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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q x           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 OR o            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROMTO 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 IdentificationIncorporation or Organization)
    
    Number)
 3201 Enterprise Parkway, Suite 350, Cleveland, Ohio 44122 (Address of principal executive offices including zip code) (216) 464-8400 (Registrants telephone number including area code) 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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x The number
of shares of common stock, $.01 par value, outstanding as of September 30, 2004 was
3,810,535.




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TABLE OF CONTENTS PART 1. FINANCIAL INFORMATIONItem 1. Financial StatementsBALANCE SHEETSSTATEMENTS OF OPERATIONSSTATEMENTS OF CHANGES IN NET ASSETSSTATEMENTS OF CASH FLOWSSTATEMENT OF INVESTMENTSNOTES TO THE FINANCIAL STATEMENTSItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 6. Exhibits and Reports on Form 8-KSIGNATURESEX-31.1 302 CEO CertificationEX-31.2 302 CFO CertificationEX-32.1 906 CEO CertificationEX-32.2 906 CFO CertificationEX-31.1 Certification of Chief Executive OfficerEX-31.2 Certification of Chief Financial OfficerEX-32.1 Certification Purusant to 18 U.S.C. 1350EX-32.2 Certification Pursuant to 18 U.S.C. 1350




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PART 1. FINANCIAL INFORMATION 
 Item 1. Financial Statements BRANTLEY CAPITAL CORPORATION 
 BALANCE SHEETS
 September 30,
    
    December 31,2004
    
    2003(Unaudited)
    
    (Audited)ASSETSInvestments, at fair valueCompanies 5% to 25% owned
    
    $
    52,057,815
    
    
    $
    51,814,010Companies less than 5% owned
    
    
    12,462,858
    
    
    
    8,576,394Cash and cash equivalents
    
    
    19,976
    
    
    
    4,688,731Restricted cash
    
    
    7,000,000
    
    
    
    6,000,000Dividends and interest receivable
    
    
    6,874,597
    
    
    
    6,074,224Other assets
    
    
    131,139
    
    
    
    700,000Total Assets
    
    $
    78,546,385
    
    
    $
    77,853,359LIABILITIES AND STOCKHOLDERS EQUITYNotes payable
    
    $
    8,480,000
    
    
    $
    7,500,000Advisory fee payable
    
    
    939,300
    
    
    
    473,474Accrued professional fees
    
    
    804,285
    
    
    
    343,023Distributions payable
    
    
    
    
    
    
    2,630,172Other liabilities
    
    
    573,011
    
    
    
    816,025Total Liabilities
    
    
    10,796,596
    
    
    
    11,762,694Stockholders Equity:Common
Stock, $0.01 par value; 25,000,000 shares authorized and 3,810,535
shares issued and outstanding at  September 30, 2004
and December 31, 2003, respectively
    
    
    38,105
    
    
    
    38,105Additional paid in capital
    
    
    34,506,838
    
    
    
    34,506,838Retained earnings
    
    
    33,204,846
    
    
    
    31,545,722Total Stockholders Equity
    
    
    67,749,789
    
    
    
    66,090,665Total Liabilities and Stockholders Equity
    
    $
    78,546,385
    
    
    $
    77,853,359Net Asset Value Per Share
    
    $
    17.78
    
    
    $
    17.34
 The accompanying notes to the financial statements are an integral part of these statements.




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BRANTLEY CAPITAL CORPORATION STATEMENTS OF OPERATIONS
(Unaudited)
 For the nine months
    
    For the nine monthsended
    
    endedSeptember 30,
    
    September 30,2004
    
    2003Investment Income (Loss):Interest and DividendsCompanies owned 5% to 25%
    
    $
    883,549
    
    
    $
    5,333,116Companies less than 5% owned
    
    
    417,745
    
    
    
    694,342Write Off of Interest and Dividends Receivable
    
    
    
    
    
    
    (517,886
    )Total investment income
    
    
    1,301,294
    
    
    
    5,509,572Operating Expenses:Advisory fees
    
    
    1,409,707
    
    
    
    1,479,334Administration fees
    
    
    56,085
    
    
    
    56,096Professional fees
    
    
    598,917
    
    
    
    215,929Interest and other expense
    
    
    676,247
    
    
    
    642,247Total operating expenses
    
    
    2,740,956
    
    
    
    2,393,606Investment income (loss), net
    
    
    (1,439,662
    )
    
    
    3,115,966Net Realized and Unrealized Gains (Losses)
on Investments:Net realized gains (losses) on investments
    
    
    (781
    )
    
    
    470,896Net unrealized gains on investments
    
    
    3,099,567
    
    
    
    793,726Net realized and unrealized gains (losses) on
investment
transactions
    
    
    3,098,786
    
    
    
    1,264,622Net increase in net assets resulting
from operations
    
    $
    1,659,124
    
    
    $
    4,380,588Net increase in net assets from
operations per
share, basic and diluted
    
    $
    0.44
    
    
    $
    1.15Weighted average number of shares outstanding,
basic and diluted
    
    
    3,810,535
    
    
    
    3,810,535
 The accompanying notes to the financial statements are an integral part of these statements.




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BRANTLEY CAPITAL CORPORATION 
 STATEMENTS OF OPERATIONS
(Unaudited)
 For the quarter
    
    For the quarterended
    
    endedSeptember 30,
    
    September 30,2004
    
    2003Investment Income (Loss):Interest and DividendsCompanies owned 5% to 25%
    
    $
    292,100
    
    
    $
    4,861,673Companies less than 5% owned
    
    
    117,749
    
    
    
    231,158Write Off of Interest and Dividends Receivable
    
    
    
    
    
    
    Total investment income
    
    
    409,849
    
    
    
    5,092,831Operating Expenses:Advisory fees
    
    
    475,851
    
    
    
    544,880Administration fees
    
    
    18,688
    
    
    
    18,904Professional fees
    
    
    215,031
    
    
    
    39,067Interest and other expense
    
    
    242,736
    
    
    
    241,084Total operating expenses
    
    
    952,306
    
    
    
    843,935Investment income (loss), net
    
    
    (542,457
    )
    
    
    4,248,896Net Realized and Unrealized Gains (Losses)
on Investments:Net realized gains on investments
    
    
    
    
    
    
    470,896Net unrealized gains (losses) on investments
    
    
    3,510,388
    
    
    
    (2,194,822
    )Net realized and unrealized gains (losses) on investment
transactions
    
    
    3,510,388
    
    
    
    (1,723,926
    )Net increase in net assets resulting
from operations
    
    $
    2,967,931
    
    
    $
    2,524,970Net increase in net assets from operations per
share, basic and diluted
    
    $
    0.78
    
    
    $
    0.66Weighted average number of shares outstanding,
basic and diluted
    
    
    3,810,535
    
    
    
    3,810,535
 The accompanying notes to the financial statements are an integral part of these statements.




