SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Quarterly Period Ended September 30, 1998 Commission file number
33-21281 WESTMED VENTURE PARTNERS 2, L.P.
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(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.
Amendment to Form 10-Q
For the quarter ended September 30, 1998
Item 2 of Part I, Management's Discussion and Analysis of Financial Condition
and Results of Operations, on pages 13 to 15 of Form 10-Q of WestMed Venture
Partners 2, L.P. for the quarterly period ended September 30, 1998, filed with
the Securities and Exchange Commission on November 16, 1998 is amended by adding
the following:
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 Management Company is responsible to provide or arrange for the provision of
administrative services necessary to support the Partnership's operations. The
Management Company 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 Management Company.
The Administrator is currently assessing its computer hardware and software
systems, specifically as they relate to the operations of the Partnership. As
part of this investigation of potential Y2K problems, the Administrator has
contracted with an outside computer service provider to examine all of the
Administrator's computer hardware and software applications, to identify any Y2K
concerns. This review and evaluation is in process and is expected to be
completed by May 1999. If Y2K problems are identified, the Administrator will
purchase, install and test the necessary software patches and new computer
hardware to ensure that all of its computer systems are Y2K compliant. This
correction phase, if required, is expected to be completed by September 1999.
Additionally, the Administrator has contacted the outside service providers used
to assist the Administrator or the Management Company 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.
Finally, the Y2K issue is a global concern that may affect all business
entities, including the Partnership's portfolio companies. The General Partner
is continuing to assess the impact of Y2K concerns affecting its portfolio
companies. However, the extent to which any potential Y2K problems could affect
the valuations of these companies is presently unknown.
<PAGE>
WESTMED VENTURE PARTNERS 2, L.P.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets as of September 30, 1998 (Unaudited) and December 31, 1997
Schedule of Portfolio Investments as of September 30, 1998 (Unaudited)
Statements of Operations for the Three and Nine Months Ended September 30, 1998
and 1997 (Unaudited) Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (Unaudited) Statement of Changes in Partners'
Capital for the Nine Months Ended September 30, 1998 (Unaudited) Notes to
Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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,
1998 December 31,
(Unaudited) 1997
ASSETS
Portfolio investments at fair value (cost $7,515,618 at
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1998 and $10,057,579 at December 31, 1997) $ 4,003,841 $ 6,828,199
Cash and cash equivalents 2,105,922 593,258
Accounts receivable 7,561 -
Receivable from securities sold 386,107 257,276
Accrued interest receivable 1,628 8,989
Prepaid insurance 49,222 36,722
--------------- --------------
TOTAL ASSETS $ 6,554,281 $ 7,724,444
=============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 56,951 $ 55,130
Due to Managing General Partner 32,449 48,733
Due to Independent General Partners 7,500 10,000
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Total liabilities 96,900 113,863
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Partners' Capital:
Managing General Partner 64,574 76,106
Limited Partners (38,727 Units) 6,392,807 7,534,475
--------------- --------------
Total Partners' capital 6,457,381 7,610,581
--------------- --------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 6,554,281 $ 7,724,444
=============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
WESTMED VENTURE PARTNERS 2, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (Unaudited)
September 30, 1998
Active Portfolio Investments:
<TABLE>
Initial Investment
Company / Position Date Cost Fair Value
Abtox, Inc. (B)
<S><C> <C> <C> <C>
454,545 shares of Preferred Stock Mar. 1997 $ 353,533 $ 0
- -------------------------------------------------------------------------------------------------------------------------------
Integramed America, Inc.(A)
211,672 shares of Common Stock Mar. 1989 2,322,426 145,630
- -------------------------------------------------------------------------------------------------------------------------------
KeraVision, Inc.(A)
68,728 shares of Common Stock Nov. 1992 530,300 292,094
