SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended September 30, 1999
Commission file number 33-21281
WESTMED VENTURE PARTNERS 2, L.P.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3473015
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(State of organization) (I.R.S. Employer Identification No.)
CIBC Oppenheimer Tower, World Financial Center
New York, New York 10281
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 667-7000
Not applicable
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
<PAGE>
WESTMED VENTURE PARTNERS 2, L.P.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets as of September 30, 1999 (Unaudited) and December 31, 1998
Schedule of Portfolio Investments as of September 30, 1999 (Unaudited)
Statements of Operations for the Three and Nine Months Ended September 30, 1999
and 1998 (Unaudited)
Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
Statement of Changes in Partners' Capital for the Nine Months Ended September
30, 1999 (Unaudited)
Notes to Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 3. Quanitative and Qualitative Disclosure about Market Risk.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
WESTMED VENTURE PARTNERS 2, L.P.
BALANCE SHEETS
<TABLE>
September 30,
1999 December 31,
(Unaudited) 1998
ASSETS
<S> <C>
Portfolio investments at fair value (cost $3,410,058 as of
September 30, 1999 and $5,194,257 as of December 31, 1998) $ 547,044 $ 2,434,455
Cash and cash equivalents 4,397,339 3,076,472
Receivable from securities sold 23,382 110,643
Accrued interest receivable 2,179 1,186
Prepaid insurance 29,479 53,072
--------------- ----------------
TOTAL ASSETS $ 4,999,423 $ 5,675,828
=============== ================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 35,830 $ 43,337
Litigation settlement reserve 21,000 -
Due to Managing General Partner 29,153 32,592
Due to Independent General Partners 7,500 10,000
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Total liabilities 93,483 85,929
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Partners' Capital:
Managing General Partner 49,061 55,900
Limited Partners (38,727 Units) 4,856,879 5,533,999
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Total Partners' capital 4,905,940 5,589,899
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TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 4,999,423 $ 5,675,828
=============== ================
</TABLE>
See notes to financial statements.
<PAGE>
WESTMED VENTURE PARTNERS 2, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (Unaudited)
September 30, 1999
<TABLE>
Initial Investment
<S> <C> <C> <C> <C> <C> <C>
Company / Position Date Cost Fair Value
Abtox, Inc.
<C> <C> <C> <C>
454,545 shares of Preferred Stock Mar. 1997 $ 353,533 $ 0
- -------------------------------------------------------------------------------------------------------------------------------
Integramed America, Inc.(A)(B)
47,500 shares of Common Stock Mar. 1989 2,084,644 190,000
- -------------------------------------------------------------------------------------------------------------------------------
La Jolla Pharmaceutical Company(A)( C)
45,700 shares of Common Stock Nov. 1991 236,319 22,850
25,076 warrants to purchase 12,538 shares of Common
Stock at $6.00 per share, expiring 6/3/00 0 784
Warrant to purchase 5,015 shares of Common Stock
at $5.00 per share, expiring 6/3/00 0 0
--------------- ---------------
236,319 23,634
- -------------------------------------------------------------------------------------------------------------------------------
Synaptic Pharmaceutical Corporation(A)(D)
26,295 shares of Common Stock June 1991 214,742 131,475
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Targeted Genetics, Inc.(A)(E)
112,900 shares of Common Stock June 1992 498,820 179,935
- -------------------------------------------------------------------------------------------------------------------------------
VitaGen, Inc.*
1,484,123 shares of Series A Preferred Stock Jan. 1992 17,706 17,706
356,190 shares of Series B Preferred Stock 4,294 4,294
--------------- ---------------
22,000 22,000
- -------------------------------------------------------------------------------------------------------------------------------
Totals from Active Portfolio Investments $ 3,410,058 $ 547,044
=============== ===============
Supplemental Information: Liquidated Portfolio Investments (F)
Cost Realized Loss Return
Totals from Liquidated Portfolio Investments $ 13,432,369 $ (6,611,499) $ 6,820,870
================= =============== ===============
Combined Combined
Unrealized and Fair Value
Cost Realized Loss and Return
Totals from Active and Liquidated Portfolio
Investments $ 16,842,427 $ (9,474,513) $ 7,367,914
=============== =============== ===============
</TABLE>
<PAGE>
WESTMED VENTURE PARTNERS 2, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (Unaudited) - continued
September 30, 1999
(A) Public company
(B) In September 1999, the Partnership sold 5,418 common shares of Integramed
America, Inc. for $21,653, realizing a loss of $216,129.
