Name of Prospective Investor Memorandum Number
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MOBILE KIDNEY STONE CENTERS
OF CALIFORNIA II, L.P.
A Limited Partnership Formed Under the Laws of California
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM
up to $169,320 in Cash
up to $97,425 in Personal Guaranties
40 Units of Limited Partnership Interest
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THIS MEMORANDUM IS FURNISHED PURSUANT TO A CONFIDENTIALITY AGREEMENT
BETWEEN THE PARTNERSHIP AND THE INVESTOR WHOSE NAME APPEARS ABOVE. THE
CONFIDENTIALITY AGREEMENT PROHIBITS THE DISCLOSURE OF THE CONFIDENTIAL
MATERIAL CONTAINED IN THIS MEMORANDUM, EXCEPT TO THE EXTENT SUCH
INVESTOR DEEMS IT NECESSARY TO SHARE SUCH INFORMATION WITH HIS LEGAL,
ACCOUNTING OR OTHER FINANCIAL ADVISORS, WHO LIKEWISE SHALL BE BOUND BY
THE SAME CONFIDENTIALITY RESTRICTIONS SET FORTH IN THE CONFIDENTIALITY
AGREEMENT.
MEDTECH INVESTMENTS, INC.
Exclusive Sales Agent
2008 Litho Place
Fayetteville, North Carolina 28304
▇-▇▇▇-▇▇▇-▇▇▇▇
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WINSTON #892462 v 2
The Date of this Memorandum is April 21, 2000
MOBILE KIDNEY STONE CENTERS OF CALIFORNIA II, L.P.
up to $169,320 in Cash
up to 40 Units of Limited Partnership Interest
at $4,233 in Cash and $2,435.63 in Personal Guaranties per Unit
Mobile Kidney Stone Centers of California II, L.P., a
California limited partnership (the "Partnership") operated by its general
partner, Mobile Kidney Stone Centers of California, Ltd. I, a California limited
partnership (the "General Partner") and an affiliate of Prime Medical Services,
Inc., a Delaware corporation, hereby offers on the terms set forth herein up to
40 Units (the "Units") of limited partnership interest in the Partnership, at a
price per Unit of $4,233 in cash, plus a personal guaranty of 0.5% of the
Partnership's obligations under a loan of $487,125 from First-Citizens Bank &
Trust Company (the "Loan") (a $2,435.63 principal guaranty obligation per Unit).
See "Terms of the Offering." Each Unit will represent an initial 0.5% economic
interest in the Partnership. See "Risk Factors - Other Investment Risks -
Dilution of Limited Partners' Interests." The Partnership owns and operates a
Storz Modulith(R) SLX-T model extracorporeal shockwave lithotripter for the
lithotripsy of kidney stones. The lithotripter is transported in a mobile van
(together with the installed and operational lithotripter, the "Lithotripsy
System") enabling the Partnership to provide lithotripsy services at various
locations primarily within a 150 mile radius of Sacramento, California (the
"Service Area").
The Partnership intends to use the net proceeds of this
Offering (after deduction of expenses payable by the Partnership) to reduce the
Partnership's currently outstanding indebtedness under the Loan. See "Sources
and Applications of Funds." The cash purchase price and personal guaranties are
due at subscription; however, prospective Investors who meet certain
requirements may be able to personally borrow funds from a third-party financial
institution in order to pay a portion of their cash purchase price per Unit. See
"Terms of the Offering - Limited Partner Loans." The Offering will terminate on
June 1, 2000 (or earlier upon the sale of all 40 Units as provided herein),
unless extended at the discretion of the General Partner for a period not to
exceed 180 days.
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Purchase of Units involves risks and is suitable only for
persons of substantial means who have no need for liquidity in this investment.
Among other factors, prospective investors should note that the health care
industry is undergoing significant government regulatory reforms and that the
Partnership faces substantial competition in the Service Area. See "Risk
Factors" and "Terms of the Offering - Suitability Standards."
-------------------------------
Cash Selling Net Cash Amount of
Offering Price Commissions(1) Proceeds (2) Guaranties(3)
Per Unit(4) $ 4,233 $ 75 $ 4,158 $ 2,435.63
Total Maximum(5) $169,320 $ 3,000 $166,320 $ 97,425.00
(See Footnotes on Back of Cover Page)
See Glossary for capitalized terms used herein and not
otherwise defined.
(1) The Units will be sold on a "best-efforts" any or all basis by
MedTech Investments, Inc., a broker-dealer registered with the
Securities and Exchange Commission, a member of the National
Association of Securities Dealers, Inc. and an Affiliate of the
General Partner (the "Sales Agent"). The Partnership will pay
the Sales Agent a $75 commission for each Unit sold and will
reimburse the Sales Agent for its Offering costs (not to exceed
$7,000). The Partnership has agreed to indemnify the Sales
Agent against certain liabilities, including liabilities vender
the Securities Act of 1933 (the "Securities Act"). See "Plan of
Distribution."
(2) Net Cash Proceeds do not reflect deduction of expenses payable
by the Partnership. See "Sources and Applications of Funds."
The cash price per Unit ($4,233) is payable in cash upon
subscription; provided, that prospective Investors who meet
certain requirements may be able to personally borrow funds
from a third-party financial institution in order to pay a
portion of their cash purchase price per Unit. For the
convenience of the Investors, the Partnership has arranged for
financing of a portion of the Units' cash purchase price (the
"Limited Partner Loan") with First-Citizens Bank & Trust
Company, which is headquartered in Raleigh, North Carolina, and
has approximately 370 offices throughout the southeastern
United States (the "Bank"). Therefore, in lieu of paying the
entire purchase price in cash at subscription, prospective
Investors may execute and deliver to the Sales Agent, together
with their Subscription Packets, at least $2,500 in cash and a
Limited Partner Note payable to the Bank in a maximum principal
amount of up to $1,733 per Unit to be purchased, a Loan and
Security Agreement, Security Agreement and two Uniform
Commercial Code Financing Statements ("UCC-1's") (collectively,
the "Loan Documents"). See "Terms of the Offering - Limited
Partner Loans" and the forms of the Limited Partner Note, the
Loan and Security Agreement and Security Agreement attached to
the Form of Loan Commitment as Exhibits A, B and C,
respectively, which is attached hereto as Appendix B and the
UCC-1's attached as part of the Subscription Packet.
(3) At subscription, each Investor must execute and deliver to the Sales Agent
a guaranty agreement (the "Guaranty") under which he or she will guarantee
payment of a portion of the Partnership's obligations under the Loan, the
proceeds of which were used by the Partnership to (i) acquire a new Storz
Modulith(R)SLX-T model extracorporeal shock-wave lithotripter with
accessories; (ii) acquire and upfit a new mobile van to transport the
lithotripter; and (iii) pay sales taxes on the purchase of the Lithotripsy
System. As a class, the initial Limited Partners guaranteed $292,275 (60%)
of the Partnership's principal obligations under the Loan. In its capacity
as general partner of the Partnership, the General Partner initially
guaranteed 40% of the Loan, which represents a $194,850 principal guaranty
obligation. See "Risk Factors - Operating Risks - Partnership Limited
Resources and Risks of Leverage." For each Unit purchased, an Investor will
be required to guarantee 0.5% of the Loan, which represents up to a
$2,435.63 principal guaranty obligation. As of the date of this Memorandum
the outstanding balance on the Loan is $441,205.79. A Limited Partner's
liability under the Guaranty may exceed the principal guaranty per Unit as
provided above because such liability includes not only principal, ▇▇▇▇
also accrued and unpaid interest, late payment penalties and legal costs
incurred by the Bank in collecting defaulted obligations. For a description
of the guaranty
requirements and the terms of the Guaranties, see "Terms of the
Offering - Guaranty Arrangements" and the form of Guaranty included
in the Subscription Packet accompanying this Memorandum.
(4) Each Investor may purchase no less than one Unit. The General
Partner, however, reserves the right to sell less than one Unit as
an additional investment, and to reject, in whole or in part, any
subscription.
(5) Offering proceeds will first be used by the Partnership to pay
Offering costs and expenses and the remainder of the proceeds will
be used to reduce the Partnership's currently outstanding
indebtedness under the Loan. See "Sources and Applications of
Funds." The Partnership seeks by this Offering to sell up to 40
Units for an aggregate of up to $169,320 in cash ($166,320 net of
Sales Agent's commissions) and up to $97,425 in personal guaranties
of the Partnership's principal obligations under the Loan. All
subscription funds, Guaranties and Loan Documents will be held in
an interest bearing escrow account with the Bank until the
acceptance of the Investor's subscription (and approval by the Bank
if the Investor is financing a portion of the Unit cash purchase
price through a Limited Partner Loan), rejection of the Investor's
subscription or termination of the Offering. The Partnership has
set no minimum number of Units to be sold in this Offering.
Accordingly, upon the receipt and acceptance of an Investor's
subscription by the Partnership and the approval of his or her
Guaranty by the Bank as provided herein, such Investor will be
admitted to the Partnership as a Limited Partner, provided that
acceptance of subscriptions by an Investor that elects to finance a
portion of his or her Unit cash purchase price is also conditioned
upon approval by the Bank of his or her Limited Partner Loan. Upon
admission as a Limited Partner, the Investor's subscription funds
will be released to the Partnership and the Guaranties and the Loan
Documents, if any, will be released to the Bank. In the event a
subscription is rejected, all subscription funds (without
interest), Guaranty and the Loan Documents, if any, and other
subscription documents held in escrow will be promptly returned to
the rejected Investor. The Offering will terminate on June 1, 2000,
unless it is sooner terminated by the General Partner, or unless
extended for an additional period not to exceed 180 days. See
"Terms of the Offering."
[The remainder of this page is intentionally left
blank.]
WINSTON #892462 v 2
iv
o The Units are being offered pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended,
provided by Section 4(2) thereof and Rule 506 of Regulation D
promulgated thereunder, as amended, and an exemption from state
registration requirements provided by the National Securities markets
Improvement Act of 1996. A registration statement relating to these
securities has not been filed with the Securities and exchange
Commission or any state securities commission.
o Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Units or determined that
this Memorandum is truthful or complete. Any representation to the
contrary is a criminal offense.
o The Units are subject to restrictions on transferability and resale and
may not be transferred or resold without the consent of the General
Partner and satisfaction of certain other conditions including the
availability of an exemption under the Securities Act of 1933 and
applicable state securities laws. See "Risk Factors -Other Investment
Risks - Limited Transferability and Illiquidity of Units." No public or
other market exists or will develop for the Units. Investors should
proceed only on the assumption that they may have to bear the economic
risk of an investment in the Units for an indefinite period of time.
o Prospective Investors should not construe the contents of this
Memorandum or any prior or subsequent communications, whether written
or oral, from the Partnership, its General Partner, the Sales Agent or
any of their agents or representatives as investment, tax or legal
advice. This Memorandum and the appendices hereto, as well as the
nature of the investment, should be reviewed by each prospective
Investor, such Investor's investment, tax or other advisors, and
accountants and/or legal counsel.
o No offering literature in whatever form will or may be employed in the
offering of Units, except this Memorandum (including amendments and
supplements, if any) and documents summarized herein. No person is
authorized to give any information or to make any representation not
contained in this Memorandum or in the appendices hereto, and, if given
or made, such other information or representation must not be relied
upon.
WINSTON #892462 v 2
vi
TABLE OF CONTENTS
Page
RISK FACTORS..................................................................1
Operating Risks......................................................1
Tax Risks............................................................7
Other Investment Risks..............................................13
THE PARTNERSHIP..............................................................16
TERMS OF THE OFFERING........................................................17
The Units and Subscription Price....................................17
Acceptance of Subscriptions.........................................17
Guaranty Arrangements...............................................18
Limited Partner Loans...............................................21
Subscription Period; Closing........................................23
Offering Exemption..................................................23
Suitability Standards...............................................23
How to Invest.......................................................24
Restrictions on Transfer of Units...................................24
PLAN OF DISTRIBUTION.........................................................25
BUSINESS ACTIVITIES..........................................................26
General 26
Treatment Methods for Kidney Stone Disease..........................26
The Lithotripsy System..............................................27
Acquisition of Additional Assets....................................28
Hospital Contracts..................................................28
Management..........................................................30
THE GENERAL PARTNER..........................................................30
COMPENSATION AND REIMBURSEMENT TO THE GENERAL PARTNER AND ITS AFFILIATES.....32
CONFLICTS OF INTEREST........................................................33
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER..............................34
COMPETITION..................................................................35
Affiliated Competition..............................................35
Other Competition...................................................35
REGULATION...................................................................36
Federal Regulation..................................................36
State Regulation....................................................45
PRIOR ACTIVITIES.............................................................47
SOURCES AND APPLICATIONS OF FUNDS............................................48
FINANCIAL CONDITION OF THE PARTNERSHIP.......................................49
SUMMARY OF THE PARTNERSHIP AGREEMENT.........................................53
Nature of Limited Partnership Interest..............................53
Dilution Offerings..................................................53
Fundamental Changes.................................................54
Profits, Losses and Distributions...................................56
Management of the Partnership.......................................59
Powers of the General Partner.......................................59
Rights and Liabilities of the Limited Partners......................60
Restrictions on Transfer of Partnership Interests...................61
Dissolution and Liquidation.........................................61
Optional Purchase of Limited Partner Interests......................62
Noncompetition Agreement and Protection of Confidential
Information..................................................63
Arbitration.........................................................63
Power of Attorney...................................................64
Reports to Limited Partners.........................................64
Records 64
LEGAL MATTERS................................................................64
ADDITIONAL INFORMATION.......................................................64
GLOSSARY 65
WINSTON #892462 v 2
vii
APPENDICES
Appendix A AGREEMENT OF LIMITED PARTNERSHIP OF MOBILE KIDNEY STONE
CENTERS OF CALIFORNIA II, L.P.
Appendix B LIMITED PARTNER LOAN COMMITMENT (WITH EXHIBITS)
Appendix C FORM OF OPINION OF ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ & ▇▇▇▇,
A PROFESSIONAL LIMITED LIABILITY COMPANY
Appendix D NOTES TO FINANCIAL STATEMENTS
WINSTON #892462 v 2
RISK FACTORS
Prior to subscribing for Units, Investors should carefully
examine this entire Memorandum, including the Appendices hereto, and should give
particular consideration to the general risks attendant to speculative
investments and investments in partnerships generally, and to the other special
operating, tax and other investment risks set forth below. See the "Glossary"
for terms used in this Memorandum and not otherwise defined.
Operating Risks
General Risks of Operations. The Partnership was formed under
the laws of the State of California on December 11, 1998 and only recently
commenced operations in May, 1999. Although the General Partner and its
personnel have significant experience in managing lithotripsy enterprises,
whether the Partnership can continue to effectively operate its business cannot
be accurately predicted. The benefits of an investment in the Partnership also
depend on many factors over which the Partnership has no control, including
competition, technological innovations rendering the Lithotripsy System less
competitive or obsolete, and other matters. The Partnership may be adversely
affected by various changing local factors such as an increase in local
unemployment, a change in general economic conditions, changes in interest rates
and availability of financing, and other matters that may render the operation
of the Lithotripsy System difficult or unattractive. Other factors that may
adversely affect the operation of the Lithotripsy System are unforeseen
increased operating expenses, energy shortages and costs attributable thereto,
uninsured losses and the capabilities of the Partnership's management personnel.
Uncertainties Related to Changing Healthcare Environment. The
healthcare industry has experienced substantial changes in recent years. Managed
care is becoming a major factor in the delivery of lithotripsy services in the
Service Area and the General Partner anticipates that managed care programs,
including capitation plans, will continue to play an increasing role in the
delivery of lithotripsy services and that competition for these services may
shift from individual practitioners to health maintenance organizations and
other significant providers of managed care. No assurance can be given that the
changing healthcare environment will not have a material adverse effect on the
Partnership.
Lack of Diversification. The Partnership's principal purpose
will be to continue to operate the Lithotripsy System. Because the Partnership
is dependent on only one line of business and one Lithotripsy System, there will
be greater risks from unexpected service interruptions, equipment breakdowns,
technological developments, kidney stone treatment medical breakthroughs,
economic problems and similar matters than would be the case with a more
diversified business.
WINSTON #892462 v 2
26
Impact of Insurance Reimbursement. The Partnership's revenues
are expected to be derived from the fees paid by Contract Hospitals and other
health care facilities under lithotripsy service contracts with the Partnership.
The Partnership does not currently directly bill or collect for services from
patients or their third-party payors. Payments received from Contract Hospitals
and other health care facilities may be subject to renegotiation depending on
the reimbursement such parties receive. The increasing influence of health
maintenance organizations and other managed care companies has resulted in
pressure to reduce the reimbursement available for lithotripsy procedures. Some
of the General Partner's Affiliates have recently experienced declining revenues
based on these managed care pressures in other health care markets.
Additionally, the Health Care Financing Administration ("HCFA"), the federal
agency which administers the Medicare program, has proposed rules which would
reduce the reimbursement available for lithotripsy procedures provided at
hospitals to $2,235. See "Regulation - Federal Regulation." In some cases
reimbursement rates payable to the General Partner and other Affiliates are less
than the proposed HCFA rate. Because of the competitive pressures from managed
care companies as well as threatened reductions in Medicare reimbursement, the
General Partner anticipates that reimbursement available for lithotripsy
procedures may continue to decrease. Such decreases would have a material
adverse effect on Partnership revenues. Regarding the professional fees paid to
physicians who treat patients on the Lithotripsy System, the General Partner
anticipates that similar competitive pressures may result in lower reimbursement
paid to physicians, both by private insurers and by government programs such as
Medicare.
See "Regulation."
Reliability and Efficacy of the Storz Modulith(R) SLX-T. The
Modulith(R) SLX-T received FDA premarket approval on March 27, 1997. Although
the General Partner and its Affiliates have positive direct experience with the
use of the Modulith(R) SLX-T, "downtime" periods necessitated by maintenance and
repairs of the Lithotripsy System will adversely effect Partnership revenues.
Preliminary reports from abroad and "word of mouth" anecdotal evidence indicate
that the Modulith(R) SLX-T is as effective as most of the "portable"
lithotripters in the market. The General Partner is aware that early data from
abroad concerning one precursor to the Modulith(R) SLX-T reflected a high
retreatment rate, and that an Affiliate of the General Partner experienced
electrical and mechanical problems using another precursor, the Modulith(R) SLX.
However, the General Partner's and its Affiliates' limited experience with the
transportable Modulith(R) SLX-T has shown acceptable retreatment rates. A high
retreatment rate may adversely affect the Partnership. Investors should note
that some studies indicate that lithotripsy may cause high blood pressure and
tissue damage. The General Partner questions the reliability of these studies
and believes lithotripsy has become a widely accepted method for the treatment
of renal stones.
Technological Obsolescence. The history of lithotripsy of
kidney stones as an accepted treatment procedure is relatively recent, with the
first clinical trials being conducted in West Germany beginning in 1980 and the
first premarket approval for a renal lithotripter in the United States being
granted by the FDA in December 1984. Today, lithotripsy is the treatment
procedure of choice for kidney stone disease, having replaced other treatment
methods. Published reports indicate that certain researchers are attempting to
improve a laser technology to more easily eradicate kidney stones, and
pharmaceutical companies and researchers have attempted to develop a safe drug
that can be used to dissolve kidney stones in all cases. The General Partner
cannot predict the outcome of ongoing research in these areas, and any one or
more developments could reduce or eliminate lithotripsy as an acceptable
procedure or treatment method of choice for the treatment of kidney stones.
Partnership Limited Resources and Risks of Leverage. The
Partnership used the Loan proceeds to acquire the Lithotripsy System and to pay
state sales taxes on such equipment. The net proceeds of this Offering will be
used to reduce the Partnership's currently outstanding indebtedness under the
Loan. While the General Partner anticipates that cash generated from operations
will continue to enable the Partnership to repay the remainder of the
obligations under the Loan in accordance with its terms, lower than anticipated
revenues, greater than anticipated expenses, or unexpected interruptions in
operations could result in the Partnership failing to make payments of principal
or interest when due under the Loan, and the Partnership's equity being reduced
or eliminated. In such event, the Limited Partners could lose their entire
investment and be called upon to pay their Guaranties. See "Risk Factors -
Operating Risks - Liability Under the Guaranty." Moreover, in the event of
unanticipated expenses, it may be necessary to supplement Partnership funds with
the proceeds of additional debt financing. The terms of the Loan may restrict
the Partnership's ability to obtain another financing commitment, and although
the General Partner maintains good relationships with certain commercial lending
institutions, it cannot be determined whether any additional commitment would be
available on terms acceptable to the Partnership. The General Partner and/or its
Affiliates may, but are under no obligation to, make loans to the Partnership,
and there is no assurance that they would be willing or able to do so at the
time, in amounts and on terms required by the Partnership. While the General
Partner does not anticipate that it would cause the Partnership to incur
indebtedness unless cash generated from Partnership operations were at the time
expected to enable repayment of such loan in accordance with its terms, as
discussed above, lower than anticipated revenues and/or greater than anticipated
expenses could result in the Partnership's failure to make payments of principal
or interest when due under such a loan and the Partnership's equity being
reduced or eliminated. In such event, the Limited Partners could also lose their
entire investment.
Acquisition of Additional Assets. If in the future the General
Partner determines that it is in the best interest of the Partnership to acquire
(i) one or more additional fixed base or mobile Lithotripsy Systems or (ii) any
other urological device or equipment so long as such device has received FDA
premarket approval at the time it is acquired by the Partnership, and/or (iii)
an interest in any business entity that engages in a urological business
described above, the General Partner has the authority (without obtaining the
Limited Partners' consent) to establish reserves or subject to certain
restrictions in the Loan, to borrow additional funds on behalf of the
Partnership to accomplish such goals, and may use Partnership assets and
revenues to secure and repay such borrowings. The acquisition of additional
assets may substantially increase the Partnership's monthly obligations and may
result in increased personnel requirements. See "Risk Factors - Operating Risks
- Partnership Limited Resources and Risks of Leverage." The General Partner does
not anticipate acquiring additional Partnership assets unless projected
Partnership Cash Flow or proceeds from a Dilution Offering are sufficient to
finance such acquisitions. See "Risk Factors - Other Investment Risks - Dilution
of Limited Partners' Interests." In any event, no Limited Partner would be
personally liable on any additional Partnership indebtedness without such
Limited Partner's prior written consent. There is no assurance that financing
would be available to the Partnership to acquire additional assets or to fund
any additional working capital requirements. In any event, the Partnership's
ability to incur additional indebtedness while the Loan is outstanding is
severely restricted. Any such borrowing by the Partnership will serve to
increase the risks to the Partnership associated with leverage as provided
above.
Liability Under the Guaranty. For each Unit purchased, an
Investor will be required to execute and deliver to the Bank a Guaranty pursuant
to which the Investor will personally guarantee 0.5% of the Partnership's total
obligations under the Loan, which is equivalent to a $2,435.63 principal
guaranty per Unit. Although as of the date of this Memorandum, the outstanding
principal balance of the Loan is $441,205.79, the terms of the Loan provide that
it can be renewed for its initial full amount (i.e., $487,125), and therefore,
Investors should view their potential liability under their Guaranties as if the
full Loan amount is outstanding. Liability under the Guaranty may exceed
$2,435.63 per Unit because the guaranty obligation per Unit also includes 0.5%
of all accrued and unpaid interest, late payment penalties, and legal costs
incurred by the Bank in collecting any defaulted payments. An Investor should
not purchase a Unit if he does not have resources sufficient to bear the loss of
this entire amount. See "Terms of the Offering - Guaranty Arrangements -
Liability Under the Guaranty" and "Terms of the Offering - Suitability
Standards."
If Partnership operations continue to generate sufficient
revenues to enable the Partnership to make all payments under the Loan when due,
no Limited Partner will be required to perform under his Guaranty. If a default
occurs under the Loan, the Bank may, among other remedies, seek payment directly
from the Limited Partners under the Guaranties. The Guaranties are a guaranty of
payment and not of collection and require the Limited Partners to waive certain
rights to which they might otherwise be entitled. As a result, the liability of
the Limited Partners under the Guaranties is direct and immediate and not
conditioned or contingent upon either the pursuit of any remedies against the
Partnership or any other person (including any other guarantor) or foreclosure
of any security interest or liens available to the Bank. The Guaranties are a
continuing guaranty that by their terms will survive the death, bankruptcy or
disability of a Limited Partner guarantor. A Limited Partner's liability under
the Guaranty continues regardless of whether the Limited Partner remains a
limited partner in the Partnership and is not affected or limited by any claims
or offsets the Limited Partner may have against the Partnership or the General
Partner. See the form of Guaranty Agreement included in the Subscription Packet.
