
the proceeds of the offering and charged to capital at the time of the
issuance of such shares of Common Stock.
(3) 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.
The Company will pay the Investment Adviser an annual fee for its
management services at an annual rate of 2.85% of the Company's net
assets, determined and paid quarterly.
(4) Contingent Liability
The Company may be required to reimburse the Investment Adviser for the
unamortized balance of the Sales Load Loan if the Investment Adviser is
terminated prior to the Sales Load Loan being repaid.
F-3
<PAGE> 51
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. Neither the delivery of this Prospectus nor any
sale made hereunder shall under any circumstances create an implication that
there has been no change in the affairs of the Company since the date hereof.
----------------------
TABLE OF CONTENTS
Page
Additional Information................................................... [_]
Prospectus Summary....................................................... [_]
Risk Factors..............................................................[_]
Use of Proceeds.......................................................... [_]
Distributions............................................................ [_]
The Company.............................................................. [_]
Investment Objectives and Policies........................................[_]
Management................................................................[_]
Prior Experience of Principals of the
Investment Adviser........................................................[_]
The Investment Advisory Agreement.........................................[_]
Regulation................................................................[_]
Valuation of Portfolio Securities.........................................[_]
Federal Income Tax Matters................................................[_]
Dividend Reinvestment and Cash
Purchase Plan.............................................................[_]
Description of Capital Stock..............................................[_]
Underwriting..............................................................[_]
Legal Matters.............................................................[_]
Experts...................................................................[_]
Independent Auditors' Report..............................................F-1
----------------------
Until ___________ 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.
10,000,000 Shares
of Common Stock
Brantley Capital
Corporation
-------------------------
PROSPECTUS
, 1996
-------------------------
EVEREN SECURITIES, INC.
<PAGE> 52
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, or (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. 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 in a broad array
of financial instruments and securities, including conventional exchange-traded
and non-exchange-traded options, futures contracts, futures 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, futures contracts, and
futures 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.
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<PAGE> 53
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-2
<PAGE> 54
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 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.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Company may use interest rate futures contracts, index futures
contracts and foreign currency futures contracts. An interest rate, index or
foreign currency futures contract provides for the future sale by one party and
purchase by another party of a specified quantity of a financial instrument or
the cash value of an index(F1) at a specified price and time. A public market
exists in futures contracts covering a number of indexes (including, but not
limited to: the Standard & Poor's 500 Index, the Value Line Composite Index,and
the New York Stock Exchange Composite Index) as well as financial instruments
(including, but not limited to: U.S. Treasury bonds, U.S. Treasury notes,
Eurodollar certificates of deposit, and foreign currencies). Other index and
financial instrument futures contracts are available and it is expected that
additional futures contracts will be developed and traded.
The Company may purchase and write call and put futures options.
Futures options possess many of the same characteristics as options on
securities, indexes and foreign currencies (discussed above). A futures option
gives the holder the right, in return for the premium paid, to assume a long
position (call) or short position (put) in a futures contract at a specified
exercise price at any time during the period of the option. Upon exercise of a
call option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option, the
opposite is true. The Company might, for example, use futures contracts to hedge
against or gain exposure to fluctuations in the general level of stock prices,
anticipated changes in interest rates or currency fluctuations that might
adversely affect either the value of the Company's securities or the price of
the securities that the Company intends to purchase. Although
- --------
[FN]
(F1) A futures contract on an index is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading
day of the contract and the price at which the index contract was originally
written. Although the value of a securities index is a function of the value
of certain specified securities, no physical delivery of those securities is
made.
A-3
<PAGE> 55
other techniques could be used to reduce or increase the Company's exposure to
stock price, interest rate and currency fluctuations, the Company may be able to
achieve its exposure more effectively and perhaps at a lower cost by using
futures contracts and futures options.
The Company will only enter into futures contracts and futures options
that are standardized and traded on an exchange, board of trade, or similar
entity, or quoted on an automated quotation system.
