<PAGE> 1
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, 1997 Commission File Number: 814-00127
BRANTLEY CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 34-1838462
----------- -------------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
20600 Chagrin Boulevard, Suite 1150, Cleveland, Ohio 44126
------------------------------------------------------------------------------
(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 [ ]
<PAGE> 2
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 20, 1998 was $38,573,255, 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 20, 1998 was
3,810,535.
Documents Incorporated by Reference
Portions of Brantley Capital Corporation's Proxy Statement for the 1998 Annual
Meeting. (incorporated into Part III of this Form 10-K)
<PAGE> 3
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
PART I
<S> <C>
Item 1. Business.........................................................................1
Item 2. Properties.......................................................................6
Item 3. Legal Proceedings................................................................6
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..........................................................8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................................8
Item 8. Financial Statements and Supplementary Data.....................................12
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.............................................24
PART III
Item 10. Directors and Executive Officers of the Registrant..............................24
Item 11. Executive Compensation..........................................................24
Item 12. Security Ownership of Certain Beneficial
Owners and Management...........................................................24
Item 13. Certain Relationships and Related Transactions..................................24
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.........................................................25
Signatures.......................................................................................................26
Exhibit Index....................................................................................................27
</TABLE>
-i-
<PAGE> 4
PART I
ITEM 1. BUSINESS
Brantley Capital Corporation (the "Company") is a closed-end,
non-diversified investment company incorporated on August 1, 1996 under the
General Corporation Law of the State of Maryland, that has elected to be treated
as a "business development company" under the Act of 1940 (the "Act"). The
Company invests 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 invests 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 seeks to provide an element of current income primarily from interest,
dividends and fees paid by its portfolio companies. Finally, the Company seeks
to preserve the long-term value for its shareholders through its investing and
operating policies.
With respect to its investments in private companies, the Company's
principal focus is on industries that it considers to be good candidates for
successful consolidation. The Company also favors investments in private
companies that it believes can achieve the necessary size, profitability,
management depth and sophistication to become public companies or become
candidates for acquisition by merger or otherwise. 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 is a partner in the growth of its private portfolio
companies, rather than merely a financial participant. The Company offers
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 is on companies that the Investment
Advisor (as defined below) 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 generally limits 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
<PAGE> 5
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.
INVESTMENT ADVISOR
Brantley Capital Management, Ltd., 20600 Chagrin Boulevard, Suite 1150,
Cleveland, Ohio 44122, serves as the investment advisor (the "Investment
Advisor") to the Company pursuant to an agreement (the "Investment Advisory
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 Advisory Agreement is subject to renewal on
November 26, 1998. The Investment Advisor 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 Advisor 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 between the Investment Advisor and the Company. The Investment Advisor
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 is currently executing an investment strategy in which
investments in portfolio companies are, and will continue to 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 invests its cash in cash items, government securities or high quality
debt securities maturing in one year or less from the time of investment.
-2-
<PAGE> 6
OPERATIONS
The Investment Advisor 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, and a manager, and Michael J. Finn, President
and a manager, in each case, of the Investment Advisor, 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 Advisor creates 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.
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 has remained consistent since the Company's
formation. The criterion include portfolio companies that have 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 invests 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 pays
particular attention to the following characteristics:
MANAGEMENT. The Company seeks investments in companies whose management
teams consist of talented individuals of high integrity with significant
experience. The Company intends to
-3-
<PAGE> 7
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 favors 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 wants 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 prefers 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 also favors
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 be attracted to 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 considers 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 targets 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.
-4-
<PAGE> 8
POTENTIAL CO-INVESTMENTS AND FOLLOW-ON INVESTMENTS
The Company has, and anticipates, "co-investing" with existing
affiliates of the Company and the Investment Advisor, 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 Investment
Advisor include certain venture capital investment partnerships in which certain
officers and directors of the Company and officers of the Investment Advisor
serve as general partners of such investment partnerships' general partner.
