Item 1. Business. --------
Formation
WestMed Venture Partners 2, L.P. (the "Partnership" or the "Registrant") is a Delaware limited partnership organized in April 1988. In July 1988, the Partnership elected to operate as a business development company under the Investment Company Act of 1940, as amended (the "1940 Act"). The Partnership's investment objective is to achieve long-term capital appreciation from its portfolio of venture capital investments, consisting of companies engaged in the health-care industry. The Partnership considers this activity to constitute the single industry segment of venture capital investing.
The general partners of the Partnership include two individuals (the "Independent General Partners") and WestMed Venture Management 2, L.P., a Delaware limited partnership (the "Managing General Partner" and collectively with the Independent General Partners, the "General Partners"). The general partner of the Managing General Partner is Medical Venture Holdings, Inc., a Delaware corporation affiliated with CIBC Oppenheimer Corp. ("Opco") (formerly Oppenheimer & Co., Inc.). Opco is the successor corporation to Oppenheimer & Co., Inc., following the acquisition and subsequent merger of Oppenheimer & Co., Inc. and CIBC Wood Gundy Corp. in November 1997. Opco is a subsidiary of Canadian Imperial Bank of Commerce. The limited partners of the Managing General Partner are Opco, MVP Holdings, Inc. and BSW, Inc., a Delaware corporation owned by John A. Balkoski, Philippe L. Sommer and Howard S. Wachtler. Alsacia Venture Management, Inc. (the "Sub-Manager"), a corporation controlled by Philippe L. Sommer, serves as the sub-manager of the Partnership pursuant to a sub-management agreement between the Managing General Partner and the Sub-Manager. The Sub-Manager has been retained by the Managing General Partner to assist the Managing General Partner in the performance of certain of its duties to the Partnership.
In 1988, the Partnership publicly offered 60,000 units of limited partnership interest (the "Units") at $500 per Unit. The Units were registered under the Securities Act of 1933, as amended, pursuant to a Registration Statement on Form N-2 (File No. 33-21281) which was declared effective on August 5, 1988. The Partnership held its initial and final closings on September 1, 1988 and October 1, 1989, respectively, and terminated the offering on February 15, 1990. As a result of the public offering, the Partnership accepted subscriptions for a total of 38,727 Units. Gross capital contributions to the Partnership in connection therewith totaled $19,559,091, including $19,363,500 from the limited partners (the "Limited Partners" and collectively with the Managing General Partner, the "Partners") and $195,591 from the Managing General Partner.
The Venture Capital Investments
From its inception to December 31, 1999, the Partnership had invested $16,842,427 in twelve portfolio companies, including venture capital fees and other acquisition costs totaling $1,063,133. During 1999, the Partnership sold or wrote-off securities having an aggregate cost of $5,194,257, resulting in a loss of $3,449,633. These transactions and other events affecting the Partnership's portfolio investments during 1999 are listed below.
During 1999, the Partnership sold its remaining investment in the following portfolio companies:
o 100,383 common shares of La Jolla Pharmaceutical Company and a warrant to purchase an additional 12,538 common shares of La Jolla Pharmaceutical at $6.00 per share for $71,761, realizing a loss of $606,818,
o 52,918 common shares of Integramed America, Inc. for $182,567, realizing a loss of $2,139,859,
o 36,395 common shares of Synaptic Pharmaceutical Corporation for $200,664, realizing a loss of $96,561,
o 225,395 common shares of Targeted Genetics, Inc. for $338,450, realizing a loss of $728,903,
o 58,728 common shares of KeraVision, Inc. for $936,782, realizing a gain of $483,641,
o the remaining holdings of VitaGen, Inc. for $14,400, realizing a loss of $7,600.
Also during 1999, the Partnership realized a loss of $353,533 from the write-off of its remaining investment in Abtox, Inc.
As of December 31, 1999, the Partnership had liquidated all of its portfolio investments, except for a warrant to purchase 5,015 common shares of La Jolla Pharmaceutical Company at $5.00 per share, which expires on June 3, 2000. The warrant, which was acquired in a private transaction, is not listed in a public market, has no cost basis and had a fair value of $0 as of December 31, 1999. The investments liquidated by the Partnership through December 31, 1999 had an aggregate cost of $16,842,427. These investments returned $7,292,841 to the Partnership, resulting in a net realized loss of $9,549,586. Additionally, from its inception to December 31, 1999, the Partnership earned $239,574 of interest and other income from its portfolio investments. As a result, as of December 31, 1999, the Partnership had a cumulative net realized loss of $9,310,012 from its portfolio of venture capital investments.
Termination
The Managing General Partner is pursuing the termination of the Partnership as soon as practical with the goal of maximizing returns to Partners. The Partnership's originally scheduled termination date was December 31, 1998, with provision for extension for two additional two-year periods. The Independent General Partners determined not to extend the Partnership's termination date. However, pursuant to the Partnership Agreement and Delaware Law, the Managing General Partner will continue to manage the Partnership through its date of liquidation, which will occur when it has satisfied all liabilities and obligations to creditors and has sold, distributed or otherwise disposed of its investments in portfolio companies.
Competition
The Partnership encounters competition from other entities having similar investment objectives. 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. Competition has also been from foreign investors and from large industrial and financial companies investing directly rather than through venture capital affiliates. The Partnership has frequently been a co-investor with other professional venture capital groups and these relationships have expanded the Partnership's access to investment opportunities. However, as discussed, the Partnership is pursuing its termination and will not make any additional investments.
