Item 1. Business.
Formation
ML Oklahoma Venture Partners, Limited Partnership (the "Partnership" or the "Registrant") was organized under the Revised Uniform Limited Partnership Act of the State of Oklahoma on July 15, 1988. MLOK Co., Limited Partnership (the "Managing General Partner") and four individuals (the "Individual General Partners") are the general partners of the Partnership. The Managing General Partner is an Oklahoma limited partnership in which Merrill Lynch Venture Capital Inc. (the "Management Company") is the general partner. The Management Company is an indirect subsidiary of Merrill Lynch & Co., Inc. and an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch").
The Partnership's objective is to achieve long-term capital appreciation by making venture capital investments in new or developing companies, primarily Oklahoma companies, and other special investment situations. The Partnership does not engage in any other business or activity. The Partnership is scheduled to terminate on December 31, 1998, subject to the right of the Individual General Partners to extend the term for up to two additional two-year periods.
The Partnership was organized as a "qualified venture capital company" under Oklahoma law and, therefore, was required to invest over 55% of its capitalization in companies which constitute "Oklahoma business ventures", as that term is defined under Oklahoma law. Accordingly, the Partnership's limited partners (the "Limited Partners") were entitled to a credit against their 1989 Oklahoma state income tax in an amount equal to 20% of their original investment in the Partnership. From its inception through December 31, 1997, the Partnership had invested $9,919,136 in 18 portfolio investments of which $6,478,342, or 65.31%, represents investments in Oklahoma business ventures.
The Partnership publicly offered, through Merrill Lynch, 25,000 units of limited partnership interest at $1,000 per unit (the "Units"). The Units were registered under the Securities Act of 1933 pursuant to a Registration Statement on Form N-2 (File No. 33-24547), which was declared effective on December 1, 1988. The Partnership completed its offering on August 14, 1989. A total of 10,248 Units were sold to the Limited Partners. Gross capital contributions to the Partnership total $10,355,556; $10,248,000 from the Limited Partners, $103,556 from the Managing General Partner and $4,000 from the Individual General Partners.
The information set forth under the captions "Risk and Other Important Factors" (pages 11 through 18), "Investment Objective and Policies" (pages 21 through 26) and "Oklahoma Considerations" (pages 26 through 28) in the Prospectus of the Partnership dated December 1, 1988 filed with the Securities and Exchange Commission pursuant to Rule 497(b) under the Securities Act of 1933, as supplemented by a supplement dated April 25, 1989 filed pursuant to Rule 497(d) under the Securities Act of 1933 (the "Prospectus"), is incorporated herein by reference.
The Venture Capital Investments
During 1997, the Partnership completed follow-on investments totaling $650,000 in three existing portfolio companies. From August 14, 1989 (commencement of operations) to December 31, 1997, the Partnership had invested $9,919,136 in 18 portfolio companies. The Partnership has now fully invested its original net proceeds from the offering of Units and will not make investments in any new portfolio companies. However, the Partnership may make additional follow-on investments in existing portfolio companies as required. As of December 31, 1997, the Partnership's investment portfolio consisted of eight active investments with a cost basis of $4,673,359 and a fair value of $7,697,927. From its inception to December 31, 1997, the Partnership had liquidated investments with an aggregate cost basis of $5,245,777. These liquidated investments returned $6,318,519 for a cumulative net realized gain of $1,072,742 as of December 31, 1997. The Partnership also has earned interest and other income from its portfolio investments totaling $391,889 from its inception to December 31, 1997. Following is a detail of portfolio activity during 1997:
In October 1997, the Partnership exercised a warrant to purchase 875,000 shares of Data Critical Corp. common stock at an exercise price of $.40 per share and a total cost of $350,000. Additionally, in December 1997, the Partnership sold 100,000 shares of Data Critical Corp. common stock for $100,000, realizing a gain of $60,000.
In December 1997, the Partnership made a $50,000 follow-on investment in Excel Energy Technologies, Ltd. acquiring a 15% promissory note. In December 1997, the Partnership made a $250,000 follow-on investment in Silverado Foods, Inc. acquiring a 14% bridge loan and a warrant to purchase 35,000 shares of common stock at $.625 per share expiring on December 19, 2002.
On November 3, 1997, ZymeTx, Inc. completed its initial public offering. In connection with the offering, the company effected a 1-for-4 reverse stock split resulting in an exchange of the Partnership's 1,218,315 shares of ZymeTx common stock for 304,579 shares.
During 1997, the Partnership sold its investment of 275,317 shares of C.R. Anthony Company common stock for $2,184,292, realizing a gain of $1,584,101. In June 1997, Diagnetics, Inc. sold its assets and liquidated, resulting in a return of $87,001 to the Partnership and a realized loss of $726,609. Competition
The Partnership encounters competition from other entities having similar investment objectives, including other entities affiliated with Merrill Lynch & Co., Inc. Primary competition for venture capital investments has been from venture capital partnerships, venture capital affiliates of large industrial and financial companies, small business investment companies and wealthy individuals.
Employees
The Partnership has no employees. The Managing General Partner, subject to the supervision of the Individual General Partners, manages and controls the Partnership's venture capital investments. The Management Company performs, or arranges for others to perform, the management and administrative services necessary for the operation of the Partnership and is responsible for managing the Partnership's short-term investments.
