Name of Prospective Investor Memorandum Number
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INDIANA LITHOTRIPTERS LIMITED PARTNERSHIP I
A Limited Partnership Formed Under the Laws of Indiana
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM
up to $279,075 in Cash
25 Units of Limited Partnership Interest
at $11,163 in Cash per Unit
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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
▇-▇▇▇-▇▇▇-▇▇▇▇
▇▇▇▇▇▇▇ #910642 v 2 vii
WINSTON #910642 v 2
The Date of this Memorandum is June 28, 2000
INDIANA LITHOTRIPTERS LIMITED PARTNERSHIP I
up to $279,075 in Cash
up to 25 Units of Limited Partnership Interest
at $11,163 in Cash per Unit
Indiana Lithotripters Limited Partnership I, an Indiana
limited partnership (the "Partnership") operated by its General Partner,
Lithotripters, Inc., a North Carolina corporation (the "General Partner"),
hereby offers on the terms set forth herein up to 25 units of limited
partnership interest in the Partnership (the "Units"), at a price per Unit of
$11,163 in cash. See "Terms of the Offering." Each Unit will represent an
initial 1% economic interest in the Partnership. See "Risk Factors - Other
Investment Risks - Dilution of Limited Partners' Interest." The Partnership
currently operates a Lithostar(TM) second generation extracorporeal shock-wave
lithotripter for the lithotripsy of kidney stones. The Lithostar(TM) is
installed in a self-propelled Calumet Coach (the Coach with the installed
Lithostar(TM) is referred to herein as the "Existing Lithotripsy System")
enabling the Partnership to provide lithotripsy services at various locations
primarily in southern Indiana and within a 100-mile radius of Louisville,
Kentucky (the "Service Area").
The Partnership intends to use the proceeds of this Offering
to (i) pay the costs of this Offering, (ii) finance a portion of the cost of
purchasing a new transportable lithotripter and a new mobile truck to transport
the new lithotripter (the "New Lithotripsy System"), and (iii) finance the costs
of upgrading the imaging system of the Partnership's Existing Lithotripsy
System. See "Sources and Applications of Funds" and "Business Activities -
Acquisition of New Lithotripsy System." The Existing Lithotripsy System and the
New Lithotripsy System are, collectively, referred to herein as the "Lithotripsy
Systems." The cash purchase price is due at subscription; however, prospective
Investors who meet certain requirements may be able fund a portion of their Unit
purchase price with the proceeds of certain third-party financing. See "Terms of
the Offering - Limited Partner Loans." The Offering will terminate on August 9,
2000 (or earlier upon the sale of all 25 Units as provided herein), unless
extended at the discretion of the General Partner for a period not to exceed 180
days.
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."
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Cash Selling Net Cash
Offering Price Commissions(1) Proceeds(2)
-------------- ----------- --------
Per Unit(3) $ 11,163 $ 150 $ 11,013
Total Maximum(4) $279,075 $ 3,750 $275,325
(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 $150 commission for
each Unit sold and will reimburse the Sales Agent for its Offering
costs (not to exceed $5,000). The Partnership has agreed to indemnify
the Sales Agent against certain liabilities, including liabilities
under 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 price per
Unit ($11,163) 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 Investors, the Partnership has arranged for financing of
a portion of the Units' purchase price 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 cash and a Limited Partner Note payable to the Bank in a maximum
principal amount of up to $8,663 per Unit to be purchased, a Loan and
Security Agreement, Security Agreement and two Uniform Commercial Code
Financing Statements ("UCC-1s") (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 Limited Partner 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) 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.
(4) Offering Proceeds will first be used by the Partnership to pay offering
costs and expenses (up to $33,750) and the remainder of the proceeds
will be used to finance (i) a portion of the cost of the New
Lithotripsy System and (ii) the costs of an imaging upgrade to the
Partnership's Existing Lithotripsy System. See "Sources and
Applications of Funds" and "Business Activities - Acquisition of New
Lithotripsy System." The Partnership seeks by this Offering to sell up
to 25 Units for an aggregate of up to $279,075 in cash ($275,325 net of
Sales Agent's commissions). All subscription funds 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 purchase price
through a Limited Partner Loan), rejection of the Investor's
subscription or termination of this 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 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
Unit purchase price is conditioned upon approval by the Bank of his
Limited Partner Loan. Upon admission as a Limited Partner, the
Investor's subscription funds will be released to the Partnership and
the Loan Documents, if any, will be released to the Bank. In the event
a subscription is rejected, all subscription funds (without interest),
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 August 9, 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 left intentionally blank.]
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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.