Employees
The Partnership has no employees. The Managing General Partner, subject to the supervision of the Independent General Partners, manages and controls the Partnership's venture capital investments. The Managing General Partner is responsible for the management and administrative services necessary for the operation of the Partnership, including managing the Partnership's short-term investments. The Sub-Manager, subject to the supervision of the Managing General Partner and Individual General Partners, has provided management services in connection with the Partnership's venture capital investments. Fees paid to the Sub-Manager are paid directly by the Managing General Partner.
Item 2.
Item 2. Properties. ----------
The Partnership does not own or lease physical properties.
Item 3.
Item 3. Legal Proceedings. -----------------
On June 5, 1996, the Partnership and Philippe L. Sommer, among others, were named in an action filed in Harris County, Texas by James Kelly and Norman L. Sussman (the "Action"). The plaintiffs in the Action assert certain causes of action against all defendants, including violations of the securities laws, fraud, fraudulent inducement, civil conspiracy and wrongful sequestration. All of the aforesaid causes of action arise out of the Partnership's investment, with other venture capital funds, in VitaGen, Inc., formerly Hepatix, Inc., a company founded to develop and pursue approval of an extracorporeal liver assist device. The plaintiffs in the Action are two of the original founders of Hepatix, Inc. The Action was subsequently removed to Federal District Court in Houston and on October 15, 1996 a motion was made to dismiss the Action against the Partnership and Mr. Sommer.
On January 29, 1998, the court dismissed all but four of the plaintiffs' counts. The Action was then remanded back to State court. On September 13, 1999, a mediation was held between the parties and the matter was settled in principal. Under the current terms of the settlement, the defendants paid $175,000, of which the Partnership's share was $21,000, exclusive of legal fees.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. ---------------------------------------------------------------------
There is no established public trading market for the Units and it is not anticipated that any public market for the Units will develop. Accordingly, accurate information as to the market value of a Unit at any given date is not available. The approximate number of individual holders of Units as of March 15, 2000 was 3,496.
On January 28, 2000, the Partnership paid a cash distribution to Partners totaling $4,342,118. Limited Partners of record on December 31, 1999 received $4,298,697 or $111 per Unit and the Managing General Partner received $43,421. There were no cash distributions paid during the years ended December 31, 1998 and 1997. Cumulative cash distributions paid to Partners from inception through December 31, 1999 totaled $7,631,835, including $7,555,517 to the Limited Partners, or approximately $195 per Unit, and $76,318 to the Managing General Partner.
Pursuant to the Partnership's agreement of limited partnership, as amended (the "Partnership Agreement"), the Partnership's net income and net realized gains from all sources are allocated to all Partners, in proportion to their capital contributions, until all Partners have been allocated an amount equal to 6% per annum, simple interest, on their total Adjusted Invested Capital; i.e., original capital contributions reduced by previous distributions (the "Priority Return"). Thereafter, net income and net realized gains from venture capital investments in excess of the amount used to cover the Priority Return are allocated 20% to the Managing General Partner and 80% to all Partners in proportion to their capital contributions. Any net income from non-venture capital investments in excess of the amount used to cover the Priority Return is allocated to all Partners in proportion to their capital contributions. Realized losses are allocated to all Partners in proportion to their capital contributions, provided that, if realized gains had been previously allocated in the 80-20 ratio discussed above, then losses are allocated in the reverse order in which profits were allocated.
Item 6.
Item 6. Selected Financial Data. -----------------------
* Limited Partners were admitted to the Partnership in 12 separate closings from October 1, 1988 to October 1, 1989. Per Unit amounts shown above are based on average allocations to all Limited Partners and do not reflect specific Limited Partner allocations, which are determined by the original closing date associated with the Units held by each Limited Partner.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. -----------------------------------------------------------------------
Liquidity and Capital Resources
As of December 31, 1999, the Partnership had a cash and cash equivalent balance of $4,867,693, comprised of $4,380,298 in a short-term investment with a maturity of less than one year and $487,395 in an interest-bearing cash account. For the years ended December 31, 1999, 1998 and 1997, the Partnership earned interest from such investments totaling $179,018, $92,422, and $49,199, respectively. Interest earned in future periods is subject to fluctuations in short-term interest rates and changes in amounts available for investment in such securities.
Subsequent to the end of the year, on January 28, 2000, the Partnership paid a cash distribution to Partners totaling $4,342,118. Limited Partners of record on December 31, 1999 received $4,298,697 or $111 per Unit and the Managing General Partner received $43,421. There were no cash distributions paid during the years ended December 31, 1998 and 1997. Cumulative cash distributions paid to Partners from inception through December 31, 1999 total $7,631,835, including $7,555,517 to the Limited Partners, or approximately $195 per Unit, and $76,318 to the Managing General Partner.
The Partnership will not make any additional portfolio investments. Generally, net proceeds received from the sale of portfolio investments are distributed to Partners as soon as practicable, after an adequate reserve for operating expenses. Funds needed to cover the Partnership's future operating expenses primarily will be obtained from the Partnership's existing cash reserves.
The Managing General Partner is pursuing the termination of the Partnership as soon as practical with the goal of maximizing returns to Partners. The Partnership's originally scheduled termination date was December 31, 1998, with provision for extension for two additional two-year periods. The Independent General Partners determined not to extend the Partnership's termination date. However, pursuant to the Partnership Agreement and Delaware Law, the Managing General Partner will continue to manage the Partnership through its date of liquidation, which will occur when it has satisfied all liabilities and obligations to creditors and has sold, distributed or otherwise disposed of its investments in portfolio companies.