The success of any futures transaction depends on the Investment
Adviser correctly predicting changes in the level and direction of stock prices,
interest rates, currency exchange rates and other factors. Should those
predictions be incorrect, the Company's return might have been better had the
transaction not been attempted; however, in the absence of the ability to use
futures contracts, the Investment Adviser might have taken portfolio actions in
anticipation of the same market movements with similar investment results but,
presumably, at greater transaction costs.
Some futures contracts call for making or taking delivery of the
underlying securities, however, these obligations are usually closed out prior
to delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Company engaging in the
transaction realizes a capital gain, or if it is more, the Company realizes a
capital loss. Conversely, if an offsetting sale price is more than the original
purchase price, the Company engaging in the transaction realizes a capital gain,
or if it is less, the Company realizes a capital loss. The transaction costs
must also be included in these calculations.
RISKS ASSOCIATED WITH FUTURES
There are several risks associated with the use of futures contracts
and futures options. A purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. In trying to
increase or reduce market exposure, there can be no guarantee that there will be
a correlation between price movements in the futures contract and in the
portfolio exposure sought. In addition, there are significant differences
between the securities and futures markets that could result in an imperfect
correlation between the markets, causing a given transaction not to achieve its
objectives. The degree of imperfection of correlation depends on circumstances
such as: variations in speculative market demand for futures, futures options
and the related securities, including technical influences in futures and
futures options trading and differences between the securities market and the
securities underlying the standard contracts available for trading. For example,
in the case of index futures contracts, the composition of the index, including
the issuers and the weighing of each issue, may differ from the composition of
the Company's portfolio, and, in the case of interest rate futures contracts,
the interest rate levels, maturities, and creditworthiness of the issues
underlying the futures contract may differ from the financial instruments held
in the Company's portfolio. A decision as to whether, when and how to use
futures contracts 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 stock price or interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses. Stock index futures contracts are not normally subject to
such daily price change limitations.
There can be no assurance that a liquid market will exist at a time
when the Company seeks to close out a futures or futures option position. The
Company would be exposed to possible losses on its positions
A-4
<PAGE> 56
during the interval of its inability to close. In addition, many of the
contracts discussed above are relatively new instruments without a significant
trading history. As a result, there can be no assurance that an active secondary
market will develop or continue to exist.
LIMITATIONS ON OPTIONS AND FUTURES
If other options, futures contracts, or futures options of types other
than those described herein are traded in the future, the Company may also use
those investment vehicles, provided the Board of Directors determines that their
use is consistent with the Company's investment objectives.
The Company will not enter into a futures contract or purchase an
option thereon if, immediately thereafter, the purchase price of the futures
contracts plus premiums paid by the Company for open futures option positions,
less the amount by which any such positions are "in-the-money,"(F2) would exceed
5% of the Company's total assets.
When purchasing a futures contract or writing a put option on a futures
contract, the Company must maintain with its custodian (or broker, if legally
permitted) cash or cash equivalents (including any margin) equal to the market
value of such contract. When writing a call option on a futures contract, the
Company similarly will maintain with its custodian cash or cash equivalents
equal to the amount by which such option is in-the-money until the option
expires or is closed out by the Company.
In order to comply with Commodity Futures Trading Commission Regulation
4.5 and thereby avoid being deemed a "commodity pool operator," the Company will
use commodity futures or commodity options contracts solely for bona fide
hedging purposes within the meaning and intent of Regulation 1.3(z), or, with
respect to positions in commodity futures and commodity options contracts that
do not come within the meaning and intent of 1.3(z), the aggregate payments
required to establish such positions will not exceed 5% of the fair market value
of the assets of the Company, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into (in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount (as
defined in Section 190.01(x) of the Commission Regulations) may be excluded in
computing such 5%).
TAXATION OF OPTIONS AND FUTURES
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 and futures 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 and futures 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.
- --------
[FN]
(F2) A call option is "in-the-money" if the value of the futures contract that
is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
A-5
<PAGE> 57
If the Company writes an equity call option(F3) 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.
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into and the settlement price on the earlier of delivery notice date or
expiration date. If the Company delivers securities under a futures contract,
the Company also realizes a capital gain or loss on those securities.
