Report for the year ending ...

              Report for the Year Ending
June 30, 2010
Mobilizing Sources of Equity Capital for Oklahoma
Businesses
2
April 26, 2011
Governor Mary Fallin
Lt. Governor Todd Lamb
President Pro Tempore Brian Bingman
Speaker Kris Steele
Members of the Legislature
Director of Commerce Dave Lopez
Economic Development Officials
The Oklahoma Capital Investment Board (OCIB or Board) helps create and attract new sources of equity capital for
Oklahoma entrepreneurs. Most of the Board’s work has been delivered through its venture investment (VIP) and
capital access programs (CAP). The VIP supports investments in private, professionally managed venture capital
firms that have a history of producing solid returns for investors and that have a sound strategy for finding
investment opportunities in Oklahoma. The CAP is a credit enhancement tool available for banks and other lending
institutions to help them stretch to make loans to Oklahoma businesses. OCIB operates these programs with the
belief that there are benefits in maintaining a long-term focus and that patient, prudent investing will enable the
Board to fulfill its mission to the greatest degree.
Through the development of the Board’s third portfolio it has invested in eleven venture funds. OCIB has
targeted funds that are focused on sectors of interest or expected growth within the state. Examples include funds
focusing on bio-tech, healthcare, aerospace and manufacturing.
During the year, OCIB supported funds have invested an additional $1.6 million in equity capital in Oklahoma
companies. This brings the investment totals for OCIB’s venture program to approximately $135 million in
equity capital to 30 Oklahoma companies. Through March of 2010, these companies had created 9,400 jobs and
$204 million in payroll in Oklahoma. As of fiscal year-end, the Board’s total commitments remained at the prior
year level of 19 total funds which represented $69.5 million in total commitments. Of this amount, $64 million
has been advanced.
Over the years, the Board’s Oklahoma Capital Access Program (OCAP) has supported approximately $47 million in
loans to more than 1,500 Oklahoma businesses. In recent years, and in 2010, the large majority of these loans were
to businesses in rural Oklahoma. Only about half these companies provided payroll and employment numbers but
those reporting represented 1,380 new jobs and $40.8 million in payroll.
The Board believes that as the state continues to spend significant resources on technology research and
development in the form of grants, seed funding and other incentives, OCIB’s role of supporting Oklahoma’s
venture capital industry remains extremely important. Many Oklahoman’s, although poised for success, need
outside resources in the form of technical expertise and capital in order to compete in a global market place. The
continued recruitment of active investors with significant resources will be needed to keep our best and brightest
here in Oklahoma.
Michael Mitchelson Devon L. Sauzek
Chairperson President
3
ABOUT OCIB
The Oklahoma Capital Investment Board (OCIB or Board) was established in 1992 and has been working since
then to develop and support the state’s risk capital industry. More specifically, for the past 18 years, OCIB has
worked to establish a venture capital industry capable of supporting Oklahoma’s best and brightest entrepreneurs.
These efforts have focused on supporting the growth of local venture capital firms and on recruiting outside
venture capital firms to the state.
Prior to OCIB’s creation there were two venture capital firms headquartered in Oklahoma. Today this number has
grown, depending upon your definition, to 15 or more Oklahoma-based venture firms and many additional out-of-state
firms spending time in the state looking for great investment opportunities. Investing in local firms as well
as the recruitment of outside firms has been a key part of OCIB’s investment strategy. The successful recruitment
of firms not only brings outside capital to our state, but also needed investment expertise. Their sharing of
knowledge and other resources is key to the development of Oklahoma’s venture capital industry and the
Oklahoma companies it supports.
In FY��10 OCIB staff met with approximately 40 funds that were either asking OCIB to consider making
investments in their funds or that were looking for investment opportunities. In addition, Board supported funds
continued to invest in Oklahoma companies.
FY’10 was a good year for the OCAP in terms of loan enrollment. During the year OCIB’s OCAP enrolled
approximately 30 new loans totaling in excess of $2.25 million. As in years past, a vast majority of these loans
were to rural companies. The year was also successful in that less than $30,000 in claims were filed.
The Board also began the initial work needed to prepare for the 2011 Technology Ventures Summit (TVS). This
event was ultimately held in Tulsa with a day of training for entrepreneurs and angel investors and a second day
for entrepreneurs to present their business plans to investors. Based upon the number of participants and their
feedback, the event was a success.
OCIB also continued to play an active role in supporting the efforts of others working to help Oklahoma
entrepreneurs build and grow their companies. As in the past, the Board participated in and was a sponsor of the
Oklahoma Venture Forum, continued to be supportive of the Oklahoma Venture of the Year Awards Banquet and
participated in and sponsored the Governor’s Cup.
OCIB’s third portfolio is fully committed and the Board has developed initial plans for its fourth portfolio.
Implementation will depend on extension of the Board’s guarantee authority by the Oklahoma Legislature.
4
ORGANIZATION
The Board is a state-beneficiary public trust. There are five Trustees, appointed by the Governor with
the advice and consent of the Senate. Trustees are selected based upon their outstanding knowledge and
leadership, and for their experience in managing venture investments. The Board at fiscal year end 2010
included:
BOARD MEMBER
FY'10 OFFICE
Bill Andrew
Financial Advisor
Edward Jones
Enid, OK
Gerald G. Austin
Executive Vice President, retired
Fleming Companies, Inc.
