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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER: 814-00127
BRANTLEY CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MARYLAND 34-1838462
- ------------------------------------------------------ ------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
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20600 Chagrin Boulevard, Suite 1150, Cleveland, Ohio 44122
(Address of principal executive offices including zip code)
(216) 283-4800
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 21, 1997 was $34,707,161, based on the last sale
price of such stock as quoted by Nasdaq on such date (officers, directors and 5%
shareholders are considered affiliates for purposes of this calculation).
The number of shares of common stock outstanding as of March 21, 1997 was
3,810,535.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Brantley Capital Corporation's Proxy Statement dated March 27,
1997 (incorporated into Part III of this Form 10-K)
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TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business............................................................ 3
Item 2. Properties.......................................................... 7
Item 3. Legal Proceedings................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders................. 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................. 7
Item 6. Selected Financial Data............................................. 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 8
Item 8. Financial Statements and Supplementary Data......................... 9
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................................. 18
PART III
Item 10. Directors and Executive Officers of the Registrant.................. 18
Item 11. Executive Compensation.............................................. 18
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................................... 18
Item 13. Certain Relationships and Related Transactions...................... 18
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K................................................................. 18
Signatures....................................................................... 19
Exhibit Index.................................................................... 20
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PART I
ITEM 1. BUSINESS
Brantley Capital Corporation (the "Company") is a newly organized,
closed-end, non-diversified investment company incorporated on August 1, 1996
under the General Corporation Law of the State of Maryland, which has elected to
be treated as a "business development company" under the Investment Company Act
of 1940 (the "Investment Company Act"). The Company was formed to invest
primarily in the equity securities (for example, common stock, preferred stock,
convertible preferred stock, or options, warrants or rights to acquire stock)
and equity-linked debt securities (for example, convertible debt or indebtedness
accompanied by warrants, options or rights to acquire stock) of private
companies. The Company also intends to invest a portion of its assets in
post-venture small-cap public companies (as defined below). The Company's
investment objective is the realization of long-term capital appreciation in the
value of its investments. In addition, whenever feasible in light of market
conditions and the cash flow characteristics of its portfolio companies, the
Company will seek to provide an element of current income primarily from
interest, dividends and fees paid by its portfolio companies.
With respect to its investments in private companies, the Company's
principal focus will be on industries that it considers to be good candidates
for successful consolidation. The Company also will favor investments in private
companies that it believes can achieve the necessary size, profitability,
management depth and sophistication to become public companies or become
attractive merger or acquisition candidates. The Company seeks to enable its
stockholders to participate in investments not typically available to the public
due to the private nature of a substantial majority of the Company's portfolio
companies, the size of the financial commitment often required in order to
participate in such investments, and/or the experience, skill and time
commitment required to identify and take advantage of these investment
opportunities.
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 corporate strategies and advising
such companies regarding important decisions affecting their businesses,
including potential acquisitions, recruiting key managers, and securing equity
and debt financing.
With respect to its investments in post-venture small-cap public companies,
the Company's primary focus will be on companies that its investment adviser
believes to have significant potential for growth in sales and earnings. A
"post-venture" company is a company that has received venture capital or private
equity financing either (a) during the early stages of the company's business or
the early stages of the development of a new product or service, or (b) as part
of a restructuring or recapitalization of the company. The Company intends to
limit its post-venture investments to companies which, within the prior ten (10)
years, have received an investment of venture or private equity capital, have
sold or distributed securities to venture or private equity capital investors,
or have completed an initial public offering of equity securities.
The Company anticipates that its position as an investor in both private
companies and post-venture small-cap public companies will benefit its ultimate
returns on its investments. This benefit will be derived from historic and
future knowledge that the Company and its managers have and will gain regarding
companies, technologies, management, markets and pricing in both public and
private markets. For example, knowledge of emerging technologies and companies
in the private markets can be beneficial in selecting small-cap public stocks.
Conversely, knowledge of public companies and market performance can be
beneficial in pricing and structuring private investments.
On December 3, 1997, the Company completed its $38 million initial public
offering (including a $1,500,000 over allotment option exercised by the
underwriters on January 3, 1997). Through December 31, 1996 and continuing
through the filing date of this report, the Company made short-term temporary
investments of the type more fully described under the heading "Temporary
Investments," but did not invest in any private or post-venture small cap public
companies.