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TABLE OF CONTENTS
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
Limited Partner Loans...................................................18
Subscription Period; Closing............................................20
Offering Exemption......................................................20
Suitability Standards...................................................20
How to Invest...........................................................21
Restrictions on Transfer of Units.......................................21
PLAN OF DISTRIBUTION.......................................................22
BUSINESS ACTIVITIES........................................................23
General.................................................................23
Treatment Methods for Kidney Stone Disease..............................23
The Existing Lithotripsy System.........................................24
Upgrade to Existing Lithotripsy System..................................25
Acquisition of New Lithotripsy System...................................25
Acquisition of Additional Assets........................................28
Hospital Contracts......................................................29
Operation of the Lithotripsy Systems....................................30
Management..............................................................30
Employees...............................................................31
FINANCIAL CONDITION OF THE PARTNERSHIP.....................................31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS
OF OPERATIONS.....................................................35
SOURCES AND APPLICATIONS OF FUNDS..........................................37
THE GENERAL PARTNER........................................................38
COMPENSATION AND REIMBURSEMENT TO THE GENERAL PARTNER
AND ITS AFFILIATES................................................39
CONFLICTS OF INTEREST......................................................41
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER............................43
COMPETITION................................................................43
Affiliated Competition..................................................43
Other Competition.......................................................44
REGULATION.................................................................45
Federal Regulation......................................................45
State Regulation........................................................54
PRIOR ACTIVITIES...........................................................55
SUMMARY OF THE PARTNERSHIP AGREEMENT.......................................56
Nature of Limited Partnership Interest..................................57
Profits, Losses and Distributions.......................................57
Management of the Partnership...........................................58
Powers of the General Partner...........................................59
Rights and Liabilities of the Limited Partners..........................59
Restrictions on Transfer of Partnership Interests.......................60
Noncompetition Agreement and Protection of Confidential Information.....60
Dissolution and Liquidation.............................................61
Optional Purchase of Limited Partner Interests..........................62
Dilution Offerings......................................................62
Arbitration.............................................................63
Power of Attorney.......................................................63
Reports to Limited Partners.............................................63
Records.................................................................63
LEGAL MATTERS..............................................................63
ADDITIONAL INFORMATION.....................................................64
GLOSSARY...................................................................64
APPENDICES
Appendix A AGREEMENT OF LIMITED PARTNERSHIP OF INDIANA LITHOTRIPTERS
LIMITED PARTNERSHIP I
Appendix B FORM OF LIMITED PARTNER LOAN COMMITMENT (WITH EXHIBITS)
Appendix C FORM OF OPINION OF ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ & ▇▇▇▇, PLLC
Appendix D NOTES TO FINANCIAL STATEMENTS
▇▇▇▇▇▇▇ #910642 v 2 31
WINSTON #910642 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.
Operating Risks
General Risks of Operations. The Partnership was formed under
the laws of the State of Indiana on November 13, 1990 and commenced operations
in May, 1991. 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 Systems 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 Systems
difficult or unattractive. Other factors that may adversely affect the operation
of the Lithotripsy Systems 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, 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 fundamental purpose
will be to operate the Lithotripsy Systems. Because the Partnership is dependent
on only one line of business, it will have 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.
Impact of Insurance Reimbursement. The Partnership's revenues
are expected to continue to be derived from the fees paid by Contract Hospitals
and other health care facilities under contracts with the Partnership, as well
as fees directly billed or collected 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. Such reimbursement may be reduced for several reasons,
including the introduction of an outpatient prospective payment system regarding
Medicare patients, which in turn could lower reimbursement available from
private health insurers. The increasing influence of health maintenance
organizations and other managed care companies has resulted in pressure to
reduce the reimbursement available for lithotripsy procedures. Additionally, the
Health Care Financing Administration ("HCFA"), the federal agency which
administers the Medicare program, has issued rules which reduce the
reimbursement available for lithotripsy procedures provided at hospitals to
$2,265. See "Regulation - Federal Regulation." In some cases reimbursement rates
payable to the Partnership and the General Partner's Affiliates from commercial
third-party payors are already 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 Systems, 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 Partnership's Lithotripters.
The Partnership currently operates a Lithostar(TM) extracorporeal shock wave
lithotripter. The Lithostar(TM) has approximately an eleven-year United States
operating history, having received premarket approval from the FDA for renal
lithotripsy on September 30, 1988. This approval followed a period of clinical
testing beginning in February 1987 at four test sites in the United States,
which was preceded by substantial clinical testing of the Lithostar(TM) at the
Urological Clinic of the ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ University of Mainz, West Germany.
The General Partner estimates that more than 400 Lithostar(TM) systems are
currently operating in over twenty countries, and the General Partner and its
Affiliates operate over 30 Lithostars(TM) in this and other ventures. In the
General Partner's opinion, the Lithostar(TM) has proven to be reliable and
dependable medical equipment; however, any downtime periods necessitated for
maintenance or repairs of the Existing Lithotripsy System will adversely affect
Partnership revenues. In 1996, the FDA approved a new higher intensity
shock-head system for the Lithostar(TM), which the General Partner believes has
shortened procedure times. The Lithostar(TM) operated by the Partnership was
upfitted with the new shock-head system in 1996. Based upon a detailed follow-up
study of 86,000 renal and 51,000 ureteral stones treated on the Lithostar(TM) in
all of the General Partner's affiliated partnerships using both the original and
newer shock-head systems, the General Partner notes an 86% total success rate
with an overall retreatment rate of 15%. This retreatment rate included stones
of all sizes and locations, including staghorn calculi which at times required
multiple treatments. Based upon this study and the General Partner's experience
in doing well in excess of 128,000 cases over the past ten and one-half years in
its affiliated limited partnerships, the General Partner is of the opinion that
the Lithostar(TM) is generally an effective and sound alternative for the
treatment of renal stones.