These investment partnerships include Brantley Venture Partners I, L.P.,
Brantley Venture Partners II, L.P. and Brantley Venture Partners III, L.P. On
November 18, 1997, the Company received an exemptive order from the Securities
and Exchange Commission (the "Commission") that, subject to certain terms and
conditions, relieves the Company from certain provisions of the Act to permit
certain joint transactions with the investment partnerships.
ELIGIBLE PORTFOLIO COMPANIES
The Company, as a "business development company" under the Act, 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 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 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.
-5-
<PAGE> 9
(3) Securities received in exchange for or distributed on or with
respect to securities described in (1) or (2) above, or pursuant to the exercise
of options, warrants or rights relating to such securities.
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, the business development company must have been organized
(and have its principal place of business) in the United States for the purpose
of making investments in the types of securities described in (1) or (2) above.
Moreover, in order for securities of portfolio companies to constitute Eligible
Assets for the purpose of the 70% test described above, 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 portfolio investments
that are not eligible assets. This portion of the Company's portfolio consists
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 previously managed by
affiliates of the Investment Advisor, the Company's investment analysis and
decision-making processes, and on the investment terms the Company offers in
respect of 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 Investment Advisor 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
-6-
<PAGE> 10
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, 1997.
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:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
January 1, 1997 - March 31, 1997 $ 10.00 $ 8.89
April 1, 1997 - June 30,1997 $ 10.00 $ 8.50
July 1, 1997 - September 30, 1997 $ 9.75 $ 8.50
October 1, 1997 - December 31, 1997 $ 9.63 $ 8.63
December 3, 1996 - December 31, 1996 $ 10.25 $ 10.00
</TABLE>
At March 20, 1998, there were approximately 73 shareholders of record
of the Company's common stock with a market price of 10.63 per share. There are
10,535 unregistered shares of common stock issued by the company pursuant to a
sale of such shares to the Company's Chief Executive and Chief Operating
Officers at the Company's formation. The sale was subject to the terms,
conditions and price of the initial public offering.
During the period ended December 31, 1996, the Company neither declared
nor paid any dividends. During the year ended December 31, 1997, the Company
declared the following dividends.
<TABLE>
<CAPTION>
<S> <C>
April 15, 1997 $.01
July 15, 1997 $.01
October 16, 1997 $.01
December 18, 1997 $.09
</TABLE>
-7-
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under ITEM 8 is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Brantley Capital Corporation (the "Company") is a closed end,
non-diversified investment company that has elected to be treated as a "business
development company" under the Act of 1940, as amended (the "Act"). The Company
invests primarily in the equity and equity-linked debt securities of private
companies. The Company's principal investment objective is the realization of
long-term capital appreciation in respect of such investments.
The Annual Report on Form 10-K contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company and its investment portfolio companies. Such
statements are only predictions and the actual events or results may differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those relating to investment capital demand, pricing, market acceptance, the
effect of economic conditions, litigation and the effect of regulatory
proceedings, competitive forces, the results of financing and investing efforts,
the ability to complete transactions and other risks identified below or in the
Company's filings with the Securities and Exchange Commission. 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.
RESULTS OF OPERATIONS
The Company began operations upon the completion of an initial public
offering on December 3, 1996. Its 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 can invest, and has invested, a portion of its assets in post-venture
small-cap public companies.
Pending the completion of equity and equity-linked debt security
investments that meet the Company's investment objectives, available funds are
invested in short-term securities. Dividend and interest income on short-term
investments was $445,097 and $1,712,400 respectively, for the quarter and twelve
months ended December 31, 1997. The significant components of total operating
expenses were fees of $1,126,741 to Brantley Capital Management, L.L.C., the
Company's investment advisor during the year ended December 31, 1997, and other
professional fees.
-8-
<PAGE> 12
During the quarter and twelve months ended December 31, 1997, the
Company's equity and equity-linked debt security investments resulted in net
realized and unrealized gains on investment transactions of $2,773,938 and
$5,682,693, respectively. During 1997 the Company was invested in small
capitalization public stocks which are subject to general stock market
conditions and the four private investments described below. The 1997 unrealized
gains (losses) were significantly influenced by general market conditions and
the operating performance of Fitness Quest as more fully described below.