Oklahoma City, OK
Vice Chairperson
John A. Brock
Owner
Rockford Exploration
Tulsa, OK
Secretary/Treasurer
Jean McGill
President
Noble Investments, Inc.
Tulsa, OK
Michael Mitchelson
Attorney
Oklahoma City, OK
Chairperson
The Board retains Institutional Equity Associates, LLC to provide investment management and
administrative services. The principals of this firm are Robert G. Heard and Devon L. Sauzek. Mr.
Sauzek serves as OCIB president and Diana K. Mooney as administrative officer. General Counsel for
the Board is Robert A. Curry of the firm Conner & Winters, Tulsa. The CPA firm of Finley & Cook,
Shawnee, performed the annual audit.
CONTACTS
For further information contact:
OKLAHOMA CAPITAL INVESTMENT BOARD
Devon Sauzek or Diana Mooney
405/848-9456
AUDIT
5
The annual audit was performed for OCIB by Finley & Cook, Shawnee, and is on file with the State Auditor and
Inspector. The audited financial statements are attached.
6
Oklahoma Capital
Investment Board
Financial Statements
June 30, 2010 and 2009
(With Independent Auditors’ Report Thereon)
OKLAHOMA CAPITAL INVESTMENT BOARD
FINANCIAL STATEMENTS
Table of Contents
Page
Independent Auditors’ Report ........................................................................................................... 1
Management’s Discussion and Analysis ........................................................................................... I-1
Financial Statements:
Statements of Net Assets .............................................................................................................. 3
Statements of Changes in Net Assets ........................................................................................... 5
Statements of Cash Flows ............................................................................................................. 7
Notes to Financial Statements ....................................................................................................... 8
Report on Internal Control Over Financial Reporting and
on Compliance and Other Matters Based on
an Audit of Financial Statements Performed in
Accordance with Government Auditing Standards ......................................................................... 16
- 1 -
1421 East 45th Street • Shawnee, OK 74804
P: 405.878.7300 • www.finley-cook.com • F: 405.395.3300
INDEPENDENT AUDITORS’ REPORT
Board of Trustees
Oklahoma Capital Investment Board
We have audited the accompanying statements of net assets of the Oklahoma Capital Investment Board
(OCIB), a part of the financial reporting entity of the State of Oklahoma, as of June 30, 2010 and 2009,
and the related statements of changes in net assets and cash flows for the years then ended. These
financial statements are the responsibility of OCIB’s management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the financial statements of
certain of the various investment interests in which OCIB had an equity interest as of June 30, 2010 and
2009. Investment interests represented approximately 22% and 20% of OCIB’s total assets as of
June 30, 2010 and 2009, respectively. The financial statements of certain investment interests were
audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates
to the amounts included for certain investment interests, is based on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States
and the standards applicable to financial audits contained in Government Auditing Standards issued by
the Comptroller General of the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the financial statements referred
to above present fairly, in all material respects, the financial position of OCIB as of June 30, 2010 and
2009, and the results of its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
The Management’s Discussion and Analysis (MD&A) on pages I-1 to I-4 is not a required part of the
basic financial statements but is supplementary information required by the Governmental Accounting
Standards Board. We have applied limited procedures, which consisted principally of inquiries of
management regarding the methods of measurement and presentation of the supplementary information.
However, we did not audit this information and express no opinion on it.
(Continued)
- 2 -
INDEPENDENT AUDITORS’ REPORT, CONTINUED
In accordance with Government Auditing Standards, we have also issued our report dated
September 2, 2010, on our consideration of OCIB’s internal control over financial reporting and on our
tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and
other matters. The purpose of that report is to describe the scope of our testing of internal control over
financial reporting and compliance and the results of that testing, and not to provide an opinion on the
internal control over financial reporting or on compliance. That report is an integral part of an audit
performed in accordance with Government Auditing Standards and should be considered in assessing
the results of our audit.
Shawnee, Oklahoma
September 2, 2010
MANAGEMENT’S DISCUSSION AND ANALYSIS
I–1
As management of the Oklahoma Capital Investment Board (OCIB), our discussion and analysis of its
financial performance provides an overview of OCIB’s activities for the fiscal years ended
June 30, 2010 and 2009. Please read it in conjunction with OCIB’s financial statements which begin on
page 3. The financial statements of OCIB include the operations of the Oklahoma Capital Formation
Company, LLC (OCFC).
FINANCIAL HIGHLIGHTS
 In FY-2010, OCIB made a $1,586,000 contribution to its venture investment fund commitments;
 In FY-2010, OCIB received $37,000 in distributions from its Venture Investment Program
(proceeds were applied to the OCFC line of credit);
 In FY-2010, the Oklahoma Capital Access Program (OCAP) enrolled 28 new loans totaling
$2.3 million; and
 In FY-2009, OCIB programs resulted in more than $10.9 million dollars of funding for
Oklahoma companies.
