Item 1. Business.
Formation
WestMed Venture Partners, L.P. (the "Partnership" or the "Registrant") is a Delaware limited partnership organized in February 1987. In May 1987, 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 consist of two individuals (the "Independent General Partners") and WestMed Venture Management, L.P., a Delaware limited partnership (the "Managing General Partner"), the general partner of which is Medical Venture Holdings, Inc. ("MVH"), a Delaware corporation and an affiliate of Oppenheimer & Co., Inc. ("Opco").
In 1987, the Partnership publicly offered 100,000 units of limited partnership interest (the "Units") at $500 per Unit. The Units were registered under the Securities Act of 1933, pursuant to a Registration Statement on Form N-2 (File No. 33-11926), which was declared effective on July 2, 1987. The Partnership held its initial closing on September 1, 1987 and completed the offering on April 1, 1988, at which time it had accepted subscriptions for a total of 66,929 Units. Gross capital contributions to the Partnership from the public offering totaled $33,802,529; $33,464,500 from the limited partners (the "Limited Partners" and collectively with the Managing General Partner, the "Partners") and $338,029 from the Managing General Partner.
The Venture Capital Investments
From its inception through December 31, 1996, the Partnership had invested $28.6 million in 23 portfolio companies (including venture capital fees and other acquisition costs totaling $2 million). At December 31, 1996, the Partnership's investment portfolio consisted of investments in 12 companies. Such investments had an aggregate cost of $9.2 million and a fair value of $11.5 million. From its inception through December 31, 1996, the Partnership had either fully liquidated or partially liquidated portfolio investments with a cost of $19.4 million. These liquidated investments returned $11.4 million to the Partnership for a net realized loss of $8.0 million. At December 31, 1996, the Partnership had a cumulative net realized loss from its venture capital investments totaling $7.5 million, including $504,000 of interest and other income from portfolio investments. As discussed below, during 1996 the Partnership sold its investment in Corvita Corporation. Also during 1996, the Partnership invested $212,000 in Aprogenix, Inc., an existing portfolio company, and recorded a partial write-off totaling $230,000 on its investment in Argonaut Medical, Inc. (formerly Nimbus Medical, Inc.). These investment transactions and other events affecting the Partnership's portfolio security holdings during 1996 are listed below.
In May 1996, UroCor, Inc. completed its initial public offering at $11 per share. In connection with the offering, the Partnership exchanged its 368,930 preferred shares for 384,982 common shares of the company.
In June 1996, the Partnership made a $212,000 follow-on investment in Aprogenix, Inc. (including venture capital fees totaling $12,120), acquiring a 10% convertible note due 5/29/98 and a warrant to purchase 13,000 shares of common stock at $1.10 per share, expiring on 5/29/99. Additionally, as a result of the above mentioned financing, the Partnership's warrant to purchase 16,458 shares of Aprogenix common stock for $7.39 per share was exchanged for a warrant to purchase 21,450 shares of Aprogenix common stock for $5.67 per share.
In connection with the sale of Nimbus Medical, Inc., completed in December 1996, the Partnership wrote-off $229,899 of its $380,431 investment in the company. The surviving entity was renamed Argonaut Medical, Inc.
In February 1996, the Partnership received a $30,289 cash distribution from Nimbus Medical, L.P.
During 1996, Bellara Medical Products, Ltd. merged with Pharmaction Pty Limited becoming Pharmaction Holdings Limited. As a result of the merger, the Partnership exchanged its 442,430 common shares of Bellara for 294,953 ordinary shares of Pharmaction Holdings and an option to purchase an additional 147,476 ordinary shares at $.20 per share.
On June 10, 1996, HBO & Co. declared a 100% stock distribution. As a result, the Partnership received an additional 1,963 shares of HBO & Co.common stock.
During May 1996, the Partnership sold its investment in Corvita Corporation for $4.33 million, realizing a gain of $1.94 million.
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 investors and these relationships have expanded the Partnership's access to investment opportunities.