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INVESTMENT ADVISER
Brantley Capital Management, L.L.C., 20600 Chagrin Boulevard, Suite 1150,
Cleveland, Ohio 44122, serves as the investment adviser (the "Investment
Adviser") to the Company pursuant to an agreement with an initial term of two
(2) years, renewable from year to year thereafter if it is approved annually by
the Company's Board of Directors or by vote of a majority of the Company's
outstanding shares of capital stock (including, in either instance, approval by
Company directors who are not interested persons). The Investment Adviser is
responsible, on a day-to-day basis, for the selection and supervision of
portfolio investments and for management oversight of the Company's records and
financial reporting requirements. The Company pays the Investment Adviser an
annual management fee of 2.85% of the Company's net assets, determined at the
end of each calendar quarter, and payable quarterly in arrears throughout the
term of the investment advisory agreement. The Investment Adviser is responsible
for the salaries and expenses of its own personnel, office space costs, and
local telephone and administrative support costs.
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
eighteen (18) months to three (3) 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.
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.
OPERATIONS
The Investment Adviser locates potential investment opportunities primarily
by making use of an extensive network of investment bankers, commercial bankers,
accountants and other finance professionals; venture capitalists and other
investment professionals; attorneys; business executives; and entrepreneurs.
The investment process includes the identification, evaluation,
negotiation, documentation and closing of the investment. Robert P. Pinkas,
Chairman, Chief Executive Officer, Chief Financial Officer, Treasurer and a
manager, and Michael J. Finn, President and a manager, in each case, of the
Investment Adviser, have extensive experience in all phases of the investment
process. The evaluation of a potential investment includes due diligence, which
includes review of historical and prospective financial information, and which,
particularly in the case of a privately-owned company, usually involves on-site
visits; interviews with management, employees, customers and vendors of the
potential portfolio company, and background checks and research relating to its
management, markets, products and services.
Upon the completion of due diligence and a decision to proceed with an
investment in a private company, the Investment Adviser will create an
investment memorandum containing information pertinent to the investment for
presentation to the Company's Board of Directors, which must approve the
investment. Additional due diligence with respect to any investment by the
Company may be conducted by the Company's attorneys and independent accountants
prior to the closing of the investment.
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SELECTION OF INVESTMENTS
The Company anticipates that, as a general rule, most of its investments
will be in small-to medium-sized companies with total assets or annual sales
under $500,000,000. Many of these companies may have very limited operating
histories. The Company's main criterion for the selection of investments in
portfolio companies will be the potential for substantial growth in sales and
earnings. The Company seeks to identify companies which management believes have
significant opportunities in the markets they serve or that have devised
innovative products, services or ways of doing business that afford them a
distinct competitive advantage. Such companies might achieve growth either
internally or by acquisition. In addition, the Company intends to invest in
companies seeking to consolidate fragmented industries. Often, such
consolidations can improve performance by bringing experienced management,
economies of scale and greater capital resources to bear on businesses that
might have lacked such management, economies and resources in the past.
In evaluating potential portfolio companies, the Company will pay
particular attention to the following characteristics:
MANAGEMENT. The Company will favor investments in companies whose
management teams consist of talented individuals of high integrity with
significant experience. The Company intends to pay particular attention to the
depth of the management team and the extent to which key managers have an
ownership interest in the company.
OPPORTUNITY FOR SIGNIFICANT INFLUENCE. The Company will favor investments
in companies in which it has the opportunity to become a partner in the building
of the companies, rather than being merely a financial participant. In addition,
the Company will favor investments in which its representatives will play a role
in setting corporate strategies for the portfolio companies, and will advise
such companies regarding important decisions affecting their businesses,
including acquisitions for such companies, recruiting key managers, and securing
equity and debt financing.
MARKET DYNAMICS. The Company will favor investments in companies that are
addressing a large, unfulfilled market demand with long-term high-growth
prospects and that can reasonably expect to achieve and maintain a significant
market share through proprietary products and services. The Company will also
favor investments in companies that deliver products and services with
significant performance and cost advantages and for which there exist
significant barriers to effective competition by others. In addition, with
respect to its investments in private companies, the Company will favor
industries that it considers to be good candidates for successful consolidation.
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 (or its managers) of the
Company's equity interest.
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, and these companies often have
stronger management teams, better financial controls and significant competitive
advantages.