OVERVIEW OF THE FINANCIAL STATEMENTS
This annual financial report consists of two parts: Management’s Discussion and Analysis (this section)
and the basic financial statements. OCIB is a public trust of the State of Oklahoma and follows
enterprise fund reporting; accordingly, the financial statements are presented using the economic
measurement focus and the accrual basis of accounting. Enterprise fund statements offer short-term and
long-term financial information about the activities and operations of OCIB. These statements are
presented in a manner similar to those of a private business.
FINANCIAL ANALYSIS OF OCIB
Net Assets
The following table summarizes the net assets at June 30:
2010 2009
Current assets $ 20,106,328 20,112,028
Noncurrent assets 82,866,379 90,315,844
Total assets 102,972,707 110,427,872
Liabilities 35,975,734 40,027,509
Net assets $ 66,996,973 70,400,363
MANAGEMENT’S DISCUSSION AND ANALYSIS, CONTINUED
I–2
FINANCIAL ANALYSIS OF OCIB, CONTINUED
Net Assets, Continued
Assets at June 30, 2010 and 2009, principally consisted of $80,485,000 and $87,300,000 of tax credits,
respectively, of which $20,000,000 was current and $60,485,000 and $67,300,000 was noncurrent for
2010 and 2009, respectively. Assets also included investment interests of $22,381,379 and $23,015,844
as of June 30, 2010 and 2009, respectively.
Operating Activities
The operations of OCIB, when combined with OCFC, are dependent upon the results of the investments
made. During 2010 and 2009, no new investment interests were established. A summary of operating
results for 2010 and 2009 is as follows:
2010 2009
Operating expenses:
Management fees $ ( 538,542) ( 554,142)
Accounting, legal, and consultants ( 36,709) ( 28,125)
Other ( 4,048) ( 11,021)
Total operating expenses ( 579,299) ( 593,288)
Other expenses:
Interest expense ( 640,140) ( 1,011,744)
Other ( 1,027) ( 1,358)
Total other expenses ( 641,167) ( 1,013,102)
Net financial losses from investment interests—
equity basis ( 2,182,924) ( 5,259,027)
Change in net assets $ ( 3,403,390) ( 6,865,417)
MANAGEMENT’S DISCUSSION AND ANALYSIS, CONTINUED
I–3
FINANCIAL ANALYSIS OF OCIB, CONTINUED
Operating Activities, Continued
Cash flow from investment interests for 2010 and 2009 was as follows:
2010 2009
Cash payments for investment interests $ ( 1,585,553) ( 3,838,625)
Cash distributions from investment interests 37,094 1,110,764
Net cash flow used in investment interests $ ( 1,548,459) ( 2,727,861)
A significant part of the overall operations of OCIB is its transferable tax credits. As of June 30, 2010
and 2009, OCIB had $80,485,000 and $87,300,000 of transferable tax credits, respectively, recorded as
assets in its financial statements; $20,000,000 of the tax credits was recognized as current and the
remainder as noncurrent. During 2010, $6,815,000 additional tax credits were sold. During 2009, no
additional tax credits were sold. OCIB has agreements with four corporations to purchase up to an
aggregate of $8,000,000 per year of tax credits, in conjunction with a legitimate call on an OCIB
guarantee. The agreements to purchase the tax credits have been assigned as collateral for the
$33,257,878 term note and the $15,812,452 line of credit which OCIB has guaranteed for OCFC.
As more fully explained in the notes to the financial statements, OCIB has initiated a program entitled
the Oklahoma Capital Access Program (OCAP). Under OCAP, Oklahoma depository institutions pay a
fee or premium to OCIB to enroll qualified loans in OCAP. OCIB, in return for the premium paid,
establishes a reserve account equal to the amount of the fee plus an obligation by OCIB for a
predetermined portion of the loan. Cash, up to the amount of the reserve account, may then be paid to
the institution if the institution suffers a loss on a loan in the OCAP portfolio and submits a claim to
OCIB. OCIB is not guaranteeing the entire loan portfolio, but only an amount in the reserve account
established. In no event is OCIB’s exposure more than the balance in the reserve account as defined in
the OCAP agreement. As of June 30, 2010 and 2009, the maximum amount of exposure for OCIB was
approximately $1,239,000 and $1,214,000, respectively. Total loans covered by the program were
approximately $33,091,000 and $32,426,000 at June 30, 2010 and 2009, respectively.
As of June 30, 2010 and 2009, OCIB’s commitment for unfunded investment interests was
approximately $7,753,000 and $9,123,000, respectively.
MANAGEMENT’S DISCUSSION AND ANALYSIS, CONTINUED
I–4
FINANCIAL ANALYSIS OF OCIB, CONTINUED
Borrowings
To fund investment interests, OCIB has financing through a $15,812,452 line of credit and a
$33,257,878 term note. Activity of the debt for 2010 and 2009 was as follows:
Beginning
Balance Refinancing Advances Repayments
Ending
Balance
Line of credit $ 39,872,032 ( 33,257,878) 2,807,972 ( 6,852,095) 2,570,031
Term note - 33,257,878 - - 33,257,878
$ 39,872,032 - 2,807,972 ( 6,852,095) 35,827,909
2010
Beginning
Balance Advances Payments
Ending
Balance
Line of credit $ 35,405,628 5,618,246 ( 1,151,842) 39,872,032
2009
As further discussed in the notes to the financial statements, the debt is secured by the specific
assignment of agreements with four corporations to purchase tax credits from OCIB. The line of credit
is presently due November 30, 2010, and the term note is due June 30, 2011.