The Lithostar(TM) used by the Partnership is an older model,
and the General Partner believes that the Partnership must acquire a new
transportable lithotripter in order to maintain the Partnership's current level
of efficiency and respond to competitive pressures. The Partnership anticipates
purchasing one new transportable extracorporeal shock wave lithotripter with the
proceeds of this Offering and Partnership debt financing. See "Business
Activities - Acquisition of New Lithotripsy System." The General Partner
believes a new transportable lithotripter offers an advantage over the
Partnership's Existing Lithotripsy System because it can be moved from site to
site more quickly, and can be used in hospital procedure rooms at treatment
facilities with limited pad space. Pursuant to the terms of the Partnership
Agreement, the Partnership's acquisition of a New Lithotripsy System is subject
to the prior approval of a Majority in Interest of the Limited Partners. In the
event the requisite consent of the Limited Partners is received, the General
Partner will select from three available models the unit which offers the best
combination of value and efficacy for the Partnership. The General Partner will
consult with the Partnership's Physician Advisory Board prior to selecting the
model of lithotripter to be acquired. The models currently under consideration
as of the date of this Memorandum are (i) the Storz Modulith(R) SLX-T
("Modulith(R) SLX-T"), (ii) the Medirex Tripter X-1 Compact ("Compact"), and
(iii) the Siemens Modularis(TM) Uro Plus ("Modularis(TM)").
The Modulith(R) SLX-T received FDA premarket approval on March
27, 1997. 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 and its Affiliates' experience with the
transportable Modulith(R) SLX-T has shown acceptable retreatment rates. A high
retreatment rate may adversely affect the Partnership. The General Partner and
its Affiliates currently operate 11 Modulith(R) SLX-T lithotripters throughout
the United States. The Compact and the Modularis(TM) received FDA premarket
approval in 1996 and 1998, respectively. The General Partner and its Affiliates
have limited direct experience with the use of the Compact and no direct
experience with the Modularis(TM). Downtime periods necessitated by maintenance
and repairs of any unit selected from the three models of lithotripters under
consideration will adversely affect Partnership revenues. Investors should note
that some studies indicate that lithotripsy may cause high blood pressure and
tissue damage. The Partnership 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. In
addition, the availability of lower-priced transportable lithotripters in the
United States has dramatically increased the number of lithotripters in the
country, increased competition for lithotripsy procedures and created downward
pressure on the prices the Partnership can charge for its services.
Partnership Limited Resources and Risks of Leverage. The
proceeds of this Offering cannot be accurately determined until the Closing has
occurred and the number of Units sold has been calculated. In any event, such
proceeds will not be sufficient to fund all anticipated expenses, and the
Partnership will have to supplement Partnership funds with the proceeds of debt
financing. See "Business Activities - Acquisition of the New Lithotripsy System"
and "Sources and Application of Funds." Although the General Partner maintains
good relationships with certain commercial lending institutions, it has not
obtained a loan commitment from any party in any amount on behalf of the
Partnership and whether one would timely be forthcoming on terms acceptable to
the Partnership cannot be assured. 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, 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.
Acquisition of Additional Assets. Subject to certain
limitations set forth in the Partnership Agreement, 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 in addition to the
Existing Lithotripsy System; or (ii) any other assets related to the provision
of lithotripsy services, the General Partner has the authority to establish
reserves or 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 prior written approval of a Majority in Interest of the Limited
Partners is required for the acquisition of the New Lithotripsy System and any
additional lithotripsy systems. See the Partnership Agreement attached hereto as
Appendix A. The acquisition of additional assets may substantially increase the
Partnership's monthly obligations and result in greater personnel requirements.
See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of
Leverage." Other than the New Lithotripsy System, which the Partnership intends
to purchase with a portion of the proceeds of the Offering and Partnership debt
financing, 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. In any event, no
Limited Partner would be personally liable on any additional Partnership
indebtedness without such 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. Any such
borrowing by the Partnership will serve to increase the risks to the Partnership
associated with leverage as provided above.
Competition. Many fixed-site and mobile lithotripters are
currently operating in and around the Service Area which will be in direct
competition with the Partnership's Lithotripsy Systems. Affiliates of the
General Partner operate in and near the Service Area. The competing lithotripsy
service providers, including the General Partner's Affiliates, generally have
existing contracts with hospitals and other facilities. Except as otherwise
provided in the Partnership Agreement or 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.
Limited Partner Restrictions. The Partnership Agreement severely restricts
the Limited Partners' ability to own interests in competing equipment or
ventures. 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 remain 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 TRICARE (formerly known as 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 have 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.
To the best knowledge of the General Partner, no certificate
of need ("CON") will be required to operate in Indiana or on a wholesale basis
in Kentucky. In Kentucky, the Partnership will lease the Lithotripsy Systems to
hospitals and other treatment centers, which will in turn be responsible for
providing the lithotripsy services and for billing. Various licensure
requirements must be met for the Partnership to provide mobile lithotripsy
services in Indiana and Kentucky. The General Partner will continue to seek to
comply with such requirements. See "Regulation - State Regulation".