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BRANTLEY CAPITAL CORPORATION 
 STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
 Additional
    
    
    
    
    
    TotalCommon
    
    Paid in
    
    Retained
    
    StockholdersStock
    
    Capital
    
    Earnings
    
    EquityBalance at December 31, 2001
    
    $
    38,105
    
    
    $
    37,484,895
    
    
    $
    30,483,314
    
    
    $
    68,006,314Net decrease in net assets from operations:Net investment income (loss)
    
    
    
    
    
    
    (2,978,057
    )
    
    
    819,660
    
    
    
    (2,158,397
    )Net realized loss
    
    
    
    
    
    
    
    
    
    
    (402,012
    )
    
    
    (402,012
    )Net unrealized gain
    
    
    
    
    
    
    
    
    
    
    454,423
    
    
    
    454,423Balance at December 31, 2002
    
    $
    38,105
    
    
    $
    34,506,838
    
    
    $
    31,355,385
    
    
    $
    65,900,328Net increase in net assets from operations:Net investment income
    
    
    
    
    
    
    
    
    
    
    2,656,555
    
    
    
    2,656,555Net realized loss
    
    
    
    
    
    
    
    
    
    
    (3,204,104
    )
    
    
    (3,204,104
    )Net unrealized gain
    
    
    
    
    
    
    
    
    
    
    3,368,058
    
    
    
    3,368,058Distributions from:Net investment income
    
    
    
    
    
    
    
    
    
    
    (2,630,172
    )
    
    
    (2,630,172
    )Balance at December 31, 2003
    
    $
    38,105
    
    
    $
    34,506,838
    
    
    $
    31,545,722
    
    
    $
    66,090,665Net decrease in net assets from operations:Net investment loss
    
    
    
    
    
    
    
    
    
    
    (1,439,662
    )
    
    
    (1,439,662
    )Net realized loss
    
    
    
    
    
    
    
    
    
    
    (781
    )
    
    
    (781
    )Net unrealized gain
    
    
    
    
    
    
    
    
    
    
    3,099,567
    
    
    
    3,099,567Balance at September 30, 2004
    
    $
    38,105
    
    
    $
    34,506,838
    
    
    $
    33,204,846
    
    
    $
    67,749,789
 The accompanying notes to the financial statements are an integral part of these statements.




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BRANTLEY CAPITAL CORPORATION 
 STATEMENTS OF CASH FLOWS
(Unaudited)
 For the nine months
    
    For the nine monthsended
    
    endedSeptember 30,
    
    September 30,2004
    
    2003Cash Flows from Operating Activities:Net change in net assets resulting from operations:
    
    $
    1,659,124
    
    
    $
    4,380,588Adjustments to reconcile net change in net assets resulting
from operations to net cash used for operations:Net realized gain (loss) from investments
    
    
    781
    
    
    
    (470,896
    )Net unrealized gains on investments
    
    
    (3,099,567
    )
    
    
    (793,726
    )Changes in assets and liabilities:Restricted Cash
    
    
    (1,000,000
    )
    
    
    Dividend and interest receivable
    
    
    (800,373
    )
    
    
    (187,249
    )Other assets
    
    
    568,861
    
    
    
    (60,760
    )Advisory fee payable
    
    
    465,826
    
    
    
    26,521Accrued professional fees
    
    
    461,262
    
    
    
    (388,148
    )Distributions payable
    
    
    (2,630,172
    )
    
    
    Other liabilities
    
    
    (243,016
    )
    
    
    138Net cash used for operating activities
    
    
    (4,617,274
    )
    
    
    2,506,468Cash Flows from Investing Activities:Purchases of investment securities
    
    
    (1,031,481
    )
    
    
    (1,707,275
    )Sales/Maturities of investment securities
    
    
    
    
    
    
    3,640,420Net cash used for investing activities
    
    
    (1,031,481
    )
    
    
    1,933,145Cash Flows from Financing Activities:Note Payable
    
    
    980,000
    
    
    
    1,500,000Net cash provided by financing activities
    
    
    980,000
    
    
    
    1,500,000Net change in cash and cash equivalents for the period
    
    
    (4,668,755
    )
    
    
    5,939,613Cash and cash equivalents, beginning of the period
    
    
    4,688,731
    
    
    
    237,154Cash and cash equivalents, end of the period
    
    $
    19,976
    
    
    $
    6,176,767
 The accompanying notes to the financial statements are an integral part of these statements.




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BRANTLEY CAPITAL CORPORATION 
 STATEMENT OF INVESTMENTS  (Unaudited)
September 30, 2004 FairName of Issuer and Title of Issue
    
    Shares/Par
    
    ValueAviationFlight Options International Inc. Preferred Stock
and Warrants *#@
    
    
    3,342,060
    
    
    $
    32,500,000Business ServicesDisposable Products Company, LLC Subordinated Debt
with Warrants *#
    
    
    4,795,049
    
    
    
    3,628,381The Holland Group, Inc. Convertible Preferred Stock #@
    
    
    282,530
    
    
    
    2,125,000International Total Services, Inc. Common Stock
    
    
    104,250
    
    
    
    101Prime Office Products, Inc. Convertible Preferred Stock #@
    
    
    800,000
    
    
    
    1,600,0007,353,482Drugs & Health CareIntegrated Physician Solutions, Inc. Convertible Preferred
Stock *#@
    
    
    793,000
    
    
    
    4,420,180Integrated Physician Solutions, Subordinated Debt with
Warrants#
    
    
    697,448
    
    
    
    692,348Health Care Solutions, Subordinated Debt with Warrants #
    
    
    1,701,782
    
    
    
    1,602,611National Rehabilitation Partners, Inc. Convertible Preferred
Stock#@
    
    
    2,218,375
    
    
    
    1,454,285National Rehabilitation Partners, Inc. Subordinated Debt #
    
    
    27,228
    
    
    
    27,2288,196,652MiscellaneousStreamline Foods, Inc. Convertible Preferred Stock #@
    
    
    897,572
    
    
    
    700,000Streamline Foods, Inc. Subordinated Debt with Warrants #
    
    
    122,500
    
    
    
    95,000Value Creation Partners, Inc. Convertible Preferred Stock *#@
    
    
    304,989
    
    
    
    4,489,000Waterlink, Inc. Warrants
    
    
    53,550
    
    
    
    5,284,000Retail TradeFitness Quest, Inc. Convertible Preferred Stock *#@
    
    
    788,961
    
    
    
    8,091,876Fitness Quest, Inc. Common Stock #@
    
    
    120,766
    
    
    
    1,238,621Fitness Quest, Inc. Warrants #@
    
    
    181,172
    
    
    
    1,856,04211,186,539Total Investments(Cost $26,211,210)
    
    
    
    
    
    $
    64,520,673
   All investments are U.S. companies*
    
    Represents 5% or more of total stockholders equity.#
    
    Represents privately held securities which are considered illiquid.@
    
    Represents more than 5% but less than 25% of the voting class of securities. The accompanying notes to the financial statements are an integral part of
these statements.




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BRANTLEY CAPITAL CORPORATION 
 NOTES TO THE FINANCIAL STATEMENTS  (Unaudited)
 1. Significant Accounting Policies The
unaudited 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 accounting
principles generally accepted in the United States of America 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 Companys 2003 Annual Report filed on
Form 10-K. The unaudited financial statements reflect, in the opinion of
management, 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, 2004, the results of its operations for the quarters
ended September 30, 2004 and 2003, the results of its operations for the
nine months ended September 30, 2004 and 2003, and its cash flows for the
nine months ended September 30, 2004 and 2003. Interim results are not
necessarily indicative of results to be expected for a full fiscal year. 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. The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions 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 revenue and expenses
during the reporting period. Actual results could differ materially from those estimates. Portfolio investments listed on an exchange or traded on NASDAQ
National Market are 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, 2004 and December 31, 2003, the identified
costs of investments for financial statement and tax reporting
purposes were $26,211,210, and $25,182,154, respectively. Cash equivalents consist of highly liquid investments with
insignificant interest rate risk and original maturities of three
months or less at acquisition date.