Results of Operations
For the years ended December 31, 1999, 1998 and 1997, the Partnership had a net realized loss from operations of $3,495,788, $2,490,260 and $36,438, respectively. Net realized gain or loss from operations is comprised of (i) net realized gain or loss from portfolio investments and (ii) net investment income or loss (interest, dividends and other income less operating expenses).
Realized Gains and Losses from Portfolio Investments - For the year ended December 31, 1999, the Partnership had a $3,449,633 net realized loss from its portfolio investments. During 1999, the Partnership sold the following publicly-traded securities: 100,383 common shares of La Jolla Pharmaceutical Company and a warrant to purchase an additional 12,538 common shares of La Jolla Pharmaceutical at $6.00 per share for $71,761, realizing a loss of $606,818; 52,918 common shares of Integramed America, Inc. for $182,567, realizing a loss of $2,139,859; 36,395 common shares of Synaptic Pharmaceutical Corporation for $200,664, realizing a loss of $96,561; 225,395 common shares of Targeted Genetics, Inc. for $338,450, realizing a loss of $728,903; 58,728 common shares of KeraVision, Inc. for $936,782, realizing a gain of $483,641; and the remaining holdings of VitaGen, Inc. (formerly Hepatix, Inc.) for $14,400, realizing a loss of $7,600. Also during 1999, the Partnership realized a loss of $353,533 from the write-off of its remaining investment in Abtox, Inc.
For the year ended December 31, 1998, the Partnership had a $2,301,431 net realized loss from its portfolio investments. During 1998, the Partnership sold the following publicly-traded securities: the remaining 104,210 shares of Gliatech, Inc. common stock for $1,656,467, realizing a gain of $855,038; 40,000 common shares of Synaptic Pharmaceutical Corporation for $597,562 realizing a gain of $267,317; and 10,000 common shares of KeraVision, Inc. for $110,643 realizing a gain of $33,484. Additionally, in September 1998, the Partnership liquidated its investment in Sennes Drug Innovations, Inc. in connection with the settlement of a lawsuit between Sennes and certain shareholders, including the Partnership, against Baylor College of Medicine, an original investor in Sennes. The Partnership received $386,107, which resulted in a realized loss of $836,246, in exchange for its holdings in Sennes and release of all claims against Baylor. Also in September 1998, the Partnership realized an additional loss of $707,067, from the partial write-off of its $1,060,000 investment in Abtox, Inc. During 1998, Abtox filed for protection under Chapter 11 of the federal bankruptcy code and is currently seeking funding to reorganize. Finally, on December 31, 1998, the Partnership wrote-off $1,913,957 of its $1,935,957 investment in VitaGen, Inc. due to a financial restructuring of the company completed in December 1998.
For the year ended December 31, 1997, the Partnership had a $227,199 net realized gain from its portfolio investments. During 1997, the Partnership sold 20,000 common shares of Synaptic Pharmaceutical Corporation for $300,200, realizing a gain of $130,503 and 20,000 common shares of Gliatech, Inc. for $257,276, realizing a gain of $96,696.
Investment Income and Expenses - For the years ended December 31, 1999, 1998 and 1997, the Partnership had a net investment loss of $46,155, $188,829 and $263,637, respectively.
The $142,674 favorable change in net investment loss for 1999 compared to 1998 resulted from a $94,782 increase in investment income and a $47,892 reduction in operating expenses. The increase in investment income primarily resulted from an $86,596 increase in interest earned from short-term investments for 1999 compared to 1998. This increase resulted from an increase in amounts invested in short-term securities during 1999 compared to 1998 resulting from proceeds received from the liquidation of most of the Partnership's remaining portfolio investments during 1999. The Partnership invests such proceeds in short-term securities until the funds are either used for operations or distributed to Partners. The remaining positive variance in investment income for 1999 compared to 1998, resulted from the one-time write-off, during 1998, of accrued interest relating to promissory notes due from VitaGen, Inc. The decrease in operating expenses for 1999 primarily resulted from a $56,833 decrease in the management fee, as discussed below. Additionally, a net decrease in other operating expenses of $12,059 was offset by a one-time payment of $21,000 relating to the September 1999 settlement of the VitaGen litigation. See note 6 of notes to financial statements for additional information.
The $74,808 favorable change in net investment loss for 1998 compared to 1997 resulted from a $46,900 reduction in operating expenses and a $27,908 increase in investment income. The decrease in operating expenses for 1998 primarily resulted from a $27,307 decrease in the management fee, as discussed below, and a $22,764 decrease in insurance expense due to reduced liability insurance premiums. The increase in investment income primarily resulted from a $43,223 increase in interest earned from short-term investments due to an increase in the amount of funds available for investment in such securities during the 1998 period compared to the same period in 1997. Partially offsetting the increase in interest from short-term investments was a $15,315 negative variance in interest and dividend income from portfolio investments for the 1998 period compared to 1997, primarily due to the write-off, during 1998, of accrued interest relating to promissory notes due from VitaGen, Inc., as discussed above.