Like other business development companies, mutual funds, financial and
business organizations and individuals around the world, the Company could be
adversely affected if the computer systems used by its investment adviser and
third party administrator, custodian and transfer agent do not properly process
and calculate date-related information from and after January 1, 2000.
Accounting and custodial services of the fund are provided by State Street Bank
& Trust Company. Transfer agency services are provided by Boston Equiserv. The
Company has made inquiries to these service providers regarding whether they
expect to have their computer systems adjusted for the year 2000 transition.
While there can be no assurances that the steps being taken by the service
providers will be sufficient to avoid any adverse impact on the Company, all of
these service providers have reported that they expect their systems to be in
compliance with year 2000 requirements prior to that time.
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 15, 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 1998.
At December 31, 1997, the Company had $24,691,345 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, 1997, the cash was primarily invested in a United
States Treasury security.
At December 31, 1997, the cost of equity and equity-linked debt
security investments made to date was $13,530,220 and their aggregate market
value was $18,791,178. Management believes the companies identified have
significant potential for long-term growth in sales and earnings. Equity and
equity-linked debt security investments that individually represent more than 3%
of the total assets of the Company at December 31, 1997 were comprised of the
following transactions:
On April 21, 1997, in connection with the Company's commitment to
provide $2.1 million of a $10 million senior subordinated note facility for
Waterlink, Inc. ("Waterlink"), the Company received warrants to purchase 26, 250
shares of Waterlink common stock at an exercise price of $4.50 per share (the
"Waterlink Warrants"). Waterlink is a consolidation strategy company in the
-9-
<PAGE> 13
industrial water and wastewater treatment market. The subordinated note facility
was entered into to enable Waterlink to draw down, at its discretion,
subordinated debt to help finance a recent acquisition, and provided for the
issuance of notes at a 12% interest rate per annum during the first year and 14%
per annum thereafter on the utilized portion of the facility, if any, with a
final maturity five (5) years from the closing. On June 27, 1997, Waterlink
completed its initial public offering of common stock. As a result, Waterlink
sold 4,500,000 shares at an $11.00 per share price. Following the Waterlink
initial public offering, Waterlink terminated its senior subordinated note
facility. At its termination, the facility had not been drawn down and no notes
were issued to the Company. The Company still holds the Waterlink Warrants. At
December 31, 1997, the market price of Waterlink common stock (NYSE:WLK) closed
at $16.50.
On September 30, 1997, the Company entered into a $1.5 convertible
junior subordinated promissory note facility for Health Care Solutions, Inc.
("Health Care Solutions"). Health Care Solutions is an acquisition strategy
company in the home healthcare services market and is currently at a $50 million
annual sales rate level with a strong presence in the Midwest and Great Lakes
States region. The terms of the notes call for an 18% interest rate per annum
during the first year and 12% per annum thereafter, with final maturity two
years from the closing. After the first year, the notes are convertible into
common stock at a price of $3.50 per share. In connection with its commitment to
provide this facility, the Company received warrants to purchase up to $450,000
of common stock valued at an exercise price of 10% of an initial public offering
("IPO") price completed during the term of the notes, or at $3.50 per share
should the warrants be exercised other than in connection with an IPO. The
warrant may not be exercised until the earlier of September 30, 1998 or the
occurence of certain events. The warrants are currently not exercisable. The
proceeds of the notes will be used by Health Care Solutions to help finance
current and future acquisitions.
On December 16, 1997, the Company funded a $1.35 million commitment to
invest with Brantley Venture Partners III, L.P. in a $3.85 million preferred
stock issue for Fitness Quest, Inc. ("Fitness Quest"). As a result the Company
purchased approximately 788,961 shares of Fitness Quest Series A Convertible
Preferred Stock at $1.71 per share. Fitness Quest is a direct marketing and
distribution company launching an acquisition strategy. A portion of the
proceeds were used by Fitness Quest for a management buy-out of the company from
its previous owner, The Time Warner Music Group, a 100% wholly owned subsidiary
of Time Warner, Inc., and the remainder will be used for potential acquisitions.