(C) During the quarter ended September 30, 1999, the Partnership sold 34,683
common shares of La Jolla Pharmaceutical Company for $23,411, realizing a
loss of $257,095.
(D) In September 1999, the Partnership sold 10,100 common shares of
Synaptic Pharmaceutical Corporation for $88,260,realizing a gain of $5,777.
(E) During the quarter ended September 30, 1999, the Partnership sold 102,495
common shares of Targeted Genetics, Inc. for $163,506, realizing a loss of
$354,489.
(F) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through September 30, 1999.
* May be deemed an affiliated person of the Partnership as defined in the
Investment Company Act of 1940.
See notes to financial statements.
<PAGE>
WESTMED VENTURE PARTNERS 2, L.P.
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- --------------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C> <C> <C>
Interest from short-term investments $ 45,354 $ 27,493 $ 118,577 $ 57,661
Interest and dividend income from portfolio
investments - (18,126) - (8,186)
------------ ------------- ------------- ----------------
Total investment income 45,354 9,367 118,577 49,475
------------ ------------- ------------- ----------------
Expenses:
Management fee 24,653 32,449 73,773 105,086
Professional fees 9,169 24,866 41,212 64,611
Insurance expense 7,956 6,206 24,604 34,656
Litigation expense 21,000 - 21,000 -
Mailing and printing 5,201 7,029 16,063 18,440
Independent General Partners' fees 2,500 2,500 7,500 7,500
Custodial fees 571 603 1,692 1,710
Miscellaneous 1,026 - 1,934 -
------------ ------------- ------------- ----------------
Total investment expense 72,076 73,653 187,778 232,003
------------ ------------- ------------- ----------------
NET INVESTMENT LOSS (26,722) (64,286) (69,201) (182,528)
Net realized loss from portfolio investments (442,758) (1,543,313) (511,546) (688,275)
------------ ------------- ------------- ----------------
NET REALIZED LOSS FROM OPERATIONS (469,480) (1,607,599) (580,747) (870,803)
Change in unrealized depreciation of investments 625,909 1,094,376 (103,212) (282,397)
------------ ------------- ------------- ----------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 156,429 $ (513,223) $ (683,959) $ (1,153,200)
============ ============= ============= ================
</TABLE>
See notes to financial statements.
<PAGE>
WESTMED VENTURE PARTNERS 2, L.P.
STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30,
<TABLE>
1999 1998
-------------- ---------------
CASH FLOWS USED FOR OPERATING ACTIVITIES
<S> <C> <C>
Net investment loss $ (69,201) $ (182,528)
Adjustments to reconcile net investment loss to cash used for
operating activities:
Decrease (increase) in receivables and other assets 22,600 (12,700)
Increase (decrease) in liabilities, net 7,554 (16,963)
-------------- ---------------
Cash used for operating activities (39,047) (212,191)
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CASH FLOWS PROVIDED BY INVESTING ACTIVITIES
Cost of portfolio investments purchased - (188,888)
Net proceeds from sale of portfolio investments 1,359,914 1,913,743
-------------- ---------------
Cash provided by investing activities 1,359,914 1,724,855
-------------- ---------------
Increase in cash and cash equivalents 1,320,867 1,512,664
Cash and cash equivalents at beginning of period 3,076,472 593,258
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,397,339 $ 2,105,922
============== ===============
Supplemental disclosure of non-cash investing activities:
Receivable from securities sold $ 23,382 $ 386,107
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
WESTMED VENTURE PARTNERS 2, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (Unaudited)
For the Nine Months Ended September 30, 1999
<TABLE>
Managing
General Limited
Partner Partners Total
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1998 $ 55,900 $ 5,533,999 $ 5,589,899
Net decrease in net assets resulting
from operations (6,839) (677,120) (683,959)
------------ --------------- ----------------
Balance as of September 30, 1999 $ 49,061 $ 4,856,879(A) $ 4,905,940
============ =============== ================
</TABLE>
(A) The net asset value for each $500 unit of limited partnership interest
("Unit"), including an assumed allocation of net unrealized depreciation of
investments, was $125 as of September 30, 1999. Such per unit amount is
based on average allocations to all limited partners and does 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. Cumulative cash distributions paid to limited
partners total $84 per Unit as of September 30, 1999.