Employees
The Partnership has no employees. The Managing General Partner, under the supervision of the Independent General Partners, manages and controls the Partnership's venture capital investments. The Managing General Partner performs, or arranges for others to perform, the management and administrative services necessary for the operation of the Partnership and is responsible for managing the Partnership's short-term investments.
Item 2.

Item 2. Properties.
The Partnership does not own or lease physical properties.
Item 3.

Item 3. Legal Proceedings.
The Partnership is not a party to any material pending legal proceedings.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders.
A Special Meeting of Limited Partners was held on June 21, 1996 with respect to 1) a proposal to allow the Managing General Partner to retain the services of a Sub-Manager to assist the Managing General Partner in the performance of its duties to the Partnership and 2) a proposal to amend the Partnership Agreement to reduce the minimum number of Individual General Partners from three to two. At the meeting, both such proposals were approved.
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 a public market for the Units will develop. The number of individual holders of Units at December 31, 1996 was approximately 6,500.
In November 1996, the General Partners approved a cash distribution to Partners totaling $4.5 million. The distribution was paid on January 30, 1997 to Limited Partners of record on December 31, 1996. Limited Partners received $4,484,243, or $67 per Unit, and the General Partner received $45,295. There were no cash distributions to Partners during the years ended December 31, 1995 or 1994. Cumulative cash distributions paid or accrued to Partners from inception to December 31, 1996, total $10,240,307; $10,137,904 to the Limited Partners, or approximately $151 per Unit, and $102,403 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. 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.
Item 6.

Item 6. Selected Financial Data.
($ In Thousands, Except For Per Unit Information)
* Limited Partners were admitted to the Partnership in eight separate closings from September 1, 1987 to April 1, 1988. 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
During the year ended December 31, 1996, the Partnership invested $212,000, including venture capital fees totaling $12,000, in one existing portfolio company. At December 31, 1996, the Partnership had invested an aggregate of $28.6 million in 23 portfolio companies, including acquisition costs and venture capital fees totaling $2 million. The Partnership has invested approximately 95% of its original $30 million of net proceeds received from the offering of Units. Although the Partnership will not make any new portfolio investments, it does expect to make additional follow-on investments in existing portfolio companies.
In May 1996, the Partnership received $4.3 million from the sale of its investment in Corvita Corporation.
At December 31, 1996, the Partnership held $6.1 million in cash and short-term investments as follows: $5.7 million in short-term securities with maturities of less than three months and $460,000 in an interest-bearing cash account. For the years ended December 31, 1996, 1995 and 1994, the Partnership earned interest from such investments totaling $229,000, $129,000 and $105,000, 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. It is anticipated that funds needed to cover the Partnership's future follow-on investments and operating expenses will be obtained from existing cash reserves, interest earned from its short-term securities and proceeds from the sale of portfolio investments.
On November 12, 1996, the General Partners approved a cash distribution to Partners totaling $4,529,538. The distribution was paid on January 30, 1997 to Limited Partners of record on December 31, 1996. Limited Partners received $4,484,243, or $67 per Unit, and the General Partner received $45,295. The distribution was paid January 30, 1997. Cumulative cash distributions to Partners total, including the distribution paid in January 1997, $10,240,307.
Results of Operations
For the year ended December 31, 1996, the Partnership had a net realized gain from operations of $1.4 million. For the years ended December 31, 1995 and 1994, the Partnership had a net realized loss from operations of $309,000 and $3.2 million, respectively. Net realized gain or loss from operations is comprised of (i) net realized gains or losses from portfolio investments and (ii) net investment income or loss (interest and dividends less operating expenses).
Realized Gains and Losses from Portfolio Investments - For the year ended December 31, 1996, the Partnership had a net realized gain from portfolio investments of $1.7 million. In May the Partnership sold its investment in Corvita Corporation for $4.3 million, resulting in a $1.9 million realized gain. Nimbus Medical, Inc. was sold during 1996 and the surviving entity was renamed Argonaut Medical, Inc. As a result of the sale and transfer of the company's assets, the Partnership recorded a $230,000 realized loss on its investment in Argonaut, reflecting a partial write-off of its original investment.