Competition. Many fixed-site and mobile lithotripters are
currently operating in and around the Service Area which are in direct
competition with the Partnership's Lithotripsy System. The General Partner and
entities which are Affiliates of the General Partner also compete in and near
the Service Area. The competing lithotripsy service providers, including the
General Partner and its Affiliates, generally have existing contracts with
hospitals and other facilities. The General Partner competes with the
Partnership in the Service Area by providing lithotripsy services at the Kaiser
Foundation Hospital in Sacramento. The General Partner and its Affiliates also
compete with the Partnership by providing lithotripsy services near the Service
Area. In addition, except as provided by law, neither the General Partner nor
its Affiliates are prohibited from engaging in any business or arrangement that
may compete with the Partnership. See "Prior Activities," "Conflicts of
Interest" and "Competition."
There is no assurance that other parties will not, in the
future, operate fixed-base or mobile lithotripters in and around the Service
Area. To the General Partner's knowledge, no manufacturers are restricted from
selling their lithotripters to other parties in the Service Area. Furthermore,
the Partnership competes with facilities and individual medical practitioners
who offer conventional treatment (e.g., surgery) for kidney stones. Managed care
companies generally contract either directly with hospitals or specified
providers for lithotripsy services for beneficiaries of their plans. It is not
uncommon for managed care companies to have contracts already in place with
hospitals or specified providers, and the Partnership will not be able to
provide services to beneficiaries of those plans unless it convinces either the
managed care companies or the hospitals to switch to the Partnership's services.
Restrictions on Limited Partners. The Partnership Agreement
severely restricts the Limited Partners' ability to own interests in competing
equipment or ventures, other than interests held by the General Partner or its
Affiliates. However, the General Partner may, in its sole discretion, waive the
restrictions with respect to interests held by an Investor at the time he
becomes a Limited Partner. See "Summary of the Partnership Agreement -
Noncompetition Agreement and Protection of Confidential Information." The
enforceability of these noncompetition agreements is generally a matter of state
law. No assurance can be given that one or more Limited Partners may not
successfully compete with the Partnership. See "Competition."
Government Regulation. All facets of the healthcare industry
are highly regulated and will become more so in the future. The ability of the
Partnership to operate legally and be profitable may be adversely affected by
changes in governmental regulations, including expected changes in
reimbursement, Medicare and Medicaid certification requirements, federal and
state fraud and abuse laws, including the federal Anti-Kickback Statute, the
federal False Claims Act, federal and state self-referral laws, state
restrictions on fee splitting and other governmental regulation. See
"Regulation". These laws and regulations may adversely affect the economic
viability of the Partnership. The laws are broad in scope, and interpretations
by courts have been limited. Violations of these laws would subject the General
Partner and all Limited Partners to governmental scrutiny and/or felony
prosecution and punishment in the form of large monetary fines, loss of
licensure, imprisonment and exclusion from Medicare and Medicaid. Certain
provisions of Medicare and Medicaid law limit provider ownership and control
over the various health care services to which physicians may make Medicare and
Medicaid referrals. The primary laws involved are the "▇▇▇▇▇ II" federal statute
prohibiting financial relationships between physicians and certain entities to
which they refer patients, and the Anti-Kickback Statute which prohibits
compensation in exchange for or to induce referrals.
Regarding ▇▇▇▇▇ II, HCFA published proposed ▇▇▇▇▇ II
regulations in 1998. Under the proposed regulations, physician Limited Partner
referrals of Medicare and Medicaid patients to Contract Hospitals for
lithotripsy services would be prohibited. If HCFA adopts the proposed ▇▇▇▇▇ II
regulations as final, or if a reviewing court were to interpret the ▇▇▇▇▇ II
statute using the proposed regulations as interpretive authority, then the
Partnership and its physician Limited Partners would likely be found in
violation of ▇▇▇▇▇ II. In such instance, the Partnership and/or its physician
Limited Partners may be required to refund any amounts collected from Medicare
and Medicaid patients in violation of the statute, and they may be subject to
civil monetary penalties and/or exclusion from the Medicare and Medicaid
programs.
The Anti-Kickback Statute prohibits paying or receiving any
remuneration in exchange for making a referral for healthcare services which may
be paid for by Medicare, Medicaid or CHAMPUS. The law has been broadly
interpreted to include any payments which may induce or influence a physician to
refer patients. One of the federal agencies that enforces the Anti-Kickback
Statute has issued several "safe harbors" which, if complied with, mean the
payment or transaction will be deemed not to violate the law. This Offering does
not comply with any "safe harbor." There is limited guidance from reviewing
courts regarding the application of the broad language of the Anti-Kickback
Statute to joint ventures similar to the one described in this Offering. In
order to prove violations of the Anti-Kickback law, the government must
establish that one or more parties offered, solicited or paid remuneration to
induce or reward referrals. The government has said that in certain situations
the mere offering of an opportunity to invest in a venture would constitute
illegal remuneration in violation of the Anti-Kickback Statute. Although the
General Partner believes the structure and purpose of the Partnership are in
compliance with the Anti-Kickback Statute, no assurances can be given that
government officials or a reviewing court would agree. Violation of the
Anti-Kickback Statute could subject the Partnership, the General Partner and the
physician Limited Partners to criminal penalties, imprisonment, fines and/or
exclusion from the Medicare and Medicaid programs.
The federal False Claims Act and similar laws generally
prohibit an individual or entity from knowingly and willfully presenting a claim
(or causing a claim to be presented) for payment from Medicare, Medicaid or
other third party payors that is false and fraudulent. In recent cases, False
Claims Act violations have been based on allegations that ▇▇▇▇▇ II or the
Anti-Kickback Statute has been violated.
In addition to ▇▇▇▇▇ II, the Anti-Kickback Statute and the
False Claims Act, an unfavorable interpretation of other existing laws, or
enactment of future laws or regulations, could potentially adversely affect the
operation of the Partnership. If this occurs, the General Partner is obligated
either to purchase or cause the sale of the Partnership Interests of all of the
Limited Partners or to dissolve the Partnership. See "Summary of the Partnership
Agreement - Optional Purchase of Limited Partner Interests."
Regarding state law, California prohibits physicians from
referring patients to facilities in which the physicians have a significant
financial interest unless the physician's return on investment is based upon the
proportional ownership interest in the facility and the physician discloses the
ownership interest to the patient in writing and advises the patient that the
patient may choose another provider to obtain the service. Various licensure
requirements must be met for the Partnership to provide mobile lithotripsy
services in California. The General Partner and the Management Agent have been
seeking and will continue to seek to cause the Partnership to comply with such
requirements. See "Regulation - State Regulation".
Contract Terms and Termination. The Partnership provides
lithotripsy services to 10 Contract Hospitals pursuant to 7 separate Hospital
Contracts. All of the Hospital Contracts grant the Partnership the exclusive
right to provide lithotripsy services at the particular Contract Hospital. Two
of the Hospital Contracts provide for automatic renewal on a year-to-year basis.
These Hospital Contracts are terminable without cause upon 180 days or less
prior written notice by either party prior to any renewal date. Three of the
Hospital Contracts have no automatic renewal provision and will terminate on
December 31, 2000 unless the parties mutually agree to extend the terms. One
Hospital Contract's term also expires on December 31, 2000, however, the
contract provides for an indefinite term thereafter which is terminable without
cause upon 180 days written notice by either party. In addition, the Partnership
is negotiating a contract extension with Catholic Health Care West, which will
cover services at four more Contract Hospitals. The Partnership is currently
providing services at such Contract Hospitals on a month-to-month basis. It is
expected that most new lithotripsy service contracts, if any, would have
one-year terms and be automatically renewed unless either party elects to cancel
prior to the end of the term. The General Partner believes it has a good
relationship with the Contract Hospitals and does not anticipate significant
terminations. There is no assurance, however, that terminations will either not
occur or that the resulting impact to the Partnership would not have a material
adverse effect on Partnership operations. In addition, competing vendors may
attempt to cause certain Contract Hospitals to contract with them instead of the
Partnership. The loss of Contract Hospitals to competition will adversely affect
Partnership revenues and such effect could be material. Thus, there is no
assurance that Partnership operations as conducted on the date of this
Memorandum will continue as herein described or contemplated, and the
cancellation of a significant number of service contracts or the Partnership's
inability to secure new ones could have a material negative impact on the
financial condition and results of the Partnership. See "Business Activities -
Hospital Contracts" and "Risk Factors - Competition."
Loss on Dissolution and Termination. Upon the dissolution and
termination of the Partnership, the proceeds realized from the liquidation of
its assets, if any, will be distributed to its partners only after satisfaction
of the claims of all creditors, including, but not limited to, the Bank. See
"Risk Factors-Operating Risks - Liability Under the Guaranty" and "Risk Factors
- other Investment Risks - Liability Under Limited Partner Loan." Accordingly,
the ability of a Limited Partner to recover all or any portion of his investment
under such circumstances will depend on the amount of funds so realized and the
claims to be satisfied therefrom. See "Summary of the Partnership Agreement -
Optional Purchase of Limited Partner Interests."
Tax Risks
Investors should note that the General Partner anticipates no
significant tax benefits associated with the operation of the Lithotripsy System
or the Partnership. No ruling will be sought from the Service on the United
States federal income tax consequences of any of the matters discussed in this
Memorandum or any other tax issues affecting the Partnership or the Limited
Partners. The Partnership is relying upon an opinion of Counsel with respect to
certain material United States federal income tax issues. Counsel's opinion is
not binding on the Service as to any issue, and there can be no assurance that
any deductions, or the period in which deductions may be claimed, will not be
challenged by the Service. Each Investor should carefully review the following
risk factors and consult his or her own tax advisor with respect to the federal,
state and local income tax consequences of an investment in the Partnership.
THE TAX RISKS SET FORTH IN THIS SECTION ARE NOT INTENDED TO BE
AN EXHAUSTIVE LIST OF THE GENERAL OR SPECIFIC TAX RISKS RELATING TO THE PURCHASE
OF UNITS IN THE PARTNERSHIP. EACH INVESTOR IS DIRECTED TO THE FULL OPINION OF
COUNSEL (APPENDIX C TO THE MEMORANDUM). IT IS STRONGLY RECOMMENDED THAT EACH
INVESTOR INDEPENDENTLY CONSULT HIS OR HER PERSONAL TAX COUNSEL CONCERNING THE
TAX CONSEQUENCES ASSOCIATED WITH HIS OR HER OWNERSHIP OF AN INTEREST IN THE
PARTNERSHIP. THE CONCLUSIONS REACHED IN COUNSEL'S OPINION ARE RENDERED WITHOUT
ASSURANCE THAT SUCH CONCLUSIONS HAVE BEEN OR WILL BE ACCEPTED BY THE SERVICE OR
THE COURTS.
THIS MEMORANDUM AND COUNSEL'S OPINION DO NOT DISCUSS, NOR WILL
COUNSEL BE RENDERING AN OPINION REGARDING, ANY ESTATE AND GIFT TAX OR STATE AND
LOCAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP. FURTHERMORE,
INVESTORS SHOULD NOTE THAT THE ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES OF AN
INVESTMENT IN THE PARTNERSHIP MAY BE ADVERSELY AFFECTED BY FUTURE CHANGES IN THE
FEDERAL INCOME TAX LAWS, WHETHER BY FUTURE ACTS OF CONGRESS OR FUTURE
ADMINISTRATIVE OR JUDICIAL INTERPRETATIONS OF APPLICABLE FEDERAL INCOME TAX
LAWS. ANY OF THE FOREGOING MAY BE GIVEN RETROACTIVE EFFECT.
INVESTORS SHOULD NOTE THAT THE UNITS ARE BEING MARKETED BY THE
PARTNERSHIP AS AN ECONOMIC INVESTMENT AND THAT THE PARTNERSHIP ANTICIPATES AND
INTENDS NO SIGNIFICANT TAX BENEFITS FROM AN INVESTMENT IN THE UNITS. SEE
"PASSIVE INCOME AND LOSSES" IN THIS SECTION. THE INVESTMENT IN UNITS IS A
LONG-TERM INVESTMENT. INVESTORS SHOULD NOT INVEST IN THE PARTNERSHIP TO ACHIEVE
TAX BENEFITS AS THE GENERAL PARTNER ANTICIPATES SIGNIFICANT PARTNERSHIP TAXABLE
INCOME THROUGHOUT THE TERM OF THE PARTNERSHIP.
Possible Legislative or Other Actions Affecting Tax
Consequences. The federal income tax treatment of an investment in an
equipment/service oriented limited partnership such as the Partnership may be
modified by legislative, judicial or administrative action at any time, and any
such action may retroactively affect investments and commitments previously
made. The rules dealing with federal income taxation of limited partnerships are
constantly under review by the Service, resulting in revisions of its
regulations and revised interpretations of established concepts. In evaluating
an investment in the Partnership, each Investor should consult with his or her
personal tax advisor with respect to possible legislative, judicial and
administrative developments.
Disqualification of Employee Benefit Plans. Purchase of Units
in the Partnership may cause certain Limited Partners, certain hospitals and
healthcare treatment centers, the Partnership, and employees of the foregoing to
be treated under Section 414(m) of the Code as being employed in the aggregate
by a single employer or "affiliated service group" for purposes of minimum
coverage, participation and other employee benefit plan requirements imposed by
the Code. In contrast, an employer not affiliated under Section 414(m) need only
consider its own employees in determining whether its employee benefit plans
satisfy Code requirements. Aggregation of employees could cause the
disqualification of the retirement plans of certain Limited Partners and related
entities. Aggregation could also require the value of the vested retirement
benefit of a highly compensated employee who is a participant in a disqualified
plan to be included in his or her gross income, regardless of whether the
employee is a Limited Partner. These rules may adversely affect Investors who
are currently involved in a medical practice joint venture, regardless of their
purchase of Units in the Partnership. The General Partner and Counsel have been
informally advised by officials of the Service that the Service would not likely
attempt to apply the affiliated service group rules to the Partnership, nor has
the Service applied these rules to similar arrangements in the past. Informal
discussions with the Service, however, are not binding on the Service, and there
can be no guarantee that the Service will not apply the affiliated service group
rules to the Partnership.
INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE APPLICABILITY OF THE AFFILIATED SERVICE GROUP RULES DESCRIBED
HEREIN TO THE EMPLOYEE BENEFIT PLANS MAINTAINED BY THEM OR THEIR MEDICAL
PRACTICES.
Partnership Allocations. The Partnership Agreement contains
certain allocations of profits and losses that could be reallocated by the
Service if it were determined that the allocations did not have "substantial
economic effect." On December 31, 1985, the Treasury Regulations dealing with
the propriety of partnership allocations were finalized. As a general rule,
allocations of profits and losses must have "substantial economic effect." Based
upon current law, Counsel is of the opinion that, if the question were
litigated, it is more probable than not that the allocation of profits and
losses set forth in the Partnership Agreement would be sustained for federal
income tax purposes. Investors are cautioned that the foregoing opinion is based
in part upon final Regulations which have not been extensively commented upon or
construed by the courts.
Income in Excess of Distributions. The Partnership Agreement
provides that in each year annual Distributions may be made to the Partners.
Excluded from the definition of cash available for distribution is the amount of
funds necessary to discharge Partnership debts (including scheduled payments and
certain prepayments under the Loan) and to maintain certain cash reserves deemed
necessary by the General Partner. If Partnership cash flow declines, a Limited
Partner could be subject to income taxes payable out of personal funds to the
extent of the Partnership's income, if any, attributed to him without receiving
from the Partnership sufficient Distributions to pay the Limited Partner's tax
with respect to such income.
Effect of Classification as Corporation. The Partnership has
not and will not seek a ruling from the Service concerning the tax status of the
Partnership. It is the opinion of Counsel that the Partnership will be treated
as a partnership for federal income tax purposes and not as an association
taxable as a corporation unless the Partnership so elects. The Partnership has
not and will not make an election to be classified as other than a partnership
for federal income tax purposes. Although the Partnership intends to rely on the
legal opinion of Counsel, the service will not be bound thereby. Moreover, there
can be no assurance that legislative or administrative changes or court
decisions may not in the future result in the Partnership being treated as an
association taxable as a corporation, with a resulting greater tax burden
associated with the purchase of Units.
The General Partner, in order to comply with applicable tax
law, will keep the Partnership's books and records and otherwise compute Profits
and Losses based on the accrual method, and not the cash basis method, of
accounting pursuant to Section 448 of the Code. The accrual method of accounting
generally records income and expenses when they are accrued or economically
incurred.
Passive Income and Losses. The General Partner expects that
the Partnership will continue to realize taxable income and not taxable losses
during the foreseeable future. Nevertheless, if it instead realizes taxable
losses, the use of such losses by the Limited Partners will generally be limited
by Code Section 469.
Code Section 469 provides limitations for the use of taxable
losses attributable to "passive activities." Code Section 469 operates generally
to prohibit passive losses from being used against income from active
activities. The passive activity rules are extremely complex and Investors are
urged to consult their own tax advisors as to their applicability, particularly
as they relate to the ability to deduct any losses from the Partnership against
other income of the Investor.
THE PASSIVE ACTIVITY LOSS RULES WILL AFFECT EACH INVESTOR
DIFFERENTLY, DEPENDING ON HIS OWN TAX SITUATION. EACH INVESTOR SHOULD CONSULT
WITH HIS OWN TAX ADVISOR TO DETERMINE THE EFFECT OF THESE RULES ON THE INVESTOR
IN LIGHT OF THE INVESTOR'S INDIVIDUAL FACTS AND CIRCUMSTANCES.
Depreciation. The Partnership will use the Modified
Accelerated Cost Recovery System ("MACRS") to depreciate the cost of any
equipment or improvements hereafter acquired. Any additions or improvements to
the Lithotripsy System will also be depreciated over a five year term using the
200% declining balance method of depreciation, switching to the straight-line
method to maximize the depreciation allowance. If purchases or improvements are
made after the beginning of any year, only a fraction of the depreciation
deduction may be claimed in that year.
As under prior law, the 1986 Act provides that the full amount
of depreciation on personal property (such as the Lithotripsy System) is
recaptured upon disposition (i.e., is taxed as ordinary income) to the extent
gain is realized on the disposition. Investors should note that the 1986 Act
repealed the investment tax credit for all personal property.
Partnership Elections. The Code permits partnerships to make
elections for the purpose of adjusting the basis of partnership property on the
distribution of property by a partnership to a partner and on the transfer of an
interest in a partnership by sale or exchange or on the death of a partner. The
general effect of such elections is that transferees of Partnership Interests
will be treated, for the purposes of depreciation and gain, as though they had a
direct interest in the Partnership's assets, and the difference between their
adjusted bases for their Partnership Interests and their allocable portion of
the Partnership's bases for its assets will be allocated to such assets based
upon the fair market value of the assets at the times of transfers of the
Partnership Interests. Any such election, once made, cannot be revoked without
the consent of the Service. Under the terms of the Partnership Agreement, the
General Partner, in its discretion, may make the requisite election necessary to
effect such adjustment in basis.
Sale of Partnership Units. ▇▇▇▇ realized on the sale of Units
by a Limited Partner who is not a "dealer" in Units or in limited partnership
interests will be taxed as capital gain, except that the portion of the sales
price attributable to inventory items and unrealized receivables will be taxed
as ordinary income. "Unrealized receivables" of the Partnership include the
Limited Partner's share of the ordinary income that the Partnership would
realize as a result of the recapture of depreciation (as described above) if the
Partnership had sold Partnership depreciable property immediately before the
Limited Partner sold his Partnership Interest. Investors should note that the
IRS Restructuring and Reform Act of 1998 generally imposes a maximum tax rate of
20% on net long-term capital gains. To the extent the Partnership has income
attributable to depreciation recapture incurred on the sale of a capital asset,
such income will be taxed at a maximum rate of 25%. The Revenue Reconciliation
Act of 1993 imposed a maximum potential individual income tax rate of 39.6% on
ordinary income.
Tax Treatment Of Certain Fees and Expenses Paid By The
Partnership. Under the Code, a partnership expenditure will, as a general rule,
fall into one of the following categories: (1) deductible expenses --
expenditures such as interest, taxes, and ordinary and necessary business
expenses which the partnership is entitled to deduct in full when paid or
incurred; (2) amortizable expenses -- expenditures which the partnership is
entitled to amortize (i.e., deduct ratably) over a fixed period of time; (3)
capital expenditures -- expenditures which must be added to the amortization or
depreciation base of partnership property (or partnership loans) and deducted
over a period of time as the property (or partnership loan) is amortized or
depreciated; (4) organization expenses -- expenditures related to the
organization of the partnership, which under Section 709 of the Code are
amortized over a 60-month period, provided an election to do so is made; (5)
syndication expenses -- expenditures paid or incurred in promoting the sale of
interests in the partnership, which under Section 709 of the Code must be
capitalized but may be neither depreciated, amortized, nor otherwise deducted;
(6) partnership distributions -- payments to partners representing distributions
of partnership funds, which may be neither capitalized, amortized nor deducted;
(7) start-up expenses -- expenditures incurred by a partnership during an
initial period, which under Section 195 of the Code may be amortized over a
60-month period; and (8) guaranteed payments to partners -- payments to partners
for services or use of capital which are deductible or treated in the other
categories of expenditures listed above, provided they meet the applicable
requirements.
Several amendments to the Code enacted by the Tax Reform Act
of 1984 alter established tax accounting principles. One or more of these
amendments may affect the federal income tax treatment of fees and expenses,
particularly fees paid or incurred by a partnership for services. In particular,
new Code Section 461(h) now provides that an expense or fee paid to a service
provider may not be accrued for federal income tax purposes prior to the time
"economic performance" occurs. "Economic performance" occurs as (and no sooner
than) the service provider provides the required services.
All expenditures of the Partnership must constitute ordinary
and necessary business expenses in order to be deducted by the Partnership when
paid or incurred, unless the deduction of any such item is otherwise expressly
permitted by the Code (e.g., taxes). Expenditures must also be reasonable in
amount. The Service could challenge a fee deducted by the Partnership on the
ground that such fee is a capital expenditure, which must either be amortized
over an extended period or indefinitely deferred, rather than deducted as an
ordinary and necessary business expense. The Service could also challenge the
deduction of any fee on the basis that the amount of such fee exceeds the
reasonable value of the services performed, the goods acquired or the other
benefits to the Partnership.
Under Section 482 of the Code, the Service has broad
discretion to reallocate income, deductions, credits or allowances between
entities with common ownership or control if it is determined that such
reallocation is necessary to prevent the evasion of taxes or to reflect the
income of such entities. The Partnership and the General Partner are entities to
which Section 482 applies and it is possible that the Service could contend that
certain items should be reallocated in a manner that would change the
Partnership's proposed tax treatment of such items.
The General Partner believes the payments to it and its
Affiliates are customary and reasonable payments for the services rendered by
them to the Partnership; however, these fees were not determined by arm's length
negotiations. Nothing has come to the attention of Counsel which would give
Counsel reasonable cause to question the General Partner's determination. On
audit the Service may challenge such payments and contend that the amount paid
for the services exceeds the reasonable value of those services. Because of the
factual nature of the question of the reasonableness of any particular fee,
Counsel cannot express an opinion as to the outcome of the reasonableness of the
amount of any fee should the issue be litigated.
Syndication Expenses. Section 709 of the Code prohibits a
partnership from deducting or amortizing costs that are incurred to promote the
sale of partnership interests (i.e., syndication expenses). The Regulations
provide definitions for syndication expenses that must be capitalized.
Syndication expenses include brokerage fees, registration fees, legal fees for
securities advice, accounting fees for preparation of representations to be
included in the offering materials, and printing costs of the offering
materials. The Partnership intends to treat the entire amount payable to the
Sales Agent as a sales commission for selling the Units, as well as certain
other fees and expenses allocable to the preparation of this Memorandum and to
the offering of the Units in the Partnership, as nondeductible, nonamortizable
syndication expenses.
Investors will economically bear their respective
proportionate share of syndication expenses as these costs likely will be paid
out of proceeds from the Offering. These costs will be borne irrespective of
their amount, timing and ability of the Partnership to deduct these costs for
tax purposes.