See notes to financial statements.
<PAGE>
WESTMED VENTURE PARTNERS 2, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
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 carried at fair value as
determined quarterly by the Managing General Partner under the supervision of
the Independent General Partners. The fair value of publicly-held portfolio
securities is adjusted to the closing public market price for the last trading
day of the accounting period 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
<PAGE>
WESTMED VENTURE PARTNERS 2, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited) - continued
greater than a 5% shareholder thereof, and other liquidity factors 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 which
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. Net unrealized depreciation of $2.9
million as of September 30, 1999, which was recorded for financial statement
purposes, has not been recognized for tax purposes. Additionally, from inception
to September 30, 1999, other timing differences totaling $4.8 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
<PAGE>
WESTMED VENTURE PARTNERS 2, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited) - continued
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. 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 September
30, 1999, the Partnership has a $6.4 million net realized loss from its venture
capital investments, including $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 nine months ended September 30, 1999. Cumulative venture capital fees
incurred from inception to September 30, 1999 totaled $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.,
<PAGE>
WESTMED VENTURE PARTNERS 2, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited) - 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 would be required to
pay $175,000, of which the Partnership's share would be $21,000, exclusive of
legal fees.
6. Classification of Investments
As of September 30, 1999, the Partnership's investments were categorized as
follows:
<TABLE>
Percentage of
Type of Investments Cost Fair Value Net Assets*
- ------------------- ---------------- --------------- -----------
<S> <C> <C> <C>
Common Stock $ 3,034,525 $ 525,044 10.70%
Preferred Stock 375,533 22,000 0.45%
---------------- --------------- ----------
Total $ 3,410,058 $ 547,044 11.15%
================ =============== ==========
Country/Geographic Region
Eastern U.S. $ 2,299,386 $ 321,475 6.55%
Midwestern U.S. 353,533 0 0.00%
Western U.S. 757,139 225,569 4.60%
---------------- --------------- ----------
Total $ 3,410,058 $ 547,044 11.15%
================ =============== ==========
Industry
Biotechnology $ 1,303,414 $ 335,044 6.83%
Medical Services 2,084,644 190,000 3.87%
Medical Devices 22,000 22,000 0.45%
---------------- --------------- ----------
Total $ 3,410,058 $ 547,044 11.15%
================ =============== ==========
</TABLE>
* Percentage of net assets is based on fair value.
7. Subsequent Events
Subsequent to the end of the quarter, from October 1, 1999 to November 11,
1999, the Partnership sold the following securities: 44,500 common shares of
Integramed America, Inc. for $152,097; its remaining 45,700 common shares of
La Jolla Pharmaceutical Company for $19,661; its remaining 112,900 common shares
of Targeted Genetics, Inc. for $158,849; and its remaining 26,295 common
shares of Synaptic Pharmaceutical Corporation for $112,404. These transactions
will be reflected in the Partnership's operating results for the period ending
December 31, 1999.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
As of September 30, 1999, the Partnership held $4,397,339 in cash and short-term
investments, consisting of $3,982,890 in short-term securities with maturities
of less than thirty days and $414,449 in an interest-bearing cash account.
Interest from such investments for the three and nine months ended September 30,
1999, was $45,354 and $118,577, respectively. Interest earned from short-term
investments in future periods is subject to fluctuations in short-term interest
rates and changes in amounts invested in such securities.
