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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
For the Quarterly Period Ended September 30, 2000 | Commission File Number: 814-00127 |
BRANTLEY CAPITAL CORPORATION
Maryland | 34-1838462 | |
(State or other Jurisdiction of
|
(I.R.S. Employer Identification Number) | |
Incorporation or Organization)
|
20600 Chagrin Boulevard, Suite 1150, Cleveland, Ohio 44122
(216) 283-4800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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 [ ].
The number of shares of common stock outstanding as of September 30, 2000 was 3,810,535.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BRANTLEY CAPITAL CORPORATION
BALANCE SHEETS
September 30, | |||||||||
2000 | December 31, | ||||||||
(Unaudited) | 1999 | ||||||||
ASSETS
|
|||||||||
Cash and cash equivalents (Note 2)
|
$ | 14,213,315 | $ | 19,127,039 | |||||
Investments, at market (Note 2)
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38,194,541 | 34,502,138 | |||||||
Dividends and interest receivable
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2,044,951 | 1,235,462 | |||||||
Other assets
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49,899 | 126,793 | |||||||
Total Assets
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$ | 54,502,706 | $ | 54,991,432 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY
|
|||||||||
Liabilities:
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|||||||||
Payable for investments purchased
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$ | | $ | 243,662 | |||||
Advisory fee payable (Note 3)
|
383,167 | 365,884 | |||||||
Accrued professional fees
|
16,833 | 85,720 | |||||||
Dividends payable
|
| 1,752,847 | |||||||
Other liabilities
|
79,870 | 102,984 | |||||||
Total Liabilities
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$ | 479,870 | $ | 2,551,097 | |||||
Stockholders Equity:
|
|||||||||
Common Stock, $0.01 par value; 25,000,000 shares authorized and
3,810,535 shares issued and outstanding at September 30,
2000 and December 31, 1999 respectively
|
$ | 38,105 | $ | 38,105 | |||||
Additional paid in capital
|
37,505,433 | 37,505,433 | |||||||
Retained earnings
|
16,479,298 | 14,896,797 | |||||||
Total Stockholders Equity
|
54,022,836 | 52,440,335 | |||||||
Total Liabilities and Stockholders Equity
|
$ | 54,502,706 | $ | 54,991,432 | |||||
Net Asset Value Per Share
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$ | 14.18 | $ | 13.76 | |||||
The accompanying notes to the financial statements are an integral part of these statements.
BRANTLEY CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
For the quarter | For the quarter | |||||||||
ended | ended | |||||||||
September 30, | September 30, | |||||||||
2000 | 1999 | |||||||||
Investment Income:
|
||||||||||
Interest and dividend income
|
$ | 629,691 | $ | 328,380 | ||||||
Operating Expenses:
|
||||||||||
Advisory fees
|
382,576 | 355,853 | ||||||||
Administration fees
|
18,853 | 18,779 | ||||||||
Professional fees
|
36,198 | 34,127 | ||||||||
Other
|
74,162 | 62,370 | ||||||||
Total expenses
|
511,789 | 471,129 | ||||||||
Net Investment Income (Loss)
|
$ | 117,902 | $ | (142,749 | ) | |||||
Net Realized and Unrealized Gains (Losses) on Investments:
|
||||||||||
Net realized gain (loss) on investments
|
215,534 | (442,718 | ) | |||||||
Net unrealized gain on investments
|
447,782 | 2,122,672 | ||||||||
Net gain on investments
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663,316 | 1,679,954 | ||||||||
Net change in net assets resulting from operations
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$ | 781,218 | $ | 1,537,205 | ||||||
Net Income per Share, Primary and Fully Diluted
|
$ | 0.21 | $ | 0.40 | ||||||
Weighted Average Number of Shares Outstanding, Primary and
Fully Diluted
|
3,810,535 | 3,810,535 | ||||||||
The accompanying notes to the financial statements are an integral part of these statements.