Contract Terms and Termination. The Partnership provides
lithotripsy services to four Contract Hospitals pursuant to four separate
Hospital Contracts. The Contract Hospitals generally pay the Partnership a fee
for each lithotripsy procedure performed at the health care facility; however,
the Partnership does directly bill and collect for services from some patients
or their third-party payors. Three of the Hospital Contracts grant the
Partnership the exclusive right to provide lithotripsy services at the
particular Contract Hospitals. All of the Hospital Contracts provide for
automatic renewal on a year-to-year basis. Two of the Hospital Contracts are
terminable without cause at any time upon 60 days written notice by either
party, and two Hospital Contracts are terminable without cause at the end of the
initial term or any renewal period upon 60 days prior written notice. The
Partnership also leases the Existing Lithotripsy System to an Affiliate of the
General Partner for the purpose of providing lithotripsy services at a hospital
located in Louisville, Kentucky. See "Competition." The General Partner believes
it has a good relationship with the Contract Hospitals and does not anticipate
any terminations. There is no assurance, however, that fees payable to the
Partnership by Contract Hospitals will not decline or that terminations will not
occur. The resulting impact of such events would have a material adverse effect
on Partnership operations. 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. In addition, all of
the existing contracts have, and any new contracts are expected to have,
provisions permitting termination in the event certain laws or regulations are
enacted or applied to the contracting parties' business arrangements in a manner
deemed materially detrimental to either party. See "Government Regulation"
above. 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 would adversely affect Partnership revenues and such
effect could be material. Thus, there is no assurance that Partnership
operations as carried on as of the date of this Memorandum or contemplated in
the future will continue as herein described or contemplated, and the
cancellation of any service contract 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. 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
Systems or the Partnership. No ruling will be sought from the Service on the
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, however, and there is 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 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 PERSONAL TAX COUNSEL CONCERNING THE TAX
CONSEQUENCES ASSOCIATED WITH HIS OWNERSHIP OF AN INTEREST IN THE PARTNERSHIP.
THE CONCLUSIONS REACHED IN THE OPINION ARE RENDERED WITHOUT ASSURANCE THAT SUCH
CONCLUSIONS HAVE BEEN OR WILL BE ACCEPTED BY THE SERVICE OR THE COURTS.
THIS MEMORANDUM AND THE OPINION DO NOT DISCUSS, NOR WILL
COUNSEL BE RENDERING AN OPINION REGARDING, THE 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 AND JUDICIAL INTERPRETATIONS OF APPLICABLE FEDERAL INCOME TAX
LAWS. ANY OF THE FOREGOING MAY BE GIVEN RETROACTIVE EFFECT.
Possible Legislative or Other Actions Effecting 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 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
out-patient 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 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 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. This opinion is subject to certain assumptions and
qualifications. 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 and to maintain certain cash
reserves deemed necessary by the General Partner. If Partnership Cash Flow is
insufficient to fund expenses and maintain adequate reserves, 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 OR HER OWN TAX SITUATION. EACH INVESTOR SHOULD
CONSULT WITH HIS OR HER OWN TAX ADVISOR TO DETERMINE THE EFFECT OF THESE RULES
ON THE INVESTOR IN LIGHT OF THE INVESTOR'S INDIVIDUAL FACTS AND CIRCUMSTANCES.
Depreciation. As in the case of its existing equipment, the
Partnership will use the Modified Accelerated Cost Recovery System ("MACRS") to
depreciate the cost of any newly acquired equipment (including the New
Lithotripsy System) or improvements. Any additions or improvements to the
Lithotripsy Systems 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 Systems) 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,
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 this 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
General Partner, in its capacity as the Partnership's management agent, a
monthly management fee equal to the greater of $8,000 or 7.5% of Partnership
Cash Flow per month. The management fee is paid to the General Partner 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 General Partner 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. The Limited Partners
generally have very limited right to participate in the management, control or
conduct of the Partnership's business and affairs. See "Summary of the
Partnership Agreement." 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 and
operating partnerships and 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 Opinion of
Counsel, attached hereto as Appendix C.
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 ratable share of undistributed profits, and any distributions
received from the Partnership to the extent that, after giving effect to such
distributions, all liabilities of the Partnership, other than liabilities
attributable to Partners on account of their Partnership Interests, would exceed
the fair value of the Partnership's assets. However, under Indiana law, to the
extent that cash distributed to a Limited Partner constitutes the return of all
or a portion of such Limited Partner's capital contribution as provided by the
Act, although such distribution was rightfully made, such Limited Partner will
be liable to the Partnership for a period of one year following the receipt of
such distribution for any sum not in excess of such return of capital necessary
to discharge the Partnership's liabilities to creditors who extended credit to
the Partnership during the period the contribution was held by the Partnership.
Furthermore, if a Limited Partner receives a return of all or a portion of such
Limited Partner's capital contribution in violation of the Partnership Agreement
or the Act, such Limited Partner will be liable to the Partnership for a period
of six years for the amount of such contribution wrongfully returned to the
Limited Partner.