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La Jolla Pharmaceutical Company(A)
100,383 shares of Common Stock Nov. 1991 678,579 288,602
25,076 warrants to purchase 12,538 shares of Common
Stock at $6.00 per share, expiring 6/3/99 0 7,046
Warrant to purchase 5,015 shares of Common Stock
at $5.00 per share, expiring 6/3/99 0 0
--------------- ---------------
678,579 295,648
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Synaptic Pharmaceutical Corporation(A)
76,395 shares of Common Stock June 1991 627,470 1,126,826
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Targeted Genetics, Inc.(A)
225,395 shares of Common Stock June 1992 1,067,353 281,744
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VitaGen, Inc.* (C)
1,484,123 shares of Series A Preferred Stock Jan. 1992 1,558,181 1,484,123
356,190 shares of Series B Preferred Stock Oct.1997 377,776 377,776
--------------- ---------------
1,935,957 1,861,899
- -------------------------------------------------------------------------------------------------------------------------------
Totals from Active Portfolio Investments $ 7,515,618 $ 4,003,841
=============== ===============
SUPPLEMENTAL INFORMATION: LIQUIDATED PORTFOLIO INVESTMENTS (D)
Cost Realized Loss Return
Totals from Liquidated Portfolio Investments(E) $ 9,326,809 $ (4,486,797) $ 4,840,012
============= =============== ===============
Combined Combined
Unrealized and Fair Value
Cost Realized Loss and Return
Totals from Active and Liquidated Portfolio
Investments $ 16,842,427 $ (7,998,574) $ 8,843,853
============== =============== ===============
</TABLE>
<PAGE>
WESTMED VENTURE PARTNERS 2, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS (Unaudited) - continued
September 30, 1998
(A) Public company
(B) As of September 30, 1998, the Partnership wrote-off $707,067 of the cost of
its preferred stock investment in Abtox, Inc. Abtox recently filed for
protection under Chapter 11 of the federal Bankruptcy Code and is currently
seeking funding to reorganize.
(C) During the quarter, Hepatix, Inc. changed its name to VitaGen, Inc. In
August 1998, the Partnership converted $356,190 of promissory notes due
from VitaGen into 356,190 shares of VitaGen's Series B preferred stock.
Accrued interest on such notes was waived by all noteholders, including the
Partnership, and warrants previously held to purchase 44,524 common shares
at $1.60 per share, originally issued in connection with such promissory
notes, were canceled.
(D) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through September 30, 1998. See
Note 7 of notes to financial statements for portfolio sales completed
subsequent to September 30, 1998.
(E) In April 1998, the Partnership sold its remaining 104,210 shares of
Gliatech, Inc. common stock for $1,656,467, realizing a gain of $855,038.
In September 1998, the Partnership, liquidated its investment in Sennes
Drug Innovations, Inc. for $386,107, realizing a loss of $836,246.
* 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,
1998 1997 1998 1997
------------- ------------- ------------- --------------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C> <C> <C>
Interest from short-term investments $ 27,493 $ 6,320 $ 57,661 $ 42,940
Interest and dividend income from portfolio
investments (18,126) 1,122 (8,186) 3,117
-------------- ------------ ------------- -------------
Totals 9,367 7,442 49,475 46,057
-------------- ------------ ------------- -------------
Expenses:
Management fee 32,449 43,399 105,086 122,545
Professional fees 24,866 31,886 64,611 65,396
Mailing and printing 7,029 3,620 18,440 16,314
Insurance expense 6,206 15,915 34,656 43,437
Custodial fees 603 627 1,710 2,139
Independent General Partners' fees 2,500 2,500 7,500 7,500
Miscellaneous - - - 250
-------------- ------------ ------------- -------------
Totals 73,653 97,947 232,003 257,581
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NET INVESTMENT LOSS (64,286) (90,505) (182,528) (211,524)
Net realized (loss) gain from portfolio investments (1,543,313) 97,898 (688,275) 97,898
-------------- ------------ ------------- -------------
NET REALIZED (LOSS) GAIN FROM
OPERATIONS (1,607,599) 7,393 (870,803) (113,626)
Change in unrealized depreciation of investments 1,094,376 1,106,597 (282,397) 426,224
-------------- --------- ------------- -------------
NET (DECREASE) INCREASE IN NET
ASSETS RESULTING FROM OPERATIONS $ (513,223) $ 1,113,990 $ (1,153,200) $ 312,598
============== ============ ============= =============
</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>
1998 1997
-------------- ---------------
CASH FLOWS USED FOR OPERATING ACTIVITIES
<S> <C> <C>
Net investment loss $ (182,528) $ (211,524)
Adjustments to reconcile net investment loss to cash used for
operating activities:
Increase in receivables and other assets (12,700) (16,959)