Pursuant to a management agreement between the Partnership and the Managing General Partner, the Managing General Partner is responsible for the management, administrative and certain investment advisory services necessary for the operation of the Partnership. For such services, the Managing General Partner receives a management fee at the annual rate of 2% of the lesser of the net assets of the Partnership or the net contributed capital of the Partnership; i.e., gross capital contributions to the Partnership, net of selling commissions and organizational expenses, reduced by capital distributed. Such fee is determined and paid quarterly. For the years ended December 31, 1999, 1998 and 1997 the management fee was $76,345, $133,178 and $160,485, respectively. The steady decline in the management fee over the three-year period ended December 31, 1999, reflects the reduced net asset value of the Partnership during this period. The Partnership's net asset value was reduced during this period by reductions to the fair value of its portfolio investments and cash distributions paid or accrued to Partners. The management fee will continue to decline as the Partnership continues with its liquidation. To the extent possible, the management fee and other operating expenses have been paid with funds provided from operations. Funds provided from operations are obtained from interest received from short-term investments, interest and dividend income from portfolio investments and proceeds from the sale of portfolio investments. As noted above, funds needed to cover the Partnership's future operating expenses primarily will be obtained from its existing cash reserves.
Unrealized Gains and Losses and Changes in Unrealized Depreciation of Portfolio Investments - For the year ended December 31, 1999, the Partnership had a $2,759,802 favorable net change in unrealized depreciation of investments. During 1999, $3,388,700 was transferred from unrealized loss to realized loss in connection with the portfolio investments sold or written-off during the year, as discussed above. Partially offsetting this favorable change was a $628,898 net downward revaluation of the Partnership's portfolio investments during 1999.
For the year ended December 31, 1998, the Partnership had a $469,578 favorable net change in unrealized depreciation of investments. During 1998, $909,359 was transferred from unrealized loss to realized loss in connection with the portfolio investments sold or written-off during the year, as discussed above. Partially offsetting this favorable change was a $530,498 net downward revaluation of the Partnership's portfolio investments during 1998.
For the year ended December 31, 1997, the Partnership had a $676,802 unfavorable net change in unrealized depreciation of investments. During 1997, the Partnership reduced the fair value of its portfolio investments by $542,954 due to a net downward revaluation of its publicly held securities during 1997. Additionally, during 1997, $133,848 was transferred from unrealized gain to realized gain in connection with the portfolio securities sold during the year, as discussed above.
Net Assets - Changes to net assets resulting from operations is comprised of (i) net realized gains and losses from operations and (ii) changes to net unrealized appreciation or depreciation of portfolio investments.
As of December 31, 1999, the Partnership's net assets were $511,795, reflecting a decrease of $5,078,104 from net assets of $5,589,899 as of December 31, 1998. This change represents the $4,342,188 accrued cash distribution to Partners, paid in January 2000, and the $735,986 decrease in net assets resulting from operations for 1999. The decrease in net assets resulting from operations for 1999 was comprised of the $3,495,788 net realized loss from operations partially offset by the $2,759,802 favorable change in net unrealized depreciation of investments for 1999.
As of December 31, 1998, the Partnership's net assets were $5,589,899, reflecting a decrease of $2,020,682 from net assets of $7,610,581 as of December 31, 1997. This change represents the decrease in net assets resulting from operations for 1998, comprised of the $2,490,260 net realized loss from operations, partially offset by the $469,578 favorable change in net unrealized depreciation of investments for 1998.
As of December 31, 1997, the Partnership's net assets were $7,610,581, reflecting a decrease of $713,240 from net assets of $8,323,821 as of December 31, 1996. This change represents the decrease in net assets resulting from operations for 1997, comprised of the $36,438 net realized loss from operations and the $676,802 unfavorable change in net unrealized depreciation of investments for 1997.
The net asset value per $500 Unit, including an allocation of the net unrealized depreciation of investments, as of December 31, 1999, 1998 and 1997 was $13, $143 and $195, respectively. Such per Unit amounts are based on average allocations to all Limited Partners and do not reflect specific Limited Partner allocations, which are determined by the original closing date associated with the Units held by each Limited Partner.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The Partnership is subject to market risk arising from changes in the value of its portfolio investments and interest-bearing cash equivalents, including short-term securities, which may result from fluctuations in interest rates and equity prices. The Partnership has calculated its market risk related to its holdings of these investments based on changes in interest rates and equity prices utilizing a sensitivity analysis. The sensitivity analysis estimates the hypothetical change in fair values, cash flows and earnings based on an assumed 10% change (increase or decrease) in interest rates and equity prices. To perform the sensitivity analysis, the assumed 10% change is applied to market rates and prices on investments held by the Partnership at the end of the accounting period.
As of December 31, 1999, the Partnership held one short-term investment in a discounted commercial paper instrument with a remaining maturity of 30 days. This short-term investment was carried at an aggregate amortized cost of $4,380,298 as of December 31, 1999. An assumed 10% increase in the market interest rate of such short-term investment held by the Partnership as of December 31, 1999, would result in a reduction to the fair value of such investment and an unrealized loss which is considered to be immaterial.
Market risk relating to the Partnership's interest-bearing cash equivalents held as of December 31, 1999 is considered to be immaterial.
Item 8.