Management Fee to General Partner. The Partnership pays the
Management Agent a monthly management fee equal to 7.5% of Partnership Cash Flow
per month. The management fee is paid to the Management Agent for the time and
attention devoted by it for supervising and coordinating the management and
administration of the Partnership's day-to-day operations pursuant to the terms
of the Management Agreement. The Partnership will continue to deduct the
management fee in full in the year paid. Assuming the management fee to be paid
to the Management Agent is ordinary, necessary and reasonable in relation to the
services provided, Counsel is of the opinion that the Partnership may deduct the
management fee in full in the year paid.
State and Local Taxation. Each Investor should consult his own
attorney or tax advisor regarding the effect of state and other local taxes on
his personal situation.
Other Investment Risks
Conflicts of Interest. The activities of the Partnership
involve numerous existing and potential conflicts of interest between the
Partnership, the General Partner and their Affiliates. See "Compensation and
Reimbursement to the General Partner and its Affiliates," "The General Partner,"
"Competition" and "Conflicts of Interest."
No Participation in Management. The General Partner has full
authority to supervise the business and affairs of the Partnership pursuant to
the Partnership Agreement and the Management Agreement. Except as otherwise
provided in the Partnership Agreement or the Act, Limited Partners have no right
to participate in the management, control or conduct of the Partnership's
business and affairs. The General Partner, its employees and its Affiliates are
not required to devote their full time to the Partnership's affairs and intend
to continue devoting substantial time and effort to organizing other ventures
throughout the United States that are similar to the Partnership. The General
Partner will continue to devote such time to the Partnership's business and
affairs as it deems necessary and appropriate in the exercise of reasonable
judgment. The participation by any Limited Partner in the management or control
of the Partnership's affairs could render him generally liable for the
liabilities of the Partnership that could not be satisfied by assets of the
Partnership. See the Form of Legal Opinion of Counsel attached hereto as
Appendix C.
Ability of the General Partner to Effect Fundamental Changes.
The General Partner, with the prior approval of a Majority in Interest of the
Limited Partners, has the authority under the Partnership Agreement to effect
transactions that could result in the termination or reorganization of the
Partnership, a total or partial dilution of the Limited Partners' interests in
the Partnership, and/or the exchange of interests in another enterprise for the
limited partnership interests held by the Limited Partners. See "Summary of the
Partnership Agreement - Fundamental Changes."
Limited Partners' Obligation to Return Certain Distributions.
Except as provided by other applicable law and provided that a Limited Partner
does not participate in the management or control of the Partnership, he will
not be liable for the liabilities of the Partnership in excess of his
investment, his Guaranty and his ratable share of undistributed profits.
However, a Limited Partner shall be liable for a period of up to four years to
return to the Partnership any distributions received from the Partnership if, at
the time of such distributions, he knew that after giving effect to such
distributions, all liabilities of the Partnership, other than liabilities as to
Partners on account of their Partnership Interests and liabilities as to which
recourse of creditors is limited to specified Partnership property, exceed the
fair value of the Partnership's assets. For purposes of calculating the assets
and liabilities of the Partnership, the fair value of property in which the
recourse of creditors is limited to such property may be treated as a
Partnership asset to the extent that the fair value exceeds outstanding
liabilities on the property.
Dilution of Limited Partners' Interests. The General Partner
has the authority under the Partnership Agreement to cause the Partnership to
issue, offer and sell additional limited partnership interests in the future (a
"Dilution Offering"). Upon the sale of interests in the Partnership in a
Dilution Offering, the Percentage Interests of the Partners will be
proportionately diluted. See "Summary of the Partnership Agreement - Dilution
Offerings."
Liability Under Limited Partner Loan. Investors personally
borrowing funds to finance a portion of their Unit cash purchase price with the
proceeds of a Limited Partner Loan will be directly obligated to the Bank as
provided in the Loan Documents. A default under the Limited Partner Loan could
result in the foreclosure of the Investor's right to receive any Partnership
Distributions as well as the loss of other personal assets unrelated to his
Partnership Interest. Prospective Investors should review carefully all the
provisions contained in the Loan Commitment and the terms of the Limited Partner
Note and Loan and Security Agreement with their counsel and financial advisors.
Neither the Partnership nor the General Partner endorses or recommends to the
prospective Investors the desirability of obtaining financing from the Bank nor
does the summary of the Loan Documents provided herein constitute legal advice.
A Limited Partner's liability under a Limited Partner Note continues regardless
of whether the Limited Partner remains a limited partner in the Partnership. As
a consequence, such liability cannot be avoided by claims, defenses or set-offs
the Limited Partner may have against the Partnership, the General Partner or
their Affiliates. In addition to the suitability requirements discussed below,
any prospective Investor applying for a Bank loan to fund a portion of his Unit
purchase must be approved by the Bank for purposes of his delivery of the
Limited Partner Note. The Bank has established its own criteria for approving
the creditworthiness of a prospective Investor and has not established objective
minimum suitability standards. Instead, the Bank is empowered to accept or
reject prospective Investors.
Long-term Investment. The General Partner anticipates that the
Partnership will continue to operate the Lithotripsy System for an indefinite
period of time and that the Partnership will not liquidate prior to its intended
termination. Accordingly, Investors should consider their investment in the
Partnership as a long-term investment of indefinite duration.
Limited Transferability and Liquidity of Units.
Transferability of Units is severely restricted by the Partnership Agreement and
the Subscription Agreement, and with the exception of certain limited permitted
transfers, the consent of the General Partner is necessary for any other
transfers. No public market for the Units exists and none is expected to
develop. Moreover, the Units generally may not be transferred unless the General
Partner is furnished with an opinion of counsel, satisfactory to the General
Partner, to the effect that such assignment or transfer may be effected without
registration under the Securities Act and any state securities laws applicable
to the transfer. The Partnership will be under no obligation to register the
Units or otherwise take any action that would enable the assignment or transfer
of a Unit to be in compliance with applicable federal and state securities laws.
Thus, a Limited Partner may not be able to liquidate an investment in the
Partnership in the event of an emergency and the Units may not be readily
accepted as collateral for loans. Moreover, a sale of a Unit by a Limited
Partner may cause adverse tax consequences to the selling Limited Partner, as
well as potentially effect a default under any outstanding Limited Partner Loan.
Accordingly, the purchase of Units must be considered a long-term and illiquid
investment.
Offering Price. The offering price of the Units has been
determined by the General Partner based upon a valuation of the Partnership
conducted by an independent third-party valuation firm, and based on various
assumptions that may or may not occur. A copy of this valuation will be made
available on request. The offering price of the Units is not, however,
necessarily indicative of their value, if any, and no assurance can be given
that the Units, if and when transferable, could be sold for the offering price
or for any amount.
Limitation of General Partner's Liability and Indemnification.
The Partnership Agreement provides that the General Partner will not be liable
to the Partnership or to any Partner of the Partnership for errors in judgment
or other acts or omissions in connection with the Partnership as long as the
General Partner, in good faith, determined such course of conduct was in the
best interest of the Partnership, and such course of conduct did not constitute
willful misconduct or gross negligence. Therefore, the Limited Partners may have
a more limited right of action against the General Partner in the event of its
misfeasance or malfeasance than they would have absent the limitations in the
Partnership Agreement. The Partnership will indemnify the General Partner
against losses sustained by the General Partner in connection with the
Partnership, unless such losses are a result of the General Partner's gross
negligence or willful misconduct. In the opinion of the SEC, indemnification for
liabilities arising out of the Securities Act is contrary to public policy and
therefore is unenforceable.
Insurance. The terms of the Loan require the Partnership to
cover the Lithotripsy System by insurance for losses due to fire and other
casualties under policies customarily obtained for properties of this type.
Prime Medical Services, Inc. ("Prime"), an Affiliate of the General Partner and
the sole shareholder of Sun Medical, the Management Agent and the sole general
partner of the General Partner, maintains active policies of insurance for the
benefit of itself and certain affiliated entities covering employee crime,
workers' compensation, business and commercial automobile operations,
professional liability, inland marine, business interruption, real property and
commercial liability risks. These policies include the Partnership, and the
General Partner believes that coverage limits of these policies are within
acceptable norms for the extent and nature of the risks covered. The Partnership
is responsible for its share of premium costs. There are certain types of
losses, however, that are either uninsurable or are not economically insurable.
For instance, contractual liability is generally not covered under Prime's
policies. Should such losses occur with respect to Partnership operations, or
should losses exceed insurance coverage limits, the Partnership could suffer a
loss of the capital invested in the Partnership and any anticipated profits from
such investment.
Optional Purchase of Limited Partner Interests. As provided in
the Partnership Agreement, certain Affiliates of the existing Limited Partners
have the first option, and the General Partner has the second option (which it
may assign to the Partnership in its sole discretion), to purchase all the
interest of a Limited Partner who (i) dies, (ii) becomes the subject of a
domestic proceeding, (iii) becomes insolvent, (iv) acquires a direct or indirect
ownership of an interest in a competing venture (including the lease or sublease
of competing technology), or (v) defaults on his obligations under the Guaranty.
Except in the case of the death of a Limited Partner, the option purchase price
is an amount equal to the lesser of the fair market value of the Partnership
Interest to be purchased or the Limited Partner's share of the Partnership's
book value, if any, as reflected by the Limited Partner's capital account in the
Partnership (unadjusted for any appreciation in Partnership assets and as
reduced by depreciation deductions claimed by the Partnership for tax purposes).
The option purchase price is likely to be considerably less than the fair market
value of a Limited Partner's interest in the Partnership. Because losses,
depreciation deductions and Distributions reduce capital accounts, and because
appreciation in assets is not reflected in capital accounts, it is the opinion
of the General Partner that the option purchase price may be nominal in amount.
In addition, in the event existing or newly enacted laws or regulations or any
other legal developments adversely affect (or potentially adversely affect) the
operation of the Partnership or the business of the Partnership (e.g., any
prohibitions on provider ownership), the General Partner, in its sole
discretion, is obligated to either (i) purchase the Partnership Interests of all
of the Limited Partners for an amount equal to the lesser of the fair market
value or book value or (ii) dissolve the Partnership. See the Partnership
Agreement attached hereto as Appendix A, "Summary of the Partnership Agreement -
Optional Purchase of Limited Partner Interests," and "Risk Factors - Operating
Risks - Liability Under the Guaranty."
THE PARTNERSHIP
Mobile Kidney Stone Centers of California II, L.P., a
California limited partnership (the "Partnership") was organized and created
under the California Revised Limited Partnership Act (the "Act") on December 11,
1998. The general partner of the Partnership is Mobile Kidney Stone Centers of
California, Ltd. I, a California limited partnership (the "General Partner").
The General Partner currently holds a 41.62% interest in the Partnership in its
capacity as the general partner and the existing limited partners (the "Initial
Limited Partners") currently hold the remaining interest in the Partnership. In
the event that all 40 Units offered hereby are sold, the General Partner will
hold approximately a 33.3% general partner interest in the Partnership, the
Initial Limited Partners will hold approximately a 46.7% limited partner
interest in the Partnership and the Investors who purchase the Units offered
hereby (the "New Limited Partners") will hold approximately an aggregate 20%
interest in the Partnership. The Percentage Interests of the General Partner and
the Initial Limited Partners (aggregate) will decrease by approximately .2% and
.3%, respectively, for each Unit sold. In addition, all Percentage Interests are
subject to further reduction in the future by any additional dilution offerings.
The principal executive office of the Partnership and the General Partner is
located at ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇. The
telephone number of the Partnership and the General Partner is (▇▇▇) ▇▇▇-▇▇▇▇.
TERMS OF THE OFFERING
The Units and Subscription Price
Mobile Kidney Stone Centers of California II, L.P., a limited
partnership formed under the laws of the State of California, hereby offers an
aggregate of up to 40 Units of limited partnership interest in the Partnership
(the "Units"). Each Unit represents an initial 0.5% economic interest in the
Partnership. See "Risk Factors - Other Investment Risks - Dilution of Limited
Partners' Interests." Each Investor may purchase not less than one Unit. The
General Partner may, however, in its sole discretion, sell less than one Unit as
an additional investment and reject in whole or in part any subscription. The
price for each Unit is $4,233 in cash, plus a personal guaranty of 0.5% of the
Partnership's obligations under the Loan of $487,125 from the Bank (a $2,435.63
principal guaranty obligation per Unit). See "Terms of the Offering - Guaranty
Arrangements." The cash purchase price and Guaranty are due at subscription;
however, certain qualified Investors may personally borrow funds from a
third-party financial institution to pay a portion of the cash purchase price.
For the convenience of the Investors, the Partnership has arranged for financing
of a portion of the Unit cash purchase price with the Bank. See "Terms of the
Offering - Limited Partner Loans." The proceeds of the Offering will first be
used by the Partnership to pay Offering costs and expenses. The remaining
proceeds, if any, will then be used to reduce the Partnership's current
outstanding indebtedness under the Loan. See "Sources and Applications of
Funds."
Acceptance of Subscriptions
To enable the Bank and the General Partner to make credit and
investor decisions, respectively, each prospective Investor must complete and
deliver to the General Partner a Purchaser Financial Statement in the form
included in the Subscription Packet accompanying this Memorandum, or a
substitute financial statement containing the same information as provided
therein, and pages one and two of the prospective Investor's most recently filed
Form 1040 U.S. Individual Income Tax Return. An Investor that pays the full
amount of his Unit purchase price with a check at subscription and whose
subscription is received and accepted by the Partnership and the Bank (for the
purposes of the Guaranty), will become a Limited Partner in the Partnership, and
his subscription funds will be released from escrow to the Partnership.
Acceptance by the General Partner of a subscription of an Investor that elects
to finance a portion of the Unit cash purchase price with the proceeds of a
Limited Partner Note is conditioned upon the Bank's approval of such loan. If
the financing Investor is otherwise acceptable to the Partnership, after receipt
of the Bank's approval, the Partnership will inform the Escrow Agent that it has
accepted the Investor's subscription and the Escrow Agent will release the
Investor's cash subscription proceeds to the Partnership and the Loan Documents
to the Bank, and the Bank, in turn, will pay the proceeds from the Limited
Partner Note to the Partnership. The Investor will become a Limited Partner in
the Partnership at the time the Bank releases the proceeds of his Limited
Partner Note to the Partnership. Subscriptions may be rejected in whole or in
part by the Partnership and need not be accepted in the order received. To the
extent the Partnership rejects or reduces an Investor's subscription as provided
above, the Investor's Unit cash purchase price, Guaranty, and the principal
amount of his Limited Partner Note will be proportionately refunded and reduced,
as the case may be. Notice of acceptance of an Investor's subscription to
purchase Units and his Percentage Interest in the Partnership will be furnished
promptly after acceptance of the Investor's subscription.
Guaranty Arrangements
Each Investor will be required to execute a Guaranty as a part
of his subscription. Each Limited Partner will have substantial exposure under
his Guaranty. See "Risk Factors - Liability Under the Guaranty." The following
summary of certain provisions of the Guaranty does not constitute legal advice.
The form of the Guaranty is set forth in the Subscription Packet accompanying
this Memorandum and should be reviewed carefully by prospective Investors and
their counsel.
Liability Under the Guaranty. Each Investor will be required
to execute and deliver to the Bank a Guaranty pursuant to which he will
personally guarantee the payment by the Partnership of a portion of its
obligations to the Bank under the Loan. For each Unit purchased, an Investor
will be required to guarantee 0.5% of the Partnership's total obligations under
the Loan, which is equivalent to up to a $2,435.63 principal obligation guaranty
per Unit. As of the date of this Memorandum, the outstanding principal balance
of the Loan is $441,205.79, however the terms of the Loan provide for the
renewal thereof, and therefore, Investors should view their personal obligations
under their Guaranties to equal their pro rata share of the original Loan amount
(i.e., $487,125). Liability under the Guaranty may exceed $2,435.63 per Unit
because the guaranty obligation per Unit includes not only principal, but also
0.5% of all accrued and unpaid interest, late payment penalties and legal costs
incurred by the Bank in collecting any defaulted payments.
The amount of the Limited Partners' Guaranties will be
proportionately reduced from time to time to the extent of the payments made by
the Partnership under the Loan. Interest-only was payable monthly during the
first six months of the Loan. The interest-only period expired on October 31,
1999 and the outstanding Loan principal, plus accrued interest, is payable over
36 monthly installments as provided below. The amount of each of the first 35
equal monthly installments of principal and interest is equal to the monthly
payment resulting from amortization of the outstanding Loan principal over 36
months, assuming a fixed 10% per annum interest rate. A final payment of all
outstanding principal and accrued interest will be payable in the 36th month.
The 10% interest rate, as provided above, is used only for purposes of
calculating the amount of the equal monthly installments over the 35 month
period. Loan interest actually accrues at the Bank's Prime Rate, as the same may
change from time to time. Pursuant to a formula set forth in the Loan promissory
note, prepayments of Loan principal must be made annually out of Partnership
Cash Flow until the Loan is paid in full. As of the date of this Memorandum, the
Partnership has not made any prepayments. The General Partner believes that Loan
principal prepayments will reduce the term of the Loan. The monthly installment
payments of principal and interest for the term of the Loan are equal to $15,718
per month.
If Partnership operations continue to generate sufficient
revenues to enable the Partnership to make all payments under the Loan to the
Bank when due, such payments will be sufficient to repay the Bank fully over the
term of the Loan, and no Partner will be required to perform under his Guaranty.
However, a default by the Partnership, the General Partner or the Limited
Partners under the Loan or the Guaranties will entitle the Bank to exercise one
or more of the following remedies: (i) declare all principal payments and
accrued interest immediately due and payable; (ii) foreclose on its security
interest in the Partnership's assets (including the Lithotripsy System and the
Partnership's accounts receivable); and/or (iii) seek payment directly from the
Limited Partners under the Guaranties. Events of default include the following:
(i) default in the payment or performance of any obligation, covenant or
liability contained or referred to in the Loan documents, including the
Guaranties, unless remedied to the reasonable satisfaction of Bank within 30
days; (ii) any warranty, representation or statement made or furnished to the
Bank by or on behalf of the Partnership or any of its guarantors (including the
Limited Partners) proving to have been false in any material respect when made
or furnished; (iii) loss, theft, substantial damage, destruction, sale or
encumbrance to or of any of the collateral, or the making of any levy, seizure
or attachment thereof or thereon, which is not removed within 30 days; (iv)
dissolution, termination of existence (or, in the case of an individual
guarantor, death), insolvency, business failure, appointment of a receiver of
any part of the property of, assignment for the benefit of creditors by, or the
commencement of any proceeding under any bankruptcy or insolvency laws by or
against the Partnership or any guarantor which is not favorably terminated
within 30 days; (v) the Partnership's failure to maintain its existence in good
standing unless remedied within 30 days of notice by the Bank; (vi) the
assertion or making of any seizure, vesting or intervention by or under
authority of any government by which the management of the Partnership is
displaced of their authority in the conduct of their business or their business
is curtailed; (vii) upon the entry of any monetary judgment or the assessment
and/or filing of any tax lien against the Partnership or any guarantor or upon
the issuance of any writ or garnishment or attachment against any property of,
debts due or rights of the Partnership or such guarantor to specifically include
the commencement of any action or proceeding to seize monies of the Partnership
or such guarantor on deposit in any bank account with the Bank, which is not
removed or terminated within 30 days. However, any default by any one or more of
the Partnership's guarantors under the above provisions applicable thereto, will
only be an actionable default if one or more such defaulting guarantors either
alone or in the aggregate guarantees 25% or more of the Loan, and provided
further that the Bank has not, within twelve months of the occurrence of such
guarantor's default, received, accepted and approved a substitute guaranty or
guaranties from a party or parties acceptable to it in an amount greater than or
equal to the amount of such defaulting guarantor's guaranties, or the
Partnership has not made a prepayment of the Loan principal in an amount equal
to the amount of the defaulting guarantor's guaranty. The Bank may also
accelerate the Loan if it should deem itself, or its collateral, insecure or the
payment or performance under the Loan impaired and may demand additional
collateral at any time it deems the Loan to be insufficiently secured. As
discussed below, under the terms of the Guaranties, Limited Partners waive
certain rights to which they might otherwise be entitled, and are required to
pay their share of the Bank's attorneys' fees and court costs if the Bank is
successful in enforcing the Guaranties through a lawsuit. Copies of the
Partnership's Loan documentation with the Bank are available upon request to the
General Partner.
The Guaranties are a guaranty of payment and not of
collection. As a result, the liability of the Limited Partners under the
Guaranties is direct and immediate and not conditional or contingent upon either
the pursuit of any remedies against the Partnership or any other person
(including any other guarantor) or foreclosure of any security interest or liens
available to the Bank. The Bank may accept any payment, plan for adjustment of
debts, plan for reorganization or liquidation, or plan of composition or
extension proposed by, or on behalf of, the Partnership without in any way
affecting or discharging the liability of the Limited Partners. Limited Partners
waive any right to require that an action first be brought against the
Partnership, the General Partner, any other guarantor or any other person, or to
require that resort be had to any security or to any balance of any deposit
account or credit on the books of Bank in favor of the Partnership or any other
person. The Guaranty is a continuing guaranty that by its terms survives the
death, bankruptcy, dissolution or disability of a Limited Partner guarantor. A
Limited Partner's liability under a Guaranty continues regardless of whether the
Limited Partner remains a limited partner in the Partnership.
Under the terms of the Guaranties, the Limited Partners
expressly waive: (i) notice of acceptance of the guaranty and of extensions of
credit to the Partnership; (ii) presentment and demand for payment of the
Partnership's promissory note; (iii) protest and notice of dishonor or of
default; (iv) demand for payment under the Guaranty; and (v) all other notice to
which the Limited Partner might otherwise be entitled.
The principal liability of an Investor under the Guaranty will
be up to $2,435.63 per Unit. Each Investor should regard his exposure with
respect to his investment in the Partnership to be his cash subscription ($4,233
per Unit) plus the amount for which he is personally liable under his Guaranty,
up to $2,435.63 per Unit in principal, plus accrued and unpaid interest, as well
as late payment penalties, legal fees and court costs. An Investor should not
purchase a Unit if he does not have resources sufficient to bear the loss of
this entire amount. The Guaranty generally provides that within thirty days
following the Bank's determination that the Partnership is in default under the
Loan, the Bank will send a notice to each Limited Partner (the "Notice") setting
forth the Partnership's total Loan obligations as of the date of the Notice
(inclusive of all interest, late payment penalties and legal costs incurred in
connection with the enforcement of such obligation accrued but unpaid through
such date), together with a statement of the amount which the Limited Partner is
responsible for paying (the "Guaranty Amount"). Failure by the Bank to send the
Notice in a timely fashion will not, however, release the Limited Partner
guarantor from any liability under his Guaranty. The Notice will provide that
unless the Bank receives payment of the Guaranty Amount from the Limited Partner
within five business days following the date of the Notice, the Guaranty Amount
will be increased by the Limited Partner's pro rata share (based on the number
of guarantors who did not pay the Guaranty Amount within five days of the date
of the notice) of any additional accrued but unpaid interest, late payment
penalties and legal costs through the date such payment is made. Because each
Guaranty runs directly from the Limited Partner to the Bank, claims or defenses
the Limited Partner may have against the Partnership or the General Partner may
not be used to avoid payment under the Guaranty. See the form of the Guaranty
included in the Subscription Packet accompanying this Memorandum. See also
"Terms of the Offering - Suitability Standards."
Approval of Bank. In addition to meeting the suitability
requirements discussed below under "Suitability Standards," each Investor must
be approved by the Bank for purposes of their delivery of the Guaranty. The Bank
has established its own criteria for approving the credit-worthiness of
Investors, either individually or as a group, and has not established objective
minimum suitability standards. Instead, the Bank is empowered under the terms of
the Loan to accept or reject any Investor. See "Risk Factors - Operating Risks -
Liability Under the Guaranty."