For the year ended December 31, 1995, the Partnership had a net realized gain from portfolio investments of $65,000 resulting from the sale of 51,000 common shares of Aprogenix, Inc. in the public market for $276,000.
For the year ended December 31, 1994, the Partnership had a net realized loss of $2.8 million from its portfolio investments. During March and April 1994, the Partnership sold 20,000 common shares of CliniCom Incorporated in the public market for $422,000, realizing a loss of $944,000. Additionally at December 31, 1994, the Partnership wrote-off $166,000 of cost relating to its remaining 4,908 shares of common stock of CliniCom due to the continued depressed public market price of such shares. During 1995, CliniCom was acquired by HBO & Co. Also, in December 1994, the Partnership wrote-off its $323,000 investment in Vaso Products Inc., $576,000 of its $826,000 investment in Bellara Medical Products Inc. (Pharmaction Holdings, Ltd.) and $801,000 of its $1.3 million investment in Ultramed, Inc. due to continued business and financial difficulties at these companies.
Investment Income and Expenses - Net investment loss for the years ended December 31, 1996, 1995 and 1994 was $341,000, $375,000 and $421,000, respectively. The $34,000 decrease in net investment loss for 1996 compared to 1995 resulted from a $114,000 increase in investment income offset by an $80,000 increase in operating expenses for 1996. The increase in investment income primarily resulted from an increase in interest earned from short-term investments for 1996. This increase resulted from an increase in funds available for investment in such securities during 1996 due to the receipt of $4.3 million in May 1996 from the sale of the Partnership's investment in Corvita, as discussed above. The increase in operating expenses for 1996 primarily resulted from a $47,000 increase in the management fee, as discussed below and a $40,000 increase in professional fees, resulting from the preparation of a proxy statement in connection with the Special Meeting of Limited Partners held on June 21, 1996.
The decrease in net investment loss for 1995 compared to 1994, primarily resulted from the $41,000 increase in investment income for 1995. This increase reflects a $24,000 increase in interest from short-term investments for 1995 compared to 1994, due to higher short-term interest rates during the 1995 period. Additionally, accrued interest income from portfolio investments totaling $2,400 and $19,000 was reversed in 1995 and 1994, respectively, resulting in an additional $17,000 increase in investment income for 1995 compared to 1994. Operating expenses remained relatively flat, decreasing only $5,000 from 1995 compared to 1994. Management and custodial fees decreased by $96,000, while professional fees and other expenses increased by $91,000 for the 1995 period.
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 of the Partnership, net of selling commissions and organizational expenses, reduced by capital distributed. Such fee is determined and payable quarterly. Additionally, the Managing General Partner has agreed to reduce the management fee payable by the Partnership for any director's fees earned by the Managing General Partner from any of the Partnership's portfolio companies. For the years ended December 31, 1996, 1995 and 1994, the management fee was $315,000, $268,000 and $361,000, respectively. The increased management fee for 1996 compared to 1995 resulted from the Partnership's higher quarterly net asset values during 1996 compared to 1995. 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 received from the sale of portfolio investments.
Unrealized Gains and Losses and Changes in Unrealized Appreciation or Depreciation of Portfolio Investments - For the year ended December 31, 1996, the Partnership had a $437,000 net unrealized gain, resulting from the net upward revaluation of its portfolio investments during 1996. Additionally, $129,000 of net unrealized gain was transferred to realized gain relating to the sale of the Partnership's investment in Corvita and the partial write-off of the Partnership's investment in Argonaut, as discussed above. The $437,000 unrealized gain offset by the $129,000 net transfer from unrealized gain to realized gain resulted in a $308,000 increase in net unrealized appreciation of investments for 1996.
For the year ended December 31, 1995, the Partnership had a $1.6 million unrealized gain from the net upward revaluation of its publicly-held portfolio investments, primarily Somatogen, Inc. and Corvita Corporation.