Item 2.
Item 2. Properties.
The Partnership does not own or lease physical properties.
Item 3.
Item 3. Legal Proceedings.
The Partnership is not a party to any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information with respect to the market for the Units set forth under the subcaption "Substituted Limited Partners" on page 40 of the Prospectus, is incorporated herein by reference. An established public market for Registrant's Units does not now exist, and it is not anticipated that such a market will develop in the future. Accordingly, accurate information as to the market value of a Unit at any given date is not available. The approximate number of holders of Units as of March 21, 1998 is 1,071. The Managing General Partner and the four Individual General Partners of the Partnership also hold interests in the Partnership.
Beginning with the December 1994 client account statements, Merrill Lynch implemented new guidelines for reporting estimated values of limited partnerships and other direct investments on client account statements. As a result, Merrill Lynch no longer reports general partner estimates of limited partnership net asset value on its client account statements, although the Registrant may continue to provide its estimate of net asset value to Unit holders. Pursuant to the new guidelines, Merrill Lynch will report estimated values for limited partnership interests originally sold by Merrill Lynch (such as Registrant's Units) two times per year. Such estimated values will be provided to Merrill Lynch by independent valuation services based on financial and other information available to the independent services on (i) the prior August 15th for reporting on December year-end and subsequent client account statements through the following May's month-end client account statements, and on (ii) March 31st for reporting on June month-end and subsequent client account statements through the November month-end client account statements of the same year.
The Managing General Partner's estimate of net asset value as of December 31, 1997 is $734 per Unit, including an assumed allocation of net unrealized appreciation of investments. The Managing General Partner's estimate of net asset value as set forth above reflects the value of the Partnership's underlying assets remaining at year end, whereas the value provided by the independent services reflects the estimated value of the Partnership Units themselves based on information that was available on August 15th. Merrill Lynch clients may contact their Merrill Lynch Financial Consultants or telephone the number provided to them on their account statements to obtain a general description of the methodology used by the independent valuation services to determine their estimated values. The estimated values provided by the independent services and the Registrant's current net asset value are not market values and Unit holders may not be able to sell their Units or realize either amount upon a sale of their Units. In addition, Unit holders may not realize the independent estimated value or the Registrant's current net asset value amount upon the liquidation of Registrant's assets over its remaining life.
Cash Distributions
Cash distributions paid during the periods presented and cumulative cash distributions to Partners from the inception of the Partnership through December 31, 1997 are listed below:
Item 6.
Item 6. Selected Financial Data.
($ in thousands, except for per Unit information)
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources
As of December 31, 1997, the Partnership held $85,653 in an interest-bearing cash account. Interest earned on such cash balances and other short-term investments for the years ended December 31, 1997, 1996 and 1995 was $67,561, $36,435, and $46,514, respectively. Interest earned from short-term investments in future periods is subject to fluctuations in short-term interest rates and changes in amounts available for investment in such securities.
During 1997, the Partnership made follow-on investments totaling $650,000 in three existing portfolio companies. The Partnership has fully invested its original net proceeds and will not make additional investments in new portfolio companies. Generally, the Partnership will distribute to Partners all proceeds received from the sale of its portfolio investments, after an adequate reserve for future operating expenses or follow-on investments in existing portfolio companies, as soon as practicable after receipt. Funds needed to cover the Partnership's future operating expenses and follow-on investments in existing companies are expected to be obtained from existing cash reserves, interest and other investment income and proceeds from the sale of portfolio investments.
During 1997, the Partnership realized proceeds of $2.4 million from the sale of certain portfolio investments and, as a result, made two cash distributions to Partners totaling $1,812,423. Limited Partners received $1,793,400, or $175 per Unit, and the General Partners received $19,023. Cumulative cash distributions to Partners from inception of the Partnership to December 31, 1997 total $4,918,888. Limited Partners received $4,867,800, or $475 per Unit, and the General Partners received $51,088.
Results of Operations
For the year ended December 31, 1997, the Partnership had a net realized gain from operations of $688,367. For the years ended December 31, 1996 and 1995, the Partnership had a net realized loss from operations of $2,389 and a net realized gain from operations of $1,361,908, respectively. Net realized gain or loss from operations is comprised of (1) net realized gains or losses from portfolio investments and (2) net investment income or loss (interest and dividend income less operating expenses).
Realized Gains and Losses from Portfolio Investments - For the year ended December 31, 1997, the Partnership had a net realized gain from portfolio investments of $939,317. During 1997, the Partnership sold its investment of 275,317 shares of C.R. Anthony Company common stock in the public market for $2,184,292, realizing a gain of $1,584,101. In December 1997, the Partnership sold 100,000 shares of Data Critical Corp. common stock in a private transaction for $100,000, realizing a gain of $60,000. In June 1997, Diagnetics, Inc. sold its assets and liquidated, resulting in a return of $87,001 to the Partnership and a realized loss of $726,609. Finally, during 1997, the Partnership recognized a gain of $21,825, upon the receipt of the final escrow release in connection with the 1996 acquisition of Enerpro International, Inc. by Energy Ventures, Inc. ("EVI"), as discussed below.