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 futures, futures options and 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, futures and futures options positions, the
related securities and certain successor positions thereto) may be deferred to a
later taxable year. Sale of futures contracts or writing of call options (or
futures call options) or buying put options (or futures 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 future, short index
futures option or short index option position and the Company's portfolio were
deemed to "mimic" the performance of the index underlying such contract, the
option or futures 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, futures, or forward contracts). 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. Any net
gain realized from futures (or futures options) contracts will be considered
gain from the sale of securities and therefore be qualifying income for purposes
of the 90% requirement. 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 and futures 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.
- --------
[FN]
(F3) 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-6
<PAGE> 58
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
________________________________________________________________________________
Account Number for Deposit
________________________________________________________________________________
Bank or Custodial Name
________________________________________________________________________________
Address for Dividend Mailing
________________________________________________________________________________
City _______________________________ State _________________ Zip _____________
Phone (_____) ________-_________ Fax (_____) ________-_________
Date ____/___/______ Signature of Registered Holder _________________________
RETURN THIS ELECTION TO [PLAN AGENT]
AT
________________________________________
________________________________________
________________________________________
<PAGE> 59
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
The following financial statements and exhibits are filed as part of the
registration statement.
1. Financial Statements
Statement of Assets and Liabilities of the Company as of _________, 1996
2. Exhibits
a.1. Articles of Incorporation of the Company
a.2. Amended and Restated Articles of Incorporation of the Company*
b. Bylaws of the Company*
d. Form of Share Certificate*
e. Form of Dividend Reinvestment and Cash Purchase Plan*
g. Form of Investment Advisory Agreement between the Company and the
Investment Adviser*
h. Form of Principal Underwriter Agreement [WITH SOLICITING DEALER
AGREEMENT] relating to the offering of the shares*
i.1. Stock Option Plan and Form of Option Grants*
i.2. Disinterested Director Option Plan and Form of Option Grants*
j. Custodian Agreement*
k. Transfer Agent Agreement*
l. Opinion and Consent of Jenner & Block*
n. Consent of Ernst & Young LLP*
s. Form of Indemnification Agreement for directors and officers*
* To be filed by amendment
All other exhibits are omitted because they are not applicable or the
required information is shown in the financial statements or the notes thereto.
ITEM 25. MARKETING ARRANGEMENTS
The Company will enter into an agreement with an investment banking firm
(the "Principal Underwriter") for the organization and management of a
syndication of broker/dealers to serve as selling agents for the Company's
Common Stock.
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<PAGE> 60
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with the
issuance and distribution of the securities covered by this Registration
Statement.
<TABLE>
<S> <C>
Securities and Exchange Commission *
-----
National Association of Security Dealers, Inc. *
-----
Blue Sky fees and expenses *
-----
Printing Expenses *
-----
Legal fees and expenses *
-----
Accounting fees and expenses *
-----
Miscellaneous *
-----
Total $ *
-----
</TABLE>
* To be furnished by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Prior to this Offering, the outstanding capital stock of Brantley Capital
Corporation, a Maryland corporation (the "Registrant"), is owned by _________
_________________. The investment adviser for the Registrant is Brantley
Capital Management, Ltd., a Delaware corporation, a majority of the outstanding
capital stock of which is owned by Robert P. Pinkas, Chairman, Chief Executive
Officer and Chief Financial Officer of the Investment Adviser. In addition, Mr.
Pinkas is general partner of Brantley Venture Management, L.P., the general
partner of Brantley Venture Partners, L.P. ("BVP I") and, along with Michael J.