Fitness Quest has been in the fitness promotional products business since 1994
and , at the time of the purchase, had revenues at a $120 million annual sales
rate level. The terms of the Preferred Stock provide for payment of a 10%
dividend, payable quarterly.
Fitness Quest has shown strong operating results during 1997 growing to
$120 million in sales, completing the acquisition of a tread mill manufacturing
company, and improving its operating margins and profits. In addition it is
currently planning for 1998 sales growth rates of approximately 40% with
continued improvement in operating margins and profits. As a result of this
performance the Company's market value in its Fitness Quest investment was
increased to $5,440,000 resulting in an unrealized gain of $4,090,000. This
valuation was based on P/E ratios, cash flow multiples and other appropriate
financial measurements of similar private Companies and was reviewed and
approved by its Board of Directors.
-10-
<PAGE> 14
On December 23, 1997, the Company completed a $2.1 million investment
with Brantley Venture Partners III, L.P. to purchase a $6.0 million preferred
stock issue for Corporate Wings, Inc. ("Corporate Wings"). The Company's
investment consists of approximately 644,000 shares of Corporate Wings Series A
Convertible Preferred Stock at $3.26 per share. The terms of the transaction
provide for an 8% dividend, payable quarterly. Corporate Wings' businesses
include fixed base operations, related flight management services and inertial
navigation systems repair services for private and commercial aircraft from six
locations. The proceeds of the transaction will be used by Corporate Wings to
continue to execute an acquisition strategy. Corporate Wings has been in
business since 1978 and had approximately $40 million in sales in 1997.
Brantley Venture Partners II, L.P. and Brantley Venture Partners III,
L.P. (collectively, the "Partnerships") hold, in the aggregate, approximately
$115 million of venture capital private equity investments. The Partnerships are
related to the Investment Advisor in a manner that requires exemption from
certain provisions of the Act of 1940, as amended, be obtained from the
Commission in order to permit, under certain circumstances, the Company, the
Investment Advisor and the Partnerships to invest in the same portfolio
companies. As a result, the Company and the Partnerships filed an application on
March 6, 1997 with the Commission seeking an exemptive order permitting the
Company, under certain circumstances, to invest in securities of issuers in
which one of the Partnerships also intends to invest. The staff of the
Commission granted the exemptive order on November 18, 1997.
At December 31, 1997, the Company had stockholders' equity of
$42,911,615, resulting in a net asset value per share of $11.26.
-11-
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
BRANTLEY CAPITAL CORPORATION
BALANCE SHEETS
DECEMBER 31,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents (Note 2) $ 24,691,345 $ 36,329,220
Investments, at market 18,791,178 --
Dividends and interest receivable 70,722 --
Prepaid insurance 92,190 128,566
Other assets 49,194 --
Unamortized organization costs (Note 2) 130,106 162,250
------------ ------------
TOTAL ASSETS $ 43,824,735 $ 36,620,036
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Advisory fee payable (Note 3) $ 284,111 $ 81,898
Administration fee payable 18,750 6,250
Custody and accounting fee 10,500 3,200
Directors fee payable 4,019 4,500
Distributions payable 342,948 --
Professional fee payable 120,088 25,000
Organization costs payable 42,627 78,912
Offering costs payable (Note 7) 50,490 177,215
Payable to related party (Note 5) -- 88,436
Transfer agent fee payable 1,500 1,225
Accrued printing 18,000 8,000
Other liabilities 20,087 3,096
------------ ------------
TOTAL LIABILITIES $ 913,120 $ 477,732
============ ============
STOCKHOLDERS' EQUITY (NOTE 7):
Common Stock, $0.01 par value; 25,000,000
shares authorized and 3,810,535 and
3,660,535 shares issued and outstanding at
December 31, 1997 and 1996, respectively. $ 38,105 $ 36,605
Additional paid in capital 37,611,421 36,112,921
Retained earnings (deficit) 5,262,089 (7,222)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 42,911,615 36,142,304
============ ============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 43,824,735 $ 36,620,036
============ ============
</TABLE>
See accompanying notes to the financial statements.