POTENTIAL CO-INVESTMENTS AND FOLLOW-ON INVESTMENTS
The Company anticipates "co-investing" with existing affiliates 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. At the present
time, affiliates of the Company and the
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Investment Adviser include certain venture capital investment partnerships in
which officers and directors of the Company and officers of the Investment
Adviser serve as general partners of the investment partnerships' general
partner, namely: Brantley Venture Partners I, L.P. ("BVP I"), Brantley Venture
Partners II, L.P. ("BVP II") and Brantley Venture Partners III, L.P. ("BVP
III"). On March 6, 1997, the Company submitted an application to the Securities
and Exchange Commission (the "Commission") to seek an exemptive order, subject
to certain terms and conditions, to relieve the Company from certain provisions
of the Investment Company Act to permit such co-investments. There can be no
assurances given as to when or if the requested exemptive relief will be granted
by the Commission. In addition, the Company and the Investment Adviser have had
discussions with the Commission regarding 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. The
Company anticipates that it will file an application for exemptive relief with
respect to potential "follow-on" investment opportunities at some future time,
and that such application will include conditions, among others, requiring that
before such an investment would be made: (i) the investment be of a type that
has preferences and terms that are the same or better than those of the
investment owned by BVP I, BVP II or BVP III, (ii) a majority of the Company's
directors who have no financial interest in the investment and a majority of the
Company's disinterested directors approve the investment, and (iii) the Company
and Company affiliates purchase in the aggregate less than a majority of the
investment offered, such that unaffiliated institutional investors are likely to
be establishing the pricing of such investment opportunities.
ELIGIBLE PORTFOLIO COMPANIES
The Company, as a "business development company", may not acquire any
assets 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 defined in Section 55(a) of the
Investment Company Act. The principal categories of Eligible Assets relevant to
the business of the Company are the following:
(1) Securities purchased in transactions not involving any public offering
from the issuer of such securities, which issuer is an eligible
portfolio company. An "eligible portfolio company" is defined in the
Investment Company Act as any issuer which:
(a) is organized under the laws of, and has its principal place of
business in, the United States;
(b) is not an investment company other than a small business investment
company wholly-owned by the business development company; and
(c) (i) does not have any class of securities with respect to which a
broker or dealer may extend margin credit;
(ii) is actively controlled by a business development company and
has an affiliate of a business development company on its
board of trustees or directors; or
(iii) meets other such criteria as may be established by the
Commission.
(2) Securities of any eligible portfolio company which is controlled by the
business development company.
(3) Securities received in exchange for or distributed on or with respect
to securities described in (1) or (2) above, or pursuant to the
exercise of options, warrants or rights relating to such securities.
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, the business development company must have been organized (and
have its principal place of business) in the United States for the purpose of
making investments in the types of securities described in (1) or (2) above.
Moreover, in order for securities of portfolio companies to constitute Eligible
Assets for the
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purpose of the 70% test, the Company 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.
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
competes with such entities primarily on the basis of the quality of its
services, the quality of 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.
EMPLOYEES
The Company has no employees. Pursuant to the terms of the Investment
Advisory Agreement, the Adviser supplies all of the personnel necessary to
operate the Company's business.
ITEM 2. PROPERTIES
The Company does not own or lease any properties or other intangible
assets.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings, and
no such material proceedings are known by the Company to be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE
The Company's common stock is traded on the NASDAQ SmallCap Market System
("NASDAQSCM") under the symbol "BBDC." The following table sets forth, for the
period indicated, high and low bid prices per share:
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HIGH LOW
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December 3, 1996 -- December 31, 1996..................... $10.25 $10.00
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At March 21, 1997, there were approximately 52 shareholders of record of
the Company's common stock with a market price of $9.25 per share.
During the period ended December 31, 1996, the Company neither declared nor
paid any dividends.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable given the Company's limited operating history during 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the financial condition and results of operation
of the Company should be read in conjunction with the Financial Statements, the
Notes thereto and the other financial information included elsewhere in this
report. The Company began operations upon the completion of an initial public
offering on December 3, 1996. Therefore, this report reflects a limited initial
operating period of twenty-two (22) business days for the fiscal period ended
December 31, 1996.
RESULTS OF OPERATIONS
The Company's principal investment objective is the realization of
long-term capital appreciation from investing primarily in the equity and
equity-linked debt securities of private companies. In addition, the Company
intends to invest a portion of its assets in post-venture small-cap public
companies. Due to the Company's limited operating period, the Company's
financial performance at December 31, 1996 is primarily composed of "Net Loss,"
which is the difference between the Company's income from interest on short-term
investments and its total operating expenses.