REQUEST FOR INFORMATION
This financial report is designed to provide a general overview of OCIB’s finances for all those with an
interest. Questions concerning any of the information provided in this report or requests for additional
financial information should be addressed to the Oklahoma Capital Investment Board, 301 NW 63rd
Street, Suite 500, Oklahoma City, Oklahoma 73116.
See Independent Auditors’ Report.
See accompanying notes to financial statements.
- 3 -
June 30, 2010 2009
Assets
Current assets:
Cash $ 1 06,328 1 12,028
Transferable tax credits, current 2 0,000,000 2 0,000,000
Total current assets 2 0,106,328 2 0,112,028
Investment interests (Note 4):
Richland Ventures, L.P. - 7 ,350
Intersouth Partners III, L.P. 2 46,780 3 88,702
Davis, Tuttle Venture Partners, L.P. 1 ,078,919 1 ,113,798
Richland Ventures II, L.P. 8 0,107 7 0,248
Rocky Mountain Mezzanine Fund II, L.P. 1 52,401 2 39,640
Dolphin Communications Fund II, L.P. 2 ,254,747 2 ,469,090
Tullis-Dickerson Capital Focus III, L.P. 3 ,521,121 4 ,290,356
Emergent Technologies Oklahoma, L.P. 1 66,496 8 88,771
SSM Venture Partners III, L.P. 4 ,896,209 5 ,030,471
Oklahoma Equity Partners, L.L.C. 2 ,013,893 1 ,848,420
Blue Sage Capital, L.P. 2 ,414,215 8 69,663
Prolog Capital II, L.P. 2 ,530,557 2 ,144,422
Mesa Oklahoma Growth Fund I, L.P. 1 ,478,715 2 ,346,567
Oklahoma Life Sciences Fund II, L.L.C. 3 56,765 3 99,893
Oklahoma Seed Capital Fund, L.L.C. 7 12,451 5 93,182
Acorn Growth Capital Fund III, L.L.C. 4 78,003 3 15,271
Total investment interests 2 2,381,379 2 3,015,844
Transferable tax credits, less current portion 6 0,485,000 6 7,300,000
Total assets $ 1 02,972,707 1 10,427,872
(Continued)
OKLAHOMA CAPITAL INVESTMENT BOARD
STATEMENTS OF NET ASSETS
See Independent Auditors’ Report.
See accompanying notes to financial statements.
- 4 -
June 30, 2010 2009
Liabilities and Net Assets
Current liabilities:
Accounts payable $ 8 42 1 ,010
Interest payable 9 8,447 1 00,734
OCAP premiums collected in excess of claims paid 4 8,536 5 3,733
Long-term debt, current portion 3 5,827,909 -
Total current liabilities 3 5,975,734 1 55,477
Long-term debt, less current portion - 3 9,872,032
Total liabilities 3 5,975,734 4 0,027,509
Unrestricted net assets 6 6,996,973 7 0,400,363
Total liabilities and net assets $ 1 02,972,707 1 10,427,872
OKLAHOMA CAPITAL INVESTMENT BOARD
STATEMENTS OF NET ASSETS, CONTINUED
See Independent Auditors’ Report.
See accompanying notes to financial statements.
- 5 -
Years Ended June 30, 2010 2009
Operating expenses:
Management fees $ (538,542) (554,142)
Accounting, legal, and consultants (36,709) (28,125)
Program evaluation (3,090) (9,989)
Other (569) (1,032)
Venture investing (389) -
Total operating expenses (579,299) (593,288)
Other expenses:
Interest expense (640,140) (1,011,744)
Other (1,027) (1,358)
Total other expenses (641,167) (1,013,102)
Operating loss before net financial losses from investment
interests—equity basis (1,220,466) (1,606,390)
(Continued)
OKLAHOMA CAPITAL INVESTMENT BOARD
STATEMENTS OF CHANGES IN NET ASSETS
See Independent Auditors’ Report.
See accompanying notes to financial statements.