BRANTLEY CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
For nine months | For nine months | |||||||||
ended | ended | |||||||||
September 30, | September 30, | |||||||||
2000 | 1999 | |||||||||
Investment Income:
|
||||||||||
Interest and dividend income
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$ | 1,798,589 | $ | 941,550 | ||||||
Operating Expenses:
|
||||||||||
Advisory fees
|
1,157,586 | 1,053,870 | ||||||||
Administration fees
|
56,148 | 56,220 | ||||||||
Professional fees
|
107,806 | 119,927 | ||||||||
Other
|
220,874 | 256,143 | ||||||||
Total expenses
|
1,542,414 | 1,486,160 | ||||||||
Net Investment Income (Loss)
|
$ | 256,175 | $ | (544,610 | ) | |||||
Net Realized and Unrealized Gains (Losses) on Investments:
|
||||||||||
Net realized gain on investments
|
1,506,459 | 807,578 | ||||||||
Net unrealized (loss) gain on investments
|
(180,133 | ) | 936,319 | |||||||
Net gain on investments
|
1,326,326 | 1,743,897 | ||||||||
Net change in net assets resulting from operations
|
$ | 1,582,501 | $ | 1,199,287 | ||||||
Net Income per Share, Primary and Fully Diluted
|
$ | 0.42 | $ | 0.31 | ||||||
Weighted Average Number of Shares Outstanding, Primary and
Fully Diluted
|
3,810,535 | 3,810,535 | ||||||||
The accompanying notes to the financial statements are an integral part of these statements.
BRANTLEY CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
For nine months | For nine months | ||||||||||
ended September 30, | ended September 30, | ||||||||||
2000 | 1999 | ||||||||||
Cash Flows from Operating Activities:
|
|||||||||||
Net change in net assets resulting from operations:
|
$ | 1,582,501 | $ | 1,199,287 | |||||||
Adjustments to reconcile net change in net assets resulting from operations to net cash (used for) operations: | |||||||||||
Net realized (gain) on investments
|
(1,506,459 | ) | (807,578 | ) | |||||||
Net unrealized loss (gain) on investments
|
180,133 | (936,319 | ) | ||||||||
Changes in assets and liabilities:
|
|||||||||||
Dividends and interest receivable
|
(809,489 | ) | (104,541 | ) | |||||||
Organization costs
|
| 96,376 | |||||||||
Other assets
|
76,894 | (36,558 | ) | ||||||||
Advisory fee payable
|
17,283 | (10,869 | ) | ||||||||
Accrued professional fees
|
(68,887 | ) | (15,160 | ) | |||||||
Dividends payable
|
(1,752,847 | ) | | ||||||||
Other liabilities
|
(23,112 | ) | 278,999 | ||||||||
Net cash (used for) operating activities
|
(2,303,983 | ) | (336,363 | ) | |||||||
Cash Flows from Investing Activities:
|
|||||||||||
Purchases of investment securities
|
(5,904,402 | ) | (13,646,043 | ) | |||||||
Sales/ Maturities of investment securities
|
3,302,689 | 8,258,867 | |||||||||
Purchases of short-term investments
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(2,996,432,616 | ) | (3,487,924,517 | ) | |||||||
Sales/ Maturities of short-term investments
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2,996,424,588 | 3,487,882,853 | |||||||||
Net cash (used for) investing activities
|
(2,609,741 | ) | (5,428,840 | ) | |||||||
Net change in cash and cash equivalents for the period
|
(4,913,724 | ) | (5,765,203 | ) | |||||||
Cash and cash equivalents, beginning of period
|
19,127,039 | 22,973,379 | |||||||||
Cash and cash equivalents, end of the period
|
$ | 14,213,315 | $ | 17,208,176 | |||||||
The accompanying notes to the financial statements are an integral part of these statements.