During the period ended December 31, 1996, interest on short-term
investments was $139,529. The significant components of total operating expenses
were fees to the Company's Investment Adviser, professional fees, and the
amortization of organizational costs of the Company.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company completed an initial public offering of common stock of $36.5
million on December 3, 1996 and a related over-allotment option of $1.5 million
on January 3, 1997. The Company believes that the net proceeds of this offering
will be adequate to fund the growth of the Company's investment portfolio
through 1997.
At December 31, 1996, the Company had $36,329,220 in cash and cash
equivalents. The Company invested the proceeds of the initial public offering on
a short-term basis pending completion of investments in equity and equity-linked
debt securities of private companies and post-venture small-cap public
companies. At December 31, 1996 the $36,329,220 was primarily invested in a
United States Treasury Security.
At December 31, 1996, the Company had Stockholders' equity of $36,142,304,
resulting in a net asset value per share of $9.87.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BRANTLEY CAPITAL CORPORATION
BALANCE SHEETS
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DECEMBER 31, OCTOBER 29,
1996 1996
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ASSETS
Cash and cash equivalents (Note 2).............................. $ 36,329,220 $ 50
Prepaid expenses................................................ 128,566
Unamortized organization costs (Note 2)......................... 162,250 180,000
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TOTAL ASSETS............................................... 36,620,036 180,050
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LIABILITIES AND STOCKHOLDERS' EQUITY
Advisory fee payable (Note 3)................................... $ 81,898
Organization costs payable...................................... 78,912 74,700
Offering costs payable (Note 7)................................. 177,215
Payable to related party (Note 5)............................... 88,436
Other liabilities............................................... 51,271
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TOTAL LIABILITIES.......................................... 477,732 74,700
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STOCKHOLDERS' EQUITY (NOTE 7):
Common Stock, $0.01 par value; 25,000,000 shares authorized
and 3,660,535 and 10,535 shares issued and outstanding at
December 31, 1996 and October 29, 1996, respectively..... $ 36,605 $ 105
Additional Paid in Capital................................. 36,105,699 105,245
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TOTAL STOCKHOLDERS' EQUITY................................. 36,142,304 105,350
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $ 36,620,036 $ 180,050
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See accompanying notes to the financial statements.
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BRANTLEY CAPITAL CORPORATION
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM OCTOBER 30, 1996 THROUGH DECEMBER 31, 1996
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INVESTMENT INCOME:
Interest income................................................................. $ 139,529
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OPERATING EXPENSES:
Advisory Fees................................................................... 81,898
Administration Fees............................................................. 6,250
Custody and Accounting Fees..................................................... 3,200
Professional Fees............................................................... 25,000
Directors' Fees................................................................. 8,000
Amortization of organization costs.............................................. 2,750
Other........................................................................... 19,653
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TOTAL EXPENSES.................................................................. 146,751
NET LOSS.......................................................................... $ (7,222)
=========
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS.............................. $ (7,222)
=========
LOSS PER SHARE.................................................................... $ (0.002)
=========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING..................................... 3,660,535
=========
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See accompanying notes to the financial statements.
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BRANTLEY CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM OCTOBER 30, 1996 THROUGH DECEMBER 31, 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS:....................... $ (7,222)
Adjustments to reconcile net decrease in net assets resulting from
operations to net cash provided by operations:
Purchases of investment securities..................................... $(653,897,000)
Maturities of investment securities.................................... 653,897,000
Changes in assets and liabilities:
Prepaid expenses.................................................... (128,566)
Unamortized organization costs...................................... 17,750
Advisory fee payable................................................ 81,898
Organization costs payable.......................................... 4,212
Offering costs payable.............................................. 177,215
Payable to related party............................................ 88,436
Other liabilities................................................... 51,271
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NET CASH PROVIDED BY OPERATING ACTIVITIES........................... 284,994
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering.................................. 36,044,176
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NET CASH PROVIDED BY FINANCING ACTIVITIES........................... 36,044,176
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NET INCREASE IN CASH AND CASH EQUIVALENTS DURING THE PERIOD................... $ 36,329,170
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................ 50
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CASH AND CASH EQUIVALENTS, END OF THE PERIOD.................................. $ 36,329,220
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The Company paid no interest or federal income tax during the period.