- 6 -
Years Ended June 30, 2010 2009
Financial (losses) earnings from investment interests—
equity basis (Note 4):
Richland Ventures, L.P. (1,061) (163)
Intersouth Partners III, L.P. (119,025) 1 ,146
Davis, Tuttle Venture Partners, L.P. (34,880) (179,792)
Richland Ventures II, L.P. 9 ,859 2 ,991
Pacesetter Growth Fund, L.P. - (412,914)
Rocky Mountain Mezzanine Fund II, L.P. (87,239) (152,561)
Dolphin Communications Fund II, L.P. (429,762) (1,286,432)
Tullis-Dickerson Capital Focus III, L.P. (769,235) (398,226)
Emergent Technologies Oklahoma, L.P. (722,275) (6,626)
SSM Venture Partners III, L.P. (134,262) (137,470)
Oklahoma Equity Partners, L.L.C. (219,275) (1,724,325)
Blue Sage Capital, L.P. 1 ,484,637 (197,829)
Prolog Capital II, L.P. (126,365) (611,660)
Mesa Oklahoma Growth Fund I, L.P. (1,009,944) (75,206)
Oklahoma Life Sciences Fund II, L.L.C. (43,128) (90,192)
Oklahoma Seed Capital Fund, L.L.C. 1 9,269 2 1,356
Acorn Growth Capital Fund III, L.L.C. (238) (11,124)
Total net financial losses from investment interests—
equity basis (2,182,924) (5,259,027)
Net decrease in net assets (3,403,390) (6,865,417)
Net assets, beginning of year 7 0,400,363 7 7,265,780
Net assets, end of year $ 6 6,996,973 7 0,400,363
OKLAHOMA CAPITAL INVESTMENT BOARD
STATEMENTS OF CHANGES IN NET ASSETS, CONTINUED
See Independent Auditors’ Report.
See accompanying notes to financial statements.
- 7 -
Increase (Decrease) in Cash and Cash Equivalents
Years Ended June 30, 2010 2009
Cash flows from operating activities:
Cash paid to suppliers $ (1,984) (12,388)
Management fees paid (538,542) (554,142)
General and administrative expenses paid (39,968) (32,524)
Cash paid for interest expense (642,427) (1,136,712)
Cash received for tax credits 6 ,815,000 -
Net cash provided by (used in) operating activities 5 ,592,079 (1,735,766)
Cash flows from noncapital and
related financing activities:
Proceeds from line of credit 2 ,807,972 5 ,618,246
Payments on line of credit and term note (6,852,095) (1,151,842)
Payments received for OCAP 2 2,124 3 3,930
Claims paid for OCAP (27,321) (24,022)
Net cash (used in) provided by noncapital and
related financing activities (4,049,320) 4 ,476,312
Cash flows from investing activities:
Cash payments for investment interests (1,585,553) (3,838,625)
Cash distributions from investment interests 3 7,094 1 ,110,764
Net cash used in investing activities (1,548,459) (2,727,861)
Net (decrease) increase in cash and cash equivalents (5,700) 1 2,685
Cash and cash equivalents at beginning of year 1 12,028 9 9,343
Cash and cash equivalents at end of year $ 1 06,328 1 12,028
Reconciliation of operating loss to net cash
provided by (used in) operating activities:
Operating loss $ (1,220,466) (1,606,390)
Adjustments to reconcile operating loss to net cash
provided by (used in) operating activities:
Decrease in tax credits 6 ,815,000 -
Decrease in interest payable (2,287) (124,968)
Decrease in accounts payable (168) (4,408)
Net cash provided by (used in) operating activities $ 5 ,592,079 (1,735,766)
OKLAHOMA CAPITAL INVESTMENT BOARD
STATEMENTS OF CASH FLOWS
OKLAHOMA CAPITAL INVESTMENT BOARD
NOTES TO FINANCIAL STATEMENTS
June 30, 2010 and 2009
See Independent Auditors’ Report.
- 8 -
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Oklahoma Capital Investment Board (OCIB) is a public trust of the State of Oklahoma
pursuant to the Oklahoma Public Trust Act. OCIB was created to serve as the State’s tool to
mobilize sources of equity and near equity capital (as defined in the Trust Indenture) for
Oklahoma businesses. The program is designed to catalyze investment in Oklahoma projects by
experienced investment professionals. Specific initiatives utilized by OCIB include the
Oklahoma Capital Access Program (OCAP) (Note 6) and the Venture Investment Program
(described in Note 2).
OCIB is a component unit of the State of Oklahoma and is included in the State’s annual
financial report.
Reporting Entity
The financial statements also include the operations of the Oklahoma Capital Formation
Company, LLC (OCFC), formerly the Oklahoma Capital Formation Corporation. During 2007,
the name and corporate structure of the Oklahoma Capital Formation Corporation was changed
to the Oklahoma Capital Formation Company, LLC, an Oklahoma limited liability company;
previously OCFC was a corporation. During the year ended 2006, OCIB purchased 100% of the
ownership of OCFC. OCFC invests funds in qualified risk capital pools approved by OCIB.
Financial Statement Presentation and Basis of Accounting
OCIB’s financial statements are prepared in accordance with accounting principles generally
accepted in the United States. The Governmental Accounting Standards Board (GASB) is
responsible for establishing the accounting principles generally accepted in the United States for
state and local governments through its pronouncements (Statements and Interpretations).
Governments and their components are also required to follow the pronouncements of
the Financial Accounting Standards Board (FASB) issued through November 30, 1989,
(when applicable) that do not conflict with or contradict GASB pronouncements. In accordance
with GASB Statement No. 20, OCIB’s financial statements are prepared using applicable
GASB statements and not FASB pronouncements issued after November 30, 1989.
OKLAHOMA CAPITAL INVESTMENT BOARD
NOTES TO FINANCIAL STATEMENTS, CONTINUED
See Independent Auditors’ Report.