BRANTLEY CAPITAL CORPORATION
STATEMENTS OF STOCKHOLDERS EQUITY
(Unaudited)
Additional | Total | |||||||||||||||
Common | Paid in | Retained | Stockholders | |||||||||||||
Stock | Capital | Earnings | Equity | |||||||||||||
Balance at December 31, 1998
|
$ | 38,105 | $ | 37,505,433 | $ | 12,397,990 | $ | 49,941,528 | ||||||||
Net increase in net assets from operations
|
| | 4,251,654 | 4,251,654 | ||||||||||||
Distributions from:
|
||||||||||||||||
Net investment income
|
| | (495,370 | ) | (495,370 | ) | ||||||||||
Net realized gains
|
| | (1,257,477 | ) | (1,257,477 | ) | ||||||||||
Balance at December 31, 1999
|
$ | 38,105 | $ | 37,505,433 | $ | 14,896,797 | $ | 52,440,335 | ||||||||
Net increase in net assets from operations
|
| | 1,582,501 | 1,582,501 | ||||||||||||
Balance at September 30, 2000
|
$ | 38,105 | $ | 37,505,433 | $ | 16,479,298 | $ | 54,022,836 | ||||||||
The accompanying notes to the financial statements are an integral part of these statements.
BRANTLEY CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
1. Significant Accounting Policies
The interim financial statements have been prepared by Brantley Capital Corporation (the Company) pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial statements and related notes and schedules included in the Companys 1999 Annual Report filed on Form 10-K dated December 31, 1999. | |
In the opinion of management, the unaudited financial statements reflect all adjustments, all of which are of a normal recurring nature, necessary to present fairly the financial position of the Company as of September 30, 2000, the results of its operations for the nine month period ended September 30, 2000, the results of its operations for the three month period ended September 30, 2000, and its cash flows for the nine month period ended September 30, 2000. Interim results are not necessarily indicative of results to be expected for a full fiscal year. | |
In April 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, Reporting the Costs of Start-Up Activities, which requires that costs related to start-up activities be expensed as incurred. Prior to 1998, the Company capitalized its legal and other professional fees incurred in connection with organizing the Company. The Company adopted the provisions of the SOP as of January 1, 1999. The effect of the adoption of SOP 98-5 was to decrease income from continuing operations in 1999 by $96,376 ($0.03 per share) to expense costs that had been previously capitalized prior to 1999. | |
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 companys 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 NASDAQ 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. |
2. Investments, Cash and Cash Equivalents
As of September 30, 2000 and December 31, 1999, the identified costs of investments, cash, and cash equivalents were $38,303,084 and $39,342,923, respectively. |
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Cash equivalents consist of highly liquid investments with insignificant interest rate risk and original maturities of three months or less at acquisition date. Cash and cash equivalents consisted of the following: |
September 30, | December 31, | ||||||||
2000 | 1999 | ||||||||
(Unaudited) | (Audited) | ||||||||
Cash
|
$ | 3,543 | $ | 4,891 | |||||
United States Treasury Bill
|
|||||||||
5.80%, 10/12/2000
|
14,209,772 | ||||||||
4.85%, 2/17/2000
|
19,122,148 | ||||||||
$ | 14,213,315 | $ | 19,127,039 | ||||||
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 Adviser) under which the Investment Adviser is entitled to an annual management fee of 2.85% of the Companys net assets, determined at the end of each calendar quarter, and payable quarterly in arrears throughout the term of the Investment Advisory Agreement. For the nine months ended September 30, 2000, the Investment Adviser earned $1,157,586 under the Investment Advisory Agreement. Certain officers of the Company are also officers of the Investment Adviser. No officer of the Investment Adviser receives any compensation from the Company for serving as officer of the Company. |
4. Financial Highlights
For nine months | For nine months | |||||||
ended | ended | |||||||
September 30, | September 30, | |||||||
2000 | 1999 | |||||||
Net Asset Value, Beginning of the Period
|
$ | 13.76 | $ | 13.11 | ||||
Income from investment operations:
|
||||||||
Net Income (Loss)
|
0.07 | (0.14 | ) | |||||
Net Gain on Investments
|
0.35 | 0.45 | ||||||
Total from investment operations:
|
0.42 | 0.31 | ||||||
Net Asset Value, End of the Period
|
$ | 14.18 | $ | 13.42 | ||||
Market Value, End of the Period
|
$ | 8.63 | $ | 7.44 | ||||
Total Return, At Market Value
|
7.81 | % | 4.39 | % | ||||
Total Return, At NAV
|
3.02 | % | 2.36 | % |
Item 2. Managements 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 Investment Company Act of 1940, as amended (the Act). The Company invests primarily in the equity and equity-linked debt securities of private companies. The Companys principal investment objective is the realization of long-term capital appreciation in the value of such investments.