Finn, President of the Investment Adviser, and Paul H. Cascio, Vice President of
the Investment Advisor, is a general partner of Brantley Venture Management II,
L.P. and Brantley Venture Management III, L.P., the respective general partners
of Brantley Venture Partners II, L.P. ("BVP II") and Brantley Venture Partners
III, L.P. ("BVP III"). Each of the Brantley Venture Management entities is a
Delaware limited partnership. BVP I, BVP II and BVP III are also Delaware
limited partnerships and were formed to make venture capital investments. See
"Management" in the Prospectus contained herein.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Common Stock 1
</TABLE>
ITEM 29. INDEMNIFICATION
Article ____ of the Bylaws of the Company provides that the Company shall
indemnify its directors and officers to the maximum extent allowed by the
Maryland General Corporation Law. Pursuant to Section 2-418 of the Maryland
General Corporation Law, the Company generally has the power to indemnify its
present and former directors and officers against judgments, penalties, fines,
settlements, and reasonable expenses actually incurred by them in connection
with any proceeding to which they are, or are threatened to be made, party by
reason of their serving in those positions so long as they acted in good faith
and in a manner they reasonably believed to be in, or not opposed to, the best
interests of the Company, and with respect to any criminal action, so long as
they had no reasonable cause to believe their conduct was unlawful. With respect
to suits by or in the right of the Company, indemnification is not available if
the person is adjudged to be liable to the Company. The statute expressly
provides that the power to indemnify authorized thereby is not exclusive of any
rights granted under the charter, the bylaws, a resolution of the stockholders
or directors, an agreement or otherwise, both as to action in an official
capacity and as to action in another capacity while holding such office. The
Company also has the power to purchase and maintain insurance for its directors,
officers, employees or agents.
C-2
<PAGE> 61
The preceding discussion of the Company's Bylaws and Section 2-418 of the
Maryland General Corporation Law is not intended to be exhaustive and is
qualified in its entirety by the Company's Bylaws and Section 2-418 of the
Maryland General Corporation Law.
The Company intends to enter into indemnification agreements with the
Company's directors and officers. Pursuant to such agreements, the Company
will, to the extent permitted by applicable law, indemnify such persons against
all judgments, penalties, fines, settlements, and reasonable expenses actually
incurred by them in connection with the defense or settlement of any proceeding
to which they are, or are threatened to be made, party by reason of the fact
that they were directors or officers of the Company or assumed certain
responsibilities at the direction of the Company.
The form of Principal Underwriter Agreement included herein as Exhibit ___
provides for indemnification of the Underwriters under certain circumstances,
including indemnification for liabilities under the Securities Act of 1933 (the
"Securities Act").
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
Robert P. Pinkas, Chairman, Chief Executive Officer and Chief Financial
Officer, Michael J. Finn, President, and Paul H. Cascio, Vice President of the
Investment Adviser, serve as general partners of the general partners of BVP II
and BVP III, and Mr. Pinkas serves as general partner of the general partner of
BVP I. See "Item 27. Persons Controlled by or Under Common Control." The address
of each of the entities listed above is 20600 Chagrin Boulevard, Suite 1150,
Cleveland, Ohio 44122. Prior to joining BVP II and BVP III in 1995, Mr. Finn
served as portfolio manager and vice president of the Venture Capital Group of
Sears Investment Management Company, 55 West Monroe Street, Suite 3200, Chicago,
Illinois 60603. 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 Witter Reynolds Inc., Two World
Trade Center, New York, New York 10048.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The books of account, securities and other documents and records, of the
Registrant are maintained by the Investment Adviser at its offices at 20600
Chagrin Boulevard, Suite 1150, Cleveland, Ohio 44122.
ITEM 32. MANAGEMENT SERVICES
None other than as described in the prospectus contained herein.
ITEM 33. UNDERTAKINGS
(1) Not Applicable.
(2) Not Applicable.
(3) Not Applicable.
(4) The Company undertakes:
(a) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1993 (the
"Securities Act"), (ii) to reflect in the Prospectus any facts or events
arising after the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) that, individually or in the
aggregate, represent a fundamental change in the information set forth in this
Registration Statement and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in this
Registration Statement or any material change to such information in this
Registration Statement;
C-3
<PAGE> 62
(b) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of those securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(c) to remove from registration by means of a post-effective
amendment any of the securities that remain unsold at the termination of the
offering.
(5) The Company undertakes that, for purposes of determining any
liability under the Securities Act:
(a) the information omitted from the Prospectus in reliance upon
Rule 430A of the Securities Act and contained in the form of Prospectus filed by
the Company pursuant to Rule 497(h) under the Securities Act, shall be deemed to
be part of this Registration Statement as of the time it was declared effective;
and
(b) each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to the
securities offered hereby and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(6) Not Applicable.