During the nine months ended September 30, 1999, the Partnership sold certain
portfolio securities for cash proceeds totaling $1,272,653, as discussed below.
The General Partners have determined not to extend the Partnership's originally
scheduled termination date of December 31, 1998. Therefore, the Managing General
Partner is working toward the ultimate termination of the Partnership and will
continue to manage the Partnership, with continued focus on achieving long-term
capital appreciation from the Partnership's remaining investment portfolio
through the date of termination, which will occur when all liabilities and
obligations to creditors have been satisfied and all investments in portfolio
companies have been sold, distributed or otherwise disposed.
It is anticipated that funds needed to cover the Partnership's future operating
expenses and follow-on investments, if any, will be obtained from existing cash
reserves, interest from short-term investments and proceeds from the sale of
portfolio investments.
Results of Operations
For the three and nine months ended September 30, 1999, the Partnership had a
net realized loss from operations of $469,480 and $580,747, respectively. For
the three and nine months ended September 30, 1998, the Partnership had a net
realized loss from operations of $1,607,599 and $870,803, 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
and dividend income less operating expenses).
Realized Gains and Losses from Portfolio Investments - For the three and nine
months ended September 30, 1999, the Partnership had a net realized loss of
$442,758 and $511,546, respectively, from the sale of certain portfolio
investments. During the quarter ended September 30, 1999, the Partnership sold
portfolio securities in the public market for net proceeds totaling $851,376
resulting in an aggregate net realized loss of $442,758 as follows: 5,418 common
shares of Integramed America, Inc. for $21,653, realizing a loss of $216,129;
22,728 common shares of KeraVision, Inc. for $554,546, realizing a gain of
$379,178; 34,683 common shares of La Jolla Pharmaceutical Company for $23,411,
realizing a loss of $257,095; 10,100 common shares of Synaptic Pharmaceutical
Corporation for $88,260, realizing a gain of $5,777; and 102,495 common shares
of Targeted Genetics, Inc. for $163,506, realizing a loss of $354,489. During
the first six months of calendar year 1999, the Partnership sold portfolio
securities for net proceeds totaling $421,277, resulting in a net realized loss
of $68,788 as follows: 36,000 common shares of KeraVision, Inc. for $382,236,
realizing a gain of $104,463; 20,000 common shares of La Jolla Pharmaceutical
Company for $22,946, realizing a loss of $138,808; and 10,000 common shares of
Targeted Genetics, Inc. for $16,095, realizing a loss of $34,443.
For the three and nine months ended September 30, 1998, the Partnership had a
net realized loss of $1,543,313 and $688,275, respectively, from the liquidation
of certain portfolio investments. During the quarter ended September 30, 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 in exchange for
its holdings in Sennes and release of all claims against Baylor. The transaction
resulted in a realized loss of $836,246. The Partnership realized an additional
loss of $707,067, on September 30, 1998, from the partial write-off of its $1.6
million investment in Abtox, Inc. During the first half of 1998, the Partnership
sold its remaining 104,210 shares of Gliatech, Inc. common stock for $1,656,467,
realizing a gain of $855,038.
Investment Income and Expenses - For the three months ended September 30, 1999
and 1998, the Partnership had a net investment loss of $26,722 and $64,286,
respectively. The $37,564 favorable change in net investment loss for the 1999
period compared to the same period in 1998, was comprised of a $35,987 increase
in investment income and a $1,577 decrease in operating expenses. The increase
in investment income includes a $17,861 increase in interest income from
short-term investments, which resulted from an increase in funds available for
investment in such securities during the 1999 period as compared to the same
period in 1998. Additionally, interest income from portfolio investments for the
1998 period included a one-time reversal of $18,126 of accrued interest relating
to promissory notes due from VitaGen, Inc., formerly Hepatix, Inc. Such interest
was waived by the Partnership and other shareholders of VitaGen in connection
with a Series B preferred stock financing completed by VitaGen during the three
month period ended September 30, 1998.