This report 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. Words such as may, will, expect, believe, anticipate, intend, could, estimate, might, or continue or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. Forward-looking statements are included in this report pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. 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 Companys filings with the Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. 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 Companys investment objectives, available funds are invested in short-term securities. 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 and dividends paid by its portfolio companies. Dividend and interest income on investments for the nine months ended September 30, 2000 and 1999 were $1,798,589 and $941,550 respectively. The significant components of total operating expenses were advisory fees of $1,157,586 and $1,053,870 to the Investment Adviser during the nine month periods ending September 30, 2000 and 1999 respectively.
During the nine months ended September 30, 2000 and September 30, 1999 the Companys equity and equity-linked debt security investments resulted in net realized and unrealized gains on investment transactions of $1,326,326 and $1,743,897 respectively. The Company has invested in various small capitalization public stocks which are subject to general stock market and business conditions and the nine private investments described below (See Liquidity and Capital Resources). The 2000 and 1999 unrealized gains have been significantly influenced by these general stock market and business conditions, as well as the August 31, 1999 revaluation of Flight Options, Inc., as more fully described below (See Liquidity and Capital Resources).
Liquidity and Capital Resources
At September 30, 2000, the Company had $14,213,315 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 September 30, 2000, the cash was primarily invested in a United States Treasury security. Management believes that cash and cash equivalents together with proceeds from investments will provide the Company with the liquidity
Brantley Venture Partners II, L.P., Brantley Venture Partners III, L.P. and Brantley Partners IV, L.P. (collectively, the Partnerships) hold, in the aggregate, approximately $200 million of venture capital private equity investments. The Partnerships are related to the Investment Adviser in a manner that requires the receipt, from the Commission, of an exemption from certain provisions of the Act in order to permit, under certain circumstances, the Company, the Investment Adviser 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 September 30, 2000, the cost of equity and equity-linked debt security investments made by the Company to date was $24.1 million and their aggregate market value was $38.2 million, for an aggregate fair market value appreciation of 59%. Management believes the companies identified have significant potential for long-term growth in sales and earnings. Since the completion of the Companys initial public offering, management has focused its investment activities on securing new investments for the Companys portfolio. However, given the current nature of the portfolio and the fact that the portfolio as a whole is maturing, management is entering into a phase of the business plan which emphasizes positioning the more mature portfolio companies for appropriate liquidity events. As a result, the Company is continuously monitoring portfolio company results and evaluating opportunities to maximize the valuation of its investments. In that regard, the Company periodically evaluates potential acquisitions, financing transactions, initial public offerings, strategic alliances, and sale opportunities involving its portfolio companies. These transactions and activities are generally not disclosed to the Companys shareholders and the investing public until such time as the transactions are publicly announced or completed, as the case may be. Any such transaction could have an impact on the valuation of the Companys investments, however valuations would generally not be adjusted until the transaction is publicly announced or completed.