Item 8. Financial Statements and Supplementary Data. -------------------------------------------
WESTMED VENTURE PARTNERS 2, L.P. INDEX
Independent Auditors' Report
Balance Sheets as of December 31, 1999 and 1998
Schedule of Portfolio Investments as of December 31, 1999
Schedule of Portfolio Investments as of December 31, 1998
Statements of Operations for the years ended December 31, 1999, 1998 and 1997
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997
Statements of Changes in Partners' Capital for the years ended December 31, 1997, 1998 and 1999
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
WestMed Venture Partners 2, L.P.:
We have audited the accompanying balance sheets of WestMed Venture Partners 2, L.P. (the "Partnership"), including the schedules of portfolio investments, as of December 31, 1999 and 1998, 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, 1999. 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, 1999 and 1998 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 WestMed Venture Partners 2, L.P. at December 31, 1999 and 1998, 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, 1999 in conformity with generally accepted accounting principles.
As explained in Note 2, the financial statements include securities valued at $22,000 at December 31, 1998, representing .004% of net assets, 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 25, 2000
WESTMED VENTURE PARTNERS 2, L.P. BALANCE SHEETS
See notes to financial statements.
WESTMED VENTURE PARTNERS 2, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS
(A) During 1999, the Partnership sold its remaining 100,383 common shares of La Jolla Pharmaceutical Company and a warrant to purchase an additional 12,538 common shares of La Jolla Pharmaceutical at $6.00 per share for $71,761, realizing a loss of $606,818.
(B) During 1999, the Partnership sold its remaining investment in the following portfolio companies:
o 52,918 common shares of Integramed America, Inc. for $182,567, realizing a loss of $2,139,859,
o 36,395 common shares of Synaptic Pharmaceutical Corporation for $200,664, realizing a loss of $96,561,
o 225,395 common shares of Targeted Genetics, Inc. for $338,450, realizing a loss of $728,903,
o 58,728 common shares of KeraVision, Inc. for $936,782, realizing a gain of $483,641,
o its remaining holdings of VitaGen, Inc. for $14,400, realizing a loss of $7,600.
(C) During 1999, the Partnership realized a loss of $353,533 from the write-off of its remaining investment in Abtox, Inc.
(D) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through December 31, 1999.
See notes to financial statements.
WESTMED VENTURE PARTNERS 2, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS
(A) Public company
(B) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through December 31, 1998.
* May be deemed an affiliated person of the Partnership as defined in the Investment Company Act of 1940.
See notes to financial statements.
WESTMED VENTURE PARTNERS 2, L.P.
STATEMENTS OF OPERATIONS
See notes to financial statements.
WESTMED VENTURE PARTNERS 2, L.P.
STATEMENTS OF CASH FLOWS
See notes to financial statements.
WESTMED VENTURE PARTNERS 2, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(A) The net asset value per unit of limited partnership interest, including an allocation of net unrealized depreciation of investments, is $13, $143 and $195 as of December 31, 1999, 1998 and 1997, respectively. Such per Unit amounts are based on average allocations to all limited partners and do not reflect specific limited partner allocations, which are determined by the original closing date associated with the units of limited partnership interest held by each limited partner.
See notes to financial statements.
WESTMED VENTURE PARTNERS 2, L.P. NOTES TO FINANCIAL STATEMENTS
1. Organization and Purpose
WestMed Venture Partners 2, L.P. (the "Partnership") was formed under Delaware law in April 1988. The Partnership operates as a business development company under the Investment Company Act of 1940, as amended. The Partnership is a closed-end partnership and accordingly its units of limited partnership interest ("Units") are not redeemable by the Partnership. A total of 38,727 Units were sold to limited partners ("Limited Partners" and together with the Managing General Partner (as hereinafter defined), the "Partners") at $500 per Unit.
The general partners of the Partnership include two individuals (the "Independent General Partners") and the managing general partner, WestMed Venture Management 2, L.P., a Delaware limited partnership (the "Managing General Partner" and collectively with the Independent General Partners, the "General Partners"). The general partner of the Managing General Partner is Medical Venture Holdings, Inc., a Delaware corporation affiliated with CIBC Oppenheimer Corp. ("Opco"). Opco is the successor corporation to Oppenheimer & Co., Inc., following the acquisition and subsequent merger of Oppenheimer & Co., Inc. and CIBC Wood Gundy Corp. in November 1997. Opco is a subsidiary of Canadian Imperial Bank of Commerce. The limited partners of the Managing General Partner are Opco, MVP Holdings, Inc. and BSW, Inc., a Delaware corporation owned by John A. Balkoski, Philippe L. Sommer and Howard S. Wachtler. Alsacia Venture Management, Inc. (the "Sub-Manager"), a corporation controlled by Philippe L. Sommer, serves as the sub-manager of the Partnership pursuant to a sub-management agreement between the Managing General Partner and the Sub-Manager. The Sub-Manager has been retained by the Managing General Partner to assist the Managing General Partner in the performance of certain of its duties to the Partnership.
The Partnership's objective is to achieve long-term capital appreciation from its portfolio of venture capital investments, consisting of companies engaged in the health care industry. The Partnership's originally scheduled termination date was December 31, 1998, with provision for extension for two additional two-year periods. The General Partners have elected not to extend the Partnership's termination date. However, pursuant to the Partnership Agreement (as hereinafter defined) and Delaware Law, the Managing General Partner will continue to manage the Partnership through its date of liquidation, which will occur when it has satisfied all liabilities and obligations to creditors and has sold, distributed or otherwise disposed of its investments in portfolio companies.