Limited Partner Loans
The purchase price for the Units is payable in cash. The
prospective Investor may pay for the Units with personal funds alone or in part
with such funds, together with either loan proceeds personally borrowed by the
Investor under a Limited Partner Loan or other loan. Financing under the Limited
Partner Loans was arranged by the Partnership with the Bank as provided in the
Loan Commitment, attached hereto as Appendix B. Prospective Investors should
review carefully all the provisions contained in the Loan Commitment and the
terms of the Limited Partner Note and Loan and Security Agreement with their
counsel and financial advisors. Neither the Partnership nor the General Partner
endorses or recommends to the prospective Investors the desirability of
obtaining financing from the Bank nor does the summary of the Loan Documents
provided herein constitute legal advice. If the prospective Investor wishes to
finance a portion of the cash purchase price of his Units as provided herein, he
must deliver to the Sales Agent upon submission of his Subscription Packet an
executed Limited Partner Note payable to the Bank and Note Addendum, the form of
which are attached as Exhibit A to the Loan Commitment, a Loan and Security
Agreement, the form of which is attached as Exhibit B to the Loan Commitment, a
Security Agreement, the form of which is attached as Exhibit C to the Loan
Commitment and two UCC-1's, the forms of which are attached to the Subscription
Packet (collectively, the "Loan Documents"). In no event may the maximum amount
borrowed per Unit exceed $1,733. The Limited Partner Note is repayable in twelve
(12) predetermined installments in the respective amounts set forth in the Loan
Commitment. The installments are payable on each January 15th, April 15th, June
15th and September 15th commencing on September 15, 2000 (assuming the Closing
occurs prior to May 31, 2000), with a thirteenth (13th) and final installment in
an amount equal to the principal balance then owed on the Limited Partner Note
and all accrued, unpaid interest thereon due and payable on the third
anniversary of the first installment date. Interest accrues at the Bank's "Prime
Rate," as the same may change from time to time. The Prime Rate refers to that
rate of interest established by the Bank and identified as such in literature
published and circulated within the Bank's offices. Such term is used as a means
of identifying a rate of interest index and not as a representation by the Bank
that such rate is necessarily the lowest or most favorable rate of interest
offered to borrowers of the Bank generally. A prospective Investor will have no
claim or right of action based on such premise. See the form of the Limited
Partner Note attached as Exhibit A to the Loan Commitment which is attached
hereto as Appendix B.
The Limited Partner Note will be secured by the cash flow
distributions payable with respect to the prospective Investor's Partnership
Interest as provided in the Loan and Security Agreement and the Security
Agreement and as evidenced by the UCC-1s. By executing the Loan and Security
Agreement, the prospective Investor requests the Bank to extend the Loan
Commitment to him if he is approved for a Limited Partner Loan. The Loan and
Security Agreement also authorizes (i) the Bank to pay the proceeds of the
Limited Partner Note directly to the Partnership and (ii) the Partnership to
remit funds directly to the Bank out of the prospective Investor's share of any
Distributions represented by the prospective Investor's percentage Partnership
Interest to fund installment payments due on the prospective Investor's Limited
Partner Note. See the form of the Loan and Security Agreement attached as
Exhibit B to the Loan Commitment which is attached hereto as Appendix B.
If the prospective Investor is approved by the Bank and is
acceptable to the General Partner, the Escrow Agent will, upon acceptance of the
Investor's subscription by the General Partner, release the Loan Documents to
the Bank and the Bank will pay the proceeds of the Limited Partner Note to the
Partnership to fund a portion of the Investor's Unit purchase. The prospective
Investor will have substantial exposure under the Limited Partner Note.
Regardless of the results of the Partnership's operations, a prospective
Investor will remain liable to the Bank under his Limited Partner Note according
to its terms. The Bank can accelerate the entire principal amount of the Limited
Partner Note in the event the Bank in good faith believes the prospect of timely
payment or performance by the prospective Investor is impaired or the Bank
otherwise in good ▇▇▇▇▇ ▇▇▇▇▇ itself or its collateral insecure and upon certain
other events, including, but not limited to, nonpayment of any installment. The
Bank may also request additional collateral in the event it deems the Limited
Partner Note insufficiently secured. A Limited Partner's liability under a
Limited Partner Note also continues regardless of whether the Limited Partner
remains a limited partner in the Partnership. A Limited Partner's liability
under a Limited Partner Note is directly with the Bank. As a consequence, such
liability cannot be avoided by claims, defenses or set-offs the Limited Partner
may have against the Partnership, the General Partner or their Affiliates. In
addition to the suitability requirements discussed below, the prospective
Investor must be approved by the Bank for purposes of his delivery of the
Limited Partner Note. The Bank has established its own criteria for approving
the creditworthiness of a prospective Investor and has not established objective
minimum suitability standards. Instead, the Bank is empowered to accept or
reject prospective Investors. See "Risk Factors - Other Investment Risks -
Liability Under Limited Partner Loan."
Subscription Period; Closing
The subscription period will commence on the date hereof and
will terminate at 5:00 p.m., Eastern time, on June 1, 2000 (the "Closing Date"),
unless sooner terminated by the General Partner or unless extended for an
additional period up to 180 days. See "Plan of Distribution."
Offering Exemption
The Units are being offered and will be sold in reliance on an
exemption from the registration requirements of the Securities Act of 1933, as
amended, provided by Section 4(2) thereof and Rule 506 of Regulation D
promulgated thereunder, as amended, and an exemption from state registration
provided by the National Securities Markets Improvement Act of 1996. The
suitability standards set forth below have been established in order to comply
with the terms of these offering exemptions.
Suitability Standards
In addition to the suitability requirements discussed below,
each Investor wishing to obtain a Limited Partner Loan must be approved by the
Bank. The Bank has established its own criteria for approving the
credit-worthiness of Investors and has not established objective minimum
suitability standards. The Bank has sole discretion to accept or reject any
Investor.
An investment in the Partnership involves a high degree of
financial risk and is suitable only for persons of substantial financial means
who have no need for liquidity in their investments and who can afford to lose
all of their investment. See "Risk Factors - Other Investment Risks - Limited
Transferability and Illiquidity of Units." An Investor should not purchase a
Unit if the Investor does not have resources sufficient to bear the loss of the
entire amount of the purchase price, including any portion financed. The General
Partner anticipates selling Units only to individual investors; however, the
General Partner reserves the right to sell Units to entities.
Because of the risks involved, the General Partner anticipates
selling the Units only to Investors residing in California who it reasonably
believes meet the definition of "accredited investor" as that term is defined in
Rule 501 under the Securities Act, but reserves the right to sell up to 35
Investors who are nonaccredited investors. Certain institutions and the
following individuals are "accredited investors":
(1) An individual whose net worth (or joint net worth with his or her spouse)
exceeds $1,000,000 at the time of subscription;
(2) An individual who has had an individual income in
excess of $200,000 in each of the two most recent
fiscal years and who reasonably expects an
individual income in excess of $200,000 in the
current year; or
(3) An individual who has had with his or her spouse a
joint income in excess of $300,000 in each of the
two most recent fiscal years and who reasonably
expects a joint income in excess of $300,000 in
the current year.
Individual Investors must also be at least 21 years old and
otherwise duly qualified to acquire and hold partnership interests. The General
Partner reserves the right to refuse to sell Units to any person, subject to
federal and applicable state securities laws.
Each Investor must make an independent judgment, in
consultation with his own counsel, accountant, investment advisor or business
advisor, as to whether an investment in the Units is advisable. The fact that an
Investor meets the Partnership's suitability standards should in no way be taken
as an indication that an investment in the Units is advisable for that Investor.
It is anticipated that suitability standards comparable to
those set forth above will be imposed by the Partnership in connection with
resales, if any, of the Units. Transferability of Units is severely restricted
by the Partnership Agreement and the Subscription Agreement. See "Summary of the
Partnership Agreement - Restrictions on Transfer of Partnership Interests."
Investors who wish to subscribe for Units must represent to
the Partnership that they meet the foregoing standards by completing and
delivering to the Sales Agent a Purchaser Questionnaire in the form included in
the Subscription Packet. Each Purchaser Representative, if any, acting on behalf
of an Investor in connection with this Offering must complete and deliver to the
Sales Agent a Purchaser Representative Questionnaire (a copy of which is
available upon request to the General Partner).
How to Invest
Investors who meet the qualifications for investment in the
Partnership and who wish to subscribe for Units may do so by following the
instructions included in the Subscription Packet accompanying this Memorandum.
All information provided by Investors will be kept confidential and not
disclosed except to the Partnership, the General Partner, the Bank and their
respective counsel and Affiliates and, if required, to governmental and
regulatory authorities.
Restrictions on Transfer of Units
The Units have not been registered under the Securities Act or
under any state securities laws and holders of Units have no right to require
the registration of such Units or to require the Partnership to disclose
publicly information concerning the Partnership. Units can be transferred only
in accordance with the provisions of, and upon satisfaction of, the conditions
set forth in the Partnership Agreement. Among other things, the Partnership
Agreement provides that no assignment of Units may be made if such assignment
could not be effected without registration under the Securities Act or state
securities laws. Moreover, the assignment generally must be made to an
individual approved by the General Partner who meets the suitability
requirements described in this Memorandum.
Assignors of Units will be required to execute certain
documents, in form and substance satisfactory to the General Partner,
instructing it to effect the assignment. Assignees of Units may also, in the
discretion of the General Partner, be required to pay all costs and expenses of
the Partnership with respect to the assignment.
Any assignment of Units or the right to receive Partnership
distributions in respect of Units will not release the assignor from any
liabilities connected with the assigned Units, including liabilities under the
Guaranty and any Limited Partner Loan. Such assignment may constitute an event
of default under such loan. An assignee, whether by sale or otherwise, will
acquire only the rights of the assignor in the profits and capital of the
Partnership and not the rights of a Limited Partner, unless such assignee
becomes a substituted Limited Partner. An assignee may not become a substituted
Limited Partner without (i) either the written consent of the assignor and the
General Partner, or the consent of a Majority in Interest of the Limited
Partners (except the assignor Limited Partner) and the General Partner, (ii) the
submission of certain documents and (iii) the payment of expenses incurred by
the Partnership in effecting the substitution. An assignee, regardless of
whether he becomes a substituted Limited Partner, will be subject to and bound
by all the terms and conditions of the Partnership Agreement with respect to the
assigned Units. See "Summary of the Partnership Agreement - Restrictions on
Transfer of Partnership Interests."
PLAN OF DISTRIBUTION
Subscriptions for Units will be solicited by MedTech
Investments, Inc., the Sales Agent, which is an Affiliate of the General
Partner. The Sales Agent has entered into a Sales Agency Agreement with the
Partnership pursuant to which the Sales Agent has agreed to act as exclusive
agent for the placement of the Units on a "best efforts" any or all basis. The
Sales Agent is not obligated to purchase any Units.
The Sales Agent is a North Carolina corporation that was
formed on December 23, 1987, and became a member of the National Association of
Securities Dealers on March 15, 1988. The Sales Agent will be engaged in other
similar offerings on behalf of the General Partner and its Affiliates during the
pendency of this Offering and in the future. The Sales Agent is a wholly owned
subsidiary of Prime. Investors should note the material relationship between the
Sales Agent and the General Partner, and are advised that the relationship
creates conflicts in the Sales Agent's performance of its due diligence
responsibilities under the Federal securities laws.
As compensation for its services, the Sales Agent will receive
a commission equal to $75 for each Unit sold. No other commissions will be paid
in connection with this Offering. Subject to the conditions as provided above,
the Sales Agent may be reimbursed by the Partnership for its out-of-pocket
expenses associated with the sale of the Units in an amount not to exceed
$7,000. The Partnership has agreed to indemnify the Sales Agent against certain
liabilities, including liabilities under the Securities Act.
The Partnership will not pay the fees of any purchaser
representative, financial advisor, attorney, accountant or other agent retained
by an Investor in connection with his decision to purchase Units.
The subscription period will commence on the date hereof and
will terminate at 5:00 p.m., Eastern time, on June 1, 2000, (or earlier, in the
discretion of the General Partner), unless extended at the discretion of the
General Partner for an additional period not to exceed 180 days. See "Terms of
the Offering - Subscription Period; Closing."
WINSTON #892462 v 2
49
The Partnership seeks by this Offering to sell a maximum of 40
Units for a maximum of an aggregate of $169,320 in cash ($166,320 net of Sales
Agent Commissions). The Partnership has set no minimum number of Units to be
sold in this Offering. The subscription funds, Guaranty and Loan Documents, if
any, received from each Investor will be held in escrow (which, in the case of
cash subscription funds, shall be held in an interest bearing escrow account
with the Bank) until either the Investor's subscription is accepted by the
Partnership (and approved by the Bank in the case of the Guaranties and financed
purchases of Units), the Partnership rejects the subscription or the Offering is
terminated. Upon the receipt and acceptance of an Investor's subscription by the
Partnership (and the Bank), the Investor will be admitted to the Partnership as
a Limited Partner. In connection with his admission as a Limited Partner, the
Investor's subscription funds will be released from escrow to the Partnership,
and his Guaranty and Loan Documents, if any, will be released to the Bank which
will pay the proceeds from the Limited Partner Note to the Partnership. In the
event a subscription is not accepted, all subscription funds (without interest),
the Guaranty, the Loan Documents and other subscription documents held in escrow
will be promptly returned to the rejected Investor. A subscription may be
rejected in part, in which case a portion of the subscription funds (without
interest), the Guaranty and any Limited Partner Note will be returned to the
Investor.
BUSINESS ACTIVITIES
General
The Partnership was formed to (i) acquire the Lithotripsy
System and operate it in the Service Area, (ii) improve the provision of
health-care in the Partnership's Service Area by taking advantage of both the
technological innovations inherent in the Modulith(R) SLX-T and the
Partnership's quality assurance and outcome analysis programs, and (iii) make
cash distributions to its partners from revenues generated by the operation of
the Lithotripsy System. The Partnership owns and operates the Lithotripsy System
in the Service Area and has contracted with the nine Contract Hospitals to
provide lithotripsy services.
Treatment Methods for Kidney Stone Disease
Urolithiasis, or kidney stone disease, affects an estimated
600,000 persons per year in the United States. The exact cause of kidney stone
formation is unclear, although it has been attributed to diet, climate,
metabolism and certain medications. Approximately 75% of all urinary stones pass
spontaneously, usually within one to two weeks, and require little or no
clinical or surgical intervention. All other kidney stones, however, require
some form of medical or surgical treatment. A number of methods are currently
used to treat kidney stones. These methods include drug therapy, endoscopic and
laser procedures, open surgery, percutaneous lithotripsy and extracorporeal
shock wave lithotripsy. The type of treatment a urologist chooses depends on a
number of factors such as the size of the stone, its location in the urinary
system and whether the stone is contributing to other urinary complications such
as blockage or infection. The extracorporeal shock wave lithotripter, introduced
in the United States from West Germany in 1984, has dramatically changed the
course of kidney stone disease treatment. The General Partner estimates that
currently up to 95% of all kidney stones that require treatment can be treated
by lithotripsy. Lithotripsy involves the use of shock waves to disintegrate
kidney stones noninvasively.
The Lithotripsy System
Upon closing the Loan, the Partnership used a portion of the
Loan proceeds (approximately $400,000) to acquire a new Modulith(R) SLX-T
lithotripter. The Modulith(R) SLX-T received FDA premarket approval on March 27,
1997. The General Partner and its Affiliates have limited, but positive, direct
experience with the use of the Modulith(R) SLX-T lithotripter. Preliminary
reports from abroad and "word of mouth" anecdotal evidence indicates that the
Modulith(R) SLX-T is as effective as most of the "portable" lithotripters in the
market. See "Risk Factors - Operating Risks - Reliability and Efficacy of the
Storz Modulith(R) SLX-T."
The Modulith(R) SLX-T was especially adapted for the treatment
of urological stones. In addition to the efficient fragmentation of all types of
urinary tract stones, the Modulith(R) SLX-T is suitable for performing a range
of urological examinations including cystoscopy and ureterorenoscopy. The
Modulith(R) SLX-T consists of a cylindrical pressure wave generator, an OEC 9800
C-arm x-ray system unit and a patient table. The Modulith(R) SLX-T generates
pressure waves electromagnetically from the cylindrical energy source and
parabolic reflector. The pressure wave generator operates without an acoustic
lens, thus avoiding such disadvantages as energy dissipation and aperture
limitations. The pressure at the focal point can be varied by means of the
energy control in nine steps from 10 Mpa to 100 Mpa. The energy source is fitted
with an axial and lateral air-bag. When expanded during fluoroscopy, these
air-bags ensure optimal X-ray image quality for monitoring purposes. The
pressure wave coupling is dry (water cushion is used). The shock-wave may be
released at fixed frequencies of 1 Hz, 1.5 Hz or 2 Hz, or may be triggered using
the ECG and/or respiration. The Modulith(R) SLX-T localizes stones using an OEC
9800 C-arm X-ray system. The X-ray system employs an image intensifier, cassette
film, digital spot imaging capability and two high resolution 16" monitors
capable of displaying stored digital images. The patient table can be moved
electronically in all three dimensions, and a floating function allows for quick
patient positioning. The table is X-ray transparent and allows visualization of
the entire urinary tract. The table includes a patient cradle which provides
comfortable and secure support in the prone, supine and lateral positions.
The Partnership's Modulith(R) SLX-T came with an eighteen
month limited warranty during which time all maintenance, repairs, shock tubes,
glassware and capacitors are provided free of charge. The General Partner
anticipates that upon the expiration of the warranty, the Partnership will
either pay for maintenance service on the Modulith(R) SLX-T on an as needed
basis, or enter into an annual maintenance agreement with a third-party service
provider. The General Partner estimates that expenditures for maintenance of the
Modulith(R) SLX-T will be approximately $40,000 per year.
The Partnership also used a portion of the Loan proceeds
($69,510) to acquire from AK Associates, L.L.C., an Affiliate of the General
Partner, a Ford 400 Series van which was customized to include a 14' cargo box
to house the lithotripter while it is transported from site to site. The floor
of the van is loading dock height so the lithotripter can be easily loaded on
and off the van at each treatment facility. The van is also upfitted with a lift
gate with a load capacity of 3,000 pounds for easy loading of the lithotripter
from street level. The van has been modified for securing the lithotripter and
its accessories during transport and for heating the cargo box during the winter
to prevent freezing of the lithotripter and its components. The General Partner
did not purchase the manufacturer's service contract for the van. Instead, the
Partnership pays for service on an as needed basis. The General Partner
estimates that expenditures for maintenance and repair of the van will be
approximately $6,000 per year.
Acquisition of Additional Assets
If in the future the General Partner determines that it is in
the best interest of the Partnership to acquire (i) one or more fixed base or
mobile Lithotripsy Systems, (ii) any other urological device or equipment, so
long as such device has FDA premarket approval at the time it is acquired by the
Partnership, and/or (iii) an interest in any business entity that engages in a
urological business described above, the General Partner has the authority
(without obtaining the Limited Partners' consent) to establish reserves or,
subject to certain restrictions in the Loan, to borrow additional funds on
behalf of the Partnership to accomplish such goals, and may use Partnership
assets and revenues to secure and repay such borrowings. The acquisition of such
assets likely would result in higher operating costs for the Partnership. The
General Partner does not anticipate acquiring additional Partnership assets
unless projected Partnership Cash Flow or proceeds from a Dilution Offering are
sufficient to finance such acquisitions. No Limited Partner would be personally
liable on any Partnership indebtedness without such Limited Partner's prior
written consent. There is no assurance that additional financing would be
available to the Partnership to acquire additional assets or to fund any
additional working capital requirements. Any additional borrowing by the
Partnership will serve to increase the risks to the Partnership associated with
leverage, as well as to increase the risks that cash from operations will be
insufficient to fund the obligations secured by the Limited Partners'
Guaranties. See "Risk Factors - Operating Risks - Partnership Limited Resources
and Risks of Leverage" and "Risk Factors - Operating Risks - Liability Under the
Guaranty."
Hospital Contracts
The Partnership has entered into Hospital Contracts to provide
lithotripsy services at ten treatment centers in the Service Area. The Contract
Hospitals are:
Greater Sacramento Surgery Center
▇▇▇▇ ▇▇▇▇▇ St. Joseph's Hospital
Sutter Roseville Community Center
▇▇▇▇▇▇ General Hospital
▇▇▇▇▇▇ ▇▇▇▇▇ Hospital
▇▇▇▇▇▇▇▇ Hospital
Mercy American River Hospital
▇▇▇▇▇ ▇▇▇▇▇▇ Hospital
Mercy General Hospital
Woodland Memorial Hospital
All of the Hospital Contracts grant the Partnership the
exclusive right to deliver lithotripsy services to the relevant Contract
Hospital. The Hospital Contracts require the Partnership to make a lithotripter
available at the facilities as agreed to by the Contract Hospital and the
Partnership. The Partnership generally also provides a technician and certain
ancillary services such as scheduling necessary for the lithotripsy procedure.
The Contract Hospitals generally pay the Partnership a fee for each lithotripsy
procedure performed at that health care facility. The contracts expire by their
terms at various times through December 31, 2003 and generally may be extended
only upon mutual agreement with the health care facility. Most of these
contracts may be terminated without cause upon 180 days or less written notice
by either party prior to any renewal date, or upon customary events of default.
The Mercy American River, ▇▇▇▇▇ ▇▇▇▇▇▇, Mercy General and Woodland Memorial
contracts recently expired by their terms, though the parties are currently
negotiating for renewals and are continuing to maintain a business relationship
on a month-to-month basis substantially in accordance with the terms of those
agreements. The General Partner believes it has a good relationship with many of
the Contract Hospitals. There is no assurance, however, that one or more of the
Hospital Contracts will not terminate in the future. See "Risk Factors -
Operating Risks - Contract Terms and Termination."
Reimbursement Agreements. Prime and its Affiliates have
negotiated third-party reimbursement agreements with certain national and local
payors. The national agreements apply to all the lithotripsy partnerships with
which Prime is affiliated. Although the Partnership currently provides services
under the Hospital Contracts on a wholesale basis, the Partnership will be able
to take advantage of these reimbursement agreements in the future if in the
event it contracts with a treatment facility on a retail basis. Some of the
national and local payors have agreed to pay a fixed price for the lithotripsy
services. Generally the agreements may be terminated by either party on 90 days'
notice. The national and local reimbursement agreements that have been
negotiated or renegotiated in the past two to four years almost entirely provide
for lower reimbursement rates for lithotripsy services than the older
agreements.
Operation of the Lithotripsy System
It is anticipated that the Partnership will continue to
provide services under the Hospital Contracts and similar arrangements. See
"Business Activities - Hospital Contracts" and "Risk Factors - Operating Risks -
Contract Terms and Termination." Qualified physicians who make appropriate
arrangements with Contract Hospitals receiving lithotripsy services pursuant to
the Hospital Contracts and other lithotripsy service agreements may treat their
own patients using the Lithotripsy System after they have received any necessary
training required by the rules of such Contract Hospital. The Partnership may
also make arrangements to make the Lithotripsy System available to qualified
physicians (including but not limited to qualified physician Limited Partners)
desiring to treat their own patients after they have received any necessary
training. The General Partner and Management Agent will endeavor to the best of
their abilities to require that physicians using the Partnership's Lithotripsy
System comply with the Partnership's quality assurance and outcome analysis
programs in order to maintain the highest quality of patient care. In addition,
the General Partner reserves the right to request that (i) physicians (or
members of their practice groups) treat only their own patients with the
Lithotripsy System, and (ii) physician Limited Partners disclose to their
patients in writing their financial interest in the Partnership prior to
treatment, if it determines that such practices are advisable under applicable
law. The latter disclosure is required under California law. See
"Regulation-State Regulation." The treating qualified physician will be solely
responsible for billing and collecting on his own behalf the professional
service component of the treatment procedure. Owning an interest in the
Partnership is not a condition to using the Lithotripsy System. Thus, local
qualified physicians who are not Limited Partners will be given the same
opportunity to treat their patients using the Lithotripsy System as provided
above.
Management
The Partnership has entered into a management agreement (the
"Management Agreement") with the Management Agent whereby the Management Agent
is obligated to supervise and coordinate the management and administration of
the operation of the Lithotripsy System on behalf of the Partnership in exchange
for a monthly management fee equal to 7.5% of Partnership Cash Flow per month.
See "Compensation and Reimbursement to the General Partner and its Affiliates."
The Management Agent's services under the Management Agreement include making
available any necessary training of physicians in the proper use of the
lithotripsy equipment, monitoring technological developments in renal
lithotripsy and advising the Partnership of these developments, arranging
continuing education programs for qualified physicians who use the lithotripsy
equipment and providing advertising, billing, accounts collection, equipment
maintenance, medical supply inventory and other incidental services necessary
for the efficient operation of the Lithotripsy System. Costs incurred by the
Management Agent in performing its duties under the Management Agreement are the
responsibility of the Partnership. The Management Agent's engagement under the
Management Agreement is as an independent contractor and neither the Partnership
nor its Limited Partners have any authority or control over the method or manner
in which the Management Agent performs its duties under the Management
Agreement. The Management Agreement is in the first year of its initial
five-year term. Thereafter, it will be automatically renewed for three
additional five-year terms unless terminated by the Partnership or the
Management Agent.