- 9 -
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Financial Statement Presentation and Basis of Accounting, Continued
The accompanying financial statements are presented on the enterprise fund basis using the
economic measurement focus and the accrual basis of accounting, whereby revenues are
recorded in the period earned and expenses are recorded in the period incurred.
All transactions between OCIB and OCFC have been eliminated in the preparation of these
financial statements.
Cash Balances
All cash balances are maintained in financial institutions insured by the Federal Deposit
Insurance Corporation up to $250,000. As of June 30, 2010, there were no balances over the
$250,000 insured amount.
Equipment
Capitalized equipment is depreciated using the straight-line method of depreciation over its
estimated useful life. OCIB had fully depreciated all of its fixed assets as of June 30, 2010 and
2009.
Income Taxes
As a public trust, OCIB is exempt from federal and state income taxes.
Advertising Costs
All costs associated with advertising are expensed as incurred.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents consist of the caption on
the statements of net assets described as “Cash.”
Interest paid totaled $642,427 and $1,136,712 for 2010 and 2009, respectively.
Investment Interests
Investment interests represent investments made by OCFC in limited partnerships, limited
liability companies, and other types of entities. Investment interests are recorded using the
equity method of accounting based upon the most recent audited financial statements and/or the
tax returns for the investment interests, or other reliable financial information.
OKLAHOMA CAPITAL INVESTMENT BOARD
NOTES TO FINANCIAL STATEMENTS, CONTINUED
See Independent Auditors’ Report.
- 10 -
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States 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 revenues and
expenses during the reporting period. Actual results could differ from those estimates.
(2) INVESTMENT OPERATIONS
OCIB, in order to mobilize investment in business ventures, guarantees the funds borrowed by
OCFC for such investment. Prior to 2006, OCFC was considered a third-party corporation
which contracted with OCIB to invest OCIB-guaranteed funds in qualified risk capital pools. As
noted previously, OCFC was purchased by OCIB during 2006. All intercompany activity
between OCIB and OCFC has been eliminated in preparing these financial statements.
(3) TRANSFERABLE TAX CREDITS
As a trust, part of the estate of OCIB was $100,000,000 of State of Oklahoma tax credits. The
credits can be transferred by OCIB at its sole discretion. The credits and OCIB’s right to transfer
the credits expire if not utilized by July 1, 2015. As of June 30, 2010, $19,515,000 of the credits
had been sold for $19,515,000 ($6,815,000, $4,700,000, and $8,000,000 during the years ended
June 30 2010, 2008, and 2007, respectively), and the cash was used to reduce debt. Four
corporations have signed agreements to purchase up to an aggregate of $8,000,000 per year of
the tax credits, in conjunction with a legitimate call on an OCIB guarantee. Up to $20,000,000
of the tax credits can be sold in a year.
The $80,485,000 and $87,300,000 of transferable tax credits at June 30, 2010 and 2009,
respectively, are included in OCIB’s net assets. Approximately $3,000,000 of this amount has
been set aside by the Board of Trustees of OCIB for use by OCAP.
OKLAHOMA CAPITAL INVESTMENT BOARD
NOTES TO FINANCIAL STATEMENTS, CONTINUED
See Independent Auditors’ Report.
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(4) INVESTMENT INTERESTS
A summary of the changes in investment interests as of June 30 is as follows:
Activity for 2010
Balance at
June 30,
2009
Advances
Made
During
FY-2010
Losses
Recognized in
FY-2010
Capital
Distributions
Received
During
FY-2010
Balance at
June 30,
2010
Total $ 23,015,844 1,585,553 ( 2,182,924) ( 37,094) 22,381,379
Subsequent to June 30, 2010, OCFC received distributions of approximately $710,000 from Blue
Sage Capital, L.P., $225,000 from SSM Venture Partners III, L.P., and $37,000 from Richland
Ventures II, L.P.
Activity for 2009
Balance at
June 30,
2008
Advances
Made
During
FY-2009
Losses
Recognized in
FY-2009
Capital
Distributions
Received
During
FY-2009
Balance at
June 30,
2009
Total $ 25,547,010 3,838,625 ( 5,259,027) ( 1,110,764) 23,015,844
Other Information—Unaudited: The investment interests of the various entities are reflected
using the equity method of accounting. Some of the entities reflect the investments which they
own at cost and not fair value. The general partners have estimated values for the investments in
the absence of readily ascertainable market values. At June 30, 2010 and 2009, had such
estimated fair values been utilized, the investment interests would have increased approximately
$2,610,000 and $4,062,000, respectively. This estimate is based solely on information provided
by the general partners and is unaudited.
OKLAHOMA CAPITAL INVESTMENT BOARD
NOTES TO FINANCIAL STATEMENTS, CONTINUED
See Independent Auditors’ Report.