2. Summary of Significant Accounting Policies
Valuation of Investments - Portfolio investments are valued quarterly by the Managing General Partner under the supervision of the Independent General Partners. Publicly-held portfolio securities are valued at the closing public market price on the valuation date discounted for sales restrictions. Factors considered in the determination of an appropriate discount include, underwriter lock-up or Rule 144 trading restrictions, insider status where the Partnership either has a representative serving on the board of directors of the portfolio company under consideration or is greater than a 5% shareholder thereof, and other liquidity factors
WESTMED VENTURE PARTNERS 2, L.P.
NOTES TO FINANCIAL STATEMENTS - continued
such as the size of the Partnership's position in a given company compared to the trading history of the public security. Privately-held portfolio securities are carried at cost until significant developments affecting the portfolio company provide a basis for change in valuation. The fair value of private securities is adjusted (i) to reflect meaningful third-party transactions in the private market and (ii) 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. For portfolio investments, transactions are recorded on the date the Partnership obtains an enforceable right to demand the securities or payment thereof. Realized gains and losses on investments sold are computed on a specific identification basis.
Statements of Cash Flows - Cash and cash equivalents include short-term interest-bearing investments in commercial paper and other money market investments. The Partnership considers its interest-bearing cash account to be cash equivalents.
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. From inception to December 31, 1999, other timing differences totaling $3.3 million, primarily relating to 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.
3. Allocations of Partnership Profits and Losses
Pursuant to the Partnership's agreement of limited partnership, as amended (the "Partnership Agreement"), the Partnership's net income and net realized gains from all sources are allocated to all Partners, in proportion to their capital contributions, until all Partners have been allocated an amount (the "Priority Return") equal to 6% per annum, simple interest, on their total Adjusted Invested Capital; i.e., original capital contributions reduced by previous distributions. Thereafter, net income and net realized gains from venture capital investments in excess of the amount used to cover the Priority Return are allocated 20% to the Managing General Partner and 80% to all Partners in proportion to their capital contributions. Any net income from non-venture capital investments in excess of the amount used to cover the Priority Return is allocated to all Partners in proportion to their capital contributions. Realized losses are allocated to all Partners in proportion
WESTMED VENTURE PARTNERS 2, L.P.
NOTES TO FINANCIAL STATEMENTS - continued
to their capital contributions. However, if realized gains had been previously allocated in the 80/20 ratio, then losses are allocated in the reverse order in which profits were allocated. From its inception to December 31, 1999, the Partnership had a $9.3 million net realized loss from its venture capital investments, including approximately $240,000 of interest and other income from portfolio investments.
4. Related Party Transactions
Pursuant to the Partnership Agreement, the Managing General Partner is entitled to receive a one-time venture capital fee equal to 5% of the gross proceeds from the sale of Units. Such fee is incurred as portfolio investments are made in the proportion of the cost of each portfolio investment to the net proceeds from the sale of Units. Venture capital fees incurred are recorded as a cost of acquiring the portfolio investment. The Partnership incurred no venture capital fees for the year ended December 31, 1999. Cumulative venture capital fees incurred from inception to December 31, 1999 totaled approximately $964,000.
Pursuant to a management agreement between the Partnership and the Managing General Partner, the Managing General Partner is responsible for the management, administrative and certain investment advisory services necessary for the operation of the Partnership. For such services, the Managing General Partner receives a management fee at the annual rate of 2% of the lesser of the net assets of the Partnership or the net contributed capital of the Partnership; i.e., gross capital contributions to the Partnership (net of selling commissions and organizational expenses) reduced by capital distributed. Such fee is determined and payable quarterly. The compensation of the Sub-Manager is paid directly by the Managing General Partner.
The Managing General Partner also provides certain shareholder services and database management support for the Limited Partners of the Partnership. For such services, the Managing General Partner charges the Partnership $4,500 per quarter. This amount is paid to the Managing General Partner in addition to the regular management fee discussed above.
For services rendered to the Partnership, each of the two Independent General Partners receives a $5,000 annual fee and reimbursement for all out-of-pocket expenses relating to attendance at meetings of the General Partners.
5. Litigation
On June 5, 1996, the Partnership and Philippe L. Sommer, among others, were named in an action filed in Harris County, Texas by James Kelly and Norman L. Sussman (the "Action"). The plaintiffs in the Action assert certain causes of action against all defendants, including violations of the securities laws, fraud, fraudulent inducement, civil conspiracy and wrongful sequestration. All of the aforesaid causes of action arise out of the Partnership's investment, with other venture capital funds, in VitaGen, Inc., formerly Hepatix, Inc.,
WESTMED VENTURE PARTNERS 2, L.P.
NOTES TO FINANCIAL STATEMENTS - continued
a company founded to develop and pursue approval of an extracorporeal liver assist device. The plaintiffs in the Action are two of the original founders of Hepatix, Inc. The Action was subsequently removed to Federal District Court in Houston and on October 15, 1996 a motion was made to dismiss the Action against the Partnership and Mr. Sommer.
On January 29, 1998, the court dismissed all but four of the plaintiffs' counts. The Action was then remanded back to State court. On September 13, 1999, a mediation was held between the parties and the matter was settled in principal. Under the current terms of the settlement, the defendants paid $175,000, of which the Partnership's share was $21,000, exclusive of legal fees.