Dilution of Limited Partners' Interests. The General Partner
has the authority under the Partnership Agreement to cause the Partnership to
periodically offer and sell additional limited partnership interests to local
investors who are not Limited Partners (a "Dilution Offering"). Partnership
interests offered in a Dilution Offering must be sold in a manner and according
to terms in the best interest of the Partnership, as prescribed in the sole
discretion of the General Partner. 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 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 Limited Partner 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 Systems 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 Illiquidity of Units.
Transferability of Units is severely restricted by the Partnership Agreement and
the Subscription Agreement, and the consent of the General Partner is necessary
for any transfer. 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.
Arbitrary 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 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 came as 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. Prime Medical Services, Inc. ("Prime"), the sole
shareholder 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, the General Partner has the option to purchase all
the interest of a Limited Partner who (i) dies; (ii) becomes insolvent; or (iii)
acquires a direct or indirect ownership of an interest in a competing venture.
The General Partner, in its sole discretion, may elect to assign its purchase
option rights to the Partnership. A Limited Partner whose Limited Partner
Interest is sold, as provided above, or who ceases to be a Limited Partner of
the Partnership for any reason, will be further restricted from having a direct
or indirect ownership in a competing venture (including the lease or sublease of
competing technology) within a certain restricted market area for two years
after the disposition of his Partnership Interest. Limited Partners, except in
certain circumstances set forth in the Partnership Agreement, are also
absolutely prohibited from disclosing Partnership trade secrets and confidential
information. The option purchase price for the Partnership Interest is equal to
the Partner's share of the Partnership's book value, if any, as reflected by
such Partner's Capital Account (unadjusted for any appreciation in Partnership
assets and as reduced by depreciation deductions claimed by the Partnership for
tax purposes). Because losses, depreciation, deductions and distributions reduce
capital accounts, and because appreciation in assets is not reflected in capital
accounts, the option purchase price may be nominal in amount. See the
Partnership Agreement attached hereto as Appendix A and "Summary of the
Partnership Agreement - Optional Purchase of Limited Partner Interests."
THE PARTNERSHIP
Indiana Lithotripters Limited Partnership I, an Indiana
limited partnership (the "Partnership") was organized and created under the
Indiana Revised Uniform Limited Partnership Act (the "Act") on November 13,
1990. The general partner of the Partnership is Lithotripters, Inc., a North
Carolina corporation (the "General Partner"), and a wholly owned subsidiary of
Prime. The General Partner currently holds approximately a 25.82% interest in
the Partnership in its capacity as the general partner and the existing limited
partners (the "Initial Limited Partners") currently hold the remaining 74.18%
interest in the Partnership as limited partners (including an 8.65% limited
partner interest held by the General Partner). In the event that all 25 Units
offered hereby are sold, the General Partner will hold approximately a 19.365%
general partner interest in the Partnership, the Initial Limited Partners will
hold a 55.635% limited partner interest in the Partnership and the Investors who
purchase the Units offered hereby (the "New Limited Partners") will hold an
aggregate 25% interest in the Partnership. The Percentage Interests of the
General Partner and Initial Limited Partners (aggregate) will decrease by
approximately .26% and .74%, respectively, for each Unit sold. All Partners will
have their Partnership Interests further reduced in the event of additional
dilution offerings. See "Summary of the Partnership Agreement - Dilution
Offerings." The principal address of the Partnership and the General Partner is
▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇-▇▇▇, ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇. The telephone
number of the Partnership and the General Partner is (▇▇▇) ▇▇▇-▇▇▇▇.
TERMS OF THE OFFERING
The Units and Subscription Price
Indiana Lithotripters Limited Partnership I, an Indiana
limited partnership, hereby offers an aggregate of 25 Units of limited
partnership interest in the Partnership (the "Units"). Each Unit represents an
initial 1% 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 $11,163 in cash
payable 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 Investors, the Partnership has
arranged for financing a portion of the 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, and the
remainder of the proceeds, if any, will be used to finance a portion of the cost
of (i) purchasing a new transportable lithotripter (estimated at $425,000), and
a new mobile truck (estimated at $80,000), as well as pay applicable state sales
or use taxes on the New Lithotripsy System (estimated at $25,250), and (ii)
upgrading the imaging system of the Partnership's Existing Lithotripsy System
(estimated at $56,500). See "Sources and Applications of Funds." The
Partnership's acquisition of the New Lithotripsy System is subject to the prior
approval of a Majority in Interest of the Limited Partners. See the Partnership
Agreement, attached hereto as Appendix A. The proceeds of this Offering cannot
be calculated until the number of Units sold has been determined at the Closing.
In the event the proceeds of the Offering will be insufficient to fund all of
the costs described above (a certainty in the case the acquisition of New
Lithotripsy System is approved), it is anticipated that the Partnership will
also use Partnership Cash Flow, reserves and/or the proceeds of debt financing
to fund such costs. There is no assurance, however, that debt financing will be
available for such purposes. See "Risk Factors - Operating Risks - Partnership
Limited Resources and Risks of Leverage" and "Business Activities - Acquisition
of New Lithotripsy System." As of the date of this Memorandum, the requisite
approval of the Initial Limited Partners is being solicited by the General
Partner. In the event the purchase of the New Lithotripsy System is not approved
and Offering proceeds remain after funding the Offering costs and the upgrade,
such proceeds will be kept in Partnership reserves and/or distributed to the
Initial Limited Partners.