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<PAGE> 63
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Cleveland, State of Ohio,
on the 23rd day of August, 1996.
Brantley Capital Corporation
By: /s/ Robert P. Pinkas
-----------------------------------------------
Robert P. Pinkas, Chairman of the Board, Chief
Executive Officer and Chief Financial Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated. Each person whose signature to this Registration
Statement appears below hereby appoints each of Robert P. Pinkas and Michael J.
Finn as his attorney-in-fact to sign on his behalf, individually and in the
capacities stated below, and to file any and all amendments and post-effective
amendments to this Registration Statement, which amendment or amendments may
make such changes and additions as such attorney in fact may deem necessary or
appropriate.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert P. Pinkas Chairman of the Board, Chief August 23, 1996.
- ----------------------------- Executive Officer, Chief
Robert P. Pinkas Financial Officer and Director
(principal executive officer)
/s/ Michael J. Finn President (principal financial and August 23, 1996.
- ----------------------------- accounting officer) and Director
Michael J. Finn
</TABLE>
C-5
<PAGE> 1
ARTICLES OF INCORPORATION
OF
BRANTLEY CAPITAL CORPORATION
* * * * *
I, THE UNDERSIGNED, Billie J. Swoboda, being at least eighteen
years of age, do, under and by virtue of the General Laws of the State of
Maryland authorizing the formation of corporations, hereby forms a corporation.
FIRST: The name of the corporation is BRANTLEY CAPITAL
CORPORATION.
SECOND: The purposes for which the corporation is formed is to
engage in any or all lawful business for which corporations may be organized
under the Maryland General Corporation Law.
THIRD: The post office address of the principal office of the
corporation in the State of Maryland is c/o The Corporation Trust Incorporated,
32 South Street, Baltimore, Maryland 21202. The name of the resident agent of
the corporation in the State of Maryland is The Corporation Trust Incorporated,
a corporation of the State of Maryland, and the post office address of the
resident agent is 32 South Street, Baltimore, Maryland 21202.
FOURTH: The total number of shares of stock which the
corporation shall have authority to issue is One Thousand (1,000) shares, all of
one class, of the par value of One Cent ($.01) each and of the aggregate par
value to Ten Dollars ($10.00).
FIFTH: The number of directors of the corporation shall be one
(1), which may be changed in accordance with the by-laws of the corporation. The
name of the director who shall act until the first annual meeting or until his
successor is duly chosen and qualify is Robert P. Pinkas.
SIXTH: The following provisions are hereby adopted for the
purpose of defining, limiting and regulating the powers of the corporation and
of the directors and stockholders:
The board of directors of the corporation is hereby empowered
to authorize the issuance from time to time of shares of its stock of any class,
whether now or hereafter authorized, or securities convertible into shares of
its stock of any class or classes, whether now or hereafter authorized.
<PAGE> 2
No holder of shares of stock of any class shall be entitled as
a matter of right to subscribe for or purchase or receive any part of any new or
additional issue of shares of stock of any class or of securities convertible
into shares of stock of any class, whether now or hereafter authorized or
whether issued for money, for a consideration other than money or by way of
dividend.
Notwithstanding any provision of law requiring a greater
proportion than a majority of the votes of all classes or of any class of stock
entitled to be cast, to take or authorize any action, the corporation may take
or authorize such action upon the concurrence of a majority of the aggregate
number of the votes entitled to be cast thereon.
The corporation reserves the right from time to time to make
any amendment of its charter, now or hereafter authorized by law, including any
amendment which alters the contract rights, as expressly set forth in its
charter, of any outstanding stock.
SEVENTH: The duration of the corporation shall be perpetual.
IN WITNESS WHEREOF, the undersigned incorporator of BRANTLEY
CAPITAL CORPORATION who has executed the foregoing Articles of Incorporation
hereby acknowledges the same to be her act and further acknowledges that, to the
best of her knowledge, the matters and facts set forth therein are true in all
material respects under penalties of perjury.
Dated the 1st day of August, 1996.
_________________________________
Billie J. Swoboda
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