- 12 -
(4) INVESTMENT INTERESTS, CONTINUED
OCFC had committed to making the following investment interests as of June 30, 2010:
Entity
Amount of
Commitment
Commitment
Funded as of
June 30, 2010
Unfunded
Commitment
Richland Ventures, L.P. $ 4,000,000 3,680,000 320,000 (1)
Intersouth Partners III, L.P. 4,000,000 4,000,000 -
Davis, Tuttle Venture Partners, L.P. 5,000,000 5,000,000 -
Richland Ventures II, L.P. 1,000,000 974,040 25,960 (1)
Rocky Mountain
Mezzanine Fund II, L.P. 3,000,000 3,000,000 -
Dolphin Communications
Fund II, L.P. 6,000,000 6,000,000 - (2)
Tullis-Dickerson Capital
Focus III, L.P. 7,500,000 7,500,000 -
Emergent Technologies
Oklahoma, L.P. 1,380,435 1,380,434 1
SSM Venture Partners III, L.P. 7,500,000 6,225,000 1,275,000
Oklahoma Equity Partners, L.L.C. 7,500,000 5,303,476 2,196,524
Blue Sage Capital, L.P. 2,000,000 1,527,055 472,945
Prolog Capital II, L.P. 5,000,000 3,892,467 1,107,533
Mesa Oklahoma Growth Fund I, L.P. 3,000,000 2,745,000 255,000
Oklahoma Life Sciences Fund II, L.L.C. 1,750,000 490,000 1,260,000
Oklahoma Seed Capital Fund, L.L.C. 1,000,000 670,000 330,000
Acorn Growth Capital Fund III, L.L.C. 1,000,000 489,637 510,363
$ 60,630,435 52,877,109 7,753,326
________ (1) The unfunded commitment is not expected to be used.
(2) While the present commitment is $6,000,000, Dolphin Communications Fund II, L.P.
(“Dolphin”) has the right to recall amounts that have been distributed to OCIB. Cumulative
distributions to OCIB total $1,761,236 of which $1,680,932 has been recalled by Dolphin and
paid by OCIB. At June 30, 2010, there was $19,092 of distributions which could be recalled by
Dolphin.
OKLAHOMA CAPITAL INVESTMENT BOARD
NOTES TO FINANCIAL STATEMENTS, CONTINUED
See Independent Auditors’ Report.
- 13 -
(5) MANAGEMENT SERVICES AGREEMENT
OCIB entered into a management services agreement with Institutional Equity Associates, LLC
(“EDGE”) effective January 1, 2001. Per the agreement, EDGE is to perform all of the
management functions for OCIB, as well as supply the personnel. As such, OCIB had no
employees effective February 1, 2001. The agreement is to last for a period of 15 years. An
annual fee of $443,500 is to be paid to EDGE, as well as a variable annual fee equal to 0.35% of
the amount of each commitment by OCFC to a new venture capital fund. The variable fee is
phased out over a period of time as specified in the agreement. During 2010 and 2009, total fees
paid to EDGE in accordance with the management agreement were approximately $539,000 and
$554,000, respectively.
EDGE also performs management oversight for Oklahoma Equity Partners, L.L.C., a partnership
in which OCFC has invested. No additional compensation has been paid to EDGE for this
service.
(6) OKLAHOMA CAPITAL ACCESS PROGRAM (OCAP)
As part of its overall purpose, OCIB initiated OCAP during fiscal year 1992. Under OCAP,
Oklahoma depository institutions pay a fee or premium to OCIB to enroll qualified loans in
OCAP. OCIB, in return for the premium paid, establishes a reserve account equal to the amount
of fee paid plus an obligation by OCIB for a predetermined portion of the loan. Cash, up to the
amount of the reserve account, may then be paid to an institution if an institution suffers a loss
on a loan in the OCAP portfolio and submits a claim to OCIB. OCIB is not guaranteeing the
entire loan portfolio but only an amount equal to the reserve account. In no event is OCIB’s
exposure more than the balance in the reserve account as defined in the OCAP agreement.
Fees paid to OCIB are not recognized as income, but reflected on the statements of net assets as
“OCAP premiums collected in excess of claims paid,” net of any claims paid and recoveries
received. As of June 30, a summary of OCAP is as follows:
Year
Cumulative
Fees
Received
Cumulative
OCIB
Allocation
Cumulative
Claims
Paid, Net
Total
Reserve
Account
Total Loans
by
Institutions
Loans
Covered by
OCAP
2010 $ 1,258,638 1,770,647 1,789,946 1,239,339 46,216,719 33,090,776
2009 $ 1,236,513 1,740,297 1,762,625 1,214,185 43,939,025 32,425,956
OKLAHOMA CAPITAL INVESTMENT BOARD
NOTES TO FINANCIAL STATEMENTS, CONTINUED
See Independent Auditors’ Report.
- 14 -
(6) OKLAHOMA CAPITAL ACCESS PROGRAM (OCAP), CONTINUED
During 2010 and 2009, OCIB paid $27,321 and $24,022, respectively, of claims to institutions in
the program. These claims were paid in cash from OCIB resources. During 2010 claims paid
exceeded fees collected by $5,197, and during 2009 fees collected exceeded claims paid by
$9,908. OCIB has the right to sell tax credits in the future, subject to annual and program caps,
to reimburse itself for the cash paid out.
Under the program, OCIB’s total loss exposure at June 30, 2010 and 2009, was $1,239,339 and
$1,214,185, respectively, which would come from unrestricted net assets.