THE GENERAL PARTNER
The General Partner of the Partnership is Mobile Kidney Stone
Centers of California, Ltd. I, a California limited partnership formed on
October 6, 1987. The general partner of the General Partner is Sun Medical
Technologies, Inc., a California corporation formed on June 20, 1990 ("Sun
Medical"). Prime acquired all the outstanding stock of Sun Medical on November
10, 1995 and Sun Medical remains a wholly-owned subsidiary of Prime. The
principal executive office of the General Partner is located at ▇▇▇▇▇ ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ and the principal executive
office of Sun Medical is located at ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇-▇▇▇,
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇.
Management. The General Partner is managed by Sun Medical
under an arrangement similar to the Management Agreement. The following table
sets forth the names and respective positions of the individuals serving as
executive officers and directors of Sun Medical, many of whom also serve as
executive officers of Prime.
Name Office
▇▇▇▇ ▇▇▇▇▇▇▇ President and Director
▇▇▇ ▇▇▇▇▇▇▇ Director
▇▇▇▇▇▇ ▇▇▇▇▇▇▇, M.D. Director
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ Vice President,
Chief Financial
Officer and Director
▇▇▇▇▇ ▇. ▇▇▇▇▇ Secretary
Supervision of the day-to-day management and administration of the
Partnership is the responsibility of Sun Medical in its capacity as the general
partner of the General Partner and Management Agent of the Partnership. Sun
Medical itself is managed by a four-member Board of Directors composed of ▇▇.
▇▇▇▇▇▇▇, ▇▇. ▇▇▇▇▇▇▇, ▇▇. ▇▇▇▇▇▇▇▇ and ▇▇. ▇▇▇▇▇▇▇.
Set forth below are the names and descriptions of the
background of the key executive officers and directors of Sun Medical.
▇▇▇▇ ▇▇▇▇▇▇▇ has been a Vice President of Prime and President of Sun
Medical since November 1995. ▇▇. ▇▇▇▇▇▇▇ was the Chief Financial Officer of Sun
Medical from 1990 to 1995.
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ has been Chairman of the Board and a
Director of Prime since October 1989 and was elected a Director of Sun Medical
following Prime's acquisition of all of Sun Medical's stock. ▇▇. ▇▇▇▇▇▇▇ also
has served in various capacities with American Physicians Service Group, Inc.
("APS") since February 1985, and is currently Chairman of the Board and Chief
Executive Officer of APS.
▇▇▇▇▇▇ ▇▇▇▇▇▇▇, M.D. has been President and Chief Executive Officer of
Prime since April 1996, and previously practiced urology in Washington, North
Carolina. ▇▇. ▇▇▇▇▇▇▇ was recently elected to Sun Medical's Board of Directors.
▇▇. ▇▇▇▇▇▇▇ is a board certified urologist and is a founding member,
past-president and currently a Director of the American Lithotripsy Society.
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ is Vice President-Finance, Chief Financial Officer and
Director of Sun Medical and has been Chief Financial Officer, Vice
President-Finance and Secretary of Prime since October 1989. ▇▇. ▇▇▇▇▇▇▇▇ was
Controller of ▇▇▇▇▇▇▇▇▇ Aircraft Corporation from August 1988 to October 1989.
From 1985 to 1988, ▇▇. ▇▇▇▇▇▇▇▇ served as the Chief Financial Officer of APS
Systems, Inc., a wholly-owned subsidiary of APS.
▇▇▇▇▇ ▇. ▇▇▇▇▇ recently became Secretary of Sun Medical after previously
serving as its Assistant Treasurer. ▇▇. ▇▇▇▇▇ has served as Tax Manager of Prime
since January 1998 and is a Certified Public Accountant in Texas. Prior to
joining Prime, ▇▇. ▇▇▇▇▇ was Controller for ERISA Administrative Services, Inc.
COMPENSATION AND REIMBURSEMENT TO THE
GENERAL PARTNER AND ITS AFFILIATES
The following summary describes the types and, where
determinable, the estimated amounts of reimbursements, compensation and other
benefits the General Partner and its Affiliates will receive in connection with
the continued operation and management of the Partnership and the Lithotripsy
System. None of such fees, compensation and other benefits has been determined
at arm's length. Except for the items set forth below, the General Partner does
not expect to receive any distribution, fee, compensation or other remuneration
from the Partnership. See "Business Activities - Management" and "Plan of
Distribution."
1. Management Fee. Pursuant to the Management Agreement, the
Management Agent has contracted with the Partnership to supervise the management
and administration of the day-to-day operations of the Partnership's lithotripsy
business for a monthly fee equal to 7.5% of Partnership Cash Flow per month. All
costs incurred by the Management Agent in performing its duties under the
Management Agreement are the responsibility of, and are paid directly or
reimbursed by, the Partnership. The Management Agent is the management agent for
various affiliated lithotripsy ventures. As a consequence, many of the
Management Agent's employees provide various management and administrative
services for numerous ventures, including the Partnership. In order to properly
allocate the costs of the Management Agent's employees and other overhead
expenses among the entities for which they provide services, such costs are
divided among all the ventures based upon the relative number of patients
treated by each. The General Partner believes that the sharing of personnel and
overhead costs among various entities results in significant costs savings for
the Partnership. The management fee for any given month is payable on or before
the 30th day of the next succeeding month. The Management Agreement is in the
first year of its initial five-year term. The Management Agreement will be
automatically renewed for up to three additional successive five-year terms
unless it is earlier terminated by the Partnership or the General Partner. The
General Partner and the Management Agent are reimbursed by the Partnership for
all of their out-of-pocket costs associated with the operation of the
Partnership and the Lithotripsy System, and the Partnership will pay or
reimburse to the General Partner all expenses related to this Offering. No other
fees or compensation will be payable to the General Partner, the Management
Agent or their Affiliates for managing the Partnership other than the management
fee payable to the Management Agent as provided in the Management Agreement. The
Partnership may, however, contract with the General Partner, the Management
Agent or their Affiliates to render other services or provide materials to the
Partnership provided that the compensation is at the then prevailing rate for
the type of services and/or materials provided.
2. Partnership Distributions. In its capacity as general
partner of the Partnership, the General Partner is entitled to its distributable
share (41.62% before dilution) of Partnership Cash Flow, Partnership Sales
Proceeds and Partnership Refinancing Proceeds as provided by the Partnership
Agreement. See "Summary of the Partnership Agreement - Profits, Losses and
Distributions" and the Partnership Agreement attached as Appendix A.
3. Sales Commissions. The Sales Agent, a wholly-owned
subsidiary of Prime, has entered into a Sales Agency Agreement with the
Partnership pursuant to which the Sales Agent has agreed to sell the Units on a
"best efforts" any or all basis. As compensation for its services, the Sales
Agent will receive a commission equal to $75 for each Unit sold (up to an
aggregate of $3,000). If the Offering is successful, the Sales Agent will also
be reimbursed by the Partnership for its out-of-pocket expenses associated with
its sale of the Units in an amount not to exceed $7,000. See "Plan of
Distribution" and "Conflicts of Interest."
4. Loans. The General Partner or its Affiliates will also receive interest on
loans, if any, made by them to the Partnership. See "Conflicts of Interest."
Neither the General Partner nor any of its Affiliates are, however, obligated to
make loans to the Partnership. While the General Partner does not anticipate
that it would cause the Partnership to incur indebtedness unless cash generated
from the Partnership's operations were at the time expected to enable repayment
of such loan in accordance with its terms, lower than anticipated revenues
and/or greater than anticipated expenses could result in the Partnership's
failure to make payments of principal or interest when due under such a loan and
the Partnership's equity being reduced or eliminated. In such event, the Limited
Partners could lose their entire investment.
CONFLICTS OF INTEREST
The operation of the Partnership involves numerous conflicts
of interest between the Partnership and the General Partner and its Affiliates.
Because the Partnership is operated by the General Partner, such conflicts are
not resolved through arm's length negotiations, but through the exercise of the
judgment of the General Partner consistent with its fiduciary responsibility to
the Limited Partners and the Partnership's investment objectives and policies.
The General Partner, its Affiliates and employees of the General Partner will in
good faith continue to attempt to resolve potential conflicts of interest with
the Partnership, and the General Partner will act in a manner that it believes
to be in or not opposed to the best interests of the Partnership.
The Management Agent and the Sales Agent will receive
management fees and broker-dealer sales commissions, respectively, in connection
with the business operations of the Partnership and the sale of the Units that
will be paid regardless of whether any sums hereafter are distributed to Limited
Partners. None of such fees, compensation and benefits has been determined by
arm's length negotiations. In addition, the Partnership may contract with the
General Partner or its Affiliates to render other services or provide materials
to the Partnership provided that the compensation is at the then prevailing rate
for the type of services and/or materials provided. The General Partner will
also receive interest on loans, if any, it makes to the Partnership. See
"Compensation and Reimbursement to the General Partner and its Affiliates."
The General Partner and its Affiliates will devote as much of
their time to the business of the Partnership as in their judgment is reasonably
required. Principals of Sun Medical may have conflicts of interest in allocating
management time, services and functions among their various existing and future
business activities in which they are or may become involved. See "Competition"
and "Prior Activities." The General Partner believes it and its Affiliates
together, have sufficient resources to be capable of fully discharging the
General Partner's and its Affiliates' responsibilities to the Partnership. The
General Partner and its Affiliates may engage for their own account, or for the
account of others, in other business ventures, related to medical services or
otherwise, and neither the Partnership nor the holders of any of the Units shall
be entitled to any interest therein. The General Partner, its Affiliates
(including affiliated limited partnerships and other entities), and their
employees engage in medical service activities for their own accounts. See
"Prior Activities." The General Partner or the Management Agent may serve as a
general partner of other limited partnerships that are similar to the
Partnership and they do not intend to devote their entire financial, personnel
and other resources to the Partnership. Except as provided by law, none of such
entities or their respective Affiliates is prohibited from engaging in any
business or arrangement that may be in competition with the Partnership. The
General Partner, the Management Agent, and their Affiliates are, however,
obligated to act in a fiduciary manner with respect to the management of the
Partnership and any other limited partnership in which they serve as the general
partner. In the event an issue arises as to whether a particular lithotripsy
service opportunity in or near the Service Area belongs to the Partnership, the
General Partner or another Affiliate, the General Partner will in good faith
attempt to resolve the issue in a manner that it believes to be in or not
opposed to the best interest of the Partnership. Notwithstanding the foregoing,
no assurance can be given that one or more limited partners of such Affiliates
or the Limited Partners themselves, may not challenge the decision of the
General Partner on fiduciary or other grounds. The General Partner presently
provides lithotripsy services in the Service Area under one separate
arrangement, and Affiliates of the General Partner provide services near the
Service Area. See "Competition" and "Prior Activities."
The Sales Agent is MedTech Investments, Inc., which is an Affiliate of the
General Partner. Because of the Sales Agent's affiliation with the General
Partner, there are conflicts in the Sales Agent's performance of its due
diligence responsibilities under the federal securities laws. See "Plan of
Distribution."
The interests of the Limited Partners have not been
separately represented by independent counsel in the formulation of the
transactions described herein. The attorneys and accountants who have performed
and will perform services for the Partnership were retained by the General
Partner, and have in the past performed and are expected in the future to
perform similar services for the General Partner, and Prime.
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER
The General Partner is accountable to the Partnership as a
fiduciary and consequently must exercise good faith in handling Partnership
affairs. This is a rapidly developing and changing area of the law and Limited
Partners who have questions concerning the duties of the General Partner should
consult with their counsel. Under the Partnership Agreement, the General Partner
and its Affiliates have no liability to the Partnership or to any Partner for
any loss suffered by the Partnership that arises out of any action or inaction
of the General Partner or its Affiliates if the General Partner or its
Affiliates, in good faith, determined that such course of conduct was in the
best interest of the Partnership and such course of conduct did not constitute
gross negligence or willful misconduct of the General Partner or its Affiliates.
Accordingly, Limited Partners have a more limited right of action than they
otherwise would absent the limitations set forth in the Partnership Agreement.
The General Partner and its Affiliates will be indemnified by the Partnership
against any losses, judgments, liabilities, expenses and amounts paid in
settlement of any claims sustained by them in connection with the Partnership,
provided that the same were not the result of gross negligence or willful
misconduct on the part of the General Partner or its Affiliates. Insofar as
indemnification for liabilities under the Securities Act may be permitted to
persons controlling the Partnership pursuant to the foregoing provisions, the
Partnership has been informed that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
therefore is unenforceable.
COMPETITION
Many fixed-site and mobile extracorporeal shock-wave
lithotripsy services are currently operating in and around the Service Area. The
following discussion identifies the existing services in and near the Service
Area, to the best knowledge of the General Partner.
Affiliated Competition
The Partnership faces competition from lithotripters placed in
service in California, including lithotripters owned by the General Partner and
its Affiliates. The General Partner and an Affiliate provide and will continue
to provide lithotripsy services in and near the Service Area. The General
Partner directly provides mobile lithotripsy services at Kaiser Foundation
Hospital in Sacramento and will continue to compete with the Partnership at this
location. Mobile Kidney Stone Centers of California III, L.P., an Affiliate of
the General Partner, provides lithotripsy services using a Modulith(R) SLX-T in
Alameda County, Contra Costa County, Merced County, Nevada County, Placer
County, San ▇▇▇▇▇▇▇ County and Stanislaus County. Other Affiliates of the
General Partner provide services in other areas of California.
Other Competition
Various hospitals and other facilities in the Service Area
have access to lithotripters which will be in direct competition with the
Partnership. The General Partner is aware of a fixed-site lithotripter which
operates at the University of California ▇▇▇▇▇ Medical Center in Sacramento. In
addition, a Medstone mobile lithotripter provides services at various hospitals
and ambulatory surgery centers near the Service Area. The General Partner also
believes that a competing Modulith(R) SLX-T operated by a physician-owned
venture is providing services near the Service Area and may try to commence
providing services within the Service Area in the near future. Other hospitals,
ambulatory surgery centers and other healthcare facilities may have fixed-base
or mobile lithotripters of which the General Partner is not aware. These
lithotripters would be in competition with the Partnership.
Although the General Partner anticipates that the Partnership
will continue to operate primarily in the Service Area, the actual itinerary for
the Lithotripsy System is expected to be influenced by the number of patients in
particular areas and arrangements with various hospitals and health care
centers. See "Business Activities - Operation of the Lithotripsy System".
Other hospitals in and near the Service Area may operate
lithotripters which are not extracorporeal shock-wave lithotripters but rather
use lasers or are electrohydraulic lithotripters. The General Partner believes
these machines have a competitive disadvantage because such machines are capable
of treating stones only in the ureter. The General Partner believes the
Lithotripsy System can be used on stones in locations other than the ureter. See
"Business Activities - Treatment Methods for Kidney Stone Disease."
The health care market in the Service Area is heavily
influenced by managed care companies such as health maintenance organizations.
Managed care companies generally contract either directly with hospitals or
specified providers for lithotripsy services for beneficiaries of their plans.
It is not uncommon for managed care companies to have contracts already in place
with hospitals or specified providers, and the Partnership will not be able to
provide services to beneficiaries of those plans unless it convinces either the
managed care companies or the hospitals to switch to the Partnership's services.
No assurances can be given that new competing lithotripsy
clinics will not open in the future or that innovations in lithotripters or
other treatments of kidney stone disease will not make the Partnership's
Lithotripsy System competitively obsolete. See "Risk Factors - Operating Risks -
Technological Obsolescence". In addition, the General Partner and its Affiliates
are not restricted from engaging in lithotripsy ventures unassociated with the
Partnership which may compete with the Partnership. See "Conflicts of Interest."
The manufacturer of the Lithotripsy System is under no
obligation to the General Partner or the Partnership to refrain from selling its
lithotripters to urologists, hospitals or other persons for use in the Service
Area or elsewhere. In addition, the availability of lower-priced lithotripters
in the United States could dramatically increase the number of lithotripters in
the United States, increase competition for lithotripsy procedures and create
downward pressure on the prices the Partnership can charge for its services.
Many potential competitors of the Partnership, including hospitals and medical
centers, have financial resources, staffs and facilities substantially greater
than those of the Partnership and of the General Partner.
REGULATION
Federal Regulation
The Partnership, the General Partner and the Limited Partners
are subject to regulation at the federal, state and local level. An adverse
review or determination by certain regulatory organizations (federal, state or
private) may result in the Partnership, the General Partner and the Limited
Partners being subject to imprisonment, loss of reimbursement, fines or
exclusion from participation in Medicare or Medicaid. Adverse reviews of the
Partnership's operations at any of the various regulatory levels may adversely
affect the operations and profitability of the Partnership.
Reimbursement. The Partnership charges hospitals a per-use fee
for use of the Lithotripsy System and does not directly bill or collect from any
patients or third party payors for lithotripsy services provided using its
Lithotripsy System. The amount of this per-use fee primarily depends on the
amount that governmental and commercial third party payors are willing to
reimburse hospitals for lithotripsy procedures. The primary governmental third
party payor is Medicare. Medicare reimbursement policies are statutorily created
and are regulated by the federal government. The Balanced Budget Act of 1997
required the Health Care Financing Administration ("HCFA"), the federal agency
that administers the Medicare program, to establish a prospective payment system
for outpatient procedures. One of the goals of the prospective payment system
was to lower medical costs paid by the Medicare program. HCFA issued proposed
regulations in 1998 which would reduce the reimbursement rate currently paid for
lithotripsy procedures performed on Medicare patients at hospitals to a base
rate of $2,235. The base rate includes anesthesia and sedation, equipment and
supplies necessary for the procedure, but does not include the treating
physician's professional fee. The base rate is subject to adjustment for various
hospital-specific factors. The General Partner believes the lower reimbursement
rate will be implemented in the latter half of the year 2000. In some cases,
reimbursement rates payable to the General Partner and its Affiliates are less
than the proposed HCFA rate.
The Partnership currently provides services at one ambulatory
surgery center and the General Partner retains the discretion to make the
Lithotripsy System available at other ambulatory surgery centers ("ASCs") .
Medicare does not currently reimburse for lithotripsy procedures provided at
ASCs. However, HCFA issued proposed rules in 1998 which would authorize Medicare
reimbursement for lithotripsy procedures provided at ASCs. While the proposed
rules had a target effective date of October 1, 1998, the effective date has
been postponed indefinitely for reasons unrelated to lithotripsy coverage. The
proposed rules assign a Medicare reimbursement rate of $2,107 if the lithotripsy
procedure is performed at an ASC. Whether these proposed rules will become
effective to authorize Medicare reimbursement at ASCs and, if they do become
effective, what the reimbursement rate will be, is unknown to the General
Partner.
The Medicare program has historically influenced the setting
of reimbursement standards by commercial insurers. Therefore, reduced rates of
Medicare reimbursement for lithotripsy services may result in reduced payments
by commercial insurers for the same services. As was discussed previously,
competitive pressure from health maintenance organizations and other managed
care companies has in some circumstances already resulted in decreasing
reimbursement rates from commercial insurers. See "Risk Factors - Impact of
Insurance Reimbursement." No assurances can be given that HCFA will not seek to
reduce its proposed reimbursement rates even more to avoid paying more than
commercial insurers. As a result, hospitals may seek to lower the fees paid to
the Partnership for the use of the Lithotripsy System. The General Partner
anticipates that reimbursement for lithotripsy procedures, and therefore overall
Partnership revenues, may continue to decline.
The physician service (Part B) Medicare reimbursement for
renal lithotripsy is determined using Resource Based-Relative Value Scales
("RB-RVS"). The system includes limitations on future physician reimbursement
increases tied to annual expenditure targets legislated annually by Congress or
set based upon recommendation of the Secretary of the U.S. Department of Health
and Human Services. Medicare has in the past, with regard to other Part B
services such as cataract implant surgery, imposed significant reductions in
reimbursement based upon changes in technology. HCFA has produced a lengthy
report whose conclusion is that professional fees for lithotripsy are
overvalued. Thus, potential future decreases in reimbursement must be considered
probable.
Medi-Cal is the name of the Medicaid program in California
jointly sponsored by the federal and state governments to reimburse service
providers for medical services provided to Medi-Cal recipients, who are
primarily the indigent. Medi-Cal currently provides reimbursement for
lithotripsy services. The federal Personal Responsibility and Work Opportunity
Reconciliation act of 1996 requires state health plans, such a Medi-Cal, to
limit Medicaid coverage for certain otherwise eligible persons. The General
Partner does not believe this legislation will have a significant impact on the
Partnership's revenues. In addition, federal regulations permit state health
plans to limit the provision of services based upon such criteria as medical
necessity or other criteria identified in utilization or medical review
procedures. The General Partner does not know whether Medi-Cal has taken or will
take such steps.
Self-Referral Restrictions. Health care entities which seek
reimbursement for services covered by Medicare or Medicaid are subject to
federal regulation restricting referrals by certain physicians or their family
members. Congress has passed legislation prohibiting physician self-referral of
patients for "designated health services", which include inpatient and
outpatient hospital services (42 U.S.C. ss. 1395nn) ("▇▇▇▇▇ II"). Lithotripsy
services were not specifically identified as a designated health service by this
legislation, but the prohibition includes any service which is provided to an
individual who is registered as an inpatient or outpatient of a hospital under
proposed regulations discussed below. Lithotripsy services provided by the
Partnership to Medicare and Medicaid patients are billed by the contracting
hospital in its name and under its Medicare and Medicaid program provider
numbers. Accordingly, these lithotripsy services would likely be considered
inpatient or outpatient services under ▇▇▇▇▇ II.
Following the passage of the ▇▇▇▇▇ II legislation effective
January 1, 1995, the General Partner determined that the statute would not apply
to the type of lithotripsy services to be provided by the Partnership. ▇▇▇▇▇ II
applies only to ownership interests directly or indirectly in the entity that
"furnishes" the designated health care service. The physician-investors and the
Partnership will not have an ownership interest in any Contract Hospitals which
offer the lithotripsy services to the patients on an inpatient or outpatient
basis. See 42 U.S.C. ss. 1395nn(a)(1)(A). Thus, by referring a patient to a
hospital offering the service, the physician-investors will not be making a
referral to an entity in which they maintain an ownership interest for purposes
of the application of ▇▇▇▇▇ II.
This interpretation adopted by the General Partner was
consistent with the informal view of the General Counsel's Office of the U.S.
Department of Health and Human Services. Based upon this reasonable
interpretation of ▇▇▇▇▇ II, by referring a patient to a hospital furnishing the
outpatient lithotripsy services "under arrangements" with the Partnership, a
physician investor in the Partnership is not making a referral to an entity (the
hospital) in which he or she has an ownership interest.
In 1998, HCFA published proposed regulations interpreting the
▇▇▇▇▇ II statute (the "Proposed ▇▇▇▇▇ II Regulations"). The Proposed ▇▇▇▇▇ II
Regulations and HCFA's accompanying commentary would apply the physician
referral prohibitions of ▇▇▇▇▇ II to the Partnership's contracts for provision
of the Lithotripsy System. Under the Proposed ▇▇▇▇▇ II Regulations, physician
Limited Partner referrals of Medicare and Medicaid patients to Contract
Hospitals would be prohibited because the Partnership is regarded as an entity
that "furnishes" inpatient and outpatient hospital services. The General Partner
cannot predict when final regulations will be issued or the substance of the
final regulations, but the interpretive provisions of the Proposed ▇▇▇▇▇ II
Regulations may be viewed as HCFA's interim position until final regulations are
issued. If the Proposed ▇▇▇▇▇ II Regulations are adopted as final (or, in the
meantime, if a reviewing court adopted their reasoning as the proper
interpretations of the ▇▇▇▇▇ II statute), then the Partnership's operations
would not be in compliance with ▇▇▇▇▇ II, as Limited Partners would have an
ownership interest in an entity to which they referred patients.