-12-
<PAGE> 16
<TABLE>
<CAPTION>
BRANTLEY CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEAR FOR THE PERIOD FROM
ENDED OCTOBER 30, 1996
DECEMBER 31, THROUGH
1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
INVESTMENT INCOME:
Interest and dividend income $1,712,400 $ 139,529
------------- ------------
OPERATING EXPENSES:
Advisory fees 1,126,741 81,898
Administration fees 75,000 6,250
Transfer Agent fees 15,745 -
Custody and accounting fees 42,613 3,200
Professional fees 150,930 25,000
Directors' fees 30,040 8,000
Postage and printing fees 44,600 -
Fund insurance fees 128,566 -
Amortization of organization costs 32,144 2,750
Other 35,350 19,653
------------- ------------
TOTAL EXPENSES 1,681,729 146,751
------------- ------------
NET INVESTMENT INCOME/(LOSS) $ 30,671 $ (7,222)
------------- ------------
NET REALIZED AND UNREALIZED GAINS ON
INVESTMENTS:
Net realized gain on investment transactions 421,735 -
Net unrealized appreciation during the period on
investments 5,260,958 -
------------- ------------
NET GAIN ON INVESTMENT TRANSACTIONS 5,682,693 -
------------- ------------
NET CHANGE IN NET ASSETS RESULTING FROM OPERATIONS $5,713,364 $ (7,222)
============= ============
INCOME/(LOSS) PER SHARE - Basic and diluted $ 1.500 $ (.002)
============= ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - Basic and diluted 3,810,535 3,660,535
============= ============
</TABLE>
See accompanying notes to the financial statements.
-13-
<PAGE> 17
BRANTLEY CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM OCTOBER 30, 1996
ENDED DECEMBER 31, THROUGH
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 DECEMBER 31, 1996
----------------- ---------------------
<S> <C> <C>
NET CHANGE IN NET ASSETS RESULTING FROM OPERATIONS: $ 5,713,364 (7,222)
Adjustments to reconcile net change in net assets resulting
from operations to net cash provided by (used for) operations:
Purchases of investment securities $(7,770,734,717) (653,897,000)
Sales/maturities of investment securities 7,757,626,232 653,897,000
Net realized gain from investments (421,735) --
Change in unrealized appreciation (5,260,958) --
------------- -------------
Changes in assets and liabilities:
Prepaid expenses 36,376 (128,566)
Unamortized organization costs 32,144 17,750
Advisory fee payable 202,213 81,898
Administration fee payable 12,500 6.250
Printing fee payable 10,000 8,000
Custody and accounting 7,300 3,200
Directors fee payable (481) 4,500
Professional fees payable 95,088 25,000
Transfer Agent fee payable 275 1.225
Organization costs payable (36,285) 4,212
Offering costs payable (126,725) 177,215
Payable to related party (88,436) 88,436
Dividend and interest receivable (70,722) --
Other assets (49,194) --
Other liabilities 16,991 3,096
------------- -------------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES (13,036,770) 284,994
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering -- 36,044,176
Subsequent offering 1,500,000
Distributions (101,105) --
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,398,895 36,044,176
------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS FOR THE PERIOD (11,637,875) 36,329,170
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 36,329,220 50
------------- -------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 24,691,345 $ 36,329,220
============= =============
</TABLE>
The Company paid no interest or federal income tax during the period.
See accompanying notes to the financial statements
-14-
<PAGE> 18
BRANTLEY CAPITAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID IN EARNINGS STOCKHOLDERS
STOCK CAPITAL (DEFICIT) EQUITY
----- ------- --------- ------
<S> <C> <C> <C> <C>
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
------------ ------------ ------------ ------------
Balance at December 31, 1996 $ 36,605 $ 36,112,921 $ (7,222) $ 36,142,304
------------ ------------ ------------ ------------
Net increase in net assets from
operations -- -- 5,713,364 5,713,364
Distributions from :
Net investment income -- -- (23,084) (23,084)
Realized gains -- -- (420,969) (420,969)
Issuance of 150,000 shares subsequent
to initial public offering 1,500 1,498,500 -- 1,500,000
------------ ------------ ------------ ------------
Balance at December 31, 1997 $ 38,105 $ 37,611,421 $ 5,262,089 $ 42,911,615
============ ============ ============ ============
</TABLE>
See accompanying notes to the financial statements
-15-
<PAGE> 19
BRANTLEY CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION
Brantley Capital Corporation (the "Company"), a Maryland corporation, is a
closed-end, non-diversified investment company which has elected to be
treated as a business development company under the Investment Company Act
of 1940, as amended (the "Act"). 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 invests 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 affect 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 operates as a non-diversified investment company within the
meaning of the Act and therefore, the Company's investments are likely not
to be substantially diversified.