For the year ended December 31, 1994, the Partnership had a $3.5 million net unrealized loss from its portfolio investments, primarily resulting from the net downward revaluation of its publicly-held portfolio investments. Additionally during 1994, $2.9 million was transferred from unrealized loss to realized loss relating to the write-off of certain portfolio investments. The $3.5 million unrealized loss partially offset by the $2.9 million transfer from unrealized loss to realized loss resulted in a $618,000 decrease in net unrealized appreciation of investments for 1994.
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.
At December 31, 1996, the Partnership's net assets were $13 million, reflecting a decrease of $2.8 million from $15.8 million at December 31, 1995. This decrease reflects the $4.5 million cash distribution exceeding the $1.7 million net increase in net assets from operations for 1996.
At December 31, 1995, the Partnership's net assets were $15.8 million, reflecting an increase of $1.3 million from $14.5 million at December 31, 1994. This increase resulted from the $1.3 million increase in net assets from operations for 1995.
At December 31, 1994, the Partnership's net assets were $14.5 million, reflecting a decrease of $3.9 million from $18.4 million at December 31, 1993. This decrease resulted from the $3.9 million net decrease in net assets from operations for 1994.
At December 31, 1996, 1995 and 1994, the net asset value per $500 Unit, including an allocation of net unrealized appreciation or depreciation of investments, was $192, $235 and $215, 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.
Summary of Changes to Net Assets for the Year Ended December 31, 1996
Portfolio transactions completed during 1996, resulted in a realized gain of $1,705,622. As shown below, these transactions returned $4,360,607 to the Partnership and increased its net asset value for the year by $1,126,316. Net upward revaluations of the Partnership's remaining portfolio investments during 1996, further increased net asset value by $887,266. The completed portfolio transactions and revaluations increased the Partnership's net asset value on a net basis by $2,013,582 for 1996. This increase in net assets from portfolio transactions for 1996 was offset by the $341,253 net investment loss for the year.
(1) Adjusted for follow-on investments made during 1996. (2) Adjusted for cash distribution received during 1996.
Item 8.

Item 8. Financial Statements and Supplementary Data.
WESTMED VENTURE PARTNERS, L.P. INDEX
Independent Auditors' Report
Balance Sheets as of December 31, 1996 and 1995
Schedule of Portfolio Investments as of December 31, 1996
Schedule of Portfolio Investments as of December 31, 1995
Statements of Operations for the years ended December 31, 1996, 1995 and 1994
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994
Statements of Changes in Partners' Capital for the years ended December 31, 1994, 1995 and 1996
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, L.P.:
We have audited the accompanying balance sheets of WestMed Venture Partners, L.P. (the "Partnership"), including the schedules of portfolio investments, as of December 31, 1996 and 1995, 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, 1996. 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, 1996 and 1995 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, L.P. at December 31, 1996 and 1995, 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, 1996 in conformity with generally accepted accounting principles.
As explained in Note 2, the financial statements include securities valued at $6,150,162 and $11,079,422 at December 31, 1996 and 1995, respectively, representing 47% and 70% of net assets, respectively, whose values have been estimated by the Managing General Partner in the absence of readily ascertainable market values. We have reviewed the procedures used by the Managing General Partner in arriving at its estimate of value of such securities and have inspected underlying documentation, and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material.
Deloitte & Touche LLP
New York, New York February 17, 1997, except for note 7 as to which the date is March 14, 1997
WESTMED VENTURE PARTNERS, L.P. BALANCE SHEETS December 31,
See notes to financial statements.
WESTMED VENTURE PARTNERS, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS December 31, 1996
Active Portfolio Investments:
WESTMED VENTURE PARTNERS, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS - continued December 31, 1996
(A) Public company (B) During June 1996, the Partnership made a $200,000 follow-on investment in Aprogenix, Inc., acquiring a 10% convertible note due 5/29/98 and a warrant to purchase 13,000 shares of common stock at $1.10 per share, expiring on 5/29/99. The Partnership paid a venture capital fee of $12,120 to the Managing General Partner relating to this investment. Additionally, in connection with this investment, the Partnership's warrant to purchase 16,458 shares of Aprogenix common stock for $7.39 per share was exchanged for a warrant to purchase 21,450 shares of Aprogenix common stock for $5.67 per share. (C)The 75,000 preferred shares of Cortex Pharmaceuticals, Inc. held by the Partnership are convertible into 7,359 shares of the company's common stock. (D) On June 10, 1996, HBO & Co. declared a 100% stock distribution. As a result, the Partnership received an additional 1,963 shares of HBO & Co. common stock.