See accompanying notes to the financial statements
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BRANTLEY CAPITAL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM OCTOBER 30, 1996 THROUGH DECEMBER 31, 1996
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ADDITIONAL TOTAL
COMMON PAID IN STOCKHOLDERS'
STOCK CAPITAL EQUITY
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BALANCE AT OCTOBER 30, 1996............................ $ 105 $ 105,245 $ 105,350
Net loss............................................... (7,222) (7,222)
Issuance of 3,650,000 shares through initial public
offering............................................. 36,500 36,007,676 36,044,176
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BALANCE AT DECEMBER 31, 1996........................... $36,605 $36,105,699 $ 36,142,304
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See accompanying notes to the financial statements
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BRANTLEY CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Brantley Capital Corporation (the "Company"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended (the "1940 Act")
as a closed-end, non-diversified investment company which has elected to be
treated as a business development company. The Company was organized on August
1, 1996 and commenced operations on December 3, 1996. The Company's investment
objective is the realization of long-term capital appreciation in the value of
its investments. To achieve this objective, the Company intends to invest
primarily in privately placed equities and debt and, to a lesser extent, in post
venture small-cap public companies.
The Company intends to invest in securities classified as "restricted
securities" under the Securities Act of 1933. The value of restricted stock
investments for which no public market exists cannot be precisely determined.
These securities will usually be subject to restrictions on resale or otherwise
have no established trading market. The lack of liquidity of these securities
may adversely affect the ability of the Company to dispose of them in a timely
manner and at a fair price when the Company deems it necessary or advantageous.
Privately placed securities typically depend significantly on the
management talents and efforts of one person or a small group of persons. The
loss of the services of one or more of these persons could have a material
adverse effect on the portfolio company. In addition, due to their size and
sometimes limited product diversity, these companies may be more vulnerable to
economic downturns and often require additional capital to expand or compete.
Post venture small-cap public companies may also display more sensitivity
to changes in company, industry and market conditions than more established
public companies. Because small-cap public companies often have fewer
outstanding shares than larger companies, it may be more difficult for the
Company to buy or sell significant amounts of shares without an unfavorable
impact on the prevailing prices.
The Company intends to operate as a non-diversified investment company
within the meaning of the 1940 Act and therefore, the Company's investments are
likely not to be substantially diversified.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies in conformity
with generally accepted accounting principles followed by the Company in
preparation of its financial statements.
A. Security Valuation
Privately placed securities are carried at fair value as determined in good
faith by or under the direction of the Board of Directors. Generally, the fair
value of each security will initially be based primarily upon its original cost
to the Company. Cost will be the primary factor used to determine fair value on
an ongoing basis until significant developments or other factors affecting the
investment (such as results of the portfolio company's operations, changes in
the general market conditions, subsequent financings or the availability of
market quotations) provide a basis for value other than cost valuation.
Portfolio investments listed on an exchange or traded on the Nasdaq
National Market System will be valued at the closing price listed on their
respective exchange or system on the date of valuation. Securities traded in the
over-the-counter market will be valued on the average of the closing bid and
asked prices on the day of valuation.
Debt securities with 60 days or less remaining to maturity will be valued
at amortized cost.
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
B. Repurchase Agreements
The Company may invest in repurchase agreements with institutions which the
Company's investment adviser has determined are creditworthy. Each repurchase
agreement is recorded at cost. The Company requires that the securities
purchased in a repurchase agreement be transferred to the Company's custodian in
a manner sufficient to enable the Company to obtain those securities in the
event of counter-party default. The seller is required to maintain the value of
the securities held at not less than the repurchase price, including interest.
C. Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with insignificant
interest rate risk and original maturities of three months or less at
acquisition date. At December 31, 1996 cash and cash equivalents consisted of
the following:
<TABLE>
<S> <C>
Cash............................................................... $ 54
United States Treasury Bill 4.79%, 1/02/97......................... 36,329,166
-----------
$36,329,220
===========
</TABLE>
D. Security Transactions and Related Income
Security transactions are accounted for on a trade date basis. Net realized
gains or losses on sales of securities are determined on the specific
identification method. Interest income and expenses are recognized on the
accrual basis. Dividends are recorded on the ex-dividend date.
E. Dividends and Distributions to Stockholders
The Company intends to make quarterly distributions to its stockholders of
substantially all of its investment company taxable income. The Company may
choose to distribute net realized long-term capital gains, or to retain such
gains to supplement the Company's equity capital and support growth in its
portfolio. Income distributions and capital gain distributions are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles.
F. Federal Income Taxes
The Company intends to continue to qualify as a regulated investment
company by complying with the provisions available to certain investment
companies as defined in applicable sections of the Internal Revenue Code, and to
make distributions of net investment income and net realized capital gains
sufficient to relieve it from all or substantially all federal income taxes.