-16-
<PAGE> 20
BRANTLEY CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS-CONTINUED
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.
B. REPURCHASE AGREEMENTS
The Company may invest in repurchase agreements with institutions
which the Company's investment advisor 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.
-17-
<PAGE> 21
BRANTLEY CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS-CONTINUED
2. SIGNIFICANT ACCOUNTING POLICIES-CONTINUED
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, 1997 cash and
cash equivalents consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 1,568
United States Treasury Bill
1.00%, 1/22/98 24,689,777
----------
$24,691,345
</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 lives.
H. EARNINGS PER SHARE
Earnings per share computations are based on the average number of
shares of capital stock outstanding during the year. In 1997, the
Financial Accounting Board issued Statement No. 128 "Earnings Per
Share". Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is similar to the previously
reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate,
restated to conform to Statement 128 requirements. There was no
dilutive effect in the weighted average shares outstanding for the
period ending December 31, 1997 and the period from October 30, 1996
through December 31, 1996.
I. RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform
to the current year presentation.
-18-
<PAGE> 22
BRANTLEY CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS-CONTINUED
3. INVESTMENT ADVISORY AGREEMENT
The Company has entered into an investment advisory agreement (the
"Investment Advisory Agreement") with Brantley Capital Management, L.L.C.
(the "Investment Advisor") under which the Advisor is entitled to 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. Certain
officers of the Company are also officers of the Investment Advisor. No
officer of the Investment Advisor receives any compensation from the
Company for serving as officer of the Company.
4. INVESTMENTS
At December 31, 1997, the cost of investments for federal income tax
purposes was the same for financial reporting purposes.
5. TRANSACTIONS WITH RELATED PARTIES
The Company has obtained exemptive relief from certain provisions of the
Act which permit the Company to invest in an offering which affiliates of
the Investment Advisor also intend to invest in. The Company anticipates
that, subject to certain terms and conditions, current and future
affiliates of the Advisor may frequently invest in the same portfolio
companies.
Certain offering and organization costs were paid by officers of the
Company and the Investment Advisor. As of December 31, 1996 the Company
owed the officers of the Company and the Investment Advisor $88,436 in
connection with these expenditures. No amounts were due to the officers
of the Company or the Investment Advisor as of December 31, 1997.
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.
-19-
<PAGE> 23
BRANTLEY CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS-CONTINUED
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. 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 at $10
per share resulting in total shares outstanding of 3,810,535. The
proceeds of the offerings 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.
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 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.
-20-
<PAGE> 24
BRANTLEY CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS-CONTINUED
8. STOCK OPTION PLANS (CONTINUED)
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, 1997.
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
1997. Management used the Black Scholes model to perform this
assessment. Key assumptions included an estimated volatility of .235,
expected option life of 5 years, an expected dividend yield of 3.608 and
a risk free interest rate of 5.83%.