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BRANTLEY CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS  (Unaudited)  (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 Adviser) under which the
Investment Adviser 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. For the nine months ended September
30, 2004 and 2003, the Investment Adviser earned $1,409,707 and 1,479,334 respectively 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 the nine months
    
    For the nine monthsended
    
    endedSeptember 30, 2004
    
    September 30, 2003Net Asset Value, Beginning of the Period
    
    $
    17.34
    
    
    $
    17.29Income gain (loss) from investment operations:Net investment gain (loss)
    
    
    (0.37
    )
    
    
    0.82Net realized and unrealized gain on
investments
    
    
    0.81
    
    
    
    0.33Total from investment operations
    
    
    0.44
    
    
    
    1.15Net Asset Value, End of Period
    
    $
    17.78
    
    
    $
    18.44Fair Value, End of Period
    
    $
    11.13
    
    
    $
    8.97Total return, at Fair Value
    
    
    9.12
    % (1)
    
    
    (16.49
    )% (1)Total return, at Net Asset Value
    
    
    2.54
    % (1)
    
    
    6.65
    % (1)Total Expenses/Average net assets
    
    
    5.46
    % (2)
    
    
    4.69
    % (2)Net Investment Income (Loss)/Average net assets
    
    
    (2,87
    )% (2)
    
    
    6.10
    % (2)
  (1)
    
    Not annualized.(2)
    
    Annualized.




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Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations General Overview We are a non-diversified investment company that is regulated as a
business development company under the Investment Company Act of 1940. We
provide equity and long-term debt financing to small and medium-sized private
companies in a variety of industries throughout the United States. Our
investment objective is to achieve long-term capital appreciation in the value
of our investments and to provide current income primarily from interest,
dividends and fees paid by our portfolio companies. Historically, we have focused our investing activities on private equity
securities. We generally structure our private equity investments as
participating preferred stock with an 8% to 10% dividend yield that accumulates
and is paid upon a liquidity event. Our private equity investments typically
range from $1 million to $5 million, and we generally expected these
investments to achieve liquidity within three to five years. We typically do
not receive a cash return on our private equity investments until a liquidity
event occurs, but instead seek to achieve long-term capital appreciation in net
asset value through such investments. On
March 19, 2003, we entered into a Memorandum of Understanding
(MOU) with
Phillip Goldstein, a director of the Company, pursuant to which Mr. Goldstein
agreed to dismiss the lawsuit he filed against us in September 2002, subject to
compliance with the Investment Company Act of 1940. See Part II, Item 1. Legal
Proceedings. The Court approved the proposed settlement on February 26, 2004. On June 4, 2003, we filed an application for exemptive relief from certain
provisions of the 1940 Act in order to effect the provisions of the Memorandum
of Understanding. On June 18, 2003, we received comments on our application
from the Staff (the Staff) of the Division of Investment Management of the
Securities and Exchange Commission (the SEC). On August 14, 2003 we responded
to those comments. With our response, we proposed a new Memorandum of
Understanding that was submitted to the Staff. On November 12, 2003, we
received comments regarding our August 14, 2003 response. We responded to such
comments on December 18, 2003. On February 11, 2004, the Staff of the Division
of Investment Management requested a response from the Board of Directors,
which the Board provided on February 15, 2004. The Staff responded with further
comments by letter dated September 24, 2004 (the September 2004 Letter). In
the September 2004 Letter, the Staff advised the Company that it would not
recommend approval of the Companys application for exemptive relief to approve the
Memorandum of Understanding, based on its interpretation of the SECs rules
regarding investment adviser compensation and the application of those rules to
the proposed new investment advisory agreement to be entered into between the
Company and Brantley Capital Management, L.L.C., described below, and its
analysis of the Memorandum of Understandings provision for the Companys
reimbursement to Mr. Goldstein of certain expenses (not to exceed $275,000) he
incurred in connection with the litigation related to the Annual Meeting of
Stockholders held on September 17, 2002. The Staff has currently placed the
application for exemptive relief on inactive status. Pursuant to the proposed Memorandum of Understanding, we would agree,
among other things:  
    
    To cause there to be four (4) directors who are not interested persons
as defined under the 1940 Act and cause the board to be exactly seven (7)
directors in total;
    
    If Mr. Goldstein or Gerald Hellerman is no longer director of the Company
then whichever of




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Mr. Goldstein or Mr. Hellerman remains on the board
shall have the right to select a nominee;
    
    To not convert the Company from being an advised fund to an internally
managed fund unless a majority of the independent directors agree;
    
    To allow any independent director to request independent counsel, subject
to approval of the board, which cannot be unreasonably withheld; and
    
    To refrain from making defamatory remarks about any party to the agreement. In addition, the proposed Memorandum of Understanding provides that at the
next Annual Meeting of Stockholders following SEC approval:  
    
    We would ask shareholders to approve a plan of orderly disposition of the
assets of the Company or a sale of the assets with the goal of prompt cash
distribution to shareholders;
    
    We would ask shareholders to approve a new investment advisory agreement
pursuant to which, prospectively: 
    
    The advisors fees would be reduced from 2.85% to 2.5% of our net asset value;
    
    All stock options would be forfeited and cancelled; and
    
    The advisor would be entitled to receive a fee equal to 20% of the aggregate
distributions made by the Company in excess of $10.00 per share; however,
none of the amount would be paid until aggregate distributions totaled $12.50
per share. The proposed Memorandum of Understanding also includes provisions that
would require the parties to take all steps necessary to accomplish the goals
of the Memorandum, including voting their shares in favor of the proposals when
and if they are presented at a meeting of stockholders. Under the proposed
Memorandum, we would also be required to reimburse Mr. Goldstein for certain
expenses (not to exceed $275,000) he incurred in connection with the proxy
solicitation and litigation related to the Annual Meeting of Stockholders on
September 17, 2002. Mr. Goldstein would also agree not to engage in, lead or
fund a proxy contest while the agreement is in effect. The term of the new
proposed Memorandum of Understanding would run until December 31, 2006. A shareholder of the Company has submitted a proposal as set
forth below for
consideration at the Companys next annual meeting. RESOLVED, the shareholders of Brantley Capital Corporation recommend that the
Board of Directors promptly take the steps necessary to implement the proposed
settlement of the lawsuit brought by Phillip Goldstein against Brantley and
other parties. If the proposal is adopted by the shareholders, the board of directors will
consider the MOU to have been approved by the shareholders and will determine
the appropriate process to implement the MOU in an orderly manner and to take
such other steps in furtherance thereof as it deems appropriate. If we receive necessary approvals, the effect of the Memorandum of
Understanding will be that we intend to make only follow-on investments, and
any remaining proceeds we receive from liquidity events are intended to be used
for working capital purposes and distributed to stockholders. There can be no
assurance that all such approvals will be granted. Critical Accounting Policies and Estimates Privately placed equity and mezzanine securities are carried at fair value
as determined in good faith by or under the direction of our board of directors. Initially, the fair
value of each such security is based upon its original cost. Cost is also 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 subsequent financings, the availability of market quotations, the
portfolio companys operations and changes in general market conditions)
provide a basis for value other than cost. Portfolio investments listed on a securities exchange or traded on the
Nasdaq Stock Market are valued at the closing price listed on the relevant
exchange or quotation system on the date of valuation. Securities
traded in the over-the-counter market are valued based on the average of the
closing bid and asked prices on the date of valuation. Interest income is
recorded on mezzanine investments when the payment is