7. Cash Distributions
In December 1999, the Managing General Partner approved a cash distribution to Partners totaling $4,342,118. Such distribution was paid on January 28, 2000. Limited Partners of record on December 31, 1999 received $4,298,697, or $111 per unit of limited partnership interest, and the Managing General Partner received $43,421. Cumulative cash distributions paid or accrued as of December 31, 1999 total $7,631,835, including $7,555,517 to the Limited Partners, or approximately $195 per unit of limited partnership interest, and $76,318 to the Managing General Partner.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure. ----------------------------------------------------
None.
PART III
Item 10.
Item 10. Directors and Executive Officers. --------------------------------
The Independent General Partners
The Independent 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 general partners of business development companies under the 1940 Act. In addition to general fiduciary duties, the Independent General Partners, among other things, supervise the management arrangements of the Partnership, the custody arrangement with respect to portfolio securities, the selection of accountants, fidelity bonding and the activities of the Managing General Partner. As required by 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 1987, the Securities and Exchange Commission issued an exemptive order declaring that Messrs. Elliott and White, the two Independent General Partners of the Partnership, are not "interested persons" of the Partnership as defined in the 1940 Act solely by reason of their being general partners of the Partnership. Such individuals also comprise the Audit Committee of the Partnership.
Presented below is information concerning the Independent General Partners of the Partnership as of March 15, 2000:
Thomas E. White, Age 66, Independent General Partner since 1987 260 Barnard Road Larchmont, New York 10538 Units of the Partnership owned as of March 15, 2000 - none.
Mr. White, an attorney in private practice in New York, was an independent general partner of WestMed Venture Partners, L.P. ("WVP") until its termination in September 1999. From 1974 to 1983, Mr. White was Senior Vice President and Director of Howmedica, Inc. with responsibility for various health-care operations in the United States, Europe and Latin America.
Robert A. Elliott, Age 60, Independent General Partner since 1987 Elliott Investment Co. 5000 Birch Street, Suite 6200 Newport Beach, California 92660 Units of the Partnership owned as of March 15, 2000 - none.
Mr. Elliott, currently a private investor, was the Chairman and Chief Executive Officer of VLI Corporation ("VLI") from 1983 to 1987. Mr. Elliott was an independent general partner of WVP until its termination in September 1999, and currently is a member of the Board of Trustees of Chapman University and a member of the Board of Directors of three privately-held medical device companies and one public company. He is a former Director of the Health Industries Manufacturers Association. From 1979 until 1983, Mr. Elliott was Vice President and Director of Howmedica, Inc. with responsibility for the Medical Specialty Products Division, including domestic and international manufacturing and distribution.
The Managing General Partner
The Managing General Partner, subject to the supervision of the Independent General Partners, has exclusive power and authority to manage and control the Partnership's venture capital investments. Subject to the supervision of the Independent General Partners, the Managing General Partner is authorized to make all decisions regarding the Partnership's venture capital investment portfolio, including, among other things, to 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.
The general partner of the Managing General Partner is Medical Venture Holdings, Inc. ("MVH"), a Delaware corporation affiliated with CIBC Oppenheimer Corp. ("Opco") (formerly Oppenheimer & Co., Inc.). The limited partners of the Managing General Partner are (i) Opco, (ii) MVP Holdings, Inc. ("MVP"), a Delaware corporation, and (iii) BSW, Inc. ("BSW"), a Delaware corporation wholly-owned by John A. Balkoski, Philippe L. Sommer and Howard S. Wachtler, the individuals originally responsible for the Partnership's venture capital investments.
In June 1996, the Managing General Partner engaged Alsacia Venture Management, Inc. (the "Sub-Manager") to assist the Managing General Partner in the performance of its duties to the Partnership. The Sub-Manager is controlled by Philippe L. Sommer. The compensation of the Sub-Manager is paid directly by the Managing General Partner. No additional management fees are incurred by the Partnership as a result of the Managing General Partner's relationship with the Sub-Manager.
Presented below is information as of March 15, 2000 concerning the directors and officers of MVH that are principally involved with the operations of the Partnership. Mr. Rothstein and Ms. Fusco have been officers of MVH since April 1996 and June 1996, respectively. The address of each such person is CIBC Oppenheimer Tower, World Financial Center, New York, New York 10281.
Gerald A. Rothstein, Age 57, President
Units of the Partnership owned as of March 15, 2000 - 0 Units Mr. Rothstein has been a Managing Director of Opco since 1983. He is primarily responsible for Opco's private equity efforts and focuses upon the emerging markets of Latin America and India. Mr. Rothstein is a member and chairperson of Opco's Commitment committee and also, a member of Opco's Due Diligence committee.
Ann O. Fusco, Age 45, Vice President
Units of the Partnership owned as of March 15, 2000 - 0 Units Ms. Fusco has been Director of Opco since the merger of Opco in November 1997. Prior to the merger, she was Vice President of Oppenheimer Properties, Inc. since July 1986 and has been employed by Opco since April 1984. In June 1996 Ms. Fusco became Vice President of MVH. Ms. Fusco is a Certified Public Accountant in the state of New York.
There are no family relationships among any of the Independent General Partners and the officers and directors of MVH or the Sub-Manager. MVH is owned 100% by Opco.
The Sub-Manager
The Sub-Manager is wholly-owned by Philippe L. Sommer. Presented below is information concerning Mr. Sommer as of March 15, 2000.