Decrease in accounts payable (16,963) (12,703)
-------------- ---------------
Cash used for operating activities (212,191) (241,186)
-------------- ---------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES
Cost of portfolio investments purchased (188,888) (1,060,600)
Net proceeds from sale of portfolio investments 1,913,743 74,595
-------------- ---------------
Cash provided by (used for) investing activities 1,724,855 (986,005)
-------------- ---------------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Cash distribution to Partners - (3,012,100)
-------------- ---------------
Increase (decrease) in cash and cash equivalents 1,512,664 (4,239,291)
Cash and cash equivalents at beginning of period 593,258 4,876,135
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,105,922 $ 636,844
============== ===============
Supplemental disclosure of non-cash investing activities:
Receivable from securities sold $ 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, 1998
<TABLE>
Managing
General Limited
Partner Partners Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 76,106 $ 7,534,475 $ 7,610,581
Net decrease in net assets resulting
from operations (11,532) (1,141,668) (1,153,200)
------------ --------------- ----------------
Balance at September 30, 1998 $ 64,574 $ 6,392,807(A) $ 6,457,381
============ =============== ================
</TABLE>
(A) The net asset value per unit of limited partnership interest, including an
assumed allocation of net unrealized depreciation of investments, was
$165.07 at September 30, 1998. 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.
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") (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.
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 is 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 of
September 30, 1998, the financial statements include investments valued at
$1,861,899 (28.8% of Partners' Capital) whose values have been estimated by the
Manager. 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 $3.5
million at September 30, 1998, which was recorded for financial statement
purposes, has not been recognized for tax purposes. Additionally, from inception
to September 30, 1998, other timing differences totaling $2.2 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.
Reclassifications - Certain reclassifications were made to the prior period
financial statements in order to conform to the current period presentation.
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
<PAGE>
WESTMED VENTURE PARTNERS 2, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited) - continued
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 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, 1998, the Partnership has a
$4.2 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 venture capital fees of
$10,793 for the nine month period ended September 30, 1998. Cumulative venture
capital fees incurred from inception to September 30, 1998 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.
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., 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
<PAGE>
WESTMED VENTURE PARTNERS 2, L.P.
NOTES TO FINANCIAL STATEMENTS (Unaudited) - continued
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. The remaining claims involved
allegations of breach of fiduciary duty, fraud and fraudulent inducement. The
Partnership and Mr. Sommer filed a motion for summary judgment seeking to
dismiss all pending claims. On October 5, 1998 the Court granted the
Partnership's and Mr. Sommer's motion with respect to one of the breach of
fiduciary duty claims. There will be limited discovery with respect to the
remaining claims. The Partnership and Mr. Sommer believe the remaining
allegations are without merit and intend to continue to vigorously contest the
Action.
6. Classification of Investments
As of September 30, 1998, 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 $ 5,226,128 $ 2,141,942 33.17%
Preferred Stock 2,289,490 1,861,899 28.83%
---------------- --------------- ----------
Total $ 7,515,618 $ 4,003,841 62.00%
================ =============== ==========
Country/Geographic Region
Eastern U.S. $ 2,949,896 $ 1,272,456 19.70%
Midwestern U.S. 353,533 0 0.00%
Western U.S. 4,212,189 2,731,385 42.30%
---------------- --------------- ----------
Total $ 7,515,618 $ 4,003,841 62.00%
================ =============== ==========
Industry
Biotechnology $ 2,726,935 $ 1,704,218 26.39%
Medical Devices 2,466,257 2,153,993 33.35%
Medical Services 2,322,426 145,630 2.26%
---------------- --------------- ----------
Total $ 7,515,618 $ 4,003,841 62.00%
================ =============== ==========
</TABLE>
* Percentage of net assets is based on fair value.