The reduction in operating expenses for the three months ended September 30,
1999, primarily resulted from a $15,697 decrease in professional fees,
reflecting the reversal of certain legal fee accruals during the 1999 period,
and a $7,796 decrease in the management fee, as discussed below. These reduced
expenses were partially offset by a $21,000 litigation expense reserve, recorded
during the quarter ended September 30, 1999, relating to a pending settlement of
the VitaGen, Inc. litigation, as previously disclosed. See Note 5 of Notes to
Financial Statements.
For the nine months ended September 30, 1999 and 1998, the Partnership had a net
investment loss of $69,201 and $182,528, respectively. The $113,327 favorable
change in net investment loss for the 1999 period compared to the same period in
1998, was comprised of a $69,102 increase in investment income and a $44,225
decrease in operating expenses. The increase in investment income was comprised
of a $60,916 increase in interest income from short-term investments and a
favorable change of $8,186 in interest income from portfolio investments. As
discussed above, the increase in investment income resulted from an increase in
interest earned from short-term investments and the reversal of accrued interest
relating to the promissory notes due from VitaGen.
<PAGE>
The $44,225 reduction in operating expenses for the nine months ended September
30, 1999, compared to the same period in 1998, primarily resulted from a $31,313
decrease in the management fee, as discussed below. Additionally, professional
fees declined by $23,399 due to a reversal of certain legal fee accruals and a
general reduction in accounting and legal fees reflecting the Partnership's
reduced activity during its liquidation period. Insurance expense also declined
by $10,052 due to reduced directors liability insurance premiums. These reduced
expenses were partially offset by the $21,000 litigation expense reserve,
recorded during the quarter ended September 30, 1999, 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 three months ended September 30, 1999 and
1998, the management fee was $24,653 and $32,449, respectively. For the nine
months ended September 30, 1999 and 1998, the management fee was $73,773 and
$105,086, respectively. The decline in the management fee for the 1999 periods
as compared to the 1998 periods reflects the reduced net asset value of the
Partnership, primarily resulting from the reduced value of the Partnership's
portfolio investments as of the end of the 1999 periods compared to the
corresponding periods in 1998. To the extent possible, the management fee and
other operating expenses are 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.
Unrealized Gains and Losses and Changes in Unrealized Depreciation of Portfolio
Investments - For the nine months ended September 30, 1999, the Partnership had
a $103,212 unfavorable change in net unrealized depreciation of investments.
During the nine month period, the Partnership reduced the fair value of its
remaining portfolio investments by $628,898 due to the net downward revaluation
of its publicly-traded securities as of the end of the period. This decrease was
partially offset by the net transfer of $525,686 from unrealized loss to
realized loss resulting from the sale of certain portfolio investments, as
discussed above.
For the nine months ended September 30, 1998, the Partnership had a $282,397
unfavorable change in net unrealized depreciation of investments. During the
nine month period, the Partnership reduced the fair value of its remaining
portfolio investments by $1,433,511. This change was the result of the
$1,060,600 net downward revaluation of the Partnership's investment in Abtox,
Inc., a privately-held portfolio company, and a $372,911 net downward
revaluation of the Partnership's publicly-traded securities, due to lower public
market prices of such securities at the end of the period. This decrease was
partially offset by the net transfer of $1,151,114 from unrealized loss to
realized loss resulting from the sale of certain portfolio investments, as
discussed above.
Net Assets - As of September 30, 1999, the Partnership's net assets were
$4,905,940, reflecting a decrease of $683,959 from net assets of $5,589,899 as
of December 31, 1998. This change represents the decrease in net assets
resulting from operations for the nine month period ended September 30, 1999,
comprised of the $580,747 net realized loss from operations and the $103,212
unfavorable change in net unrealized depreciation of investments.
<PAGE>
As of September 30, 1998, the Partnership's net assets were $6,457,381,
reflecting a decrease of $1,153,200 from net assets of $7,610,581 as of December
31, 1997. This change represents the decrease in net assets resulting from
operations for the nine month period ended September 30, 1998, comprised of the
$870,803 net realized loss from operations and the $282,397 unfavorable change
to unrealized depreciation of investments.