9. YEARLY DATA
Financial results for year ended December 31, 1997 and for the period
from October 30, 1996 through December 31, 1996 are summarized below:
<TABLE>
<S> <C>
PERIOD FROM OCTOBER
YEAR ENDED 30, 1996 THROUGH
DECEMBER 31,1997 DECEMBER 31, 1996
---------------- -----------------
Total investment income $1,712,400 $139,529
Net investment gain 5,682,693 --
Net increase in net assets from operations 5,713,364 (7,222)
Per share $ 1.500 (.002)
</TABLE>
-21-
<PAGE> 25
BRANTLEY CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS-CONTINUED
<TABLE>
<CAPTION>
10. FINANCIAL HIGHLIGHTS
YEAR ENDED PERIOD FROM DECEMBER 3,
DECEMBER 31, 1996 THROUGH
FOR THE PERIODS ENDED 1997 DECEMBER 31, 1996(A)
---------- -----------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period $ 9.87 $ 9.87(C)
Income from investment operations:
Net Investment Income 0.01 --(A)
Net Realized And Unrealized Gain
on Investments 1.50 --
--------- ---------
Total from investment operations: 1.51 0.00
--------- ---------
Less Distributions:
Dividends from net investment income (0.01) --
Dividends from net realized gains (0.11) --
--------- ---------
Total Distributions (0.12) --
Net Asset Value, End of the Period $ 11.26 $ 9.87
========= =========
Market Value, End of the Period $ 9.63 $ 10.00
========= =========
Total Return, At Market Value 13.90% 0.00%(B)
Total Return, At NAV 15.40% 0.00%(B)
<FN>
(A) The fund commenced operations on October 30, 1996.
(B) Not annualized.
(C) Net of offering costs of $0.13 per share.
</TABLE>
<TABLE>
<CAPTION>
11. SCHEDULE OF INVESTMENTS
December 31, 1997
NAME OF ISSUER MARKET
AND TITLE OF ISSUE SHARES/WARRANTS VALUE
------------------ --------------- ------------
<S> <C> <C>
AUTO PARTS
Gentex Corp. 19,400 $ 521,375
------------
BUSINESS SERVICES
Barra Inc 21,285 513,501
CCC Information Services Group 19,500 385,125
Norrell Corp. GA 16,161 321,200
------------
1,219,826
------------
CHEMICALS
Nova Corp. GA 24,000 600,000
------------
DRUGS & HEALTH CARE
ESC Medical Systems LTD 13,675 529,906
Jones Medical Industries Inc. 13,000 497,250
------------
1,027,156
------------
ELECTRICAL EQUIPMENT
Littlefuse, Inc. 17,400 432,825
------------
ELECTRONICS
Cambridge Technology Partners 14,900 620,213
JPM Co 16,700 354,875
Technology Solutions Co. 21,817 575,423
Yurie Systems, Inc. 12,000 242,250
------------
1,792,761
------------
HOTELS AND RESTAURANTS
Logans Roadhouse, Inc. 19,500 302,250
------------
HOUSEHOLD APPLIANCES
Chicago Miniature Lamp, Inc. 17,900 604,125
------------
LEISURE TIME
Action Performance, Inc. 16,000 606,000
------------
MISCELLANEOUS
Corporate Wings - Avionics 644,000 2,100,000
Fitness Quest - Retail 788,961 5,440,000
Health Care Solutions - Health Care 1,500,001 1,500,100
RF Micro Devices, Inc. - Electronics 15,000 184,688
Smallworld PLC - Software 16,100 352,188
Summit Design, Inc. - Software 24,200 251,075
Waterlink - Environmental 26,250 315,000
------------
10,143,051
------------
PUBLISHING
Eltron International, Inc. 11,900 359,975
------------
RETAIL TRADE
Just For Feet 23,700 $ 311,062
------------
SOFTWARE
Arbor Software Corp. 8,500 344,250
Axent Technologies, Inc. 30,523 526,522
------------
870,772
------------
U.S. GOVERNMENT SECURITIES
U.S. Treasury Bill 1.00%, 1/22/98 24,762,000 24,689,777
------------
TOTAL INVESTMENTS--Cost $38,219,997) $ 43,480,955
------------
</TABLE>
-22-
<PAGE> 26
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, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for the year ended December 31, 1997 and
the period from 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 these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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, 1997 and 1996, and the results of its operations and its cash
flows for the year ended December 31, 1997 and the period from October 30, 1996
to December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG
March 20, 1998
23
<PAGE> 27
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"
in the Company's definitive Proxy Statement dated March __, 1998, for its
Annual Meeting of Stockholders to be held May 26, 1998, filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934, (the "1998 Proxy
Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "EXECUTIVE COMPENSATION"
of the 1998 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "ELECTION OF DIRECTORS"
of the 1998 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Investment Advisor, 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 Advisor, 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 Advisor 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, 1997, the Investment Advisor was owed an
investment advisery fee in the aggregate amount of $284,111. 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 Advisor, and together own 100% of the Investment
Advisor.