WESTMED VENTURE PARTNERS, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS - continued December 31, 1996
(E) In connection with the sale of Nimbus Medical, Inc., completed in December 1996, the Partnership wrote-off $229,899 of its $380,431 investment in the company. The surviving entity was renamed Argonaut Medical, Inc. (F) In February 1996, the Partnership received a $30,289 cash distribution from Nimbus Medical, L.P. (G) During 1996, Bellara Medical Products, Ltd. merged with Pharmaction Pty Limited becoming Pharmaction Holdings Limited. As a result of the merger, the Partnership exchanged its 442,430 common shares of Bellara for 294,953 ordinary shares of Pharmaction Holdings and an option to purchase and additional 147,476 ordinary shares at $.20 per share. (H) Pursuant to a letter agreement, the Partnership converted its Ultramed, Inc. preferred stock and promissory notes into 1,886,704 shares of common stock. (I) In May 1996, UroCor, Inc. completed its initial public offering at $11 per share. In connection with the offering, the Partnership exchanged its 368,930 preferred shares for 384,982 common shares of the company. (J) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through December 31, 1996. (K) During May 1996, the Partnership sold its investment in Corvita Corporation for $4.33 million, realizing a gain of $1.94 million.
* 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, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS December 31, 1995
Active Portfolio Investments:
WESTMED VENTURE PARTNERS, L.P. SCHEDULE OF PORTFOLIO INVESTMENTS - continued December 31, 1995
Active Portfolio Investments:
(A) Public company (B) Amounts provided for "Supplemental Information: Liquidated Portfolio Investments" are cumulative from inception through December 31, 1995.
* 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, L.P. STATEMENTS OF OPERATIONS For the Years Ended December 31,
See notes to financial statements.
WESTMED VENTURE PARTNERS, L.P. STATEMENTS OF CASH FLOWS For the Years Ended December 31,
See notes to financial statements.
WESTMED VENTURE PARTNERS, L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the Years Ended December 31, 1994, 1995 and 1996
(A) The net asset value per unit of limited partnership interest, including an allocation of net unrealized appreciation or depreciation of investments, was $192, $235, and $215 at December 31, 1996, 1995 and 1994, 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, L.P. NOTES TO FINANCIAL STATEMENTS
1. Organization and Purpose
WestMed Venture Partners, L.P. (the "Partnership") was formed under Delaware law on February 5, 1987. The Partnership operates as a business development company under the Investment Company Act of 1940, as amended. The Partnership is a closed-end investment fund and accordingly its units of limited partnership interest ("Units") are not redeemable. A total of 66,929 Units were sold to limited partners (the "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, 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 Oppenheimer & Co., Inc. ("Opco"). The limited partners of the Managing GeneraL Partner are Oppenheimer Holdings, Inc., 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, is the sub-manager of the Partnership pursuant to a sub-management agreement among the Partnership, 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 its duties to the Partnership.
Opco, a member firm of the New York Stock Exchange, the National Association of Securities Dealers, Inc., and all principal United States securities exchanges, is a diversified investment banking and securities firm and registered investment advisor, providing a broad range of services to individual, corporate, and institutional clients. Opco operates in the capacity of broker and dealer for its customers, as well as trader for its own account. The services provided by Opco and its subsidiaries, and the activities in which it is engaged, include securities brokerage, securities research, customer financing, securities trading, corporate finance, mergers and acquisitions, underwriting and investment advisory services.
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 is scheduled to terminate on December 31, 1997, subject to the right of the General Partners to extend the term for up to two additional two-year periods, if they determine that such extensions are in the best interest of the Partnership.