For the year ended December 31, 1996, the Partnership had a net realized gain from portfolio investments of $370,161. In May 1996, Enerpro International, Inc. merged with EVI, a public company. In connection with the merger, the Partnership received 24,500 shares of EVI common stock for its Enerpro holdings. The Partnership sold such shares in the public market during 1996 for $737,967. Additionally, pursuant to the merger agreement, $72,353 of such proceeds were held in escrow and released in 1997, as discussed above. In 1996, the Partnership had recorded a contingency reserve of $21,825 relating to the escrow holdings and, therefore, recognized a $366,212 realized gain on a net basis in connection with this transaction. Additionally during 1996, the Partnership sold 32,000 shares of Envirogen, Inc. in the public market for $115,949, realizing a gain of $3,949.
For the year ended December 31, 1995, the Partnership had a $1,650,738 net realized gain from its portfolio investments. In February 1995, the Partnership sold its investment in BACE Manufacturing, Inc., for $2,138,475, realizing a gain of $1,599,475. In July 1995, the Partnership sold its 15,491 shares of Eckerd Corporation common stock for $479,911, realizing a gain of $336,919. Additionally in September 1995, the Partnership sold its remaining 90,000 common stock warrants of Envirogen for $39,344, realizing a gain of $39,344. Finally, in December 1995, the Partnership wrote-off its $325,000 investment in Great Outdoors Publishing Inc. due to continued business and financial difficulties at the company.
Investment Income and Expenses - For the years ended December 31, 1997, 1996 and 1995, the Partnership had a net investment loss of $250,950, $372,550 and $288,830, respectively. The $121,600 decrease in net investment loss for 1997 compared to 1996 resulted from a $73,315 increase in investment income and a $48,285 decline in operating expenses. The increase in investment income primarily resulted from an increase of $31,126 in interest from short-term investments due to an increase in funds available for such investments during 1997 compared to 1996. The Partnership invests proceeds received from the sale of portfolio investments in short-term securities until such funds are used for operations or distributions are made to Partners. Also contributing to the increase in investment income was a $42,189 positive change in income from portfolio investments, primarily due to the 1996 write-off of a $51,106 accrued interest receivable relating to promissory notes due from Americo Publishing, Inc., which were fully reserved for in 1996. The decrease in operating expenses for 1997 compared to 1996 primarily resulted from a $39,404 reduction in professional fees. This reduction primarily was due to the reversal in 1997 of excess professional fee accruals made in prior periods. Custodial fees also declined primarily due to the reversal of excess accruals made in prior periods.
The $83,720 increase in net investment loss for 1996 compared to 1995 resulted from a $100,130 decline in investment income partially offset by a $16,410 decline in operating expenses for 1996 compared to 1995. The decline in investment income primarily resulted from the $51,106 write-off of accrued interest receivable, as discussed above. Also contributing to the decline in investment income was a $10,079 decrease in interest from short-term investments resulting from a reduction in funds available for investment in such securities during 1996. The reduction in operating expenses for 1996 compared to 1995 primarily resulted from a $12,062 decrease in Independent General Partners' ("IGPs") fees and expenses due to a decline in the number of IGP meetings held during 1996.
The Management Company is responsible for the management and administrative services necessary for the operation of the Partnership. The Management Company receives a management fee of 2.5% of the gross capital contributions to the Partnership, reduced by selling commissions and organizational and offering expenses paid by the Partnership, capital distributed and realized losses, with a minimum fee of $200,000 annually. Such fee is determined and paid quarterly. The management fee for each year ended December 31, 1997, 1996 and 1995, was $200,000.
Unrealized Gains and Losses and Changes in Unrealized Appreciation of Portfolio Investments - For the year ended December 31, 1997, the Partnership recorded a $1,679,349 net unrealized loss resulting from the net downward revaluation of certain portfolio investments. These downward revaluations primarily were due to declines in the public market prices of Silverado Foods, Inc. and UroCor, Inc., partially offset by an upward revaluation of ZymeTx, Inc., which completed its initial public offering in November 1997. Additionally, during 1997 there was a net transfer of $315,767 from unrealized gain to realized gain resulting from sales or liquidations of C.R. Anthony, Data Critical and Diagnetics, as discussed above. As a result, net unrealized appreciation of investments decreased $1,995,116 for 1997.
For the year ended December 31, 1996, the Partnership recorded a $2,239,648 net unrealized gain from its portfolio investments, primarily resulting from the net upward revaluation of certain portfolio investments, primarily UroCor, Inc., which completed its initial public offering in May 1996. Offsetting the unrealized gain for 1996 was the net transfer of $194,016 from unrealized gain to realized gain resulting from the sale of Enerpro and Envirogen as discussed above. As a result, net unrealized appreciation of investments increased $2,045,632 for 1996.
For the year ended December 31, 1995, the Partnership recorded a $464,602 net unrealized gain resulting from the net upward revaluation of certain portfolio investments. Additionally during 1995, there was a net transfer of $1,414,514 from unrealized gain to realized gain resulting from portfolio investments sold or written-off during 1995, as discussed above. As a result, net unrealized appreciation of investments decreased $949,912 for 1995.
Net Assets - Changes to net assets resulting from operations are comprised of (1) net realized gains and losses and (2) changes to net unrealized appreciation of portfolio investments.