The individually significant equity and equity-linked debt security holdings of the Company at September 30, 2000 were comprised of the following investments:
Disposable Products Company, LLC
On August 10, 1998, the Company entered into an investment led by Banc One Capital to provide $1.0 million of a $3.0 million subordinated debt facility with warrants for Disposable Products Company, LLC (DPC). DPC is an acquisition strategy company in the business of manufacturing and converting paper and nonwoven materials into wiping products for sale to commercial, institutional, industrial and government markets. In addition, DPC is a converter and reseller of other safety and industrial/janitorial products. Proceeds of the transaction were used to complete the first acquisition. The terms of the debt facility call for a 12% interest rate per annum with a final maturity in 2003. Brantley also received a detachable capital stock purchase warrant exercisable into 5% of the fully-diluted capital stock of the company at the time of exercise at a nominal exercise price. The proceeds of the facility were used to finance acquisitions.
Fitness Quest, Inc.
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 10% 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 was used for acquisitions. Fitness Quest has been in the fitness promotional products business since 1994 and, at the time of the purchase, had revenues at a $100 million annual sales rate level.
During 1997, Fitness Quest grew to $120 million in sales and improved its operating margins and profits. After a complete evaluation, the Companys Board of Directors made a determination to increase the Companys market value in its Fitness Quest investment in 1997 to $5,440,000, resulting in a 1997 unrealized gain of $4,090,000. This evaluation was based on price to earnings ratios, cash flow multiples and other appropriate
In addition to the above Series A 10% Convertible Preferred Stock, the Company has funded $1,751,300 to invest with Brantley Venture Partners III, L.P. in a $ 3.5 million 10% senior subordinated debt investments in Fitness Quest. In addition, the Company received a warrant to purchase 181,172 shares of Fitness Quest common stock for $.01 per share. The proceeds of the investment were used to fund Fitness Quests working capital needs.
Flight Options International, Inc. (Formerly Corporate Wings, Inc.)
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 Flight Options, Inc. (Flight Options). The Companys investment consists of approximately 2,576,000 shares of Flight Options Series A 8% Convertible Preferred Stock at $0.8152 per share. Flight Options 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 were used by Flight Options to continue to execute an acquisition strategy. Flight Options has been in business since 1978 and had sales of approximately $40 million at the time of the Companys investment.
On December 29, 1998, the Company announced the completion of a second private equity investment in Flight Options. As a result, the Company purchased $962,500 of a $5.5 million preferred stock transaction led by The Provident Bank. The Companys purchase represents approximately 260,135 shares of a Class A 8% Convertible Preferred Stock at $3.70 per share. Proceeds were used to fund the expansion of the Flight Option program and to continue to execute their acquisition strategy. During 1998, Flight Options completed the acquisition of Miller Aviation and grew to over $125 million in annual revenues. As a result of the price of this subsequent financing, which was led by The Provident Bank, and the operating performance of Flight Options during 1998, the market value of the Companys original investment in Flight Options was increased to $9,531,760 resulting in an unrealized gain of $7,431,760. This valuation was based on the $3.70 per share price negotiated by The Provident Bank and approved by the Companys Board of Directors.
On August 31, 1999, the Company announced the completion of a third private equity investment in Flight Options. As a result, Flight Options sold $20 million of Series B 8% Preferred Stock to a third party private equity group at $4.365 per share. Consistent with the Companys investment procedures, this transaction resulted in a valuation increase on the Flight Options investment of $1,886,030 or $0.50 per share. At September 30, 2000 the financial statement value of the investment in Flight Options was $12,379,730, representing over a 300% increase from its original purchase price.
The commentary above reflects a recently executed four-for-one stock split. All share and per share amounts have been adjusted to reflect such stock split.
Health Care Solutions, Inc.
On September 30, 1997, the Company funded a $1.5 million 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 with a strong presence in the Midwest and Great Lakes States region. The terms of the notes called 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 were 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 warrants are currently exercisable. The proceeds of the notes were used by Health Care Solutions to help finance acquisitions.