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
WESTMED VENTURE PARTNERS, L.P. NOTES TO FINANCIAL STATEMENTS
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 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 no longer reflects 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 appreciation of $2.3 million at December 31, 1996, which was recorded for financial statement purposes, was not recognized for tax purposes. Additionally, from inception to December 31, 1996, other timing differences totaling $8.2 million, relating to net realized losses, 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
WESTMED VENTURE PARTNERS, L.P. NOTES TO FINANCIAL STATEMENTS
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. 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, 1996, the Partnership had a $7.5 million net loss from its venture capital investments including interest and other income from portfolio investments totaling $504,000.
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 investments. For the years ended December 31, 1996, 1995 and 1994, the Partnership incurred venture capital fees of $12,000, $17,000 and $40,000 respectively. Cumulative venture capital fees incurred from inception to December 31, 1996 totaled $1.6 million.
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. Cash Distributions
In November 1996, the General Partners approved a cash distribution to Partners totaling $4.5 million. The distribution was paid on January 30, 1997 to Limited Partners of record on December 31, 1996. Limited Partners received $4,484,243, or $67 per Unit, and the General Partner received $45,295. There were no cash distributions to Partners during the years ended December 31, 1995 or 1994. Cumulative cash distributions paid or accrued to Partners from inception to December 31, 1996, total $10,240,307; $10,137,904 to the Limited Partners, or approximately $151 per Unit, and $102,403 to the Managing General Partner.
WESTMED VENTURE PARTNERS, L.P. NOTES TO FINANCIAL STATEMENTS
6. Classification of Investments
As of December 31, 1996, the Partnership's investments were categorized as follows:
* Percentage of net assets is based on fair value.
7. Subsequent Event
On February 27, 1997, Oclassen Pharmeceuticals, Inc. merged with Watson Pharmaceuticals, Inc. As a result of the merger, the Partnership exchanged its 292,955 preferred shares of Oclassen for 108,321 common shares of Watson, of which 8,124 shares are to be held in escrow for a period of one year pursuant to the merger agreement.
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 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 21, 1997:
Thomas E. White, Age 63, Independent General Partner since 1987 485 Madison Avenue New York, New York 10022 Mr. White is an attorney in private practice in New York City. He is also an independent general partner of WestMed Venture Partners 2, L.P. ("WVP2"). 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 57, Independent General Partner since 1987 Elliott Investment Co. 5000 Birch Street, Suite 6200 Newport Beach, California 92660 Mr. Elliott, currently a private investor, was the Chairman and Chief Executive Officer of VLI Corporation from 1983 to 1987. Mr. Elliott is also an independent general partner of WVP2, a member of the Board of Trustees of Chapman University and a member of the Board of Directors of two privately-held medical device companies. 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 MVH, a Delaware corporation affiliated with Opco. The limited partners of the Managing General Partner are (i) Oppenheimer Holdings, Inc. ("OHI"), a Delaware corporation and the parent of 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 Phillipe L. Sommer. The compensation of the Sub-Manager is paid directly by the Managing General Partner. No additional management fees will be 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 21, 1997 concerning the directors and officers of MVH that are principally involved with the operations of the Partnership. Mr. McGrath has been a director and/or officer of MVH since June 1990. Mr. Rothstein and Ms. Fusco have been officers of MVH since April 1996 and June 1996, respectively. The address of each such person is Oppenheimer Tower, World Financial Center, New York, New York 10281.
Stephen M. McGrath, Sr., Age 61, Vice President and Director Mr. McGrath has been Executive Vice President of Opco and director of its Investment Banking Group since July 1985. He also served as President of Oppenheimer Strategic Investments, Inc. between May 1983 and April 1985. Mr. McGrath was Senior Vice President of Planning and Development at Warner-Lambert until 1985 and has been a director of Alliance Pharmaceutical Corp. since June 1989. He also serves as an executive officer and director of certain current and/or former affiliates of Opco.
Gerald A. Rothstein, Age 54, Vice President Mr. Rothstein has been a Managing Director of Opco since 1983. He is primarily responsible for the creation of Opco's international research department and focuses upon the emerging markets of Latin America and India. Mr. Rothstein has served on Opco's Management Committee since 1983 and is also a member of Opco's Commitment and Due Diligence committees.