For the year ended December 31, 1997, the Partnership had a $1,306,749 decrease in net assets resulting from operations, comprised of the $1,995,116 decrease in net unrealized appreciation partially offset by the $688,367 realized gain from operations for 1997. As of December 31, 1997, the Partnership's net assets were $7,600,021, down $3,119,172 from $10,719,193 as of December 31, 1996. This decrease reflects the $1,306,749 decrease in net assets from operations and the cash distributions of $1,812,423 paid to Partners during 1997.
For the year ended December 31, 1996, the Partnership had a $2,043,243 increase in net assets resulting from operations, primarily due to the $2,045,632 increase in net unrealized appreciation for 1996. As of December 31, 1996, the Partnership's net assets were $10,719,193, up $1,525,667 from $9,193,526 as of December 31, 1995. This increase reflects the $2,043,243 increase in net assets from operations exceeding the accrued cash distribution of $517,576 paid to Partners in January 1997.
As of December 31, 1995, the Partnership had a $411,996 increase in net assets resulting from operations, comprised of the $1,361,908 net realized gain from operations partially offset by the $949,912 net decrease in unrealized appreciation for 1995. As of December 31, 1995, the Partnership's net assets were $9,193,526, down $2,176,893 from $11,370,419 as of December 31, 1994. This decrease reflects the $2,588,889 of cash distributions paid to Partners during 1995 exceeding the $411,996 increase in net assets resulting from operations for 1995.
Gains or losses from investments are allocated to the Partners' capital accounts when realized in accordance with the Partnership Agreement (see Note 3 of Notes to Financial Statements). However, for purposes of calculating the net asset value per unit of limited partnership interest, net unrealized appreciation or depreciation of investments has been included as if the net appreciation or depreciation had been realized and allocated to the Limited Partners in accordance with the Partnership Agreement. Pursuant to such calculation, the net asset value per $1,000 Unit at December 31, 1997, 1996 and 1995 was $734, $1,035 and $888, respectively.
Item 8.
Item 8. Financial Statements and Supplementary Data.
ML OKLAHOMA VENTURE PARTNERS, LIMITED PARTNERSHIP INDEX
Independent Auditors' Report
Balance Sheets as of December 31, 1997 and 1996
Schedule of Portfolio Investments as of December 31, 1997
Schedule of Portfolio Investments as of December 31, 1996
Statements of Operations for the years ended December 31, 1997, 1996 and 1995
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995
Statements of Changes in Partners' Capital for the years ended December 31, 1995, 1996 and 1997
Notes to Financial Statements
NOTE - All other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or the notes thereto.
INDEPENDENT AUDITORS' REPORT
ML Oklahoma Venture Partners, Limited Partnership:
We have audited the accompanying balance sheets of ML Oklahoma Venture Partners, Limited Partnership (the "Partnership"), including the schedules of portfolio investments, as of December 31, 1997 and 1996, and the related statements of operations, cash flows, and changes in partners' capital for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at December 31, 1997 and 1996 by correspondence with the custodian; where confirmation was not possible, we performed other audit procedures. 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, such financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 1997 and 1996, and the results of its operations, its cash flows and the changes in its partners' capital for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
As explained in Note 2, the financial statements include securities valued at $4,424,331 and $10,098,594 as of December 31, 1997 and 1996, respectively, representing 58.2% and 94.2% of net assets, respectively, whose values have been estimated by the Managing General Partner in the absence of readily ascertainable market values. We have reviewed the procedures used by the Managing General Partner in arriving at its estimate of value of such securities and have inspected underlying documentation, and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material.
Deloitte & Touche LLP
New York, New York February 24, 1998
ML OKLAHOMA VENTURE PARTNERS, LIMITED PARTNERSHIP BALANCE SHEETS December 31,
See notes to financial statements.
ML OKLAHOMA VENTURE PARTNERS, LIMITED PARTNERSHIP SCHEDULE OF PORTFOLIO INVESTMENTS As of December 31, 1997
Supplemental Information: Liquidated Portfolio Investments(H)
(A) Public company
(B) Qualifies as an "Oklahoma business venture" under Oklahoma law.
(C) In October 1997, the Partnership exercised a warrant to purchase 875,000 shares of Data Critical Corp. common stock at an exercise price of $.40 per share and a total cost of $350,000. Additionally, in December 1997, the Partnership sold 100,000 shares of Data Critical Corp. common stock for $100,000, realizing a gain of $60,000.
(D) In December 1997, the Partnership made a $50,000 follow-on investment in Excel Energy Technologies, Ltd. acquiring a 15% promissory note.
(E) In December 1997, the Partnership made a $250,000 follow-on investment in Silverado Foods, Inc., acquiring a 14% bridge loan and a warrant to purchase 35,000 shares of common stock at $.625 per share expiring on December 19, 2002.
ML OKLAHOMA VENTURE PARTNERS, LIMITED PARTNERSHIP SCHEDULE OF PORTFOLIO INVESTMENTS, continued As of December 31, 1997
(F) On November 3, 1997, ZymeTx, Inc. completed its initial public offering. Additionally, during 1997, the company effected a 1-for-4 reverse stock split. As a result, the Partnership exchanged its 1,218,315 shares of common stock for 304,579 shares.