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, 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 purchase price with
the proceeds of a Limited Partner ▇▇▇▇ is conditioned upon the Bank's approval
of such loan. See "Terms of the Offering - Limited Partner Loans." 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 Loan
Documents to the Bank and the Bank will pay the proceeds from the Limited
Partner Loan 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 Loan 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 reduces an Investor's subscription as provided above, the
Investor's cash Unit purchase price, or the principal amount of his Limited
Partner Note, as the case may be, will be proportionately refunded and reduced.
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.
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
Limited Partner Loan Commitment, attached hereto as Appendix B. Prospective
Investors should review carefully all the provisions contained in the Limited
Partner 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 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 Limited
Partner Loan Commitment, a Loan and Security Agreement, the form of which is
attached as Exhibit B to the Limited Partner Loan Commitment, a Security
Agreement, the form of which is attached as Exhibit C to the Limited Partner
Loan Commitment and two UCC-1's, the form of which are attached to the
Subscription Packet (collectively, the "Loan Documents"). In no event may the
maximum amount borrowed per Unit exceed $8,663. The Limited Partner Note is
repayable in twelve (12) predetermined installments in the respective amounts
set forth in the Limited Partner Loan Commitment. The installments are payable
on each January 15th, April 15th, June 15th and September 15th commencing on
January 15, 2001 (assuming the Closing occurs prior to August 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. Under the terms of the Limited Partner Loan, the Bank may extend the
maturity date for the Limited Partner Note and increase installment payments
thereunder in the event interest rates substantially increase. See the form of
the Limited Partner Note attached as Exhibit A to the Limited Partner 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 Limited
Partner 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. In the event the Distributions are insufficient
for full payment of any installment due under the Limited Partner Note, the
Limited Partner himself shall be liable for the timely payment of any remaining
sums due under the Limited Partner Note. See the form of the Loan and Security
Agreement attached as Exhibit B to the Limited Partner 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 Partnership 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 August 9, 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 Indiana and Kentucky 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 that meet the qualifications for investment in the
Partnership and who wish to subscribe for Units may do so by following the
instructions contained 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 any
Limited Partner Loan. Such event may constitute a default under a Limited
Partner Note. 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 all 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, which also owns all the stock of the General Partner.
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 $150 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
$5,000. 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 August 9, 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."
The Partnership seeks by this Offering to sell a maximum of 25
Units for a maximum of an aggregate of $279,075 in cash ($275,325 net of Sales
Agent Commissions). The Partnership has set no minimum number of Units to be
sold in this Offering. The subscription funds, 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 financed purchases of Units), the
Partnership rejects the subscription or the Offering is terminated. Upon the
receipt and acceptance of an Investor's subscription, which, if the Investor
intends to finance a portion of the Unit purchase price with a Limited Partner
Loan, will be conditioned upon the Bank's approval of such loan, the Investor
will be admitted to the Partnership as a Limited Partner. Upon admission as a
Limited Partner, the Investor's subscription funds will be released from escrow
to the Partnership, and the 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 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 cash subscription funds
(without interest) and any Limited Partner Note will be returned to the
Investor.
BUSINESS ACTIVITIES
General
The Partnership was formed to (i) acquire one or more
Lithotripsy Systems and operate them at various locations 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
Lithotripsy Systems 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 Systems. The Partnership has
contracted with four hospitals and medical centers to provide lithotripsy
services to their patients.
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, cystoscopic
procedures, endoscopic procedures, 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 Existing Lithotripsy System
The Partnership currently operates a Lithostar(TM) which was
acquired new and placed in service in May 1991. The Lithostar(TM) was developed
as a cooperative venture between Siemens and the Urological Clinic at ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇ University in Mainz, West Germany. As a part of this venture, a
Lithostar(TM) prototype was installed in March 1986 at the Urological Clinic at
the University of Mainz with successful results. On November 18, 1987 the
Lithostar(TM) was unanimously recommended for approval by the FDA's advisory
panel of experts for urology devices. On September 30, 1988 the Lithostar(TM)
received FDA premarket approval for use in the United States for renal
lithotripsy. On April 18, 1989, the FDA approved the Lithostar(TM) for mobile
lithotripsy. On July 1, 1996, the FDA approved a new higher intensity shock-head
system for the Lithostar(TM) which has since been installed in the Lithostar(TM)
used by the Partnership. Currently, the General Partner estimates that more than
400 Lithostar(TM) systems are performing lithotripsy procedures in over 20
countries throughout the world. All components of the Lithostar(TM) are
manufactured by Siemens, a diversified multinational company.