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contractually due unless
management believes that collection of interest is remote, generally when a
loan is more than 30 days past due. Interest is not accrued on any loans that
are more than 30 days past due. Dividend income is recorded on cumulative
preferred equity securities on an accrual basis to the extent that such amounts
are expected to be collected and on common equity securities on the record date
for private companies or on the ex-dividend date for publicly traded companies.
Dividends and interest income receivables are typically collected upon a
liquidity event. We assess the collectability of dividends and interest income
receivables in connection with our determination of the fair value of the
related security. To the extent that there are adverse future developments,
previously recognized dividend and interest income may not be realized. We account for our operations utilizing accounting principles generally
accepted in the United States for investment companies. On this basis, the
principal measure of our financial performance is captioned Net increase
(decrease) in net assets resulting from operations, which is the sum of two
elements. The first element is Investment income (loss), net, which is the
difference between (1) our income from interest, dividends and fees, and (2)
our operating expenses. The second element is Net realized and unrealized
gains (losses) on investments, which is the sum of (1) the difference between
the proceeds received from our dispositions of portfolio securities and their
stated cost (Net realized gain (loss) on investments), and (2) the net change
in the fair value of our investment portfolio (Net unrealized gain (loss) on
investments). Net realized gain (loss) on investments and Net unrealized
gain (loss) on investments are directly related. For example, in the period
during which a security reflecting an unrealized gain is sold to realize a
gain, net unrealized gain on investments decreases, and net realized gain on
investments increases. Historically, we have focused our investing activities on private equity
securities. We began making such investments in 1997 and are now actively in
the phase of the business plan which emphasizes positioning our more mature
portfolio companies for appropriate liquidity events. As a result, we are
continuously monitoring portfolio company results and evaluating opportunities
to maximize the valuation of our investments. In that regard, we periodically
evaluate potential acquisitions, financing transactions, initial public
offerings, strategic alliances, and sale opportunities involving our portfolio
companies. Any such transaction could have an impact on the valuation of our
investments. These transactions and activities are generally not disclosed to
our stockholders and the investing public until such time as the transactions
are publicly announced or completed, as the case may be. Results of Operations Dividend and Interest Income Dividend and interest income on investments for the three months ended
September 30, 2004, and 2003 were $409,849, and $5,092,831, respectively. Dividend and interest income on investments for the nine months ended
September 30, 2004, and 2003 were $1,301,294, and $5,509,572, respectively. The
decrease in interest and dividend income during the three and nine months ended
September 30, 2004 was primarily due to the July 31, 2003 recapitalization of
Fitness Quest, Inc., which resulted in a special dividend in the prior year of
$4.7 million. Details of this transaction are more fully described below. Operating Expenses Total operating expenses during the three months ended September 30, 2004,
and 2003 were $952,306 and $843,935, respectively. Total operating expenses
during the three months ended September 30, 2004 and 2003 included advisory
fees of $475,851 and $544,880, respectively, professional




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fees of $215,031 and
$39,067, respectively, and interest and other expenses of $242,736 and $241,084,
respectively. Total operating expenses during the nine months ended September 30, 2004,
and 2003 were $2,740,956 and $2,393,606, respectively. Total operating expenses
during the nine months ended September 30, 2004 and 2003 included advisory fees
of $1,409,707 and $1,479,334, respectively, professional fees of $598,917 and
$215,929, respectively, and interest and other expenses of $676,247 and
$642,247, respectively. The increase in operating expenses during 2004 was a
result of costs associated with the settlement of outstanding litigation and
the preparation of an exemptive order with the SEC as more fully described
below, increase borrowings incurred in the
current year and direct costs associated with implementing additional
Sarbanes-Oxley compliance requirements. Net Realized and Unrealized Gains (Losses) on Investment Transactions During the three months ended September 30, 2004 and 2003, valuation of
our equity and mezzanine investments resulted in net realized and unrealized
gains (losses) on investments of $3,510,388 and $(1,723,926), respectively. During the
nine months ended September 30, 2004 and 2003, valuation of our equity and
mezzanine investments resulted in net realized and unrealized gains on
investments of $3,098,786 and $1,264,622, respectively. At September 30, 2004 and
December 31, 2003, we had investments in eleven privately-held companies which
are subject to general stock market and business conditions. The investment
gains during 2004 were primarily due to the sale of Fitness Quest, the merger transaction
with Integrated Physical Solution, Inc. and the
recapitalization of Value Creation Partners, net of
a write down in the valuation of
Disposable Products Company, Inc.
all as more fully described below.
The unrealized gains(losses) during 2003 were primarily due to an increase in
the valuation of Fitness Quest, Inc. and a write-down in the valuation of
Petroleum Partners, Inc. as more fully discussed below. Financial Condition, Liquidity and Capital Resources At September 30, 2004 and December 31, 2003, we had $19,976 and
$4,688,731, respectively, in unrestricted cash and cash equivalents which were
primarily invested in United States Treasury securities. Restricted cash
balances are held under direction of the lender as loan collateral and are not
readily available to fund investments or pay operating expenses. Our management generally believes that our cash and cash equivalents,
together with proceeds from our investments, will provide us with the liquidity
necessary to pay our operating expenses and make follow-on investments as
deemed appropriate. We began making investments in 1997 and are now actively in the
phase of the business plan which emphasizes positioning our more mature
portfolio companies for appropriate liquidity events. However, because of the
inherent uncertainty with respect to the timing of liquidity events, the
Company entered into a $1.5 million short-term note arrangement with Huntington
National Bank in March 2003 for the purpose of paying operating expenses
pending potential liquidity events. The note was increased to $2.5 million on
June 28, 2004. The note is unsecured and carries an interest rate of prime plus
1% (5.75% at September 30, 2004). As of September 30, 2004, $2,480,000 million
has been drawn down on the note. In October 2004, the note was repaid in
full from the proceeds of the sale of Fitness Quest and the recapitalization of Value
Creation Partners as more fully described below. At September 30, 2004 and December 31, 2003, we had stockholders equity
of $67,749,789 and $66,090,665, respectively, resulting in a net asset value
per share of $17.78 and $17.34, respectively. At September 30, 2004 and December 31, 2003, we had $ 8,480,000 and
$7,500,000 of outstanding indebtedness, respectively. For the nine months ended
September 30, 2004 and 2003, the weighted average interest rate on this
indebtedness was 4.92% and 4.22% respectively. Brantley Venture Partners II, L.P., Brantley Venture Partners III, L.P.
and Brantley Partners IV, L.P. hold, in the aggregate, approximately $154
million of private equity investments. These partnerships are related to our
investment adviser in a manner that required the receipt, from the Securities
and Exchange Commission, of an exemption from certain provisions of the
Investment Company Act of 1940 in order to




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permit us, under certain
circumstances, to invest in the same portfolio companies as the other private
investment funds managed by our investment adviser. We intend to use our cash to fund operations, make follow on investments
in our existing portfolio companies as deemed appropriate and distribute any remaining proceeds from
liquidity events to stockholders (see Overview). At September 30, 2004 and December 31, 2003, the aggregate cost of the
investments held was $26.2 million and $25.2 million, respectively, and their
aggregate market value was $64.5 million and $60.4 million, respectively, for
an aggregate fair value appreciation of $38.3 million and $35.2 million,
respectively. We did not have material off-balance sheet arrangements, as defined in
Item 303(a) of Regulation S-K under the Exchange Act for the nine months ended
September 30, 2004. Our contractual obligations as of September 30, 2004 are: Payment DueLess than 1
    
    
    
    
    
    
    
    
    
    More thanContractual
Obligations
    
    Total
    
    year or on demand
    
    1 to 3 years
    
    3 to 5 years
    
    5 yearsDebt Obligations
    
    $
    8,480,000
    
    
    $
    8,480,000
    
    
    
    
    
    
    
    
    
    
    
    Total Contractual
Obligations
    
    $
    8,480,000
    
    
    $
    8,480,000
    
    
    
    
    
    
    
    
    
    
    
    
 Portfolio Company Investments The following is a list of companies in which we had an investment and the
cost and fair value of such securities at September 30, 2004. Name of Company
    
    Nature of its Principal Business
    
    Cost
    
    Fair ValueDisposable Products Company, LLC
    
    Non-Woven Paper Products
Manufacturer
    
    
    4,795,049
    
    
    
    3,628,381Fitness Quest, Inc.
    