HCFA acknowledges in its commentary to the Proposed ▇▇▇▇▇ II
Regulations that physician overutilization of lithotripsy is unlikely and
specifically solicits comments on whether there should be a regulatory exception
for lithotripsy. HCFA has received a substantial volume of comments in support
of a regulatory exception for lithotripsy. HCFA representatives have informally
acknowledged in published commentary that some form of regulatory relief for
lithotripsy is under consideration and may be forthcoming; however, no
assurances can be made that such will be the case. The General Partner will
continue to carefully review the Proposed ▇▇▇▇▇ II Regulations and accompanying
HCFA commentary, and explore other alternative plans of operations that would
allow the Partnership to operate in compliance with ▇▇▇▇▇ II and its final
regulations.
HCFA's adoption of the current Proposed ▇▇▇▇▇ II Regulations
as final or a reviewing court's interpretation of the ▇▇▇▇▇ II statute in
reliance on the Proposed ▇▇▇▇▇ II Regulations and in a manner adverse to the
Partnership operations would mean that the Partnership and its physician Limited
Partners would likely be found in violation of ▇▇▇▇▇ II. In such circumstance,
it is possible the Partnership may be given the opportunity to restructure its
operations to bring them into compliance. In the event the General Partner is
unable to devise a plan pursuant to which the Partnership may operate in
compliance with ▇▇▇▇▇ II and its final regulations, the General Partner is
obligated under the Partnership Agreement either (i) to purchase the Partnership
Interests of all the Limited Partners at the lesser of fair market value or
their Capital Account values (including in certain cases the assumption of their
Guaranties) or (ii) to dissolve and liquidate the Partnership. See "Summary of
the Partnership Agreement - Optional Purchase of Limited Partner Interests." The
Partnership and/or the physician Limited Partners may not be permitted the
opportunity to restructure operations and thereby avoid an obligation to refund
any amounts collected from Medicare and Medicaid patients in violation of the
statute. Further, under these circumstances the Partnership and physician
Limited Partners may be assessed with substantial civil monetary penalties
and/or exclusion from providing services reimbursed by Medicare and Medicaid.
Two bills are currently pending in Congress which would modify
the reach of the ▇▇▇▇▇ II self-referral prohibition. One (H.R. 2650) was
introduced by Representative ▇▇▇▇▇, the other (H.R. 2651) by House Ways and
Means health subcommittee chair Representative ▇▇▇▇ ▇▇▇▇▇▇. The ▇▇▇▇▇ ▇▇▇▇ would
modify, and the ▇▇▇▇▇▇ ▇▇▇▇ would repeal, the ban on physicians who have
compensation arrangements with entities to which they refer patients. However,
neither bill, nor any other bill currently pending in Congress, would
substantively modify the regulation of referrals of physicians with ownership
interests. Thus, neither bill would affect the Partnership's analysis of the
potential impact of ▇▇▇▇▇ II on this Offering discussed above.
▇▇▇▇▇ and Abuse. The provisions of the federal Social Security
Act addressing illegal remuneration (the "Anti-Kickback Statute") prohibit
providers and others from soliciting, receiving, offering or paying, directly or
indirectly, any remuneration in return for either making a referral for a
Medicare, Medicaid or CHAMPUS covered service or ordering, arranging for or
recommending any such covered service. Violations of the Anti-Kickback Statute
may be punished by a fine of up to $25,000 or imprisonment for up to five (5)
years, or both. In addition, violations may be punished by substantial civil
penalties and/or exclusion from the Medicare and Medicaid programs. Regarding
exclusion, the Office of Inspector General ("OIG") of the Department of Health
and Human Services may exclude a provider from participation in the Medicare
program for a 5-year period upon a finding that the Anti-Kickback Statute has
been violated. After OIG establishes a factual basis for excluding a provider
from the program, the burden of proof shifts to the provider to prove the
Anti-Kickback Statute has not been violated.
The Limited Partners are to receive cash Distributions from
the Partnership. Since it is anticipated that some of the Limited Partners will
be physicians or others in a position to refer and perform lithotripsy services
using Partnership equipment and personnel, such Distributions could come under
scrutiny under the Anti-Kickback Statute. The Third Circuit United States Court
of Appeals has held that the Anti-Kickback Statute is violated if one purpose
(as opposed to the primary or sole purpose) of a payment to a provider is to
induce referrals. United States ▇. ▇▇▇▇▇▇, 760 F.2d 68 (1985). The ▇▇▇▇▇▇ case
was followed by the United States Court of Appeals for the Ninth Circuit, United
States ▇. ▇▇▇▇, 871 F.2d 105 (9th Cir. 1989), and cited favorably by the First
Circuit in United States v. Bay State Ambulance and Hospital Rental Service,
Inc., 874 F.2d 20 (1st Cir. 1989).
The OIG has indicated that it is giving increased scrutiny to
health care joint ventures involving physicians and other referral sources. In
1989, it published a Special Fraud Alert that outlined questionable features of
"suspect" joint ventures, including some features which may be common to the
Partnership. While OIG Special Fraud Alerts do not constitute law, they are
informative because they reflect the general views of the OIG as a health care
fraud and abuse investigator and enforcer.
The OIG has published regulations which protect certain
transactions from scrutiny under the Anti-Kickback Statute (the "Safe Harbor"
regulations). A Safe Harbor, if complied with fully, will exempt such activity
from prosecution under the Anti-Kickback Statute. However, the preamble to the
Safe Harbor regulations states that the failure of a particular business
arrangement to comply with the regulations does not determine whether or not the
arrangement violates the Anti-Kickback Statute because the regulations do not
themselves make any particular conduct illegal. This Offering and the business
of the Partnership do not comply with any Safe Harbor.
A Safe Harbor has been adopted which protects equipment
leasing arrangements. It requires that the aggregate rental charge be set in
advance, be consistent with fair market value in arms-length transactions and
not be determined in a manner that takes into account the volume or value of any
referrals or business otherwise generated between the parties. To the best
knowledge of the General Partner, the Hospital Contracts entered into by the
Partnership do not require that the aggregate rental charge be set in advance
and contain other terms which cause the Hospital Contracts not to comply with
the Safe Harbor's requirements. When it issued this Safe Harbor, the OIG
commented on "per use" charges for equipment rentals. It stated that such
arrangements must be examined on a case-by-case basis and may be abusive in
certain situations. According to the OIG, payments on a "per use" basis do not
necessarily violate the Anti-Kickback Statute, but such payments are not
provided Safe Harbor protection. The General Partner cannot give any assurances
that the Partnership's Hospital Contracts which involve a "per use" payment to
the Partnership by Contract Hospitals would not be deemed to violate the
Anti-Kickback Statute.
In the commentary introducing the Safe Harbor regulations, the
OIG recognized the beneficial effect that business investments in small entities
may have on the health care industry. The OIG promulgated a Safe Harbor for
investment interests, including limited partnership ownership interests, in
small entities which are held by persons in a position to make referrals to the
entities so long as eight criteria are met. This Offering does not meet all
eight criteria; however, this Offering does meet some of the criteria.
Specifically, the terms on which limited partnership interests are offered to
physicians who treat their patients on the Lithotripsy System are not related to
the previous or expected volume of referrals or amount of business generated by
the physicians; there is no requirement that any physician make referrals or be
in a position to make referrals as a condition for remaining an investor; there
is no cross-referral arrangement involved with the business of the Partnership;
the Partnership does not loan funds or guarantee loans for physicians who refer
patients for treatment on the Lithotripsy System; and the Distributions to
physicians who are Limited Partners are directly proportional to the amount of
their capital investment. In order to qualify for Safe Harbor protection, all
eight criteria must be met. The General Partner can give no assurance that
compliance with some, but not all, of the criteria of the Safe Harbor would
prevent the OIG from finding a potential violation of the Anti-Kickback Statute
by virtue of this Offering.
In November 1999, the OIG issued a Safe Harbor protecting
certain physician investment interests in ASCs. The commentary accompanying the
new Safe Harbor specifically distinguished physician ownership in ASCs from
physician ownership in other facilities, including lithotripsy facilities,
end-stage renal disease facilities, comprehensive outpatient rehabilitation
facilities and others. The OIG concluded that ASCs benefit from favorable public
policy considerations relating to reducing Medicare costs (including through the
impending prospective payment system discussed above); other facilities,
including lithotripsy facilities, do not share the same policy considerations or
reimbursement structures. Therefore, the Safe Harbor status given to certain
physician investments in ASCs cannot be viewed as an indication that physician
investments in other facilities, including lithotripsy facilities, would not be
deemed to violate the Anti-Kickback Statute.
Although a separate Safe Harbor was not adopted, HCFA noted in
its commentary when the Safe Harbor regulations were issued in 1991 that
additional protection may be merited for situations where a physician sees a
patient in his or her own office, makes a referral to an entity in which he or
she has an ownership interest and performs the service for which the referral is
made. In such cases, Medicare makes a payment to the facility for the service it
furnishes, which may result in a profit distribution to the physician. HCFA
noted that, with respect to the physician's professional fee, such a referral is
simply a referral to oneself, and that in such situations, both the professional
service fee and the profit distribution from the associated facility fee that
are generated from the referral may warrant protection. HCFA stated that its
primary concern regarding the above referral situation was the investing
physician's ability to profit from any diagnostic testing that is generated from
the services he or she performs. The General Partner believes the potential for
overutilization posed by referrals for diagnostic services is not present to the
same degree with therapeutic services such as lithotripsy where the necessity
for the treatment can be objectively determined; i.e., a renal stone can be
definitely determined before treatment.
The applicability of the Anti-Kickback Statute to physician
investments in health care businesses to which they refer patients and which do
not qualify for a Safe Harbor has not been the focus of many court decisions,
and therefore, judicial guidance is limited. In the only case in which the OIG
has attempted to exercise the civil exclusion remedy in the context of a
physician-owned joint venture, The Hanlester Network, et al. v. Shalala, the
Ninth Circuit for the United States Court of Appeals (the "Court") held that the
Anti-Kickback Statute is violated when a person or entity (a) knows that the
statute prohibits offering or paying remuneration to induce referrals and (b)
engages in prohibited conduct with the specific intent to violate the law.
Although the Court upheld a lower court ruling that the joint venture in
question violated the Anti-Kickback Statute vicariously through the knowing and
willful actions of one of its agents, who was acting outside the parameters of
the joint venture's offering documents, the Court concluded there was not
sufficient evidence indicating that a return on investment to physicians or
other investors in the joint venture could on its own constitute an "offer or
payment" of remuneration to make referrals. The Court also stated that since
profit distributions in Hanlester were made based on each investor's ownership
share and not on the volume of referrals, the fact that large referrals by
investors would result in potentially high investment returns did not, standing
alone, cause a violation of the Anti-Kickback Statute.
The Health Insurance Portability and Accountability Act of
1996 directed the OIG to respond to requests for advisory opinions regarding the
effect of the Anti-Kickback Statute on proposed business transactions. The
General Partner has not requested the OIG to review this Offering and, to the
best knowledge of the General Partner, the OIG has not been asked by anyone to
review offerings of this type.
Federal regulatory authorities could take the position in
future advisory opinions that business transactions similar to this Offering are
a means to illegally influence the referral patterns of the prospective
physician Limited Partners. Because there is no legal precedent interpreting
circumstances identical to these facts, it is not possible to predict how this
issue would be resolved if litigated.
Whenever an offering of ownership interests is made available
to persons with the potential to refer patients for services, there is a
possibility that the OIG, HCFA or other government agencies or officials may
question whether the ownership interests are being provided in return for or to
induce referrals by the new owners. Remuneration, which government officials
have said can include the provision of an opportunity to invest in a facility to
which a person refers patients for services, may be challenged by the government
as constituting a violation of the Anti-Kickback Statute. The risk of such a
challenge may be increased in connection with this Offering because the proceeds
of any Unit sales will not provide additional capital for the Partnership which
would be a typical justification for sales to new investors. Whether the
offering of ownership interests to investors who may refer patients to the
Partnership might constitute a violation of this law must be determined in each
case based upon the specific facts involved. The various mechanisms in place to
avoid providing a financial benefit to prospective Limited Partners for any
referrals of patients (including the requirement that all distributions of
earnings to Limited Partners be made in proportion to their investment
interest), the Partnership's utilization review and quality assurance programs,
the fact that lithotripsy is a therapeutic treatment the need of which can be
objectively determined, and the existence in the General Partner's view of valid
business reasons to engage in this transaction, form the basis in part of the
General Partner's belief that this Offering is appropriate.
The General Partner of the Partnership intends for all
business activities and operations of the Partnership to conform in all respects
with all applicable anti-kickback statutes (federal or state). The General
Partner does not believe that the Partnership's proposed operations violate the
Anti-Kickback Statute. No assurance can be given, however, that the proposed
activities of the Partnership will not be reviewed and challenged by regulatory
authorities empowered to do so, or that if challenged, the Partnership will
prevail.
If the activities of the Partnership were determined to
violate these provisions, the Partnership, the General Partner, officers and
directors of the General Partner, and each Limited Partner could be subject,
individually, to substantial monetary liability, felony prison sentences and/or
exclusion from participation in Medicare, Medicaid and CHAMPUS. A prospective
Limited Partner with questions concerning these matters should seek advice from
his or her own independent counsel.
False Claims Statutes. Federal laws governing reimbursement
for medical services generally prohibit an individual or entity from knowingly
and willfully presenting a claim (or causing a claim to be presented) for
payment from Medicare, Medicaid or other third party payors that is false or
fraudulent. The standard for "knowing and willful" includes conduct that amounts
to a reckless disregard for whether accurate information is presented by claims
processors. Penalties under these statutes include substantial civil and
criminal fines, exclusion from the Medicare program and imprisonment. One of the
most prominent of these laws is the federal False Claims Act, which may be
enforced by the federal government directly, or by a qui tam private plaintiff
on the government's behalf. Under the federal False Claims Act, both the
government and the private plaintiff, if successful, are permitted to recover
substantial monetary penalties and judgments, as well as an amount equal to
three times actual damages. In recent cases, some qui tam plaintiffs have taken
the position that violations of the Anti-Kickback Statute (discussed above) and
▇▇▇▇▇ II (discussed above) should also be prosecuted as violations of the
federal False Claims Act. The Partnership cannot assure that the government, or
a reviewing court, would not take the position that billing errors, employee
misconduct or violations of other federal statutes, should they occur, are
violations of the federal False Claims Act or similar statutes.
Some federal courts have recently taken the position that qui
tam lawsuits by private plaintiffs are unconstitutional. Most notably, a panel
of judges on the Fifth Circuit Court of Appeals took this position in a decision
issued in November 1999. That decision is being reviewed by all the judges on
the Fifth Circuit. The panel's decision was a minority view; most courts have
concluded that qui tam lawsuits are constitutional. In another case, the U.S.
Supreme Court may review this issue. Unless and until the Supreme Court decides
the issue, prospective Limited Partners should consider the ramifications of the
False Claims Act issues discussed in the preceding paragraph.
New Legislation. Two bills currently pending in Congress which
would amend or repeal the compensation provisions of the ▇▇▇▇▇ II law were
discussed above in the disclosures related to self-referral restrictions. The
General Partner is not aware of any other bill currently before Congress which,
if enacted into law, would have an adverse effect on the Partnership's
operations in a fashion similar to the ▇▇▇▇▇ II and the Anti-Kickback laws
discussed above. In the event that legislation is enacted which, in the opinion
of the General Partner, would adversely affect the operation of the
Partnership's business, the General Partner is obligated either to purchase the
Partnership Interests of all the Limited Partners or to dissolve the
Partnership. See "Summary of the Partnership Agreement - Optional Purchase of
Limited Partner Interests."
ALS Fraud and Abuse Compliance Guidelines. On March 24, 2000,
the American Lithotripsy Society ("ALS") (a voluntary membership organization
made up of physicians, health care management personnel, treatment centers and
medical suppliers) published Fraud and Abuse Compliance Guidelines for Physician
- Owned Lithotripsy Ventures (the "ALS Guidelines"). The ALS Guidelines are
aimed at assisting ALS members in recognizing and avoiding certain practices
which the ALS believes are unethical or illegal. The ALS Guidelines acknowledge
that they are neither authoritative, nor constitute legal advice. Moreover, the
ALS Guidelines stipulate that the laws upon which they are based (all of which
are discussed in this "Regulation" section) are open to alternative
interpretations. Because of the various reasons set forth in this Memorandum,
the Company believes the Offering and its operations are appropriate under such
laws, however, no assurance can be given that the activities of the Company
would be viewed by regulatory authorities as complying with these laws or the
ALS Guidelines.
FTC Investigation. Issues relating to physician-owned health
care facilities have been investigated by the Federal Trade Commission ("FTC"),
which investigated two lithotripsy limited partnerships affiliated with the
General Partner, to determine whether they posed an unreasonable threat to
competition in the health care field. The affiliated limited partnerships were
advised in 1996 that the FTC's investigation was terminated without any formal
action taken by the FTC or any restrictions being placed on the activities of
the limited partnerships. However, the General Partner cannot assure that the
FTC will not investigate issues arising from physician-owned health care
facilities in the future with respect to the General Partner or any Affiliate,
including the Partnership.
Ethical Considerations. The American Medical Association's
Code of Medical Ethics states that physicians should not refer patients to
facilities in which they have an ownership interest unless such physician
directly provides care or services to such patient at the facility. Because
physician investors will be providing lithotripsy services, the General Partner
believes that an investment by a physician will not be in violation of the
American Medical Association's Code of Medical Ethics. In the event that the
American Medical Association changes its ethical code to preclude such referrals
by physicians and such ethical requirements are applied to facilities or
services which, at the time of adoption, are owned in whole or in part by
referring physicians, the Partnership and the interests of the Limited Partners
may be adversely affected.
State Regulation
California law prohibits the offer, delivery, receipt or
acceptance by any licensed person (including physicians) of any money, as
compensation or inducement for referring patients. The California Attorney
General issued an opinion in 1999 which stated the statute prohibits any
situation where the referral of a patient may be induced by considerations other
than the best interests of the patients. However, the statute specifically
permits referrals to health care facilities in which the physician has an
ownership interest, so long as the physician's return on investment for the
ownership interest is based on the proportional ownership of the physician and
not based on the number or value of any patients referred. To the best knowledge
of the General Partner, the Partnership's ownership and investment return
structure falls within the exemption to this statute.
In 1993, California passed the Physician Ownership and
Referral Act, which prohibits physicians from referring patients to certain
health services in which the physicians have a financial interest. Those health
services are laboratory, diagnostic nuclear medicine, radiation oncology,
physical therapy, physical rehabilitation, psychometric testing, home infusion
therapy and diagnostic imaging goods and services. If the list of health
services were expanded to include lithotripsy services (or surgery services
generally), the Partnership would be prohibited from operating under its current
method of operations. The General Partner is not aware of any such legislation
currently pending in California which would expand the list of health services
in this fashion.
The Physician Ownership and Referral Act states that any
physician who refers a patient to an organization in which the physician has a
financial interest for services other than those identified in the previous
paragraph, must provide the patient (or the patient's legal guardian) with
written notice of such financial interest at the time of the referral. A
separate law requires written disclosure of a physician's "significant financial
interest" in an entity to which he or she refers patients; "significant
financial interest" means $5,000 or five (5) percent of the entity. The law
requires disclosure of the financial interest to the patient in writing and
advising the patient that the patient may choose another provider to obtain the
service. The Partnership will require that its physician Limited Partners comply
with this disclosure requirement.
California has a false claims statute similar to the federal
False Claims Act discussed above. The California false claims statute would be
applicable to claims submitted to Medi-Cal for reimbursement for services
rendered to Medi-Cal patients. California also prohibits kickbacks for services
provided to Medi-Cal patients. For the reasons discussed above with respect to
their federal law counterparts, to the best knowledge of the General Partner,
neither this Offering nor the business of the Partnership violates either of
these California laws.
California requires hospitals and ambulatory surgery centers
which wish to offer mobile healthcare services at their facilities to apply for
an amendment to their licensure status. The amendment assures the hospital or
ambulatory surgery center has the physical facilities to accommodate a mobile
unit in which patients will be treated. To the best knowledge of the General
Partner, this amendment process will not apply with respect to the Partnership's
Lithotripsy System, as patients will not be treated in the mobile unit; rather,
the lithotripter will be rolled off the Partnership's mobile van and wheeled
into an appropriate location within the hospital or center, such as the
operating suite. Since patients will be treated on the machine while it is
located within the hospital or center, the mobile healthcare service licensure
amendment process will not apply. The California Department of Health Services'
Licensing and Certification Office, which licenses hospitals and ambulatory
surgery centers, expects that the facilities contracting with the Partnership
will have appropriate policies and procedures in place with respect to the
transportable lithotripter to assure patient care and physical facility needs
are met. A certificate of need (CON) is not required before offering lithotripsy
services in California. California requires registration of x-ray machines and
requires that radiologic technologists be licensed.
Many bills introduced in both houses of the California
legislature in 1999 concerned health care regulation, and Governor ▇▇▇▇ ▇▇▇▇▇
signed a series of health-care related bills into law. Among other things, a new
Department of Managed Care was established, and other managed care requirements
were enacted. However, to the best knowledge of the General Partner, none of
these new laws would have a material adverse effect on the Partnership or this
Offering. The General Partner cannot predict whether additional health-care
regulatory bills will be introduced or enacted by the California legislature in
2000.
The Partnership and the Management Agent have been seeking and
will continue to seek to comply with all applicable statutory and regulatory
requirements. Further regulations may be imposed in California at any time in
the future. Predictions as to the form or content of such potential regulations
would be highly speculative. They could apply to the operation of the
Lithotripsy System or to the physicians who invest in the Partnership. Such
restrictive regulations could materially adversely affect the ability of the
Partnership to conduct its business.
THE GENERAL PARTNER AND THE PARTNERSHIP BELIEVE LITHOTRIPSY
SERVICES WILL CONTINUE TO BE SUBJECT TO INTENSE GOVERNMENTAL REGULATION AT THE
FEDERAL AND STATE LEVELS AND, THEREFORE, CANNOT PREDICT THE SCOPE AND EFFECT
THEREOF.
PROSPECTIVE LIMITED PARTNERS SHOULD CONSULT WITH THEIR LEGAL
COUNSEL AS TO THE IMPLICATIONS OF FEDERAL AND STATE LAWS AND PROFESSIONAL
ETHICAL CODES DEALING WITH PHYSICIAN OWNERSHIP OF MEDICAL EQUIPMENT AND
FACILITIES BEFORE PURCHASING UNITS.
PRIOR ACTIVITIES
Sun Medical is the general partner of the General Partner.
Prime, the sole shareholder of Sun Medical, is the largest and fastest growing
provider of lithotripsy services in the United States, providing lithotripsy
services at approximately 450 hospitals and surgery centers in 31 states, as
well as delivering non-medical services related to the operation of the
lithotripters, including scheduling, staffing, training, quality assurance,
maintenance, regulatory compliance and contracting with payors, hospitals and
surgery centers, while medical care is rendered by urologists utilizing the
lithotripters. Prime has an economic interest in 59 mobile and six fixed site
lithotripters, all but two of which are operated by Prime, Sun Medical and its
Affiliates. Prime began providing lithotripsy services with an acquisition in
1992 and has grown rapidly since that time through acquisitions and de novo
development. In November 1995, Prime acquired Sun Medical and thus, a
controlling interest in the General Partner. The acquisition of Sun Medical
provided Prime with complementary geographic coverage as well as additional
expertise in forming and managing lithotripsy operations. Prime and Sun
Medical's lithotripters together performed approximately 38,000 lithotripsy
procedures in 1999. Approximately 2,300 urologists utilized Prime and Sun
Medical's lithotripters in 1999, representing approximately 30% of the estimated
7,700 active urologists in the United States.
Prime manages the operations of approximately 63 of its 65
lithotripters. All of its lithotripters are operated in connection with
hospitals or surgery centers. Prime operates its lithotripters primarily as the
general partner of a limited partnership or through a subsidiary, as is the case
with entities affiliated with Sun Medical, including the General Partner. Prime
provides a full range of management and other non-medical support services to
the lithotripsy operations, while medical care is provided by urologists
utilizing the facilities and certain medical support services are provided by
the hospital or surgery center. Urologists are investors in 50 of its 65
operations.
Prime's lithotripters range in age from one to twelve years.
Of its 65 lithotripters, 59 are mobile units mounted in tractor-trailers or
self-contained coaches serving locations in 31 states. Prime also operates six
fixed site lithotripters in four states. All of Prime's fixed lithotripsy units
are located and operated in conjunction with a hospital or surgery center. Most
of these locations are in major metropolitan markets where the population can
support such an operation. Fixed site lithotripters generally cannot be
economically justified in other locations.