Ann O. Fusco, Age 42, Vice President Ms. Fusco has been Vice President of Oppenheimer Properties, Inc. since July 1986 and has been employed by Oppenheimer & Co., Inc. 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 OHI. The Sub-Manager is wholly-owned by Phillipe L. Sommer. Presented below is information concerning Mr. Sommer as of March 27, 1997.
Philippe L. Sommer, Age 45, Executive Vice President and Managing Director Mr. Sommer is a Managing Director of BSW and a member of the Board of Directors of BSW and one portfolio company of WVP2. He has been involved in health-care industry management for the past 15 years. 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 HPG and as such 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.
Opco, a member firm of the New York Stock Exchange, Inc., the National Association of Securities Dealers, Inc. and all principal U.S. securities exchanges, is a diversified investment banking and securities firm, providing a broad range of services to individual, corporate and institutional clients. Opco is registered as a broker-dealer and investment adviser with the Commission, and also is registered as a broker-dealer in all of the states of the United States and with the Securities Association in the United Kingdom and with the Commodity Futures Trading Commission as a futures commission merchant. Opco operates in the capacity of broker and dealer for its customers, as well as trader for its own account.
The services provided by Opco and its subsidiaries, and the activities in which it is engaged, include investment banking, securities brokerage, securities research, customer financing, securities trading and arbitrage, corporate finance, real estate financing and investment advisory services. Opco's investment banking activities include an active engagement in the health-care area. Opco provides public equity and debt financing to clients in the biotechnology, instrumentation and pharmaceutical products and services sectors in the health-care field. Opco also provides private financing, and merger, acquisition and divestiture assistance to health-care companies. Opco's Health-care Investment Banking Group is supported by Opco's securities research team which reports on public companies in the human health-care sector.
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. During 1996, Thomas White, an Independent General Partner of the Partnership, received an $11,600 payment from the Partnership relating to legal services in connection with the Sub-Management Agreement.
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 year ended December 31, 1996, the Managing General Partner was allocated $16,700 of the Partnership's net increase in net assets from operations. For the year ended December 31, 1995, the Managing General Partner was allocated $13,200 of the Partnership's net increase in net assets from operations and for the year ended December 31, 1994, the Managing General Partner was allocated $38,600 of the Partnership's net decrease in net assets from operations.
Pursuant to the Management Agreement, the Managing General Partner performs, or arranges for others to perform, the management, administrative and certain investment advisory services necessary for the operation of the Partnership. For such services, the Managing General Partner received 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, 1996, 1995 and 1994, the Managing General Partner received management fees of $315,000, $268,000, and $361,000 respectively.
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 Phillipe L. Sommer. The compensation of the Sub-Manager is paid directly by the Managing General Partner. No additional management fees will be incurred by the Partnership as a result of the Managing General Partner's relationship with the Sub-Manager.
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 investments. For the years ended December 31, 1996, 1995 and 1994, the Managing General Partner received venture capital fees of $12,000, $17,000 and $40,000, respectively.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership
As of March 21, 1997, 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 own as a group ten Units, or less than one-tenth of one percent of the total Units outstanding.
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, 1996 and 1995
Schedule of Portfolio Investments as of December 31, 1996
Schedule of Portfolio Investments as of December 31, 1995
Statements of Operations for the years ended December 31, 1996, 1995 and 1994
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994
Statements of Changes in Partners' Capital for the years ended December 31, 1994, 1995 and 1996
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 between the Partnership and the Managing General Partner(2)
[?] Sub-Management agreement among the Partnership, the Managing General Partner and the Sub-Manager(4)
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.
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(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 an exhibit to the Partnership's proxy statement dated May 17, 1996 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 27th day of March 1997.
WESTMED VENTURE PARTNERS, L.P.
By: WestMed Venture Management, L.P., Managing General Partner
By: Medical Venture Holdings, Inc., General Partner
By: /s/ Stephen McGrath Stephen McGrath Executive Vice 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 27th day of March 1997.