(G) During 1997, the Partnership sold its investment of 275,317 shares of C.R. Anthony Company common stock for $2,184,292, realizing a gain of $1,584,101. Additionally, in June 1997, the Partnership sold its investment in Diagnetics, Inc. for $87,001, realizing a loss of $726,609.
(H) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through December 31, 1997.
* May be deemed an affiliated person of the Partnership as defined in the Investment Company Act of 1940.
See notes to financial statements.
ML OKLAHOMA VENTURE PARTNERS, LIMITED PARTNERSHIP SCHEDULE OF PORTFOLIO INVESTMENTS As of December 31, 1996
(A) Public company
(B) Qualifies as an "Oklahoma business venture" under Oklahoma law.
* May be deemed an affiliated person of the Partnership as defined in the Investment Company Act of 1940.
See notes to financial statements.
ML OKLAHOMA VENTURE PARTNERS, LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS For the Years Ended December 31,
See notes to financial statements.
ML OKLAHOMA VENTURE PARTNERS, LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Years Ended December 31,
See notes to financial statements.
ML OKLAHOMA VENTURE PARTNERS, LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the Years Ended December 31, 1995, 1996 and 1997
(A) The net asset value per unit of limited partnership interest, including an assumed allocation of net appreciation of investments, was $734, $1,035, and $888 as of December 31, 1997, 1996 and 1995, respectively. Cumulative cash distributions paid to Limited Partners totaled $475 per Unit as of December 31, 1997.
See notes to financial statements.
ML OKLAHOMA VENTURE PARTNERS, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS
1. Organization and Purpose
ML Oklahoma Venture Partners, Limited Partnership (the "Partnership") was formed on July 15, 1988 under the Revised Uniform Limited Partnership Act of the State of Oklahoma. The Partnership's operations commenced on August 14, 1989. MLOK Co., Limited Partnership, the managing general partner of the Partnership (the "Managing General Partner"), is an Oklahoma limited partnership formed on July 15, 1988, the general partner of which is Merrill Lynch Venture Capital Inc. (the "Management Company"), an indirect subsidiary of Merrill Lynch & Co., Inc.
The Partnership's objective is to achieve long-term capital appreciation by making venture capital investments in new or developing companies, primarily Oklahoma companies, and other special investment situations. The Partnership does not engage in any other business or activity. The Partnership will terminate on December 31, 1998, subject to the right of the Individual General Partners to extend the term for up to two additional two-year periods.
2. Significant Accounting Policies
Valuation of Investments - Short-term investments are carried at amortized cost which approximates market. Portfolio investments are carried at fair value as determined quarterly by the Managing General Partner under the supervision of the Individual General Partners. The Managing General Partner determines the fair value of its portfolio investments by applying consistent guidelines. The fair value of public securities is adjusted to the closing public market price for the last trading day of the accounting period less an appropriate discount for sales restrictions, the size of the Partnership's holdings and the public market trading volume. Private securities are carried at cost until significant developments affecting a portfolio investment provide a basis for change in valuation. The fair value of private securities is adjusted 1) to reflect meaningful third-party transactions in the private market or 2) to reflect significant progress or slippage in the development of the company's business such that cost is no longer reflective of fair value. As a venture capital investment fund, the Partnership's portfolio investments involve a high degree of business and financial risk that can result in substantial losses. The Managing General Partner considers such risks in determining the fair value of the Partnership's portfolio investments.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles 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.
Investment Transactions - Investment transactions are recorded on the accrual method. Portfolio investments are recorded on the trade date, the date the Partnership obtains an enforceable right to demand the securities or payment therefor. Realized gains and losses on investments sold are computed on a specific identification basis.
ML OKLAHOMA VENTURE PARTNERS, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued
Income Taxes - No provision for income taxes has been made since all income and losses are allocable to the Partners for inclusion in their respective tax returns. The Partnership's net assets for financial reporting purposes differ from its net assets for tax purposes. Net unrealized appreciation of approximately $3.0 million as of December 31, 1997, which was recorded for financial statement purposes, has not been recognized for tax purposes. Additionally, from inception to December 31, 1997, other timing differences totaling $1.0 million relating to the original sales commissions paid and other costs of selling the Units have been recorded on the Partnership's financial statements but have not yet been deducted for tax purposes.
Statements of Cash Flows - The Partnership considers its interest-bearing cash account to be cash equivalents.
3. Allocation of Partnership Profits and Losses
Pursuant to the Partnership Agreement, profits from venture capital investments are allocated to all Partners in proportion to their capital contributions until all Partners have been allocated a 10% Priority Return from liquidated investments. Profits in excess of this amount are allocated 30% to the Managing General Partner and 70% to all Partners in proportion to their capital contributions until the Managing General Partner has been allocated 20% of the total profits from venture capital investments. Thereafter, profits from venture capital investments are allocated 20% to the Managing General Partner and 80% to all Partners in proportion to their capital contributions. Profits from other sources are allocated to all Partners in proportion to their capital contributions.
Losses are allocated to all Partners in proportion to their capital contributions. However, if profits had been previously allocated in the 70-30 or 80-20 ratios as discussed above, then losses will be allocated in the reverse order in which profits were allocated.