    Fitness Products Direct Marketer
    
    
    2,225,620
    
    
    
    11,186,539Flight Options International,
Inc.
    
    Private Air Travel Services
    
    
    5,562,500
    
    
    
    32,500,000Health Care Solutions, Inc.
    
    Home Health Care Provider
    
    
    1,573,210
    
    
    
    1,602,611The Holland Group, Inc.
    
    Temporary Staffing
    
    
    2,125,000
    
    
    
    2,125,000National Rehab Partners, Inc.
    
    Rehabilitation Services
    
    
    1,481,513
    
    
    
    1,481,513Integrated Physician Solutions,
Inc.
    
    Pediatric Physician Practice
Management Group
    
    
    3,839,448
    
    
    
    5,112,528Prime Office Products, Inc.
    
    Office Products Distributor
    
    
    1,600,000
    
    
    
    1,600,000Streamline Foods, Inc.
    
    Food Products Manufacturer and
Distributor
    
    
    795,000
    
    
    
    795,000Value Creation Partners, Inc.
    
    Food Products Manufacturer and
Distributor
    
    
    2,145,460
    
    
    
    4,489,000International Total Services,
Inc.
    
    Security
    
    
    68,410
    
    
    
    101Total
    
    $
    26,211,210
    
    
    $
    64,520,673




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Our individually significant equity and mezzanine investments at September
30, 2004 are described below: Disposable Products Company, LLC On August 10, 1998, we 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. Disposable Products is an
acquisition strategy company in the business of manufacturing and converting
paper and non-woven materials into wiping products for sale to commercial,
institutional, industrial and government markets. In addition, Disposable
Products is a converter and reseller of other safety and industrial/janitorial
products. Proceeds of the transaction were used to complete Disposable
Products first acquisition. The terms of the debt facility call for a 12%
interest rate per annum. We also received a detachable capital stock purchase
warrant exercisable for 65% of the fully-diluted capital stock of Disposable
Products at the time of exercise at a nominal exercise price. In addition,
through September 30, 2004 we funded additional 12% promissory notes of
$3,795,049 to Disposable Products. Due to the portfolio companys working
capital constraints, we wrote down our investment in Disposable Products Company
at December 31, 2003 and June 30, 2004 generating unrealized losses of
$756,661 and $410,007 respectively. Fitness Quest, Inc. On December 16, 1997, we 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. As a result, we 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. 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 for other acquisitions. Fitness Quest has been in the fitness
promotional products business since 1994. Fitness Quest operates in a highly
competitive industry and is dependent on the management talent and efforts of
key personnel for its success. We do not believe that Fitness Quest is
dependent on a single or small number of customers, possesses significant
intellectual property, or is operating in an unusually regulated industry. During 1997, Fitness Quest increased its revenue and improved its
operating margins and profits. After a complete evaluation, our board of
directors re-valued our Fitness Quest investment 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 financial
measurements of similar private companies. In addition to the above Series A
10% Convertible Preferred Stock, we funded $1,751,300 to invest with Brantley
Venture Partners III, L.P. in a $3.5 million 10% senior subordinated debt
investment in Fitness Quest in 2000. In addition, we received a warrant to
purchase 181,172 shares of Fitness Quest common stock for $0.01 per share. The
proceeds of the more recent investment were used to fund Fitness Quests
working capital needs. During the fourth quarter of 2000, we exchanged the
senior subordinated debt investment and related unpaid interest for 679,641
shares of Fitness Quest common stock. At March 31, 2003, Fitness Quest had continued to increase its revenues,
improve its operating margins, and reduce its debt. As a result, the Board of
Directors increased the value of the investment to $15,000,000 resulting in an
unrealized gain of $6,341,959 for the quarter ending March 31, 2003. On July 31, 2003, Fitness Quest successfully completed a recapitalization
of the company. As a result of this transaction, we received a distribution
from Fitness Quest of $7.3 million, including special and ordinary dividends of
$5,234,338, of which $567,000 was in repayment of previously accrued preferred
stock dividends. Subsequent to this transaction, we maintain a 15.1% ownership
interest in the company with an estimated fair value of $ 11.2 million.




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In October 2004, we sold our primary investment in Fitness Quest, Inc.
As a result, we received cash of $6.6 million, a receivable for further
proceeds of approximately $2.2 million and a minority equity interest worth approximately
$2.4 million. Flight Options International, Inc. (Formerly Corporate Wings, Inc.) On December 23, 1997, we funded $2.1 million to invest with Brantley
Venture Partners III, L.P. in a $6.0 million preferred stock issue for Flight
Options International, Inc. Our investment consists of approximately 2,576,000
shares of Flight Options Series A 8% Convertible Preferred Stock at $0.8152 per
share. Flight Options provides complete private air travel service through the
sale of fractional interests in pre-owned jet aircraft. The proceeds of the
transaction were used by Flight Options to continue to execute an acquisition
strategy. We believe Flight Options is one of the top five providers of
fractional interests in aircraft in the United States, a highly competitive
industry and is dependent on the management talent and efforts of key personnel
for its success. Flight Options is subject to certain regulations of the
Federal Aviation Administration. We do not believe it is dependent on a single
or small number of customers or possesses significant intellectual property. On December 29, 1998, we completed a second private equity investment in
Flight Options. In this investment, we purchased $962,500 of a $5.5 million
preferred stock transaction led by The Provident Bank. Our purchase represents
approximately 260,135 shares of Class A 8% Convertible Preferred Stock at $3.70
per share. The proceeds were used by Flight Options to fund the expansion of
its fractional ownership program and to continue to execute its acquisition
strategy. During 1998, Flight Options completed the acquisition of Miller
Aviation. Based upon the price of this subsequent financing and the operating
performance of Flight Options during 1998, the fair value of our original
investment 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 was approved by our board of directors. On August 31, 1999, 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 our investment valuation guidelines, this transaction resulted
in a valuation increase on our Flight Options investment of $1,886,030 or $0.50
per share. On July 11, 2000, we guaranteed a portion of Flight Options third-party
borrowings. As a result, we were issued a warrant to purchase 36,000 shares of
Flight Options common stock at a price of $0.01 per share. This guarantee was
terminated prior to December 12, 2000. On December 12, 2000 we purchased 469,925 shares of Flight Options Class C
8% Preferred Stock at $5.32 per share for a total investment of $2.5 million.
The proceeds of the transaction were used by Flight Options to fund the
continued expansion of its fractional ownership program. On June 30, 2001, Flight Options received offers from institutional
investors to purchase convertible preferred stock or subordinated debt
securities of Flight Options which support the valuation used to complete the
December 12, 2000 Class C 8% Preferred Stock transaction described in the
preceding paragraph. As a result, and consistent with our investment valuation
guidelines, our board of directors approved a valuation increase on the Flight
Options investment which resulted in our reporting an unrealized gain of
$2,742,889 or $0.72 per share for the quarter ended June 30, 2001. On December 21, 2001, Flight Options, Inc. and Raytheon Travel Air, a
Wichita, Kansas-based unit of Raytheon Company, a Lexington, Mass, based
defense contractor, agreed to combine operations into one fractional aircraft
ownership program to be known as Flight Options. The transaction was completed
during the quarter ended March 31, 2002. During the second quarter of 2003,
Raytheon Company provided additional debt and equity financing to Flight
Options.