Prime and Sun Medical believe that they maintain the most
comprehensive quality outcomes database and information system in the
lithotripsy services industry. Prime has detailed information on over 160,000
procedures covering patient demographic information and medical condition prior
to treatment, the clinical and technical parameters of the procedure and
resulting outcomes. Information is collected before, during and up to three
months after the procedure through internal data collection by doctors, nurses
and technicians and through patient questionnaires.
For numerous reasons, including differences in financial
structure, program size, economic conditions and distribution policies, the
success of the General Partner and its Affiliates in the lithotripsy field
should not be considered as indicative of the operating results obtainable by
the Partnership.
SOURCES AND APPLICATIONS OF FUNDS
The following table sets forth the funds expected to be
available to the Partnership from this Offering if all 40 Units are sold and
other sources and their anticipated and estimated uses.
----------------------------- --------------------------------------------------
Sources of Funds Sale of 40 Units
----------------------------- --------------------------------------------------
----------------------------- --------------------- ----------------------------
Offering Proceeds(1) $169,320 (100%)
-------- ------
----------------------------- --------------------- ----------------------------
----------------------------- --------------------- ----------------------------
----------------------------- --------------------- ----------------------------
----------------------------- --------------------- ----------------------------
----------------------------- --------------------- ----------------------------
----------------------------- --------------------- ----------------------------
----------------------------- --------------------- ----------------------------
----------------------------- --------------------- ----------------------------
Repayment of Partnership Debt(3) $134,320 ( 79%)
--------- -------
----------------------------- --------------------- ----------------------------
TOTAL APPLICATIONS $169,320 (100%)
======== ======
----------------------------- --------------------- ----------------------------
Notes to Sources and Applications of Funds Table
(1) Assumes 40 Units are purchased by qualified investors.
(2) Includes $3,000 in commissions payable to the Sales Agent,
reimbursement of $7,000 to the Sales Agent for out-of-pocket expenses
incurred in selling the Units and $25,000 in legal and accounting costs
associated with the preparation of this Memorandum.
(3) The total outstanding debt of the Partnership incurred pursuant to the
Loan from First Citizens Bank & Trust Company for the acquisition of
the Partnership's Lithotripsy System is $441,205.79 as of the date of
the Memorandum; however, the terms of the Loan provide that it may be
renewed for its full amount ($487,125). See "Risk Factors - Operating
Risks - Liability Under the Guaranty." Offering Proceeds will first be
used by the Partnership to pay offering costs and expenses (up to
$35,000), and then the remainder of the proceeds will be used to reduce
the existing Partnership debt (up to $134,320).
FINANCIAL CONDITION OF THE PARTNERSHIP
Set forth on the following pages are the Partnership's
internally prepared accrual based (i) Income Statement for the eight-month
period ended December 31, 1999, (ii) Balance Sheet as of December 31, 1999,
(iii) Cash Flow Statement for the eight-month period ended December 31, 1999,
and (iv) Statements of Partner's Equity for the eight-month period ended
December 31, 1999.
Past financial performance is not necessarily indicative of
future performance. There is no assurance that the Partnership will be able to
maintain its current revenues or earnings.
MOBILE KIDNEY STONE CENTERS OF CALIFORNIA II, L.P.
INCOME STATEMENT
Eight Months Ended
December 31, 1999*
Revenues $979,234
Operating Expenses
Employee compensation and benefits 98,304
Equipment maintenance and repairs 14,555
Depreciation and amortization 64,966
Management fees 36,761
Overhead allocation 76,917
Other operating expenses 60,248
--------------------------
Total operating expenses 351,751
Operating income 627,483
Other income (expense)
Interest and other income, net 440
Interest expense (17,842)
Organization and syndication costs (41,259)
--------------------------
Total other income (expense) (58,661)
--------------------------
Net income $568,822
==========================
*See notes to financial statements attached hereto as
Appendix ▇.
▇▇▇▇▇▇▇ #892462 v 2
70
MOBILE KIDNEY STONE CENTERS OF CALIFORNIA II, L.P.
BALANCE SHEET
December 31, 1999*
ASSETS
Cash $76,878
Accounts receivable, net 205,300
Other current assets 3,269
--------------------------
Total current assets 285,447
Equipment 504,681
Accumulated depreciation (64,966)
--------------------------
439,715
Other assets 328
Total assets $725,490
==========================
LIABILITIES
Accounts payable $55,623
Distributions payable 0
--------------------------
Total current liabilities 55,623
Long term debt 466,045
PARTNERS' EQUITY
Capital contributions 250,000
Syndication costs (15,000)
Distributions paid (600,000)
Accumulated earnings 568,822
--------------------------
Total partners' equity 203,822
Total liabilities and partners' equity $725,490
==========================
*See notes to financial statements attached hereto as
Appendix D.
MOBILE KIDNEY STONE CENTERS OF CALIFORNIA II, L.P.
STATEMENT OF CASH FLOWS
Eight Months Ended
December 31, 1999*
Cash flows from Operating Activities:
Net income $568,822
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 64,966
Change in operating assets and liabilities:
Accounts receivable (205,300)
Other current assets (3,269)
Accrued expenses 55,623
--------------------------
Net cash provided by operating activities 480,842
--------------------------
Cash flows from Investing Activities:
Purchase of equipment, furniture and fixture (504,681)
Deposits paid (328)
--------------------------
Net cash (used in) investing activities (505,009)
--------------------------
Cash flows from Financing Activities:
Cash borrowed from banks 466,045
Capital contributed by partners (net) 235,000
Distributions to partners (600,000)
--------------------------
Net cash (used in) financing activities 101,045
--------------------------
Net increase(decrease) in cash during the period 76,878
--------------------------
Cash, beginning of period 0
--------------------------
Cash, end of period $76,878
==========================
$76,878
*See notes to financial statements attached hereto as
Appendix D.
MOBILE KIDNEY STONE CENTERS OF CALIFORNIA II, L.P.
STATEMENT OF PARTNERS' EQUITY
Eight Months Ended
December 31, 1999*
Beginning partners' equity $0
Capital contributions $250,000
Syndication costs ($15,000)
Net income $568,822
Distributions to partners (600,000)
--------------------------
Ending partners' equity $203,822
==========================
203,822
*See notes to financial statements attached hereto as
Appendix D.
[The remainder of the page is intentionally left blank.]
SUMMARY OF THE PARTNERSHIP AGREEMENT
The Partnership Agreement sets forth the powers and purposes
of the Partnership and the respective rights and obligations of the General
Partner and the Limited Partners. The following is only a summary of certain
provisions of the Partnership Agreement, and does not purport to be a complete
statement of the various rights and obligations set forth therein. A complete
copy of the Partnership Agreement is set forth as Appendix A to this Memorandum,
and Investors are urged to read the Partnership Agreement in its entirety and to
review it with their counsel and advisors.
Nature of Limited Partnership Interest
The Investors will acquire their interests in the Partnership
in the form of Units. For each Unit purchased, a cash payment of $4,233 is
required in addition to a personal guaranty of 0.5% of the Partnership's
obligations under the Loan (up to a $2,435.63 principal guaranty obligation).
The per Unit cash purchase price and execution and delivery of the Guaranties
are both due upon subscription; however, certain qualified Investors may finance
a portion of the cash purchase price through either individually borrowed funds
or through the Limited Partner Loans. See "Terms of the Offering - Limited
Partner Loans." No Limited Partner will have any liability for the debts and
obligations of the Partnership by reason of being a Limited Partner except to
the extent of (i) his Capital Contribution and liability under a Limited Partner
Loan, if any, (ii) his liability under his Guaranty, (iii) his proportionate
share of the undistributed profits of the Partnership, and (iv) the amount of
certain Distributions received from the Partnership as provided by the Act or
other applicable law. See "Risk Factors - Other Investment Risks - Limited
Partners' Obligation to Return Certain Distributions." See also Form of Legal
Opinion of Counsel, attached hereto as Appendix C.
Dilution Offerings
The General Partner has the authority to periodically offer
and sell additional limited partnership interests in the Partnership (a
"Dilution Offering") to persons who are not investors in the Partnership
("Qualified Investors"). The primary purpose of Dilution Offerings would be to
raise additional capital for any legitimate Partnership purpose.
Any sale of limited partnership interests in a Dilution
Offering will result in proportionate dilution of the Percentage Interests of
the existing Partners; i.e., the interests of the General Partner and of the
Limited Partners in Partnership allocations, cash distributions and voting
rights will be proportionately reduced as a result of a successful Dilution
Offering. Limited Partners have no right to purchase additional limited
partnership interests offered by the Partnership in a Dilution Offering;
however, the General Partner has the right to make capital contributions or
purchase additional limited partnership interests offered in a Dilution Offering
in order to avoid dilution. Unless otherwise agreed by the General Partner and a
Majority in Interest of the Limited Partners, any additional limited partnership
interests offered in a Dilution Offering will be sold for a price no lower than
the highest price for which proportionate limited partnership interests in the
Partnership have been previously sold by the Partnership.
Fundamental Changes
Under the terms of the Partnership Agreement, the General
Partner with the prior approval of a Majority in Interest of the Limited
Partners may cause the Partnership to engage in certain transactions in the
future, any of which transactions could result in the termination or
reorganization of the Partnership and a partial or total dilution of all Limited
Partners' interests in the Partnership. The General Partner could propose a plan
providing for merger or consolidation of the Partnership with another entity;
the sale of all or substantially all of the Partnership's assets to another
entity; or any other reorganization, reclassification or exchange of the
Partnership Interests, including without limitation the exchange of Partnership
Interests for equity interests in another entity or for cash or other
consideration. If such a plan were adopted, the Limited Partners are obligated
by the terms of the Partnership Agreement to take or refrain from taking, as the
case may be, such actions as the plan may provide, including, without
limitation, executing such instruments, and providing such information as the
General Partner may reasonably request. Any such plan may also result in an
amendment to the Partnership Agreement or the adoption of a new partnership
agreement in connection with the merger of the Partnership with another entity
as provided in Section 15678.2(e) of the Act. The plan may also provide that the
General Partner and its affiliates will receive fees for services rendered in
connection with the operation of the Partnership or any successor entity
following the consummation of the transactions described in the plan, and
neither the Partnership nor the Limited Partners will have any right by virtue
of the Partnership Agreement in the fees to be derived therefrom. Any securities
or other consideration to be distributed to the Partners pursuant to any such
plan shall be distributed in the manner set forth in the Partnership Agreement
as though the Partnership were being liquidated. Although the General Partner
will endeavor to keep the Limited Partners apprised of all relevant information
regarding the above transactions, the General Partner is not obligated to
provide such information in any particular manner concerning the risks and
effect of the proposed transaction; the fairness of the proposed transaction to
the Partnership and the Limited Partners; comparative distributions to the
General Partner under the Partnership operations and under the proposed
reorganization; the method of valuing the Partnership in the proposed
transaction and the method of allocating value among various participants in the
proposed transaction; the background, reasons for and alternatives to the
transaction; and conflicts of interest of the General Partner in the proposed
reorganization.
In December 1993, Congress passed legislation amending
portions of the Securities Exchange Act of 1934 to afford new protections to
limited partnership investors in the context of certain limited partnership
mergers and reorganizations commonly known as partnership rollups. The law,
known as the "Limited Partnership Rollup Reform Act of 1993" (the "Reform Act"),
became effective on December 17, 1994, and applies to certain rollup
transactions proposed after such date. The Reform Act and the Rules promulgated
thereunder are applicable only to certain types of partnership rollups and, when
applicable, provide limited partners with the following protections:
(i) allows and facilitates communication between limited partners during
their consideration of a proposed rollup;
(ii) allows the limited partners to obtain a list of the other limited
partners involved in the rollup;
(iii) disallows the practice of compensating persons
soliciting the limited partners' approval of the rollup based on the
number of approvals received;
(iv) requires greater disclosure to the limited partners of
the terms of the rollup and its effects on the limited partners
including (a) the reason for the rollup and consideration of the
alternatives; (b) the method of allocating interests in the successor
entity to the limited partners and why such method was chosen; (c)
comparative information including changes in limited partner voting
rights, changes in distributions to the limited partners and changes in
compensation to the general partner; (d) conflicts of interest of the
general partner; (e) changes in the partnership's business plan; (f)
the valuation of the limited partnership interests; (g) any significant
difference between the exchange values of the limited partnerships and
the trading price of the securities to be issued in the rollup
transaction; (h) the risks and effects of the proposed rollup
transaction; (i) a statement by the general partner of the fairness of
the rollup and the general partner's basis for such opinion; (j) full
disclosure of any opinion (other than opinions of counsel) or appraisal
received by the general partner related to the proposed transaction, or
if no such opinion or appraisal was sought by the general partner, an
explanation of why no such opinion or appraisal is necessary to permit
the limited partners to make an informed decision regarding the
proposed transaction; (k) the rights of the limited partners to
exercise dissenters' or appraisal rights or similar rights; (l) the
method for allocating rollup consideration to the limited partners and
an explanation why such method was chosen; and (m) tax consequences of
the rollup; and
(v) requires a minimum 60 day offering period during which the
limited partners may consider the proposed rollup (or such shorter
period as required by state law).
Further, the Reform Act also provides that related Rules of
Fair Practice will be amended to prohibit exchanges and national securities
associations from listing securities issued in connection with a rollup unless
the limited partners are afforded the following protections:
(i) dissenting limited partners must have the right to one of
the following: (a) to receive an appraisal and compensation; (b) to
retain a security under substantially similar terms as the original
issue; (c) to approve of the rollup by a vote of not less than 75% of
the outstanding securities of each participating partnership, or; (d)
to use an independent committee to negotiate the terms of the
transaction.
(ii) not to have their voting power unfairly reduced or abridged.
(iii) not to bear an unfair proportion of the costs of the rollup transaction.
The Reform Act applies only to certain types of rollup
transactions, and there is no certainty that any plan considered by the
Partnership at any time would be subject to the Reform Act. Thus Investors must
assume in making an investment in the Units that their Partnership Interest will
be subject to the provisions of the Partnership Agreement permitting fundamental
changes which could result in the termination or reorganization of the
Partnership and a partial or total dilution of all Limited Partners' interests
in the Partnership.
Profits, Losses and Distributions
The following is a summary of certain provisions of the
Partnership Agreement relating to the allocation and distribution of the
Profits, Losses, Partnership Cash Flow, Partnership Refinancing Proceeds,
Partnership Sales Proceeds, and cash upon dissolution of the Partnership.
Investors should note that the Percentage Interests referenced in the discussion
below could change as a consequence of a future Dilution Offering. Because an
understanding of the defined financial terms is essential to an evaluation of
the information presented below, Investors are urged to review carefully the
definitions of the terms appearing in the Glossary.
1. Allocations.
Losses. After giving effect to the special allocations set
forth below, the Partnership's Losses, if any, for each Year generally will be
allocated to the Partners in accordance with their respective Percentage
Interests.
Profits. After giving effect to the special allocations set
forth below, the Partnership's Profits for any Year generally will be allocated
to the Partners in accordance with their respective Percentage Interests.
All items of income, gain, loss, deduction, or credit will be
allocated among the Partners proportionately. Further, notwithstanding the
foregoing, after giving effect to certain special allocations, the General
Partner must be allocated at least 1% of all items of income, gain, loss,
deduction or credit.
2. Special Allocations. The following special allocations shall be made in
the following order:
(i) Partnership Minimum Gain Chargeback. If there is a net
decrease in Partnership Minimum Gain during any Year, each Partner shall be
specially allocated items of Partnership income and gain for such Year (and, if
necessary, subsequent Years) in an amount equal to such Partner's share of the
net decrease in Partnership Minimum Gain, determined in accordance with Treasury
Regulations Section 1.704-2(g)(2). Allocations made pursuant to the previous
sentence will be made in proportion to the respective amounts required to be
allocated to each Partner pursuant to that section of the Regulations. This
provision relating to Partnership Minimum Gain Chargebacks is intended to comply
with Treasury Regulations Section 1.704-2(f) and will be interpreted and applied
in a manner consistent with that Regulation.
(ii) Partner Minimum Gain Chargeback. If there is a net
decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt
during any Year, each Partner who has a share of the Partner Minimum Gain
attributable to such Partner Nonrecourse Debt shall be specially allocated items
of Partnership income and gain for such Year (and, if necessary, subsequent
Years) in an amount equal to such Partner's share of the net decrease in Partner
Minimum Gain attributable to such Partner Nonrecourse Debt, to the extent
required and determined in accordance with Treasury Regulations Section
1.704-2(i)(4). Allocations pursuant to the previous sentence will be made in
proportion to the respective amounts required to be allocated to each Partner
pursuant to that section of the Regulations. This provision relating to Partner
Minimum Gain Chargebacks is intended to comply with Regulation Section
1.704-2(i)(4) and will be interpreted and applied in a manner consistent with
that Regulation.
(iii) Qualified Income Offset. If a Partner unexpectedly
receives any adjustments, allocations or distributions described in Treasury
Regulations Sections 1.704-1(b)(2)(ii)(d)(4) through (6) which causes or
increases a deficit balance in such Partner's Capital Account (as adjusted
pursuant to Treasury Regulations Section 1.704-1(b)(2)(ii)(d)), items of
Partnership income and gain will be specially allocated to each such Partner in
an amount and manner sufficient to eliminate, to the extent required by the
Regulations, the deficit Capital Account of such Partner as quickly as possible,
provided that an allocation pursuant to this provision shall be made only if and
to the extent that such Partner would have a deficit Capital Account after all
other allocations have been tentatively made as if this provision were not in
the Partnership Agreement. This provision is intended to be a "qualified income
offset," as defined in Regulation Section 1.704-1(b)(2)(ii)(d).
(iv) Sales Commission. The Sales Commission shall be allocated to the Units
which are acquired in this Offering in proportion to the respective capital
contributions represented by such Units (i.e., $75 in Sales Commissions per each
such Unit).
3. Allocations Between Transferor and Transferee. In the event
of the transfer of all or any part of a Partner's interest (in accordance with
the provisions of the Partnership Agreement) in the Partnership at any time
other than at the end of a year, or the admission of a new Partner (in
accordance with the provisions of the Partnership Agreement), the transferring
or new Partner's share of the Partnership's income, gain, loss, deductions and
credits, as computed both for accounting purposes and for federal income tax
purposes, will be allocated between the transferor Partner and the transferee
Partner (or Partners), or the new Partner and the other Partners, as the case
may be, in the same ratio as the number of days in such year before and after
the date of the transfer or admission; provided, however, that if there has been
a sale or other disposition of the assets of the Partnership (or any part
thereof) during such year, then upon the mutual agreement of all the Partners
(excluding the new Partner and the transferring Partner), the Partnership may in
its sole discretion treat the periods before and after the date of the transfer
or admission as separate years and allocate the Partnership's net income, gain,
net loss, deductions and credits for each of such deemed separate years.
Notwithstanding the foregoing, the Partnership's "allocable cash basis items,"
as that term is used in Section 706(d)(2)(B) of the Code, shall be allocated as
required by Section 706(d)(2) of the Code and the Regulations thereunder. See
"Risk Factors - Tax Risks - Partnership Allocations."
4. Incoming Partner Allocations. The Code prohibits the
retroactive allocation of a full share of partnership items to persons who were
partners for less than the entire year. As provided above, the Partnership
Agreement provides that items of income, gain, loss, deductions and credits will
be allocated between a transferor Partner and a transferee Partner in the same
ratio as the number of days in the year before and after the date of the
transfer or admission, unless the Partnership has sold any of its assets in the
year of the transfer or admission. If the Partnership has sold any of its assets
in the year of the transfer or admission, then the General Partner may elect, in
its sole discretion, to use the interim closing of the books method described
above. See "Risk Factors - Tax Risks - Partnership Allocations."
5. Other Allocations. The Partnership Agreement provides for other
allocations. Investors are encouraged carefully to review the Partnership
Agreement attached as Appendix A.
6. Distributions.
The Limited Partnership Agreement authorizes the following
Distributions to be made to the Partners:
Distribution of Partnership Cash Flow. Partnership Cash Flow
will be distributed to the Partners within 60 days after the end of each Year of
the Partnership, or earlier in the discretion of the General Partner in
accordance with their respective Percentage Interests.
Distribution of Partnership Sales Proceeds and Partnership
Refinancing Proceeds. Partnership Sales Proceeds and Partnership Refinancing
Proceeds will be distributed to the Partners within 60 days of the Capital
Transaction giving rise to such proceeds.
Distribution Upon Dissolution. Upon the dissolution and
termination of the Partnership, the General Partner, or if there is none, a
representative of the Limited Partners, will cause the cancellation of the
Partnership's Certificate of Limited Partnership, liquidate the assets of the
Partnership, and apply and distribute the proceeds of such liquidation in the
following order of priority:
(i) First, to the payment of debts and liabilities of the Partnership
(including amounts owed to the General Partner and its Affiliates) and the
expenses of liquidation;
(ii) Second, to the creation of any reserves that the
General Partner or the representatives of the Limited
Partners may deem reasonably necessary for the
payment of any contingent or unforeseen liabilities
or obligations of the Partnership or of the General
Partner arising out of or in connection with the
business and operation of the Partnership; and
(iii)Third, the balance, if any, will be distributed to the Partners in
accordance with the Partners' positive Capital Account balances after such
Capital Accounts are adjusted as provided in the Partnership Agreement, and
any other adjustments required by the final Regulations under Section
704(b) of the Code. Any general partner with a negative Capital Account
following distribution of the liquidation proceeds or the liquidation of
its interest in the Partnership must contribute to the Partnership an
amount equal to such negative capital account on or before the later of the
end of the Partnership's taxable year or within 90 days after the date of
liquidation. Any capital so contributed will be (i) distributed to those
Partners with positive capital accounts until such capital accounts are
reduced to zero, and/or (ii) used to discharge recourse liabilities. It is
intended that Capital Accounts will allow for liquidation distributions
consistent with the manner in which Partnership Sales Proceeds and
Partnership Refinancing Proceeds are distributed; however, there can be no
assurance that such will be the case.
Tax Withholding. The Partnership is authorized to pay, on
behalf of any Partner, any amounts to any federal, state or local taxing
authority, as may be necessary for the Partnership to comply with tax
withholding provisions of the Code or the income tax or revenue laws of any
taxing authority. To the extent the Partnership pays any such amounts that it
may be required to pay on behalf of a Partner, such amounts will be treated as a
cash Distribution to such Partner and will reduce the amount otherwise
distributable to him.
Management of the Partnership
The General Partner has the sole right to manage the business
of the Partnership and at all times is required to exercise its responsibilities
in a fiduciary capacity. The consent of the Limited Partners is not required for
any sale or refinancing of the Lithotripsy System or the purchase of new
equipment by the Partnership. The Partnership has contracted with the Management
Agent to manage and administer the day-to-day operations of the Lithotripsy
System. See "Business Activities - Management."
Under the Partnership Agreement, if the General Partner is
adjudged by a court of competent jurisdiction to be liable to the Limited
Partners or the Partnership for acts or omissions of gross negligence or
constituting willful misconduct, the General Partner may be removed and another
substituted with the consent of all of the Limited Partners.
Powers of the General Partner
1. General.
The General Partner may, in its absolute discretion, borrow
money, acquire, encumber, hold title to, pledge, sell, release or otherwise
dispose of, all or any part of the Partnership's assets, when and upon such
terms as it determines to be in the best interest of the Partnership and employ
such persons as it deems necessary for the operation of the Partnership. The
General Partner, however, is expressly prohibited from, among other things: (i)
possessing Partnership assets or assigning the rights of the Partnership in
Partnership assets or the Lithotripsy System for other than Partnership
purposes; (ii) admitting Limited Partners except as provided in the Partnership
Agreement; and (iii) performing any act (other than an act required by the
Partnership Agreement or any act taken in good faith reliance upon Counsel's
opinion) which would, at the time such act occurred, subject any Limited Partner
to liability as a general partner in any jurisdiction.
2. Tax Matters.
(i) Elections. The General Partner will, in its sole
discretion, make for the Partnership any and all elections for federal, state
and local tax purposes including, without limitation, any election, if permitted
by applicable law, to adjust the basis of the Partnership's property pursuant to
Code Sections 754, 734(b) and 743(b), or comparable provisions of state or local
law, in connection with transfers of interests in the Partnership and
Partnership Distributions.