4. Related Party Transactions
The Management Company is responsible for the management and administrative services necessary for the operation of the Partnership. The Management Company receives a management fee at an annual rate of 2.5% of the gross capital contributions to the Partnership, reduced by selling commissions and organizational and offering expenses paid by the Partnership, capital distributed and realized losses, with a minimum annual fee of $200,000. Such fee is determined and paid quarterly.
5. Limitation on Operating Expenses
The Management Company has undertaken to the Partnership that it will reduce its management fee or otherwise reimburse the Partnership in order to limit the annual operating expenses of the Partnership, exclusive of the management fee, to an amount equal to $203,720.
ML OKLAHOMA VENTURE PARTNERS, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued
6. Independent General Partners' Fees
As compensation for services rendered to the Partnership, each of the three Independent General Partners receives $16,000 annually in quarterly installments, $1,000 for each meeting of the General Partners attended, $1,000 for each committee meeting attended ($500 if a committee meeting is held on the same day as a meeting of the General Partners) and $500 for meetings held by telephone conference.
7. Cash Distributions
Cash distributions paid during the periods presented and cumulative cash distributions to Partners from the inception of the Partnership through December 31, 1997 are listed below:
8. Short-Term Investments
The Partnership held no short-term securities as of December 31, 1997. As of December 31, 1996 the Partnership's short-term securities consisted of the following investment in commercial paper:
ML OKLAHOMA VENTURE PARTNERS, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, continued
9. Portfolio Investments
As of December 31, 1997, the Partnership's portfolio investments were categorized as follows:
* Represents fair value as a percentage of net assets.
10. Subsequent Event
During the first quarter of 1998, the Partnership sold 40,000 common shares of Envirogen, Inc. for $56,924, realizing a loss of $83,076.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The Partnership
GENERAL PARTNERS
The General Partners of the Partnership consist of the four Individual General Partners and the Managing General Partner. The five General Partners are responsible for the management and administration of the Partnership. As required by the Investment Company Act of 1940 (the "1940 Act"), a majority of the General Partners must be individuals who are not "interested persons" of the Partnership as defined in the 1940 Act. In 1989, the Securities and Exchange Commission issued an order declaring that the independent general partners of the Partnership (the "Independent General Partners") are not "interested persons" of the Partnership as defined in the 1940 Act solely by reason of their being general partners of the Partnership. The Managing General Partner and the four Individual General Partners will serve as the General Partners of the Partnership until successors have been elected or until their earlier resignation or removal.
The Individual General Partners have full authority over the management of the Partnership and provide overall guidance and supervision with respect to the operations of the Partnership and perform the various duties imposed on the directors of business development companies under the 1940 Act. In addition to general fiduciary duties, the Individual General Partners, among other things, supervise the management arrangements of the Partnership and the activities of the Managing General Partner.
The Managing General Partner has exclusive power and authority to manage and control the Partnership's venture capital investments, subject to the supervision of the Individual General Partners. Additionally, subject to the supervision of the Individual General Partners, the Managing General Partner is authorized to make all decisions regarding the Partnership's venture capital investment portfolio including, among other things, find, evaluate, structure, monitor and liquidate such investments and to provide, or arrange for the provision of, managerial assistance to the portfolio companies in which the Partnership invests.
Individual General Partners
William C. Liedtke, III (1) P.O. Box 54369 Oklahoma City, OK 73154 Age 46 Individual General Partner since 1988 0 Units of the Partnership beneficially owned as of March 21, 1998 (3) Since 1997, Chief Executive Officer of Redeco Energy, Inc.; from 1996 to 1997, Chief Operating Officer of Redex Co. Ventures, Ltd.; from 1991 to 1996, Energy consultant; from 1989 to 1991, Assistant to the Governor of the State of Oklahoma; since 1984, an independent natural gas marketing consultant; an oil and gas marketing manager for Trigg Drilling Company, Inc.; a member of the State Bar of Texas.
Richard P. Miller (1) 7500 N. Mockingbird Lane Paradise Valley, AZ 85253 Age 70 Individual General Partner since 1988 0 Units of the Partnership beneficially owned as of March 21, 1998 (3) Since1988 Director of Techlaw, Inc.; since 1995, President of Paice Corp.; from 1983 to 1990, Executive Vice President of Private Sector Counsel; in 1983 and 1984, Vice President, Corporate Finance, Union Bank of California; from 1968 to 1983, founder and Chief Executive Officer of Systems Control Inc.
George A. Singer (1) 2222 E. 25th Place Tulsa, OK 74114 Age 50 Individual General Partner since 1995 0 Units of the Partnership beneficially owned as of March 21, 1998 (3) Since 1978, Manager and Principal of Singer Bros. and General Partner of several related family entities; since 1978, Executive Vice President, Pedestal Oil Company, Inc.; since 1981, Director of Manchester Pipeline Corporation; a member of the Independent Petroleum Association of America.