The Lithostar(TM) was designed with a view towards
substantially improving early lithotripsy technology. See "Business Activities -
Treatment Methods for Kidney Stone Disease." Technological improvements
incorporated into the Lithostar(TM) include an improved work station, a
shock-wave component that has eliminated the need for both water bath treatment
and disposable electrodes, and an excellent stone localization and imaging
system. Based upon its experience in its affiliated lithotripsy ventures, the
General Partner believes that most patients can be treated with the
Lithostar(TM) without anesthesia of any kind. The General Partner also believes
that Lithostars(TM) upfitted with the higher intensity shock-head system
experience somewhat shorter treatment durations. Based upon its experience with
over 30 Lithostars(TM) in this and other limited partnerships sponsored by the
General Partner and its Affiliates, the General Partner has found that the
Lithostar(TM) can fragment most kidney stones without anesthesia, cystoscopy or
the insertion of ureteral catheters, and the General Partner believes that
overall the Lithostar(TM) has been an effective alternative for the treatment of
patients.
The Coach housing the Lithostar(TM) was manufactured by
Calumet Coach Company and was placed in service in May 1991. The Coach has been
completely upfitted for the Lithostar(TM) and its clinical operations. The
engine on the Calumet Coach was replaced in June 1994 and the cabin was
refurbished in December 1998. Service for the Coach is obtained on an as-needed
basis. The General Partner estimates that expenditures for maintenance and
repair of the Coach have been incurred at a rate of approximately $15,000 per
year.
Upgrade to Existing Lithotripsy System
During the past year, an upgrade to the Lithostar(TM)'s
imaging system has become available and the General Partner, through its limited
direct experience with its Affiliates, believes that such an upgrade
significantly enhances the imaging capabilities of the Lithostar(TM), and thus
the overall efficiency of the lithotripter. Upon the successful closing of the
Offering, the Partnership will contract with Servicetrends, Inc., a lithotripsy
maintenance provider, to replace the lithotripter's image intensifiers, install
new digital x-ray cameras and pickup tubes and replace associated power
supplies. In addition, Servicetrends may also replace existing computer
monitors. The estimated cost of the imaging upgrade is $56,500. The General
Partner does not anticipate that the upgrade will require any downtime for the
Existing Lithotripsy System.
Acquisition of New Lithotripsy System
Pursuant to the terms of the Partnership Agreement, the
Partnership's acquisition of the New Lithotripsy System is subject to the prior
approval of a Majority in Interest of the Initial Limited Partners. As of the
date of this Memorandum, the requisite approval of the Initial Limited Partners
is being solicited by the General Partner. Assuming the General Partner receives
the necessary approval, it is anticipated that after the successful Closing of
this Offering, the Partnership will purchase a new transportable lithotripter
(up to $425,000) and a new mobile truck to transport the new lithotripter from
site to site (up to $80,000) with a portion of the proceeds of this Offering and
the proceeds of Partnership debt financing. The Offering proceeds cannot be
accurately determined until the Closing has occurred and the number of Units
sold have been calculated. In any event, such proceeds will not be sufficient to
fund all anticipated expenses. In the view of risks associated with leverage and
a desire to conserve Partnership resources, it is not expected that the
Partnership will acquire the New Lithotripsy System unless sufficient business
opportunities with treatment centers are anticipated by the General Partner to
be available. See "Risk Factors - Operating Risks - Partnership Limited
Resources and Risks of Leverage" and "Sources and Applications of Funds." The
portion of the proceeds of the Offering, if any, reserved for the purchase of
the New Lithotripsy System will be held in the Company's capital reserves until
the purchase of the New Lithotripsy System is made. During the time period in
which the Offering proceeds are held in the reserves, they will be subject to
the potential claims of Partnership creditors. Although the General Partner
maintains good relationships with certain commercial lending institutions, the
Partnership has not obtained a loan commitment from any party in any amount and
whether one would timely be forthcoming on terms acceptable to the Partnership
cannot be assured.
In the event the requisite consent of the Limited Partners is
received, the General Partner will select from three available models the unit
which offers the best combination of value and efficacy for the Partnership. The
General Partner will consult with the Partnership's Physician Advisory Board
prior to selecting the model of lithotripter to be acquired. The models
currently under consideration as of the date of this Memorandum are (i) the
Storz Modulith(R) SLX-T ("Modulith(R) SLX-T"), (ii) the Medirex Tripter X-1
Compact ("Compact"), and (iii) the Siemens Modularis(TM) Uro Plus
("Modularis(TM)"). The General Partner believes a new transportable lithotripter
will allow the Partnership to take advantage of additional treatment
opportunities because such a unit can be moved from site to site more easily and
more quickly, and can be moved into a hospital procedure room, providing
increased flexibility in performing lithotripsy services at sites having limited
pad space.
Modulith(R) SLX-T. The Modulith(R) SLX-T is manufactured by
▇▇▇▇ ▇▇▇▇▇ Lithotripsy-America, Inc., and received FDA premarket approval on
March 27, 1997. The General Partner and its Affiliates currently operate 11
Modulith(R) SLX-T lithotripters throughout the United States and have had
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 Partnership's Lithotripters." The Modulith(R) SLX-T was
specially 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 ureteroscopy. 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.