Philippe L. Sommer, Age 48, Sole Director, Officer and Stockholder Units of the Partnership owned as of March 15, 2000 - 0 Units
Mr. Sommer is a Managing Director of BSW, Inc. and a member of the Board of Directors of BSW. He has been involved in health-care industry management for the past 20 years. From June 1990 until July 1996, Mr. Sommer served as an Executive Vice President and a Managing Director of MVH. He was a Managing Director of MVP from April 1987 to June 1990. From January 1982 to September 1986, he was a Director of Business Development for Pfizer Hospital Products Group ("HPG") and in such capacity was responsible for directing HPG's merger and acquisition activities for medium to larger acquisitions, and for the financial evaluation and valuation of all of HPG's acquisition, venture and licensing projects.
Item 11.
Item 11. Executive Compensation. ----------------------
Each Independent General Partner receives an annual fee from the Partnership of $5,000 together with all out-of-pocket expenses relating to attendance at meetings of the General Partners.
The description of the allocation and distribution of the Partnership's profits and losses to the Managing General Partner set forth in Item 5. "Market for Registrant's Common Equity and Related Stockholder Matters" is incorporated herein by reference.
For the years ended December 31, 1999, 1998 and 1997, the Managing General Partner was allocated $7,360, $20,206 and $7,132 of the net decrease in the Partnership's net assets from operations for each of the respective periods.
Pursuant to a management agreement, the Managing General Partner is responsible for the management, administrative and certain investment advisory services necessary for the operation of the Partnership. For such services, the Managing General Partner receives a management fee at the annual rate of 2% of the lesser of the net assets of the Partnership or the net contributed capital of the Partnership; i.e., gross capital contributions to the Partnership (net of selling commissions and organizational expenses) reduced by capital distributed. Such fee is determined and payable quarterly. For the years ended December 31, 1999, 1998 and 1997, the Managing General Partner received management fees of $76,345, $133,178 and $160,485, respectively.
Pursuant to the Partnership Agreement, the Managing General Partner is entitled to receive a one-time venture capital fee equal to 5% of the gross proceeds from the sale of Units. Such fee is incurred as portfolio investments are made in the proportion of the cost of each portfolio investment to the net proceeds from the sale of Units. Venture capital fees incurred are recorded as a cost of acquiring the portfolio investment. The Partnership incurred venture capital fees of $0, $10,793 and 71,394 for the years ended December 31, 1999, 1998 and 1997, respectively. Cumulative venture capital fees incurred from inception to December 31, 1999 totaled $964,036.
In June 1996, the Managing General Partner engaged Alsacia Venture Management, Inc. (the "Sub-Manager") to assist the Managing General Partner in the performance of its duties to the Partnership. The Sub-Manager is controlled by Philippe L. Sommer. The compensation of the Sub-Manager is paid directly by the Managing General Partner. No additional management fees are incurred by the Partnership as a result of the Managing General Partner's relationship with the Sub-Manager.
The Managing General Partner 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 Managing General Partner.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. --------------------------------------------------------------
Security Ownership
As of March 15, 2000, no person or group is known by the Partnership to be the beneficial owner of more than 5% of the Units. The Independent General Partners and the directors, officers and employees of MVH and the Sub-Manager do not own any Units.
Item 13.
Item 13. Certain Relationships and Related Transactions. ----------------------------------------------
The description of the management fee and the venture capital fee set forth in Item 11, "Executive Compensation", is incorporated herein by reference.
The description of the allocation and distribution of the Partnership's profits and losses to the Managing General Partner set forth in Item 5. "Market for Registrant's Common Equity and Related Stockholder Matters" is incorporated herein by reference.
PART IV
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, 1999 and 1998
Schedule of Portfolio Investments as of December 31, 1999
Schedule of Portfolio Investments as of December 31, 1998
Statements of Operations for the years ended December 31, 1999, 1998 and 1997
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997
Statements of Changes in Partners' Capital for the years ended December 31, 1997, 1998 and 1999
Notes to Financial Statements
2. Exhibits
3.1 Amended and Restated Certificates of Limited Partnership(3)
3.2 Amendment to Amended and Restated Certificate of Limited Partnership(3)
3.3 Partnership Agreement(1)
3.4 Amendment No. 1 to the Partnership Agreement(2)
4 Articles Five through Eleven of the Partnership Agreement(1)
10.1 Management Agreement dated as of September 30, 1997 between the Partnership and the Managing General Partner(4)
10.2 Sub-Management agreement dated as of September 30, 1997 among the Partnership, the Managing General Partner and the Sub-Manager(5)
27 Financial Data Schedule
28.1 Custodian Agreement between the Partnership and Investors Fiduciary Trust Company(1)
(b) No reports on Form 8-K have been filed during the quarter for which this report is filed.
- -------------------------------
(1) Filed as an exhibit to the Partnership's Registration Statement on Form N-2 (33-11926), and incorporated herein by reference.
(2) Filed as an exhibit to the Partnership's Report on Form 8-K dated July 10, 1990 and incorporated herein by reference.
(3) Filed as an exhibit to the Partnership's Report on Form 10-K for the year ended December 31, 1990.
(4) Filed as Exhibit A to the Partnership's proxy statement dated August 29, 1997 and incorporated herein by reference.
(5) Filed as Annex I to the Partnership's proxy statement dated August 29, 1997 and incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, 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 2000.
WESTMED VENTURE PARTNERS 2, L.P.
By: WestMed Venture Management 2, L.P., Managing General Partner
By: Medical Venture Holdings, Inc., General Partner
By: /s/ Gerald A. Rothstein
Gerald A. Rothstein President
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated on the 30th day of March 2000.
WESTMED VENTURE