Bruce W. Shewmaker (2) 12 Briarwood Drive Short Hills, NJ 07078 Age 52 Individual General Partner since 1988 0 Units of the Partnership beneficially owned as of March 21, 1998 (3) SinceJanuary 1997, President and CEO of The U.S. Russia Investment Fund; from 1991 to 1996, President of New Century Management, Inc., a venture caital management and advisory firm; from 1990 to 1991, venture investment advisor with Vector Securities International, Inc., an investment banking firm specializing in health care companies; from 1984 to 1990, President of Merrill Lynch R&D Management, Inc., from 1982 to 1983 and from 1988 to 1990, Vice President of Merrill Lynch Venture Capital, Inc. (1) Independent General Partner and Member of Audit Committee. (2) Interested person, as defined in the Investment Company Act, of the Partnership. (3) Each Individual General Partner has contributed $1,000 to the capital of the Partnership. Mr. Shewmaker is a limited partner of the Managing General Partner of the Partnership. The Managing General Partner contributed $103,556 to the capital of the Partnership. George A. Singer succeeded to the interest of a prior Independent General Partner who contributed $1,000 to the capital of the Partnership.
The Managing General Partner
MLOK Co., Limited Partnership (the "Managing General Partner") is a limited partnership organized on July 15, 1988 under the laws of the State of Oklahoma. The Managing General Partner maintains its legal address at Meridian Tower, 5100 East Skelly Drive, Suite 1060, Tulsa, OK 74135. The Managing General Partner has acted as the managing general partner of the Partnership since the Partnership commenced operations on August 14, 1989. The Managing General Partner is engaged in no other activity. The Managing General Partner has contributed $103,556 to the capital of the Partnership, equal to 1% of the aggregate capital contributions of all Partners of the Partnership.
The general partner of the Managing General Partner is Merrill Lynch Venture Capital Inc. (the "Management Company") and the limited partners of the Managing General Partner include Joe D. Tippens, C. James Bode and John Frick, independent contractors to the Management Company. Information concerning the Management Company is set forth below.
The Management Company
Merrill Lynch Venture Capital Inc. (the "Management Company") has served as the management company for the Partnership since the Partnership commenced operations. The Management Company performs, or arranges for others to perform, the management and administrative services necessary for the operation of the Partnership pursuant to a Management Agreement between the Partnership and the Management Company.
The Management Company is an indirect subsidiary of Merrill Lynch & Co., Inc. The Management Company, which was incorporated under Delaware law on January 25, 1982, maintains its principal office at North Tower, World Financial Center, New York, New York 10281-1326. Listed below is information concerning the directors and officers of the Management Company, who are principally involved with the Partnership's operations. Unless otherwise noted, the address of each such person is World Financial Center, North Tower, New York, New York 10281.
Kevin K. Albert, Age 45, Director, President Officer or Director since 1990 Managing Director of Merrill Lynch & Co. Investment Banking Division ("MLIBK") since 1988; Vice President of MLIBK from 1983 to 1988.
Robert F. Aufenanger, Age 44, Director and Executive Vice President Officer or Director since 1990 Vice President of Merrill Lynch & Co. Corporate Credit and Director of the Partnership Management Group since 1991; Director of MLIBK from 1990 to 1991; Vice President of MLIBK from 1984 to 1990.
Steven N. Baumgarten, Age 42, Vice President Officer or Director since 1993 Vice President of MLPF&S since 1986.
Michael E. Lurie, Age 54, Director, Vice President Officer or Director since 1995 First Vice President of Merrill Lynch & Co. Corporate Credit and Director of the Asset Recovery Management Department, joined Merrill Lynch in 1970. Prior to his present position, Mr. Lurie was the Director of Debt and Equity Markets Credit responsible for the global allocation of credit limits and the approval and structuring of specific transactions related to debt and equity products. Mr. Lurie also served as Chairman of the Merrill Lynch International Bank Credit Committee.
Diane T. Herte Vice President and Treasurer Age 37 Officer or Director since 1995 Vice President of Merrill Lynch & Co. Investment Banking Group since 1996 and previously an Assistant Vice President of Merrill Lynch & Co. Corporate Credit Group since 1992, joined Merrill Lynch in 1984. Ms. Herte's responsibilities include controllership and financial management functions for certain partnerships and other entities for which subsidiaries of Merrill Lynch are the general partner, manager and administrator.
The directors of the Management Company will serve as directors until the next annual meeting of stockholders and until their successors are elected and qualify. The officers of the Management Company will hold office until the next annual meeting of the Board of Directors of the Management Company and until their successors are elected and qualify.
There are no family relationships among any of the Individual General Partners of the Partnership and the officers and directors of the Management Company.
The Management Company has arranged for Palmeri Fund Administrators, Inc., an independent administrative services company, to provide administrative services to the Partnership. Fees for such services are paid directly by the Management Company.
Item 11.
Item 11. Executive Compensation.
Compensation - The Partnership pays each Independent General Partner an annual fee of $16,000 in quarterly installments, $1,000 per meeting of the Individual General Partners attended and $500 for participating in each special meeting of the Individual General Partners conducted by telephone conference call and pays all non-interested Individual General Partners' actual out-of-pocket expenses relating to attendance at meetings. Additionally, the Independent General Partners receive $1,000 for each meeting of the Audit Committee attended unless such committee meeting is held on the same day as a meeting of the Individual General Partners. In such case, the Independent General Partners receive $500 for each meeting of the Audit Committee attended. The aggregate fees and expenses paid by the Partnership to the Independent General Partners for the years ended December 31, 1997, 1996, and 1995, totaled $60,947, $60,183 and $72,245, respectively.