G. Organization Costs
Costs incurred by the Company in connection with its organization have been
deferred and are being amortized on a straight line basis over their estimated
useful life.
3. INVESTMENT ADVISORY AGREEMENT
The Company has entered into an investment advisory agreement (the
"Advisory Agreement") with Brantley Capital Management, L.L.C. (the "Adviser")
under which the Adviser is entitled to a fee, computed daily and paid monthly,
at the annual rate of 2.85% of the average daily net assets of the Company.
Certain officers of the Company are also officers of the Adviser. No officer of
the Adviser receives any compensation from the Company for serving as an officer
of the Company.
4. INVESTMENTS
At December 31, 1996, the cost of investments for federal income tax
purposes was the same for financial reporting purposes.
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. TRANSACTIONS WITH RELATED PARTIES
The Company is seeking exemptive relief from certain provisions of the 1940
Act to permit the Company to invest in an offering which affiliates of the
Adviser already hold an investment in or intend to invest in. Assuming the
receipt of a favorable exemptive order from the SEC, the Company anticipates
that, subject to certain terms and conditions, current and future affiliates of
the Adviser may frequently invest in the same portfolio companies. There can be
no assurance that the Company's application for exemptive relief will be
granted.
Certain offering and organization costs were paid by officers of the
Company and the Adviser. As of December 31, 1996, the Company owed the officers
of the Company and the Adviser $88,436 in connection with these expenditures.
6. USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions, including the valuation of privately held securities, that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
7. STOCKHOLDERS' EQUITY
The Company is authorized to issue 25,000,000 shares of Common Stock with a
par value $0.01 per share. Shares totalling 3,660,535 were issued through the
organization and initial public offering of the Company at a per share price of
$10.00 per share. The proceeds of the offering were reduced by offering costs of
$455,824 before becoming available to the Company for investment.
Under the Company's Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), all cash dividends and cash distributions to stockholders are
automatically reinvested unless the stockholder elects to receive their
distributions in cash. If the market value per share of the Common Stock on the
record date equals or exceeds the net asset value per share of Common Stock on
that date, the Company will issue new shares at the net asset value.
If the net asset value exceeds the market price, shares will be purchased
on the open market or in private transactions as soon as is practicable after
such date. If before the open market purchases have been completed, the market
price exceeds the net asset value, the Company will issue new shares at net
asset value to fulfill the purchase requirements.
On January 15, 1997, the underwriters of the initial offering of the
Company's shares, exercised an option to purchase an additional 150,000 shares
of Common Stock. The additional shares were issued at $10 per share.
8. STOCK OPTION PLANS
Concurrent with the offering, the Company adopted the 1996 Stock Option
Plan (the "Plan"), which authorizes the issuance of options to purchase up to
1,175,000 shares of Common Stock to officers and employees of the Company. Upon
closing of the offering, options to purchase 350,000 shares of Common Stock of
the Company were granted to the Company's executive officers. These options will
become exercisable as to one-third of the Option Shares on the first anniversary
of the closing of the initial offering of the Company's Common Stock, as to an
additional one-third of the Option Shares on the second anniversary of the
closing of the offering and as to the remaining one-third on the third
anniversary of the closing of the offering. Options granted under the Plan will
be exercisable at a price not less than the greater of (i) the current market
value on the date of option grant and (ii) the current net asset value of the
shares of Common
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Stock. No option may be exercised more than 10 years after the date on which it
is granted. Market value and NAV on the date of grant was $10.00.
In addition, the Company has adopted a stock option plan relating to 75,000
shares of Common Stock and providing for option grants solely to the
disinterested directors of the Company (the "Director's Plan"), subject to
receipt of an order of the Securities and Exchange Commission approving such a
plan as fair and reasonable and not overreaching of the Company or its
stockholders.
In order to facilitate the purchase of shares under the Plan or Director's
Plan, the Company may make arms-length loans to each plan's participants, under
the terms required by Section 57 (j)(2) of the Investment Company Act of 1940.
No loans were outstanding as of December 31, 1996.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock Based Compensation. The Statement encourages
companies to recognize expense for stock based compensation awards based on
their fair value on the date of grant. Under the Statement, companies may
continue following the existing accounting rules, provided that pro forma
disclosures are made of what net income and earnings per share would have been
had the new fair value method been used. The Company has elected to continue the
existing accounting method and to not adopt the fair value method. Management
has assessed the impact of this pro forma disclosure requirement and determined
that it is not material to the operations of the Company in 1996.