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As a result of the transactions described above, our board of directors
has met each quarter to review the terms of the then current transactions.
Consistent with our valuation guidelines, the board has used private market
methods to value our investment in Flight Options, Inc. and approved increases
in the value of our investment in Flight Options, Inc. to its current $32.5
million. At September 30, 2004, the financial statement value of our investment
in Flight Options represents an increase of more than 484% from its original
purchase price and makes up 41% of our total assets. Health Care Solutions, Inc. On September 30, 1997, we funded a $1.5 million convertible junior
subordinated promissory note facility for Health Care Solutions, Inc. Health
Care Solutions is an acquisition strategy company in the home healthcare
services market with a strong presence in the Midwest and Great Lakes regions.
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 our commitment to provide this
facility, we received warrants to purchase up to $450,000 of common stock
valued at an exercise price of 10% of an initial public offering 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 initial public offering.
The warrants are currently exercisable. The proceeds of the notes were used by
Health Care Solutions to help finance acquisitions. In 2000, Health Care Solutions completed a re-capitalization plan,
including a two-for-one reverse stock split. As a result, we agreed to exchange
our convertible junior subordinated promissory note and accrued interest
thereon for 246,994 shares of Series C 8% Convertible Preferred Stock at an
exchange rate of $7.50 per share. The warrants to purchase up to $450,000 of
common stock at an exercise price of 10% of an initial public offering price or
at $3.50 per share remain outstanding and have been adjusted to reflect the
reverse stock split. In addition to the above Series C 8% Convertible Preferred Stock, we
funded $500,000 and $299,000 12% Convertible Subordinated Notes from Health
Care Solutions in 2000. As part of this transaction, we received a warrant to
purchase up to $50,000 of Health Care Solutions common stock at an exercise
price equal to the lower of the price determined by an initial public offering
or $7.50 per share. On March 7, 2001, we agreed to exchange the $500,000
Convertible Subordinated Note for 71,880 shares of Series D Convertible
Preferred Stock. On January 29, 2002, we funded a $1,250,000 12% Convertible
Subordinated Note to Health Care Solutions. On May 1, 2003, Health Care Solutions sold its respiratory division
assets. Through July 31, 2003, Health Care Solutions sold its remaining
operating assets. As a result of these transactions, we have received $2.2
million in proceeds through September 30, 2004. In addition we expect to
receive additional proceeds of approximately $1.25 million over the next 18
months. The remaining corporate assets of Health Care Solutions are presently
being marketed for a projected sale in 2005. The Holland Group, Inc. On July 13, 2000, we funded 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. The Holland Group is a provider of temporary staffing and
human resource management services that currently operates 35 branches in five
states. In this transaction, we purchased 282,530 shares of The Holland Groups
Series A 8% Convertible
Preferred Stock. In February 2002 we purchased a $50,000 12% convertible
subordinated note from The Holland Group which was repaid with interest in
December 2002. National Rehab Partners, Inc. On August 10, 1999, we funded $1.4 million of a $1.5 million commitment to
invest with Brantley Partners IV, L.P. and a third party equity group in a
$12.0 million preferred stock issue for National Rehab




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Partners, Inc. Pursuant
to this commitment, we purchased 2.2 million shares of Class A 8% Convertible
Preferred Stock. The proceeds of this transaction were used to complete the
acquisition of a group of rehabilitation management service providers. The
remainder of the commitment has been funded upon the successful closing of
additional acquisitions. National Rehab Partners is a Brentwood, Tennessee
rehabilitation management service company providing rehabilitation services
through acute care hospitals and hospital systems throughout the United States.
National Rehab Partners is the only national rehabilitation company focused
exclusively on helping hospitals develop their outpatient rehabilitation
services. On January 10, 2001, we funded a $26,126 10% promissory note from National
Rehab Partners. On June 13, 2001, the $26,126 note and the related accrued
interest were cancelled and replaced with a $27,228 10% promissory note. Integrated Physician Solutions, Inc. (Formerly Pediatric Physicians
Alliance, Inc.) On January 28, 1999, we funded a $3.2 million commitment to invest with
Brantley Venture Partners III, L.P. in a $7.9 million preferred stock issue for
Integrated Physician Solutions, Inc. Pursuant to our commitment, we purchased
793,000 shares of Class A-2 10% Convertible Preferred Stock. Integrated
Physician Solutions is a physician practice management systems provider. Their
objective is to develop the leading integrated physician practice management
system in the United States. Integrated Physician Solutions is dependent on the
management talent and effort of key personnel for its success in this highly
competitive industry. We do not believe it is dependent on a single or small
number of customers, possesses significant intellectual property or that it is
subject to significant regulations. The proceeds of the transaction were used
to complete the acquisition of a number of physician practices. In addition to the above Class A-2 10% Convertible Preferred Stock, in
2000 we funded $267,448 and $400,000 to invest in promissory notes, with
detachable warrants, in Integrated Physician Solutions. The detachable warrants
are for the purchase of 30,000 shares of Integrated Physician Solutions common
stock at $4.00 per share. Integrated Physician Solutions, Inc. has signed a definitive agreement to
merge with SurgiCare, Inc. (AMEX: SRG) for stock in SurgiCare, Inc. which will
be renamed Orion HealthCorp, Inc.. As a result of this transaction, holders
of Integrated Physician Solutions, Inc. stock and certain notes, will be
exchanged for an aggregate number of shares of Orion Class A Common Shares
equal to the number of such shares held by SurgiCares equityholders
immediately prior to the acquisition. Subsequent to the combination, Orion will
execute a restructuring of its debt and an approximate $7.3 million private
equity offering of Orion Class B Common Shares. Closing of the transactions
contemplated above are conditioned upon several factors, including: approval of
SurgiCares stockholders; approval of continued listing of Orions stock on the
American Stock Exchange; satisfactory completion of due diligence by certain of
the parties; satisfactory resolution of outstanding issues with creditors;
simultaneous closing of all transactions; and other conditions commonly found
in similar transactions. We expect the proposed transaction to close in
November 2004. At September 30, 2004, our investment in Integrated Physician
Solutions, Inc. was revalued to reflect the fair value of the Orion stock
we will receive in the contemplated merger, which resulted in a third quarter
2004 unrealized gain of $1,248,180. Petroleum Partners, Inc. On June 7, 2001, we entered into a $2.7 million commitment to invest with
Brantley Partners IV, L.P. in a $15.0 million preferred stock and subordinated
debt issue for Petroleum Partners, Inc. In connection with this commitment, we
purchased 250,000 shares of Class A 8% Convertible Preferred Stock at $1.00 per
share, 600,000 shares of Class B 8% Convertible Preferred Stock at $2.00 per
share, and funded a $1,250,000 10% Convertible Subordinated Note with a
detachable warrant for the purchase of 78,125 shares of common stock at $0.01
per share. Petroleum Partners, based in Cleveland, Ohio, is a provider of
outsourced maintenance services to the petroleum industrys retailers and
refineries. The proceeds from the transaction were used to acquire a company
which is a leading provider of petroleum and petrochemical