7. Subsequent Events
Subsequent to September 30, 1998, the Partnership sold 40,000 common shares of
Synaptic Pharmaceutical Corporation for $597,562.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
In January 1998, the Partnership invested $188,888 (including venture capital
fees totaling $10,793) in VitaGen, Inc., formerly Hepatix, Inc., an existing
portfolio company. The Partnership made no other follow-on investments during
the nine month period ended September 30, 1998. As discussed below, during the
three and nine months ended September 30, 1998, the Partnership liquidated
certain portfolio investments for net proceeds totaling $386,107 and $2,042,574,
respectively. The $386,107 was a receivable at September 30, 1998 and was
collected in October 1998.
As of September 30, 1998, the Partnership held $2,105,922 in cash and cash
equivalents, consisting of $1,490,735 in short-term securities with maturities
of less than one year and $611,632 in an interest-bearing cash account. The
Partnership earned $27,493 and $57,661 of interest from such investments for the
three and nine months ended September 30, 1998, respectively. Interest earned
from short-term investments in future periods is subject to fluctuations in
short-term interest rates and changes in funds available for investment in such
securities.
It is anticipated that funds needed to cover the Partnership's future operating
expenses and follow-on investments will be obtained from existing cash reserves,
interest from short-term investments and proceeds received from the sale of
portfolio investments.
The Partnership's originally scheduled termination date is 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.
Results of Operations
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. For
the three and nine months ended September 30, 1997, the Partnership had a net
realized gain from operations of $7,393 and a net realized loss from operations
of $113,626, 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 other income less operating
expenses).
Realized Gains and Losses from Portfolio Investments - 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 the
company 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. Abtox recently filed for protection under Chapter 11
of the federal bankruptcy code and is currently seeking funding to reorganize.
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.
For the three and nine months ended September 30, 1997, the Partnership had a
$97,898 net realized gain from portfolio investments resulting from the sales in
August and September 1997, of 15,000 shares of Synaptic Pharmaceutical
Corporation common stock in the public market for $225,170.
Investment Income and Expenses - For the three months ended September 30, 1998
and 1997, the Partnership had a net investment loss of $64,286 and $90,505,
respectively. The reduced net investment loss for the 1998 period compared to
the same period in 1997 resulted from a $1,925 increase in investment income and
a $24,294 decrease in operating expenses. The increase in investment income
primarily resulted from a $21,173 increase in interest income from short-term
investments due to the increased amount of cash available for investment in such
securities during the 1998 period as compared to the 1997 period. The increased
amount of cash available primarily resulted from proceeds received from the
liquidation of portfolio investments, as discussed above. Additionally,
investment income for the three months ended September 30, 1998 decreased
$19,248 primarily due to the reversal of $18,126 of accrued interest relating to
the 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 decrease in operating
expenses includes a $10,950 reduction in the management fee, as discussed below,
and a $13,344 net decrease in other operating expenses, primarily professional
fees and insurance expense.
Net investment loss for the nine months ended September 30, 1998 and 1997 was
$182,528 and $211,524, respectively. The reduced net investment loss for the
1998 period compared to the same period in 1997 includes a $25,578 decrease in
operating expenses and a $3,418 increase in investment income. The decrease in
operating expenses includes a $17,459 decrease in the management fee, as
discussed below. Other operating expenses declined $8,119, primarily due to an
$8,781 decrease in insurance expense resulting from lower premiums paid by the
Partnership for the 1998 period compared to the 1997 period. As discussed above,
the increase in investment income resulted from an increase in interest earned
from short-term investments offset by the reversal of accrued interest relating
to the promissory notes due from VitaGen.
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, 1998 and
1997, the management fee was $32,449 and $43,399, respectively. For the nine
months ended September 30, 1998 and 1997, the management fee was $105,086 and
$122,545, respectively. The decrease in the management fee for the 1998 periods,
compared to the 1997 periods, reflects the Partnership's lower net asset value
as of September 30, 1998 compared to the net asset value as of September 30,
1997. Such lower net asset value reflects the reduced carrying value of certain
of the Partnership's portfolio investments as of September 30, 1998 compared to
September 30, 1997. 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, 1998, the Partnership had
a $1,433,511 unfavorable change to net unrealized depreciation of portfolio
investments resulting from the revaluation of certain portfolio investments
during the nine month period. 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. Additionally, $1,151,114 of net
unrealized loss was transferred to realized loss resulting from portfolio
liquidations completed during the period, as discussed above. As a result, the
Partnership had a net unfavorable change to unrealized depreciation of $282,397
for the nine month period ended September 30, 1998.