9. FINANCIAL HIGHLIGHTS
For the period from December 3, 1996* to December 31, 1996:
<TABLE>
<S> <C>
Net Asset Value, Beginning of the Period............................... $ 9.87(C)
Net Loss............................................................... (0.00)
Net Asset Value, End of the Period..................................... $ 9.87
=====
Market Value, End of the Period........................................ $10.00
-----
Total Return, At Market Value**........................................ 0.00%
Total Return, At NAV**................................................. 0.00%
</TABLE>
- ---------------
* Commencement of operations
** Not annualized
(C) Net of offering costs of $0.13 per share
10. QUARTERLY DATA
Financial results by quarter for the period from December 3, 1996
(commencement of operations) through December 31, 1996 are summarized below:
<TABLE>
<S> <C>
Total investment income.............................................. $139,529
Net investment loss.................................................. (7,222)
Net decrease in net assets from operations........................... (7,222)
Per share............................................................ $ 0.00
</TABLE>
16
<PAGE> 17
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Brantley Capital Corporation
We have audited the accompanying balance sheets of Brantley Capital
Corporation as of December 31, 1996 and October 29, 1996, the related statements
of operations, stockholders' equity and cash flows for the period October 30,
1996 to December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brantley Capital Corporation
as of December 31, 1996 and October 29, 1996, and the results of its operations
and its cash flows for the period October 30, 1996 to December 31, 1996 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
March 18, 1997
17
<PAGE> 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "ELECTION OF DIRECTORS" on
pages 2-5 in the Company's definitive Proxy Statement dated March 27, 1997, for
its Annual Meeting of Stockholders to be held April 24, 1997, filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934, (the "1997 Proxy
Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "EXECUTIVE COMPENSATION" on
pages 6-9 of the 1997 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "STOCK OWNERSHIP OF OFFICERS
AND DIRECTORS" on page 5 of the 1997 Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Investment Adviser, pursuant to the terms of the Investment Advisory
Agreement, is responsible, on a day-to-day basis, for the selection and
supervision of portfolio investments. Transactions between the Company and the
Investment Adviser, including operational responsibilities, duties and
compensation, are governed by the Investment Advisory Agreement. Throughout the
term of the Investment Advisory Agreement, the Company will pay to the
Investment Adviser an annual management fee of 2.85% of the Company's net
assets, determined at the end of each calendar quarter and payable in arrears.
For the year ended December 31, 1996, the Investment Adviser was owed an
investment advisory fee in the aggregate amount of $81,898. Robert P. Pinkas,
Chairman of the Board, Chief Executive Officer, Treasurer and a director and
Michael J. Finn, President and a director of the Company are officers and
managers of the Investment Adviser, and together own 100% of the Investment
Adviser.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<C> <S>
(a) The following documents are filed as part of this report:
1. Financial Statements -- The following financial statements of the Company are
contained in Item 8 of this Form 10-K:
Balance Sheets -- December 31, 1996 and October 29, 1996
Statement of Operations -- For the Period from October 30, 1996 through December 31,
1996
Statement of Cash Flows -- For the Period from October 30, 1996 through December 31,
1996
Statement of Stockholders' Equity -- For the Period from October 30, 1996 through
December 31, 1996
Notes to the Financial Statements
Report of Independent Auditors
2. Financial Statements Schedules were omitted as they are not required or not
applicable, or the required information is included in the Financial Statements.
3. Exhibits -- Reference is made to the Exhibit Index which is found on page 20 of this
Form 10-K.
(b) No reports on Form 8-K were filed by the Company during the quarter ended December 31,
1996.
</TABLE>
18
<PAGE> 19
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT ON FORM 10-K TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
BRANTLEY CAPITAL CORPORATION
By: /s/ ROBERT P. PINKAS,
------------------------------------
Robert P. Pinkas,
Chairman of the Board,
Chief Executive Officer
and Treasurer
Date: March 27, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT ON FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE COMPANY IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------- ------------------
<C> <S> <C>
/s/ ROBERT P. PINKAS Chairman of the Board, Chief March 27, 1997
- ------------------------------------- Executive Officer, Treasurer and
Robert P. Pinkas Director (principal executive
officer and principal accounting
officer)
/s/ TAB A. KEPLINGER Vice President and Chief Financial March 27, 1997
- ------------------------------------- Officer (principal financial
Tab A. Keplinger officer)
/s/ MICHAEL J. FINN President and Director March 27, 1997
- -------------------------------------
Michael J. Finn
/s/ L. PATRICK BALES Director March 27, 1997
- -------------------------------------
L. Patrick Bales
/s/ BENJAMIN F. BRYAN Director March 27, 1997
- -------------------------------------
Benjamin F. Bryan
/s/ RICHARD MOODIE Director March 27, 1997
- -------------------------------------
Richard Moodie
</TABLE>
19
<PAGE> 20
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated
herein by reference to a prior filing, in accordance with Rule 12b-32 under the
Securities Exchange Act of 1934. (Asterisk denotes exhibits filed with this
report.)