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handling equipment
and outsourced facilities maintenance services to providers of fuel delivery
systems such as gasoline retailers and refineries. The equipment distributed by
the company includes petroleum storage tanks, pumps, fuel dispensers, flexible
piping, tank valves, leak detection gauges, canopies, air compressors and
service station lighting equipment. In addition to the above investment, we funded $625,000 of 10% Convertible
Subordinated Notes through December 31, 2002. The proceeds of the notes were
used for operating purposes. As a result of adverse operating performance, the Board of Directors
approved a valuation reduction of our investment to $1,874,219 thereby
generating a $1,450,781 investment loss for the quarter ended March 31, 2003.
At that time, the Board of Directors also approved a write-off of all interest
and dividends receivable relating to this investment of $517,886. For the
quarter ended June 30, 2003, the Board of Directors approved a second valuation
reduction in our investment by $1,874,219 thereby generating a 2003 year to
date investment loss of $3,325,000. Prime Office Products, Inc. (Formerly Business Essentials, Inc.) On April 22, 1999, we 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. Pursuant to our
commitment, we purchased 510,000 shares of Class A 8% Convertible Preferred
Stock at $2.00 per share. Prime Office Products is an office products marketing
and distribution company based in Nashville, Tennessee. The first part of the
commitment was funded to launch an acquisition strategy focused on office
distribution companies serving primarily commercial and industrial customers.
The remainder of the commitment is being funded upon the closing of additional
acquisitions. On January 8, 2002, we purchased an additional 200,000 shares of
Class A 8% Convertible Preferred Stock at $2.00 per share. On July 31, 2002, we
purchased an additional 40,000 shares of Class A 8% Convertible Preferred Stock
at $2.00 per share to fund acquisitions. On January 24, 2004, we purchased an
additional 50,000 shares of Class A 8% Convertible Preferred Stock at $2.00 per
share to fund acquisitions. Streamline Foods, Inc. On February 7, 2002 we funded a $795,000 commitment to invest with
Brantley Partners IV, L.P. in a $7,950,000 preferred stock and subordinated
debt issue for Streamline Foods, Inc. Pursuant to our commitment we purchased
approximately 898,000 shares of Series A 8% Convertible Preferred Stock at
$0.78 per share and a $95,000 13% Convertible Subordinated Note with warrants
to purchase 27,500 shares of common stock at $0.01 per share. The proceeds were
used by Streamline Foods for a buy-out of the company from its previous owner.
Streamline Foods, Inc. sources, blends, packages and distributes high sugar
content food products for branded multi-national food companies and private
label manufacturers. Value Creation Partners, Inc. On June 14, 2000, we completed a $2.1 million commitment to invest with
Brantley Partners IV, L.P. and several other private equity investors in a
$23.8 million preferred stock issue for Value Creation Partners, Inc. Pursuant
to this commitment, we purchased approximately 35,000 shares and 269,989 shares
of 8% Convertible Preferred Stock at $5.00 and $7.30 per share, respectively.
Value Creation Partners is an acquisition strategy company in the food
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 premium ingredients, mixes and products,
including equipment, for all segments of the baking industry. Their products
are sold primarily to retail bakeries, bakery distributors, supermarket
in-store bakeries, food wholesalers and food service establishments. Value
Creation Partners has recently entered into an agreement to
recapitalize the companys balance sheet which will result in a
cash distribution to us and a continuing ownership interest in the
entity. The recapitalization is expected to close in November 2004.
As a result of the Companys continued strong operating performance and the
above described transaction, our board of directors approved a revaluation of our investment
to $4,489,000, resulting in a third quarter 2004 unrealized gain of $2,263,040.




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Impact of Inflation We do not believe that our business is materially affected by inflation,
other than the impact that 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 our investments. Disclosure Regarding Forward-Looking Statements Information contained in this Quarterly Report on Form 10-Q may contain
forward-looking statements which can be identified by the use of
forward-looking terminology such as may, will, expect, intend,
anticipate, estimate or continue or the negative thereof or other
variations or similar words or phrases. The matters described throughout this
Quarterly Report on Form 10-Q and in any exhibits of which this Quarterly
Report is a part constitute cautionary statements identifying important factors
with respect to any such forward-looking statements, including certain risks
and uncertainties, that could cause actual results to differ materially from
those in such forward-looking statements. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk We have invested in small and medium-sized companies, and our investments
are considered speculative in nature. Our investments often include securities
that are subject to legal or contractual restrictions on resale that adversely
affect the liquidity and marketability of such securities. As a result, we are
subject to risk of loss which may prevent our stockholders from achieving price
appreciation and dividend distributions. The portion of our portfolio
consisting of investments in private companies is also subject to valuation
risk. We value our privately held investments based on a determination of their
fair value made in good faith by our board of directors on a quarterly basis in
accordance with our established guidelines. In the absence of a readily
ascertainable market value, the estimated values of our investments may differ
significantly from the values that would exist if a ready market for these
securities existed. Any changes in valuation are recorded in our statements of
operations as Net unrealized gain (loss) on investments. We consider the management of equity price risk essential to conducting
our business and maintaining our profitability. Our portfolio consists of
investments in private companies. We anticipate 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. This could also affect our
ability to generate cash through the sale of private equity investments, since
there may not be realistic initial public offering opportunities. 
 Item 4. Controls and Procedures  (a)
    
    As of the end of the period covered by this quarterly report on Form
10-Q, the Companys chief executive officer and chief financial
officer conducted an evaluation of the Companys disclosure controls
and procedures (as defined in Rules 13a-15 and 15d-15 of the
Securities Exchange Act of 1934). Based upon this evaluation, the
Companys chief executive officer and chief financial officer
concluded that the Companys disclosure controls and procedures are
effective in timely alerting them of any material information relating
to the Company that is required to be disclosed by the Company in the
reports it files or submits under the Securities Exchange Act of 1934.(b)
    
    There have not been any significant changes in the Companys internal
control over financial reporting that occurred during our most
recently completed fiscal quarter that have materially affected, or
are reasonably likely to materially affect, the Companys internal
control over financial reporting.




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings On September 25, 2002, Phillip Goldstein, a director and shareholder of
the Company filed a lawsuit in the District Court for the Northern District of
Ohio against us, Robert Pinkas, James Oliver, Benjamin Bryan and IVS
Associates, Inc. alleging, among other things, that the Company engaged in
wrongdoing and that the individual defendants breached their fiduciary duties
during the Annual Meeting of Stockholders held on September 17, 2002. Mr.
Goldstein alleges that the Companys actions surrounding the closing of the
polls disenfranchised certain shareholders. Mr. Goldstein sought to have votes
for which he had proxies, which were submitted after the polls were closed,
counted. He also sought an order declaring his nominees to be directors of the
Company. The Company also asserted a counterclaim against Mr. Goldstein
alleging violations of the proxy rules and the failure to disclose his
participation in a group as required by Regulation 13D. Mr. Goldstein denied
the allegations of the counterclaims. Mr. Goldsteins motion for a temporary
restraining order was denied, and a hearing for a preliminary injunction was
held on November 18-21, 2002. On December 18, 2002, Magistrate Jack B. Streepy
issued a report and recommendation that Mr. Goldsteins motion for a
preliminary injunction be granted. Both parties filed objections to the
Magistrates report. No order has been issued by the Court to date. On February
13, 2003, the judge set a trial date of March 19, 2003, and on March 19, 2003,
the judge issued a stay of the proceeding. On February 26, 2004, the Court
approved the proposed settlement of the lawsuit as more fully described below. On March 19, 2003, we entered into a Memorandum of Understanding with
Phillip Goldstein, a director of the Company, pursuant to which Mr. Goldstein
agreed to dismiss the lawsuit he filed against us in September 2002, subject to
compliance with the Investment Company Act of 1940. See Part II, Item 1. Legal
Proceedings. The Court approved the proposed settlement on February 26, 2004. On June 4, 2003, we filed an application for exemptive relief from certain
provisions of the 1940 Act in order to effect the provisions of the Memorandum
of Understanding. On June 18, 2003, we received comments on our application
from the Staff (the Staff) of the Division of Investment Management of the
Securities and Exchange Commission (the SEC). On August 14, 2003 we responded
to those comments. With our response, we proposed a new Memorandum of
Understanding that was submitted to the Staff. On November 12, 2003, we
received comments regarding our August 14, 2003 response. We responded to such
comments on December 18, 2003. On February 11, 2004, the Staff of the Division
of Investment Management requested a response from the Board of Directors,
which the Board provided on February 15, 2004. The Staff responded with further
comments by letter dated September 24, 2004 (the September 2004 Letter). In
the September 2004 Letter, the Staff advised the Company that it would not
recommend approval of the Companys application for exemptive relief to approve the
Memorandum of Understanding, based on its
interpretation of the SECs rules regarding investment adviser compensation and
the application of those rules to the proposed new investment advisory
agreement to be entered into between the Company and Brantley Capital
Management, L.L.C., described below, and its analysis of the Memorandum of
Understandings provision for the Companys reimbursement to Mr. Goldstein of
certain expenses (not to exceed $275,000) he incurred in connection with the
litigation related to the Annual Meeting of Stockholders held on September 17,
2002. The Staff has currently placed the application for exemptive relief on
inactive status.