For the nine months ended September 30, 1997, the Partnership had a $495,827
favorable change to net unrealized depreciation, resulting from the net upward
revaluation of its publicly-traded portfolio securities. Additionally, $69,603
of unrealized gain was transferred to realized gain resulting from the sale of
15,000 shares of Synaptic Pharmaceutical completed during the period, as
discussed above. As a result, the Partnership had a net favorable change to
unrealized depreciation of $426,224 for the nine month period ended September
30, 1997.
Net Assets - 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 decrease was comprised of the $282,397 unfavorable
change to unrealized depreciation of investments and the $870,803 net realized
loss from operations for the nine month period ended September 30, 1998.
As of September 30, 1997, the Partnership's net assets were $8,636,419,
reflecting an increase of $312,598 from $8,323,821 as of December 31, 1996. This
increase was comprised of the $426,224 favorable change to unrealized
depreciation of investments offset by the $113,626 net realized loss from
operations for the nine month period ended September 30, 1997.
As of September 30, 1998 and December 31, 1997, the net asset value per $500
Unit, including an allocation of net unrealized depreciation of investments, was
$165 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.
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 Management Company is responsible to provide or arrange for the provision of
administrative services necessary to support the Partnership's operations. The
Management Company 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 Management Company.
The Administrator is currently assessing its computer hardware and software
systems, specifically as they relate to the operations of the Partnership. As
part of this investigation of potential Y2K problems, the Administrator has
contracted with an outside computer service provider to examine all of the
Administrator's computer hardware and software applications, to identify any Y2K
concerns. This review and evaluation is in process and is expected to be
completed by May 1999. If Y2K problems are identified, the Administrator will
purchase, install and test the necessary software patches and new computer
hardware to ensure that all of its computer systems are Y2K compliant. This
correction phase, if required, is expected to be completed by September 1999.
Additionally, the Administrator has contacted the outside service providers used
to assist the Administrator or the Management Company 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.
Finally, the Y2K issue is a global concern that may affect all business
entities, including the Partnership's portfolio companies. The General Partner
is continuing to assess the impact of Y2K concerns affecting its portfolio
companies. However, the extent to which any potential Y2K problems could affect
the valuations of these companies is presently unknown.
<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. The remaining claims involved
allegations of breach of fiduciary duty, fraud and fraudulent inducement. The
Partnership and Mr. Sommer filed a motion for summary judgment seeking to
dismiss all pending claims. On October 5, 1998 the Court granted the
Partnership's and Mr. Sommer's motion with respect to one of the breach of
fiduciary duty claims. There will be limited discovery with respect to the
remaining claims. The Partnership and Mr. Sommer believe the remaining
allegations are without merit and intend to continue to vigorously contest the
Action.
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
Vice President and Principal Executive Officer
By: /s/ Ann Oliveri Fusco
Ann Oliveri Fusco
Vice President and Principal Financial
and Accounting Officer
Date: March 4, 1999
<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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 7,515,618
<INVESTMENTS-AT-VALUE> 4,003,841
<RECEIVABLES> 395,296
<ASSETS-OTHER> 2,155,144
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,554,281
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 96,900
<TOTAL-LIABILITIES> 96,900
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 38,727
<SHARES-COMMON-PRIOR> 38,727
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,511,777)
<NET-ASSETS> 6,457,381
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 49,475
<OTHER-INCOME> 0
<EXPENSES-NET> 232,003
<NET-INVESTMENT-INCOME> (182,528)
<REALIZED-GAINS-CURRENT> (870,803)
<APPREC-INCREASE-CURRENT> (282,397)
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
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<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (1,153,200)
<ACCUMULATED-NII-PRIOR> 0
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<AVERAGE-NET-ASSETS> 7,033,981
<PER-SHARE-NAV-BEGIN> 194.55
<PER-SHARE-NII> (4.67)
<PER-SHARE-GAIN-APPREC> (24.81)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
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<PER-SHARE-NAV-END> 165.07
<EXPENSE-RATIO> 0
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