Allocations and Distributions - The information with respect to the allocation and distribution of the Partnership's profits and losses to the Managing General Partner set forth under the caption "Partnership Distributions and Allocations" on pages 35 - 37 of the Prospectus is incorporated herein by reference.
For the year ended December 31, 1997, the Partnership had a net realized gain from operations of $688,367. For the years ended December 31, 1996 and 1995, the Partnership had a net realized loss from operations of $2,389 and a net realized gain from operations of $1,361,908, respectively. In accordance with the Partnership's allocation procedure, the Managing General Partner was allocated $6,883, $24 and $13,619 of such gains and losses for the years ended December 31, 1997, 1996 and 1995, respectively.
During 1997, the Partnership made cash distributions to Partners totaling $1,812,423. Limited Partners received $1,793,400, or $175 per Unit. The Individual General Partners received $708 and the Managing General Partner received $18,315. During 1996, the Partnership made cash distributions to Partners totaling $517,576. Limited Partners received $512,400, or $50 per Unit. The Individual General Partners received $192 and the Managing General Partner received $4,984. During 1995, the Partnership made cash distributions to Partners totaling $2,588,889. Limited Partners received $2,562,000, or $250 per Unit. The Individual General Partners received $1,000 and the Managing General Partner received $25,889. There were no distributions paid to Partners prior to 1995.
Management Fee - Pursuant to the Management Agreement, the Management Company receives a management fee at the annual rate of 2.5% of the amount of the Partners' gross capital contributions (net of selling commissions and organizational and offering expenses paid by the Partnership), reduced by capital distributed and realized capital losses, with a minimum annual fee of $200,000. Such fee is determined and paid quarterly in arrears. The management fee was $200,000 for each of the years ended December 31, 1997, 1996 and 1995.
The Management Company has agreed to reduce its management fee, or otherwise reimburse the Partnership in order to limit the annual operating expenses of the Partnership, exclusive of the management fee, to an amount equal to $203,720.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information concerning the security ownership of the Individual General Partners set forth in Item 10 under the subcaption "Individual General Partners" is incorporated herein by reference. As of March 21, 1997, no person or group is known by the Partnership to be the beneficial owner of more than 5 percent of the Units.
The Partnership is not aware of any arrangement which may, at a subsequent date, result in a change of control of the Partnership.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Kevin K. Albert, a Director and President of the Management Company and a Managing Director of Merrill Lynch Investment Banking Group ("ML Investment Banking"), joined Merrill Lynch in 1981. Robert F. Aufenanger, a Director and Executive Vice President of the Management Company, a Vice President of Merrill Lynch & Co. Corporate Credit and a Director of the Partnership Management Department, joined Merrill Lynch in 1980. Steven N. Baumgarten, a Vice President of the Management Company and MLPF&S, joined Merrill Lynch in 1986. Michael E. Lurie, a Director and Vice President of the Management Company, a First Vice President of Merrill Lynch & Co. Corporate Credit and the Director of the Asset Recovery Management Department, joined Merrill Lynch in 1970. Diane T. Herte, a Vice President and Treasurer of the Management Company and a Vice President of Merrill Lynch & Co. Investment Banking Group, joined Merrill Lynch in 1984. Messrs. Albert, Aufenanger, Lurie and Baumgarten and Ms. Herte are involved with certain other entities affiliated with Merrill Lynch or its affiliates.
Item 14.
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
Independent Auditors' Report
Balance Sheets as of December 31, 1997 and 1996
Schedule of Portfolio Investments as of December 31, 1997
Schedule of Portfolio Investments as of December 31, 1996
Statements of Operations for the years ended December 31, 1997, 1996 and 1995
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995
Statements of Changes in Partners' Capital for the years ended December 31, 1995, 1996 and 1997
Notes to Financial Statements
2. (a) Exhibits
(3) (a) Amended and Restated Certificate of Limited Partnership of the Partnership dated as of November 29, 1988.*
(b) Amended and Restated Agreement of Limited Partnership of the Partnership dated as of November 29, 1988.*
(c) Amended and Restated Agreement of Limited Partnership of the Partnership dated as of August 14, 1989.**
(10) Management Agreement dated as of November 29, 1988 between the Partnership and the Management Company.*
(27) Financial Data Schedule.
(28) (a) Prospectus of the Partnership dated December 1, 1988 filed with the Securities and Exchange Commission pursuant to Rule 497 (b) under the Securities Act of 1933, as supplemented by a supplement dated April 25, 1989 filed pursuant to Rule 497 (d) under the Securities Act of 1933.***
(b) No reports on Form 8-K have been filed during the quarter for which this report is filed.
* Incorporated by reference to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 filed with the Securities and Exchange Commission on April 3, 1989.
** Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989 filed with the Securities and Exchange Commission on November 14, 1989.
*** Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989 filed with the Securities and Exchange Commission on May 15, 1989.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 30th day of March, 1998.
ML OKLAHOMA VENTURE PARTNERS, LIMITED PARTNERSHIP
By: MLOK Co. Limited Partnership its Managing General Partner
By: Merrill Lynch Venture Capital Inc. its General Partner
By: /s/ Kevin K. Albert Kevin K. Albert President (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 30th day of March 1998.
By: MLOK Co., Limited Partnership its Managing General Partner
By: Merrill Lynch Venture Capital Inc. its General Partner