-24-
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(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, 1997 and December 31, 1996
Statement of Operations - For the year ended December 31,
1997 and the Period from October 30, 1996 through
December 31, 1996
Statement of Cash Flows - For the year ended December 31,
1997 and the Period from October 30, 1996 through
December 31, 1996
Statement of Stockholders' Equity - For the year ended
December 31, 1997 and 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 pages XX-XX of this Form 10-K.
b) No reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1997.
-25-
<PAGE> 29
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
------------------------------------
Title: Robert P. Pinkas,
Chairman of the Board,
Chief Executive Officer
and Treasurer
Date: March 31, 1998
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
- --------- ----- ----
<S> <C> <C>
/s/ Robert P. Pinkas Chairman of the Board, Chief March 31, 1998
- ------------------------------------- Executive Officer, Treasurer
Robert P. Pinkas and Director (principal
executive officer and principal
accounting officer)
/s/ Tab A. Keplinger Vice President and Chief March 31, 1998
- ------------------------------------- Financial Officer (principal
Tab A. Keplinger financial officer)
/s/ Michael J. Finn President and Director March 31, 1998
- -------------------------------------
Michael J. Finn
/s/ L. Patrick Bales Director March 31, 1998
- -------------------------------------
L. Patrick Bales
/s/ Benjamin F. Bryan Director March 31, 1998
- -------------------------------------
Benjamin F. Bryan
/s/ Richard Moodie Director March 31, 1998
- -------------------------------------
Richard Moodie
</TABLE>
-26-
<PAGE> 30
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 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) Bylaws 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 exhibits are
incorporated herein by reference)
(2) Form of Investment Advisory Agreement between the
Registrant and the Investment Advisor (Exhibit 2.g to
Amendment No. 3 to the Registration Statement filed
on November 26, 1996, which exhibits are 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 exhibits
are incorporated herein by reference)
-27-
<PAGE> 31
(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 exhibits are 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 exhibits are 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 exhibits are 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 exhibits are 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 exhibits are incorporated herein by reference)
EXHIBIT 23 Consents of Experts and Counsel
*(1) Consent of Ernst & Young, L.L.P.
EXHIBIT 27 Financial Data Schedule
-28-
<PAGE> 1
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 20, 1998,
with respect to the financial statements of Brantley Capital Corporation
included in its Annual Report (Form 10-K) for the period ended December 31,
1997.
/s/ ERNST & YOUNG LLP
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 13,530,220
<INVESTMENTS-AT-VALUE> 18,791,178
<RECEIVABLES> 0
<ASSETS-OTHER> 342,212
<OTHER-ITEMS-ASSETS> 24,691,345
<TOTAL-ASSETS> 42,911,615
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 913,120
<TOTAL-LIABILITIES> 913,120
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 37,611,421
<SHARES-COMMON-STOCK> 3,810,535
<SHARES-COMMON-PRIOR> 3,660,535
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,260,958
<NET-ASSETS> 42,911,615
<DIVIDEND-INCOME> 1,712,400
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 1,681,729
<NET-INVESTMENT-INCOME> 30,671
<REALIZED-GAINS-CURRENT> 421,735
<APPREC-INCREASE-CURRENT> 5,260,958
<NET-CHANGE-FROM-OPS> 5,713,364
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 63,000
<DISTRIBUTIONS-OF-GAINS> 381,053
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 150,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 6,769,311
<ACCUMULATED-NII-PRIOR> (7,222)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,126,741
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,681,729
<AVERAGE-NET-ASSETS> 39,526,960
<PER-SHARE-NAV-BEGIN> 9.87
<PER-SHARE-NII> .01
<PER-SHARE-GAIN-APPREC> 1.50
<PER-SHARE-DIVIDEND> .02
<PER-SHARE-DISTRIBUTIONS> .10
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.26
<EXPENSE-RATIO> .042
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