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The Memorandum of Understanding is subject to approval by the
stockholders. There can be no assurance that this exemptive relief will be
granted. Pursuant to the proposed Memorandum of Understanding, we would agree,
among other things:  
    
    To cause there to be four (4) directors who are not interested persons
as defined under the 1940 Act and cause the board to be exactly seven (7)
directors in total;
    
    If Mr. Goldstein or Gerald Hellerman is no longer director of the Company
then whichever of Mr. Goldstein or Mr. Hellerman remains on the board
shall have the right to select a nominee;
    
    To not convert the Company from being an advised fund to an internally
managed fund unless a majority of the independent directors agree;
    
    To allow any independent director to request independent counsel, subject
to approval of the board, which cannot be unreasonably withheld; and
    
    To refrain from making defamatory remarks about any party to the agreement. In addition, the proposed Memorandum of Understanding provides that at the
next Annual Meeting of Stockholders following SEC approval:  
    
    We would ask shareholders to approve a plan of orderly disposition of the assets of the
Company or a sale of the assets with the goal of prompt cash distribution to shareholders;
    
    We would ask shareholders to approve a new investment advisory agreement pursuant to which,
prospectively:  
    
    The advisors fees would be reduced from 2.85% to 2.5% of our net asset value;
    
    All stock options would be forfeited and cancelled; and
    
    The advisor would be entitled to receive a fee equal to 20% of the aggregate
distributions made by the Company in excess of $10.00 per share; however,
none of the amount would be paid until aggregate distributions totaled $12.50
per share. The proposed Memorandum of Understanding also includes provisions that
would require the parties to take all steps necessary to accomplish the goals
of the Memorandum, including voting their shares in favor of the proposals.
Under the proposed memorandum, we would also be required to reimburse Mr.
Goldstein for certain expenses (not to exceed $275,000) he incurred in
connection with the proxy solicitation and litigation related to the Annual
Meeting of Stockholders on September 17, 2002. Mr. Goldstein would also agree
not to engage in, lead or fund a proxy contest while the agreement is in
effect. The term of the new proposed Memorandum of Understanding would run
until December 31, 2006. A shareholder of the Company has submitted a proposal as set
forth below for
consideration at the Companys next annual meeting. RESOLVED, the shareholders of Brantley Capital Corporation recommend that the
Board of Directors promptly take the steps necessary to implement the proposed
settlement of the lawsuit brought by Phillip Goldstein against Brantley and
other parties. If the proposal is adopted by the shareholders, the board of directors will
consider the MOU to have been approved by the shareholders and will determine
the appropriate process to implement the MOU in an orderly manner and to take
such other steps in furtherance thereof as it deems appropriate. If we receive
necessary government and stockholder approvals, the
effect of the Memorandum of Understanding will be that we intend to make only
follow-on investments, and any remaining proceeds we receive from liquidity
events are intended to be distributed to stockholders. On October 8, 2002, Thomas Kornfeld and Robert Strougo filed a purported
class action lawsuit against the Company, the directors of the Company
excluding Phillip Goldstein, IVS Associates, Inc. and JMP Securities LLC,
alleging a series of derivative and direct claims that the directors have
breached their fiduciary duties and that the Company engaged in wrongdoing with
respect to the Annual Meeting of Stockholders held on September 17, 2002. The
factual allegations are substantially similar to the complaint filed by Mr.
Goldstein and also include allegations of conversion of corporate funds. The
complaint seeks, among other things, an order declaring Mr. Goldsteins
nominees to be directors of the Company, an order declaring that the investment
advisory agreement be terminated and damages for breach of fiduciary duty. On
January 12, 2003, the plaintiffs filed a motion to consolidate this lawsuit
with the lawsuit by Goldstein discussed above, which was subsequently denied.
On April 5, 2004 the case was dismissed with prejudice and the court retained
jurisdiction over the implementation and conservation of the settlement
agreement between the parties.




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On October 4, 2002, the Company received notice from the Midwest Regional
Office (MRO) of the SEC that they were inquiring into activities involving
the Annual Meeting. The Company has and will cooperate with the inquiry. The
letter from the MRO states that the inquiry should not be construed as an
indication by the staff of that office that any violation of law has occurred,
or as a reflection upon any person or entity that may be involved. There has
been no communication between the MRO and the Company since the fourth quarter
of 2002. 
 Item 6. Exhibits and Reports on Form 8-K a. Exhibits Articles of Incorporation and By-laws Exhibit 3  (1)
    
    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)
    
    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)(3)
    
    Amendment to the Charter of the Company (Exhibit 3.3 to the
Registration Statement filed on October 26, 2001, 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 31, 996, which exhibit is incorporated herein by
reference) Exhibit 10Material Contracts  (1)
    
    Dividend Reinvestment and Cash Purchase Plan (Exhibit 2.e to Amendment
No. 3 to the Registration Statement filed on November 26, 1996, which
exhibit is incorporated herein by reference)(2)
    
    Form of Investment Advisory Agreement between the Company and the
Investment Adviser (Exhibit 2.g to Amendment No. 3 to the Registration
Statement filed on November 26, 1996, which exhibit is incorporated
herein by reference)(3)
    
    Stock Option Plan and Form of Option Grants (Exhibit 2.i. 1 to
Amendment No. 2 to the Registration Statement filed on November 22,
1996, which exhibit is incorporated herein by reference)(4)
    
    Disinterested Director Option Plan and Form of Option Grants (Exhibit
2.i.2 to Amendment No. 2 to the Registration Statement filed on
November 22, 1996, which exhibit is incorporated herein by reference)(5)
    
    Form of Custodian Contract (Exhibit 2.j to Amendment No. 2 to the
Registration Statement filed on November 22, 1996, which exhibit is
incorporated herein by reference)(6)
    
    Form of Registrar, Transfer Agency and Service Agreement (Exhibit
2.k.l to Amendment No. 2 to the Registration Statement filed on
November 22, 1996, which exhibit is incorporated herein by reference)




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(7)
    
    Form of Administration Agreement (Exhibit 2.k.2 to Amendment No. 2 to
the Registration Statement filed on November 22, 1996, which exhibit
is incorporated herein by reference)(8)
    
    Form of Indemnification Agreement for Directors and Officers (Exhibit
2.s to Amendment No. 2 to the Registration Statement filed on November
22, 1996, which exhibit is incorporated herein by reference)(9)
    
    Memorandum of Understanding dated March 19, 2003 (Exhibit 99.1 to Form
8-K filed March 20, 2003.) Exhibit 31  (1)
    
    Certification of Chief Executive Officer Pursuant to Rules
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as
amended.(2)
    
    Certification of Chief Financial Officer Pursuant to Rules
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as
amended. Exhibit 32Other  (1)
    
    Certification Pursuant to 18 U.S.C. 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. Submitted herewith.(2)
    
    Certification Pursuant to 18 U.S.C. 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. Submitted herewith.




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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 CORPORATIONDate: November 15, 2004
    
    By: /s/ ROBERT P. PINKASRobert P. PinkasChairman of the Board andChief Executive OfficerDate: November 15, 2004
    
    By: /s/ TAB A. KEPLINGERTab A. KeplingerVice President andChief Financial Officer