(7) LONG-TERM DEBT
Long-term debt at June 30, 2009, consisted of a line of credit of $55,000,000. During
August 2009, the line of credit was separated into a non-amortizing term loan with a balance of
$24,187,548 held at the Bank of Oklahoma and a balance of $9,070,330 held at Arvest Bank,
along with a line of credit also held at the Bank of Oklahoma. The term loan and the line of
credit have maturity dates of June 30, 2011, and November 30, 2010, respectively.
At June 30, the balance due was as follows:
Commitment
Balance
Outstanding Maturity
Line of credit $ 1 5,812,452 2 ,570,031 Nov. 30, 2010
Term note 3 3,257,878 3 3,257,878 June 30, 2011
$ 4 9,070,330 3 5,827,909
2010
Commitment
Balance
Outstanding Maturity
Line of credit $ 5 5,000,000 3 9,872,032 June 30, 2011
2009
The line of credit bears interest at a rate of 4% at June 30, 2010, as defined in the debt
agreement. The term loan bears interest at a fluctuating rate as defined in the debt agreement.
The rate at June 30, 2010 and 2009, was approximately 1.5% and 1.47%, respectively. Interest
is paid quarterly. The debt is interest-only and requires no principal payments until maturity.
OKLAHOMA CAPITAL INVESTMENT BOARD
NOTES TO FINANCIAL STATEMENTS, CONTINUED
See Independent Auditors’ Report.
- 15 -
(7) LONG-TERM DEBT, CONTINUED
The debt instruments are secured by the specific assignment of agreements to purchase tax
credits. As of June 30, 2010, OCIB had $80,485,000 of State of Oklahoma tax credits and
agreements with four corporations to purchase up to an aggregate of $8,000,000 per year of tax
credits, in conjunction with a legitimate call on an OCIB guarantee.
Changes in the debt instruments during 2010 and 2009 were as follows:
Beginning
Balance Refinancing Advances Repayments
Ending
Balance
Line of credit $ 39,872,032 ( 33,257,878) 2,807,972 ( 6,852,095) 2,570,031
Term note - 33,257,878 - - 33,257,878
$ 39,872,032 - 2,807,972 ( 6,852,095) 35,827,909
2010
Beginning
Balance Advances Payments
Ending
Balance
Line of credit $ 35,405,628 5,618,246 ( 1,151,842) 39,872,032
2009
(8) COMMITMENTS AND CONTINGENCIES
Legal
From time to time, OCIB is involved in certain legal proceedings arising in the normal course of
business. In the opinion of management and counsel, the ultimate disposition of such
proceedings will not have a material effect on OCIB’s financial statements.
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND
ON COMPLIANCE AND OTHER MATTERS BASED ON
AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN
ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS
Board of Trustees
Oklahoma Capital Investment Board
We have audited the financial statements of the Oklahoma Capital Investment Board (OCIB), which is a
component unit of the State of Oklahoma, as of and for the year ended June 30, 2010, and have issued
our report thereon dated September 2, 2010. Our report includes a reference to other auditors who
performed audits on certain assets of OCIB. Our report also contains an explanatory paragraph
disclaiming an opinion on Management’s Discussion and Analysis, presented as required supplementary
information. We conducted our audit in accordance with auditing standards generally accepted in the
United States and the standards applicable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States.
Internal Control Over Financial Reporting
In planning and performing our audit, we considered OCIB’s internal control over financial
reporting as a basis for designing our auditing procedures for the purpose of expressing our
opinion on the financial statements, but not for the purpose of expressing an opinion on the
effectiveness of OCIB’s internal control over financial reporting. Accordingly, we do not
express an opinion on the effectiveness of OCIB’s internal control over financial reporting.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to
prevent, or detect and correct misstatements on a timely basis. A material weakness is a
deficiency, or a combination of deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity’s financial statements will not be prevented,
or detected and corrected on a timely basis.
Our consideration of internal control over financial reporting was for the limited purpose
described in the first paragraph of this section and was not designed to identify all deficiencies in
internal control over financial reporting that might be deficiencies, significant deficiencies, or
material weaknesses. We did not identify any deficiencies in internal control over financial
reporting that we consider to be material weaknesses, as defined above.
(Continued)
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND
ON COMPLIANCE AND OTHER MATTERS BASED ON
AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN
ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS, CONTINUED
Compliance and Other Matters
As part of obtaining reasonable assurance about whether OCIB’s financial statements are free of
material misstatement, we performed tests of its compliance with certain provisions of laws,
regulations, contracts, and grant agreements, noncompliance with which could have a direct and
material effect on the determination of financial statement amounts. However, providing an
opinion on compliance with those provisions was not an objective of our audit and, accordingly,
we do not express such an opinion. The results of our tests disclosed no instances of
noncompliance or other matters that are required to be reported under Government Auditing
Standards.
This report is intended solely for the information and use of the Board of Trustees, management of
OCIB, and the Office of the Oklahoma State Auditor and Inspector and is not intended to be and should
not be used by anyone other than these specified parties.
Shawnee, Oklahoma
September 2, 2010
This publication was issued by the Oklahoma Capital Investment Board (OCIB). Two hundred (200)
copies were printed at a cost of $953.61. Copies have been deposited with the State Publications
Clearinghouse of the Oklahoma Department of Libraries. 5/2011