Health Care Solutions, Inc. has completed a recapitalization plan including a 2 for 1 reverse stock split. As a result, Brantley Capital Corporation has agreed to exchange its convertible junior subordinated promissory note and accrued interest thereon for 246,994 shares of Series C 8% Convertible Preferred Stock at an exchange rate
In addition to the above Series C 8% Convertible Preferred Stock, the Company has funded a $500,000 12% Convertible Subordinated Note. As part of this transaction, the Company received a warrant to purchase up to $50,000 of Health Care Solutions, Inc. Common Stock at an exercise price of the lower of a price as determined by an initial public offering or $7.50 per share.
The Holland Group, Inc.
On July 13, 2000, the Company closed on a $2.1 million commitment to invest with Brantley Partners IV, L.P. in a $8.5 million preferred stock issue of The Holland Group, Inc. (Holland). Holland is a provider of temporary staffing and human resource management services that currently operates 35 branches in five states. As a result of this transaction, Brantley Capital has purchased 282,530 shares of Series A 8% Convertible Preferred Stock.
National Rehab Partners, Inc.
On August 10, 1999, the Company announced the completion of a $1.5 million commitment to invest with Brantley Partners IV, L.P. in a $12.0 million preferred stock issue for National Rehab Partners, Inc. (NRP). NRP is a Brentwood, Tennessee rehabilitation management service company providing rehabilitation services through acute care hospitals and hospital systems throughout the United States. NRP is the only national rehabilitation company focused exclusively on helping hospitals develop their outpatient rehabilitation services. The first $8.0 million of the commitment was funded to complete the acquisition of a group of rehabilitation management service providers. The remaining commitments are being funded upon the successful closing of additional acquisitions. As a result of this commitment Brantley Capital Corporation has purchased 2.2 million shares of Class A 8% Convertible Preferred Stock.
Pediatric Physicians Alliance, Inc.
On January 28, 1999, the Company announced the completion of a $3.2 million commitment to invest with Brantley Venture Partners III, L.P. in a $7.9 million preferred stock issue for Pediatric Physicians Alliance, Inc. (Pediatric Physicians Alliance). Pediatric Physicians Alliance is a physician practice management company that develops integrated pediatric networks of care. The companys objective is to develop the leading physician-based integrated pediatric organization in the United States. The proceeds of the transaction were used to complete the acquisition of a number of physician practices. As a result of this commitment the Company purchased 793,000 shares of Class A-2 10% Convertible Preferred Stock. In addition to the above Class A-2 10% Convertible Preferred Stock, the Company has funded $267,448 to invest with Brantley Venture Partners III, L.P. in $668,619 of promissory notes, with detachable warrants, in Pediatric Physicians Alliance. The notes have a maturity date of September 29, 2001. The detachable warrant is for the purchase of 30,000 shares of Pediatric Physicians Alliance common stock at $4.00 per share.
Prime Office Products, Inc. (Formerly Business Essentials, Inc.)
On April 22, 1999, the Company entered into a $1.7 million commitment to invest with Brantley Partners IV, L.P. and Massey Burch Capital Corp. in a $10.0 million preferred stock issue for Prime Office Products, Inc. (Prime). Prime is an office products marketing and distribution company based in Nashville, Tennessee. The first $6.0 million of the commitment was funded to launch an acquisition strategy focused on office distribution companies serving primarily commercial and industrial customers. The remaining commitment will be funded upon the closing of additional acquisitions. As a result of the initial closing, the Company has purchased 510,000 shares of Class A 8% Convertible Preferred Stock at $2.00 per share.
Value Creation Partners, Inc.
On June 14, 2000, the Company completed a $2.1 million commitment to invest with Brantley Partners IV, L.P. in a $23.8 million preferred stock issue for Value Creation Partners, Inc. (VCP). VCP is an acquisition strategy investment in the food and beverage industry. The proceeds of the transaction were used to complete the acquisition of Best Brands, Inc., one of the six largest manufacturers and distributors of a complete line of
Impact of Inflation
The Company does not believe that its business is materially affected by inflation, other than the impact which inflation may have on the securities markets, the valuations of business enterprises and the relationship of such valuations to underlying earnings, all of which will influence the value of the Companys investments.