As of September 30, 1999 and December 31, 1998, the net asset value per $500
Unit, including an allocation of net unrealized depreciation of investments was
$125 and $143, 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.
Year 2000 Issue - The Year 2000 ("Y2K") concern arose because many existing
computer programs use only the last two digits to refer to a year. Therefore,
these computer programs do not properly recognize a year that begins with "20"
instead of "19". If not corrected, many computer applications could fail or
create erroneous results. The impact of the Y2K concern on the Partnership's
operations is currently being assessed.
The Managing General Partner is responsible to provide or arrange for the
provision of administrative services necessary to support the Partnership's
operations. The Managing General Partner has arranged for Palmeri Fund
Administrators, Inc. (the "Administrator") to provide certain administrative and
accounting services for the Partnership, including maintenance of the books and
records of the Partnership, maintenance of the Limited Partner database,
issuance of financial reports and tax information to Limited Partners and
processing distribution payments to Limited Partners. Fees charged by the
Administrator are paid directly by the Managing General Partner.
The Administrator has assessed its computer hardware and software systems,
specifically as they relate to the operations of the Partnership. As part of
this investigation of potential Y2K concerns, the Administrator contracted with
an outside computer service provider to examine all of the Administrator's
computer hardware and software applications. This review and evaluation has been
completed. Additionally, the Administrator has completed the purchase and
installation of the necessary software upgrades and patches and new computer
hardware required for its computer systems to be Y2K compliant. The
Administrator expects to complete the testing of its systems by November 1999.
Additionally, the Administrator has contacted the outside service providers used
to assist the Administrator or the Managing General Partner with the
administration of the Partnership's operations to ascertain whether these
entities are addressing the Y2K issue within their own operation. There can be
no guarantee that the Administrator's systems or that systems of other companies
providing services to the Partnership will be corrected in a timely manner. The
estimated costs to the Partnership, relating to the investigation or correction
of Y2K problems affecting the Partnership's operations, are expected to be
nominal, if any.
Finally, the Y2K issue is a global concern that may affect all business
entities, including the Partnership's portfolio companies. The Managing General
Partner is continuing to assess the impact of Y2K concerns affecting its
portfolio companies. However, the extent to which any potential Y2K concerns
could affect the valuations of these companies is presently unknown.
<PAGE>
Item 3. 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 as of the end of the
accounting period.
The Partnership's portfolio investments had an aggregate fair value of $547,044
as of September 30, 1999. An assumed 10% decline from this fair value, including
an assumed 10% decline of the per share market prices of the Partnership's
publicly-traded securities, would result in a reduction to the fair value of
such investments and a corresponding unrealized loss of $54,704.
As of September 30, 1999, the Partnership held short-term investments with
remaining maturities of 30 days or less at face value aggregating $4,000,000.
These short-term investments were carried at an aggregate amortized cost of
$3,982,890 as of September 30, 1999. An assumed 10% decrease in the market
interest rate of such short-term investments held by the Partnership as of
September 30, 1999, would result in a reduction to the fair value of such
investments and an unrealized loss in an amount which is considered to be
immaterial.
Market risk relating to the Partnership's other interest-bearing cash
equivalents held as of September 30, 1999 is also considered to be immaterial.
<PAGE>
PART II - OTHER INFORMATION
Item 1. 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 VitGen, 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. 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 would be required to
pay $175,000, of which the Partnership's share would be $21,000, exclusive of
legal fees.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the quarter covered
by this report.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule.
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTMED VENTURE PARTNERS 2, L.P.
By: WestMed Venture Management 2, L.P.
The Managing General Partner
By: MEDICAL VENTURE HOLDINGS, INC.
General Partner
By: /s/ Gerald A. Rothstein
Gerald A. Rothstein
President and Principal Executive Officer
By: /s/ Ann Oliveri Fusco
Ann Oliveri Fusco
Vice President and Principal Financial
and Accounting Officer
Date: November 15, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WESTMED
VENTURE PARTNERS 2, L.P.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<INVESTMENTS-AT-COST> 3,410,058
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