EXHIBIT 3 Articles of Incorporation and By-laws
(1) Articles of Incorporation and Articles of Amendment and Restatement
of the Charter of the Company (Exhibit 2.a.1 to the Company's
Registration Statement on Form N-2 (Reg. No. 333-10785) filed on
August 23, 1996 (the "Registration Statement") and Exhibit 2.a.2 to
Amendment No. 2 to the Registration Statement filed on November 22,
1996, which exhibits are incorporated herein by reference)
(2) By-laws of the Company (Exhibit 2.b.2 to Amendment No. 2 to the
Registration Statement filed on November 22, 1996, which exhibit is
incorporated herein by reference)
EXHIBIT 4 Form of Share Certificate (Exhibit 2.d to Amendment No. 1 to the
Registration Statement filed on October 30, 1996, which exhibit is
incorporated herein by reference).
EXHIBIT 10 Material Contracts
(1) Dividend Reinvestment and Cash Purchase Plan (Exhibit 2.e to
Amendment No. 3 to the Registration Statement filed on November 26,
1996, which exhibit is incorporated herein by reference)
(2) Form of Investment Advisory Agreement between the Company and the
Investment Adviser (Exhibit 2.g to Amendment No. 3 to the
Registration Statement filed on November 26, 1996, which exhibit is
incorporated herein by reference)
(3) Stock Option Plan and Form of Option Grants (Exhibit 2.i.1 to
Amendment No. 2 to the Registration Statement filed on November 22,
1996, which exhibit is incorporated herein by reference)
(4) Disinterested Director Option Plan and Form of Option Grants (Exhibit
2.i.2 to Amendment No. 2 to the Registration Statement filed on
November 22, 1996, which Exhibit is incorporated herein by reference)
(5) Form of Custodian Contract (Exhibit 2.j to Amendment No. 2 to the
Registration Statement filed on November 22, 1996, which exhibit is
incorporated herein by reference)
(6) Form of Registrar, Transfer Agency and Service Agreement (Exhibit
2.k.1 to Amendment No. 2 to the Registration Statement filed on
November 22, 1996, which exhibit is incorporated herein by reference)
(7) Form of Administration Agreement (Exhibit 2.k.2 to Amendment No. 2 to
the Registration Statement filed on November 22, 1996, which exhibit
is incorporated herein by reference)
(8) Form of Indemnification Agreement for Directors and Officers (Exhibit
2.s to Amendment No. 2 to the Registration Statement filed on
November 22, 1996, which exhibit is incorporated herein by reference)
EXHIBIT 23 Consents of Experts and Counsel
*(1) Consent of Ernst & Young, L.L.P.
EXHIBIT 27 Financial Data Schedule
20
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 34-1838462) pertaining to the 1996 Stock Option Plan for Officers
and Employees of Brantley Capital Corporation of our report dated March 18,
1997, with respect to the consolidated financial statements of Brantley Capital
Corporation included in Form 10-K for the period ended December 31, 1996.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> OCT-30-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 36,620,036
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 36,620,036
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 477,732
<TOTAL-LIABILITIES> 477,732
<SENIOR-EQUITY> 36,605
<PAID-IN-CAPITAL-COMMON> 36,105,699
<SHARES-COMMON-STOCK> 3,660,535
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 36,620,036
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 139,529
<OTHER-INCOME> 0
<EXPENSES-NET> 146,751
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> (7,222)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,650,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 36,439,986
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 81,898
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 146,751
<AVERAGE-NET-ASSETS> 18,400,043
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.87
<EXPENSE-RATIO> .008
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
THE COMPANY WAS ORGANIZED ON AUGUST 1, 1996 AND COMMENCED OPERATIONS ON DECEMBER
3, 1996.
</FN>
</TABLE>