Risks
Pursuant to Section 64(b)(1) of the Act, a business development company is required to describe the risk factors involved in an investment in the securities of such company due to the nature of the companys investment portfolio. Accordingly, the Company states that its objective is to achieve capital appreciation through investments in businesses believed to have favorable growth potential. Such businesses are often small, undercapitalized companies that can lack management depth and have not yet attained consistent levels of profitability. The Companys private equity investments often include securities that are subject to legal or contractual restrictions on resale, that adversely affect the liquidity and marketability of such securities.
The Company considers the management of equity price risk essential to conducting its business and maintaining its profitability. The Company manages this risk by maintaining a diverse portfolio of equity and equity-linked debt securities. A portion of the Companys investment portfolio consists of equity and equity-linked debt securities in private companies. The Company anticipates no impact on these investments from modest changes in public market equity prices. However, should significant changes in market prices occur, there could be a long-term effect on valuations of private companies, which could affect the carrying value and the amount and timing of gains realized on these investments. A portion of the Companys investment portfolio also consists of common stocks and warrants to purchase common stocks in publicly traded companies. These investments are directly exposed to equity price risk, in that a hypothetical ten percent change in these equity prices would result in a similar percentage change in the fair market value of these investments.
Because of the speculative nature of the Companys investments and the lack of any market for the securities initially purchased by the Company, there is a significantly greater risk of loss than is the case with traditional investment securities. The high-risk, long-term nature of the Companys private equity investment activities may prevent shareholders of the Company from achieving price appreciation and dividend distributions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information set forth under Item 2 Risks of this Quarterly Report on Form 10-Q is incorporated herein by reference.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders
At a Special Meeting of Stockholders held on August 31, 2000 there were a total of 3,663,237.401 shares voted either in person or by proxy. The stockholders ratified the selection of Arthur Andersen LLP as the Companys independent public accountant for the fiscal years ending December 31, 1999 and 2000.
The results of voting for the ratification of the selection of Arthur Andersen LLP as the Companys independent public accountant were as follows:
Number of votes for:
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3,590,047.137 | |
Number of votes against:
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69,434.264 | |
Number of abstentions
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3,756.000 |
Item 6. Exhibits and Reports on Form 8-K
a. |
Exhibits Reference is made to the Exhibit Index that is found on page 15 of this Form 10-Q. |
b. |
Reports on Form 8-K During the quarter ended September 30, 2000, the Company filed no reports on Form 8-K. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BRANTLEY CAPITAL CORPORATION |
Date: November 14, 2000 |
By: /s/ ROBERT P. PINKAS Robert P. Pinkas Chairman of the Board and Chief Executive Officer |
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Date: November 14, 2000 |
By: /s/ TAB A. KEPLINGER Tab A. Keplinger Vice President and Chief Financial Officer |
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
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Articles of Incorporation and By-laws | |
(1)
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Articles of Amendment and Restatement of the Charter of the Company (Exhibit 3.1 to the Annual Report on Form 10-K filed on March 31, 1999, which exhibit is incorporated herein by reference) | |
(2)
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Amended and Restated Bylaws of the Company (Exhibit 3.2 to the Annual Report on Form 10-K filed on March 31, 1999, which exhibit is incorporated herein by reference) | |
Exhibit 4
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Form of Share Certificate (Exhibit 2.d to amendment No. 1 to the Registration Statement filed on October 31, 1996, which exhibit is incorporated herein by reference) | |
Exhibit 10
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Material Contracts | |
(1)
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Dividend Reinvestment and Cash Purchase Plan (Exhibit 2.e to Amendment No. 3 to the Registration Statement filed on November 27, 1996, which exhibit is incorporated herein by reference) | |
(2)
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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 27, 1996, which exhibit is incorporated herein by reference) | |
(3)
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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)
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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)
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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)
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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)
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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)
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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 27*
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Financial Data Schedule |
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