(ii) Tax Matters Partner. The Partnership Agreement designates
the General Partner as the Tax Matters Partner (as defined in Section 6231 of
the Code) and authorizes it to act in any similar capacity under state or local
law. As the Tax Matters Partner, the General Partner is authorized (at the
Partnership's expense): (i) to represent the Partnership and Partners before
taxing authorities or courts of competent jurisdiction in tax matters affecting
the Partnership or Partners in their capacity as Partners; (ii) to extend the
statute of limitations for assessment of tax deficiencies against Partners with
respect to adjustments to the Partnership's federal, state or local tax returns;
(iii) to execute any agreements or other documents relating to or affecting such
tax matters, including agreements or other documents that bind the Partners with
respect to such tax matters or otherwise affect the rights of the Partnership
and Partners; and (iv) to expend Partnership funds for professional services and
costs associated therewith. In its capacity as Tax Matters Partner, the General
Partner shall oversee the Partnership tax affairs in the manner which, in its
best judgment, are in the interests of the Partners. Moreover, the General
Partner will, in its sole discretion, not make an election pursuant to Treasury
Regulation 301.7701.3 to be treated as an association taxable as a corporation.
Rights and Liabilities of the Limited Partners
The Limited Partners do not have any right to participate in
the management or control of the business of the Partnership. Limited Partners
are not required to make any capital contributions to the Partnership except
amounts agreed by them to be paid, or pay or be personally liable for, any
expense, liability or obligation of the Partnership, except (i) to the extent of
their respective interests in the Partnership, (ii) for the obligation to return
certain Distributions made to them as provided by the Act, and (iii) to the
extent of their liabilities pursuant to their respective Guaranties. See "Risk
Factors - Other Investment Risks - Limited Partners' Obligations to Return
Certain Distributions" and "Operating Risks - Liability Under the Guaranty."
Restrictions on Transfer of Partnership Interests
No Partnership Interest nor any Units may be transferred
without the prior written consent of the General Partner, which approval may be
granted or denied in the sole discretion of the General Partner, and subject to
the satisfaction of certain other conditions set forth in the Partnership
Agreement. The Partnership Agreement contains additional limitations on
transfer, including provisions prohibiting transfer that would violate federal
or state securities laws. No transferee of the Units will automatically become a
Limited Partner. Admission of a transferee requires the fulfillment of other
obligations enumerated in the Partnership Agreement, including either the
approval of a Majority in Interest of the Limited Partners (except the assignor
Limited Partner) and the General Partner, or the approval of the assignor
Limited Partner and the General Partner. Any transferee of a Partnership
Interest who has not been admitted to the Partnership as a Partner shall not be
entitled to any of the rights, powers or privileges of his transferor except the
right to receive and be credited or debited with his proportionate share of
Partnership income, gains, profits, losses, deductions, credits or
distributions. A transferor Limited Partner will not be released from his
personal liability under the Guaranty upon the transfer of his Partnership
Interest, unless otherwise specifically agreed by the Bank at the time of the
transfer. In addition, a transferor Limited Partner will not be released from
his to her personal liability under the Limited Partner Loan, unless otherwise
specifically agreed by the Bank, and the sale of his or her Partnership Interest
may constitute an event of default under any outstanding Limited Partner Loan.
The General Partner may transfer all or a portion of its
Partnership Interest only with the consent of a Majority in Interest of the
Limited Partners before the transferee can be admitted as a Substitute General
Partner. Notwithstanding the foregoing, the Partnership Agreement gives the
General Partner the authority to transfer all or part of its General Partner
interest to any transferee controlled by it or one or more of its Affiliates
without obtaining the Limited Partners' consent. Any such transferee would
automatically be a Substitute General Partner. Both the admission of any new
shareholder and the withdrawal of any shareholder from the General Partner may
be done without the approval of the Limited Partners.
Dissolution and Liquidation
The Partnership will dissolve and terminate for any of the
following reasons:
1. The sale, exchange or disposition of all or substantially
all of the property of the Partnership without making provision for the
replacement thereof (except to the extent otherwise provided in a reorganization
plan approved by the General Partner and a Majority in Interest of the Limited
Partners as described above);
2. The expiration of its term on December 31, 2049;
3. The bankruptcy or occurrence of certain other events with respect to the
General Partner;
4. The determination of the General Partner that the Partnership should be
dissolved; or
5. The election to dissolve the Partnership made by the General Partner in
the event of certain legislation, case law or regulatory changes adversely
affecting the operation of the Partnership.
6. The election to dissolve the Partnership made by all of the Partners.
The retirement, resignation, bankruptcy, assignment for the
benefit of creditors, dissolution, death, disability or legal incapacity of a
general partner will not, however, result in a termination of the Partnership if
the remaining general partner or general partners, if any, elect to continue the
business of the Partnership, or if no general partner remains, if within 90 days
of the occurrence of one of such events, a Majority in Interest of the Limited
Partners elect in writing to continue the Partnership and, if necessary,
designate a new general partner.
Upon dissolution, the General Partner or, if there is none, a
representative of the Limited Partners, will liquidate the Partnership's assets
and distribute the proceeds thereof in accordance with the priorities set forth
in the Partnership Agreement. See "Profits, Losses and Distributions -
Distributions - Distribution upon Dissolution" above and "Optional Purchase of
Limited Partner Interests" below.
Optional Purchase of Limited Partner Interests
As provided in the Partnership Agreement, certain Affiliates
of the existing Limited Partners have the first option, and the General Partner
has the second option (which it may assign to the Partnership in its sole
discretion), to purchase all the interest of a Limited Partner who (i) dies,
(ii) becomes the subject of a domestic proceeding, (iii) becomes insolvent, (iv)
acquires a direct or indirect ownership of an interest in a competing venture
(including the lease or sublease of competing technology), or (v) defaults on
his obligations under the Guaranty. Except in the case of the death of a Limited
Partner, the option purchase price is an amount equal to the lesser of the fair
market value of the Partnership Interest to be purchased or the Limited
Partner's share of the Partnership's book value, if any, as reflected by the
Limited Partner's capital account in the Partnership (unadjusted for any
appreciation in Partnership assets and as reduced by depreciation deductions
claimed by the Partnership for tax purposes). The option purchase price is
likely to be considerably less than the fair market value of a Limited Partner's
interest in the Partnership. Because losses, depreciation deductions and
Distributions reduce capital accounts, and because appreciation in assets is not
reflected in capital accounts, it is the opinion of the General Partner that the
option purchase price may be nominal in amount. In addition, in the event
existing or newly enacted laws or regulations or any other legal developments
adversely affect (or potentially adversely affect) the operation of the
Partnership or the business of the Partnership (e.g., any prohibitions on
provider ownership), the General Partner, in its sole discretion, is obligated
to either (i) purchase the Partnership Interests of all of the Limited Partners
for an amount equal to the lesser of fair market value or book value or (ii)
dissolve the Partnership. In the event of the death of a Limited Partner, the
option purchase price for that Partner's Partnership Interest is an amount equal
to the greater of (i) one and one-half times the aggregate distributions made
with respect to the Partnership Interest during the twelve-month period ending
the last day of the month immediately preceding the month in which the death
occurs or (ii) the Limited Partner's share of the Partnership's book value, if
any (prorated in the event that only a portion of his Partnership Interest is
being purchased) as reflected by the Capital Account of the Limited Partner. If
the General Partner exercises the purchase option, the General Partner will
assume any liabilities under any personal Guaranty still outstanding with
respect to the withdrawing Limited Partner. The withdrawing Limited Partner will
not be released from his obligations under the Guaranty unless so agreed by the
Bank. See the Partnership Agreement attached hereto as Appendix A and "Risk
Factors - Operating Risks - Liability Under the Guaranty."
Noncompetition Agreement and Protection of Confidential Information
The Partnership Agreement provides that each Limited Partner
is prohibited from having a direct or indirect ownership of an interest in a
competing venture (including the lease or sublease of competing technology)
other than an interest held by a Limited Partner in the General Partner or one
of its Affiliates (such non-excluded interests, the "Outside Activities"). While
they are Limited Partners in the Partnership, each Limited Partner is precluded
from engaging in any Outside Activities, provided that the General Partner is
authorized, in its sole discretion, to waive this restriction with respect to
any ownership interest of a Limited Partner in an Outside Activity acquired
before the date the person becomes a Limited Partner. In the event that a
Limited Partner's interest in the Partnership is terminated or transferred upon
the occurrence of certain events as provided in the Partnership Agreement, he or
she is precluded, for a period of two (2) years following the date of his
withdrawal, from engaging in any Outside Activity within any market area in
which the Partnership is providing services or has provided services within the
twelve months preceding the withdrawal. This prohibition is in addition to the
right of the General Partner to acquire the interest of a Limited Partner
engaged in an Outside Activity as provided in the Partnership Agreement. See
"Optional Purchase of Limited Partner Interests" in this Section, and the
Partnership Agreement attached hereto as Appendix A.
In addition, the Partnership Agreement provides that each
Limited Partner acknowledges and agrees that his participation in the
Partnership necessarily involves his access to confidential information that is
proprietary in nature and, therefore, the exclusive property of the Partnership.
Accordingly, the Limited Partners (other than the General Partner and its
Affiliates who hold Limited Partner interests) are precluded from disclosing
such confidential information during their participation as Limited Partners in
the Partnership or thereafter unless required by law or with the prior written
consent of the Partnership.
Arbitration
The Partnership Agreement provides that disputes arising
thereunder shall be resolved by submission to arbitration in accordance with the
provisions of California law.
Power of Attorney
Each Investor, by executing the Subscription Agreement,
irrevocably appoints ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ and ▇▇▇▇ ▇▇▇▇▇▇▇, severally, to act as
attorneys-in-fact to execute the Partnership Agreement, any amendments thereto
and any certificate of limited partnership filed by the General Partner. The
Partnership Agreement, in turn, contains provisions by which each Limited
Partner irrevocably appoints ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ and ▇▇▇▇ ▇▇▇▇▇▇▇, severally, to act
as his attorneys-in-fact to make, execute, swear to and file any document
necessary to the conduct of the Partnership's business, such as deeds of
conveyance of real or personal property as well as any amendment to the
Partnership Agreement or to any certificate of limited partnership which
accurately reflects actions properly taken by the Partners.
Reports to Limited Partners
Within 90 days after the end of each Year of the Partnership,
the General Partner will send to each person who was a Limited Partner at any
time during such year such tax information, including, without limitation,
Federal Tax Schedule K-1, as will be reasonably necessary for the preparation by
such person of his federal income tax return, and such other financial
information as may be required by the Act.
Records
Proper and complete records and books of account will be kept
by the General Partner or the Management Agent in which will be entered fully
and accurately all transactions and other matters relative to the Partnership's
business as are usually entered into records, books and accounts maintained by
persons engaged in businesses of a like character. Pursuant to applicable law,
the Partnership books and records will be kept on the accrual method basis of
accounting. The Partnership's fiscal year will be the calendar year. The books
and records will be located at the Partnership's office, and will be open to the
reasonable inspection and examination of the Limited Partners or their duly
authorized representatives during normal business hours as provided by the Act.
LEGAL MATTERS
On the Closing Date, it is expected that ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇ & ▇▇▇▇, a Professional Limited Liability Company, of Winston-Salem,
North Carolina, will render an opinion as to the formation and existence of the
Partnership, the status of Investors as limited partners and certain federal tax
matters, the form of which is attached as Appendix C to this Memorandum. See
"Risk Factors - Tax Risks."
ADDITIONAL INFORMATION
The Partnership will make available to you the opportunity to ask questions of
its management and to obtain information to the extent it possesses such
information or can acquire it without an unreasonable effort or expense, which
is necessary to verify the accuracy of the information contained herein or which
you or your professional advisors desire in evaluating the merits and risks of
an investment in the Partnership. Copies of certain Hospital Contracts and
insurance reimbursement agreements may not, however, be available due to
confidentiality restrictions contained therein.
GLOSSARY
Certain terms in this Memorandum shall have the following
meanings:
Act. The Act means the California Revised Limited Partnership Act, as in
effect on the date hereof.
Affiliate. An Affiliate is (i) any person, partnership,
corporation, association or other legal entity ("person") directly or indirectly
controlling, controlled by or under common control with another person, (ii) any
person owning or controlling 10% or more of the outstanding voting interests of
such other person, (iii) any officer, director or partner of such person and
(iv) if such other person is an officer, director or partner, any entity for
which such person acts in such capacity.
Bank. First-Citizens Bank & Trust Company.
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Capital Account. The Partnership capital account of a Partner as computed
pursuant to the Partnership Agreement.
Capital Contributions. All capital contributions made by a
Partner or his predecessor in interest which shall include, without limitation,
contributions made pursuant Article VII of the Partnership Agreement.
Capital Transaction. Any transaction which, were it to generate proceeds,
would produce Partnership Sales Proceeds or Partnership Refinancing Proceeds.
Closing Date. 5:00 p.m., Eastern Time, on June 1, 2000 (or earlier in the
discretion of the General Partner). The Closing Date may be extended for a
period of up to 180 days in the discretion of the General Partner.
Code. The Internal Revenue Code of 1986, or corresponding provisions of
subsequent, superseding revenue laws.
Contract Hospitals. The 10 hospitals and medical centers to which the
Partnership provides lithotripsy services pursuant to 7 separate Hospital
Contracts.
Counsel. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ & ▇▇▇▇, a Professional Limited Liability
Company, P.O. Drawer 84, Winston-Salem, North Carolina 27102.
Dilution Offering. Pursuant to the terms of the Partnership
Agreement, the future offering of additional limited partnership interests in
the Partnership by the General Partner. Any such offering generally will
proportionally reduce the existing Percentage Interests of the then current
Partners in the Partnership; provided, however, that the General Partner may
avoid dilution by either making a proportional additional capital contribution
or buying units in a Dilution Offering.
Distributions. Cash or other property, from any source, distributed to
Partners.
Escrow Agent. First-Citizens Bank & Trust Company.
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FDA. The United States Food and Drug Administration.
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Financial Statement. The Purchaser Financial Statement,
included in the Subscription Packet accompanying this Memorandum, to be
furnished by the Investors for review by the General Partner and the Bank in
connection with their decision to accept or reject a subscription.
General Partner. The general partner of the Partnership, Mobile Kidney
Stone Centers of California, Ltd. I, a California limited partnership and an
Affiliate of Prime.
Guaranty. The Guaranty Agreement in the form included in the
Subscription Packet accompanying this Memorandum pursuant to which each new
Limited Partner will guarantee his pro rata portion of the Partnership's
obligations to the Bank under the Loan.
Hospital Contracts. The 7 separate lithotripsy services agreements the
Partnership has entered into with the Contract Hospitals.
Investors. Potential purchasers of Units.
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Limited Partner Loan. The loan to be made by the Bank to certain qualified
Investors that wish to finance a portion of the Unit purchase price.
Limited Partner Note. The promissory note from an Investor
financing a portion of the Unit purchase price to the Bank in the principal
amount of up to $1,733 per Unit, the proceeds of which will be paid directly to
the Partnership. The form of the Limited Partner Note (including the Note
Addendum attached thereto) is attached as Exhibit A to the Form of Loan
Commitment which is attached hereto as Appendix B.
Limited Partners. The current Limited Partners and those
Investors in the Units admitted to the Partnership pursuant to this Offering and
any person admitted as a substitute Limited Partner in accordance with the
provisions of the Partnership Agreement.
Lithotripsy System. The van with the installed and operational
Modulith(R)SLX-T owned and operated by the Partnership and any other additional
or replacement lithotripter and transport vehicle
Loan. The loan of $487,125 from the Bank to the Partnership.
Loan proceeds were used by the Partnership to (i) acquire a new lithotripter,
(ii) acquire and upfit a new mobile van and (iii) pay sales taxes on the
purchases of the lithotripter and the van. The Loan is secured by the
Lithotripsy System, the Partnership's accounts receivable and other Partnership
assets, the guaranty of the General Partner, and the Limited Partner Guaranties.
Loan and Security Agreement. The agreement to be executed in
conjunction with the Limited Partner Note by an Investor who finances a portion
of the Unit purchase price through a Limited Partner Loan. The form of the Loan
and Security Agreement is attached as Exhibit B to the Loan Commitment which is
attached hereto as Appendix B.
Loan Documents. The Loan Commitment, the Limited Partner Note, the Loan and
Security Agreement, the Security Agreement and UCC-1's, collectively.
Loss. The net loss (including capital losses and excluding Net
Gains from Capital Transactions) of the Partnership for each year as determined
by the Partnership for federal income tax purposes.
Management Agent. Sun Medical Technologies, Inc., a California corporation,
and a wholly-owned subsidiary of Prime. The Management Agent is also the sole
general partner of the General Partner.
Memorandum. This Confidential Private Placement Memorandum, including all
Appendices hereto, and any amendment or supplement hereto.
Modulith(R) SLX-T. The Partnership's Storz Modulith(R) SLX
Transportable ("SLX-T") model extracorporeal shock-wave lithotripter
manufactured by Storz which the Partnership acquired with the proceeds of the
Loan.
Net Gains from Capital Transactions. The gains realized by the
Partnership as a result of or upon any sale, exchange, condemnation or other
disposition of the capital assets of the Partnership (which assets shall include
Code Section 1231 assets) or as a result of or upon the damage or destruction of
such capital assets.
Nonrecourse Deductions. A deduction as set forth in Treasury
Regulations Section 1.704-2(b)(1). The amount of Nonrecourse Deductions for a
given Year equals the excess, if any, of the net increase, if any, in the amount
of Partnership Minimum Gain during such Year over the aggregate amount of any
Distributions during such Year of proceeds of a Nonrecourse Liability that are
allocable to an increase in Partnership Minimum Gain, determined according to
the provisions of Treasury Regulations Section 1.704-2(h).
Nonrecourse Liability. Any partnership liability (or portion
thereof) for which no Partner bears the "economic risk of loss," within the
meaning of Treasury Regulations Section 1.704-2(i).
Offering. The offering of Units pursuant to this Memorandum.
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Partner Minimum Gain. An amount, with respect to each Partner
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if
such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Treasury Regulations Section 1.704-2(i).
Partner Nonrecourse Debt. Any nonrecourse debt (for the
purposes of Treasury Regulations Section 1.1001-2) of the Partnership for which
any Partner bears the "economic risk of loss," within the meaning of Treasury
Regulations Section 1.752-2.
Partner Nonrecourse Deductions. Deductions as described in
Treasury Regulations Section 1.704-2(i)(2). The amount of Partner Nonrecourse
Deductions with respect to a Partner Nonrecourse Debt for any Year equals the
excess, if any, of the net increase, if any, in the amount of Partner Minimum
Gain attributable to such Partner Nonrecourse Debt during such Year over the
aggregate amount of any Distributions during that Year to the Partner that bears
the economic risk of loss for such Partner Nonrecourse Debt to the extent such
Distributions are from the proceeds of such Partner Nonrecourse Debt and are
allocable to an increase in Partner Minimum Gain attributable to such Partner
Nonrecourse Debt, determined in accordance with Treasury Regulations Section
1.704-2(i).
Partners. The General Partner and the Limited Partners, collectively, when
no distinction is required by the context in which the term is used herein.
Partnership. Mobile Kidney Stone Centers of California II, L.P., a
California limited partnership, which owns and operates the Lithotripsy System.
Partnership Agreement. The Partnership's Agreement of Limited Partnership,
a copy of which is attached as Appendix A, as such may be amended from time to
time.
Partnership Cash Flow. For the applicable period the excess,
if any, of (A) the sum of (i) all gross receipts from any source for such
period, other than the Partnership loans, Capital Transactions and Capital
Contributions, and (ii) any funds released by the Partnership from previously
established reserves, over (B) the sum of (i) all cash expenses paid by the
Partnership for such period, (ii) the amount of all payments of principal on
loans to such Partnership, (iii) capital expenditures of the Partnership, and
(iv) such reasonable reserves as the General Partner shall deem necessary or
prudent to set aside for future repairs, improvements, or equipment replacement
or additions, or to meet working capital requirements or foreseen or unforeseen
future liabilities and contingencies of the Partnership; provided, however, that
the amounts referred to in (B) (i), (ii) and (iii) above shall be taken into
account only to the extent not funded by Capital Contributions, loans or paid
out of previously established reserves. Such term shall also include all other
funds deemed available for distribution and designated as "Partnership Cash
Flow" by the General Partner.
Partnership Interest. The interest of a Partner in the Partnership as
defined by the Act and the Partnership Agreement.
Partnership Minimum Gain. Gain as defined in Treasury Regulations Section
1.704-2(d).
Partnership Refinancing Proceeds. The cash realized from the
refinancing of Partnership assets after retirement of any secured loans and less
(i) payment of all expenses relating to the transaction and (ii) establishment
of such reasonable reserves as the General Partner shall deem necessary or
prudent to set aside for future repairs, improvements, or equipment replacement
or additions, or to meet working capital requirements or foreseen or unforeseen
future liabilities or contingencies of the Partnership.
Partnership Sales Proceeds. The cash realized from the sale,
exchange, casualty or other disposition of all or a portion of Partnership
assets after the retirement of all secured loans and less (i) the payment of all
expenses related to the transaction and (ii) establishment of such reasonable
reserves as the General Partner shall deem necessary or prudent to set aside for
future repairs, improvements, or equipment replacement or additions, or to meet
working capital requirements or foreseen or unforeseen future liabilities or
contingencies of the Partnership.
Percentage Interest. The interest of each Partner in the
Partnership, to be determined in the case of each Investor by reference to the
percentage oppositive his or her name set forth in Schedule A to the Partnership
Agreement. Each Unit sold pursuant to this Offering represents an initial 0.5%
economic interest in the Partnership. The Percentage Interest will be set forth
in Schedule A to the Partnership Agreement or any other document or agreement,
as a percentage or a fraction or on any numerical basis deemed appropriate by
the General Partner.
Prime. Prime Medical Services, Inc. a publicly held Delaware corporation
and parent of the Management Agent and Sales Agent.
Prime Rate. The rate of interest periodically established by the Bank and
identified as such in literature published and circulated within the Bank's
offices.
Pro Rata Basis. In connection with an allocation or
distribution, an allocation or distribution in proportion to the respective
Percentage Interest of the class of Partners to which reference is made.
Profit. The net income of the Partnership for each year as determined by
the Partnership for federal income tax purposes.
Qualified Income Offset Item. An adjustment, allocation or
distribution described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5) or 1.704-1(b)(2)(ii)(d)(6) unexpectedly received by a
Partner.
Sales Agent. MedTech Investments, Inc., a registered broker-dealer, member
of the National Association of Securities Dealers, Inc. and an Affiliate of the
General Partner.
SEC. The United States Securities and Exchange Commission.
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Securities Act. The Securities Act of 1933, as amended.
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Security Agreement. The agreement to be executed in
conjunction with the Limited Partner Note by an Investor who finances the
purchase price of his Units as provided herein. The form of the Security
Agreement is attached as Exhibit C to the Form of Loan Commitment which is
attached hereto as Appendix B.
Service. The Internal Revenue Service.
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Service Area. The geographic region in which Partnership
operations are conducted and which presently consists primarily of areas within
a 150 mile radius of Sacramento, California. The General Partner has sole
discretion to expand the Service Area subject to fiduciary duties owed by the
General Partner to its Limited Partners.
Storz. ▇▇▇▇ ▇▇▇▇▇ Lithotripsy-America, Inc. and its Affiliates.
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Subscription Agreement. The Subscription Agreement, included
in the Subscription Packet accompanying this Memorandum, to be executed by the
prospective Limited Partners in connection with their purchase of Units.
Subscription Packet. The packet of subscription materials to be completed
by Investors in connection with their subscription for Units.
UCC-1. The Uniform Commercial Code Financing Statement, two
copies of which are attached to the Subscription Packet and are to be executed
in conjunction with the Limited Partner Note by an Investor who finances a
portion of the Unit purchase price through a Limited Partner Loan. The UCC-1
will be used by the Bank to perfect its security interest in such Investor's
share of Distributions.
Units. The 40 equal limited partner interests in the
Partnership offered pursuant to this Memorandum for a price per Unit of $4,233
in cash, plus 0.5% in guaranties of the Partnership's obligations under the Loan
(a $2,435.63 principal Loan guaranty per Unit).
Year of the Partnership. An annual accounting period ending on
December 31 of each year during the term of the Partnership.