Storz has agreed to provide the Partnership with a Modulith(R)
SLX-T lithotripter together with accessories for an estimated purchase price of
$425,000 (excluding state sales tax), which price reflects approximately a 19%
discount ($100,000) from Storz's current list price of $525,000. Storz provides
technical support to facilitate installation and testing of the Modulith(R)
SLX-T. The Modulith(R) SLX-T comes with an eighteen month limited warranty
during which time all maintenance, repairs, shock tubes, glassware and
capacitors are provided free of charge. The Storz Maintenance Contract in future
years covers the same items listed above and is quoted currently at an annual
price of $40,000.
Compact. The Compact is manufactured by Medirex Systems Corp.
("Medirex"). Medirex has agreed to provide the Partnership with a Compact
lithotripter together with accessories for a total purchase price of
approximately $395,000 (excluding state sales tax), which price reflects
approximately an 11% discount ($50,000) from the current list price of $445,000.
The Compact received FDA premarket approval in 1996. The General Partner and its
Affiliates have limited direct experience with the use of the Compact
lithotripter.
Medirex is affiliated with the Direx group of companies, which
have been pioneers in the development of transportable lithotripsy technology.
The Compact was particularly designed for the treatment of urological stones. In
addition to the efficient fragmentation of all types of urinary tract stones,
the Compact is suitable for performing a range of simple urological procedures.
The Compact consists of a spark gap generator, a Digiscope RX2 fluoroscopic
image intensifier and a patient table. The operating technology is known as
electrohydraulic technology, and the Compact generates pressure waves by the use
of an electrode inside a metal reflector. The Compact localizes stones using a
Digiscope RX2 fluoroscopic image intensifier, which is collapsible for easy
transport. The U-arm laterally rotates into over- and under-table positions to
allow display of the entire ureter without repositioning the patient, and the
pressure generator can be rotated out of the X-ray path. The patient table can
be moved electronically by remote control in all three dimensions and is capable
of supporting heavy patients. The table also folds down at both ends to improve
transportability. Medirex provides a blank patient database with the Compact for
discretionary use and ownership by the purchaser. Medirex provides technical
support to facilitate installation and testing of the Compact. The Compact has
an eighteen month limited warranty during which time all maintenance, repairs,
shock tubes, glassware and capacitors are provided free of charge. The Medirex
maintenance contract in future years covers the same items listed above and is
currently quoted at an annual price of $35,000. Any expenses for maintenance and
repairs not covered by the warranty are the obligations of the purchaser.
Modularis(TM). The Modularis(TM) is manufactured by Siemens
Medical Systems, Inc. ("Siemens"). Siemens has agreed to provide the Partnership
with a Modularis(TM) with accessories for a total purchase price of
approximately $425,000 (excluding state sales tax), which price reflects
approximately a 33% discount ($210,000) from the current list price of $635,000.
The Modularis(TM) received FDA premarket approval in October 1998. The General
Partner and its Affiliates have no direct experience with the use of the
Modularis(TM) lithotripter.
The Modularis(TM), like the other models under consideration,
was particularly designed for the treatment of urological stones. In addition to
the efficient fragmentation of all types of urinary tract stones, the
Modularis(TM) is suitable to performing a wide range of urological procedures,
including, laparoscopy, endourology and moderate ambulatory interventions. The
Modularis(TM) unit consists of a shock wave System C electromagnetic generator
component, a mobile C-arm fluoroscopic imaging system component and a fully
functional endourology patient table. In addition, the Modularis(TM) can be
configured to include a dual echo ultrasound system. The operating technology is
electromagnetic shock waves and the Modularis(TM) localizes stones using a
counterbalanced isocentric C-arm for fluoroscopy, radiography and intervention
monitoring. The C-arm allows unrestricted movement within a 190(degree) orbital
rotation. Due to the modular configuration of the Modularis(TM), the ESWL
component can be removed from the x-ray path. The patient table can be moved
electronically by remote control in all dimensions via footswitch or keypad, and
is capable of supporting heavy patients. The tabletop, head and foot are
extendable and the patient table is equipped with a side cut-out/insert to
accommodate the shock wave head. The table top is radiolucent in the diagnostic
area. Siemens provides technical support to facilitate installation and testing
of the Modularis(TM). The Modularis(TM) has a twelve month limited warranty
during which time all maintenance, repairs, shock tubes, glassware and
capacitors are provided free of charge. The Siemens maintenance contract in
future years covers the same items listed above and is currently quoted at an
annual price of $50,000.
The General Partner anticipates that upon the expiration of
the warranty on the new lithotripter selected, the Partnership would either pay
for maintenance service on the unit on an as needed basis, or enter into an
annual maintenance agreement with a third-party service provider. The
Partnership also plans to acquire from AK Associates, L.L.C., an Affiliate of
the General Partner, a Ford 400 Series truck customized to include a 14' cargo
box to house the new lithotripter while it is transported from site to site. The
floor of the truck is loading dock height so the lithotripter can be easily
loaded on and off the truck at each treatment facility. The truck 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 truck 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 new lithotripter and its
components. The Partnership will either purchase the manufacturer's service
contract for the truck or pay for service on an as needed basis. The General
Partner estimates that expenditures for maintenance and repair of the truck will
be approximately $6,000 per year.
Acquisition of Additional Assets
Subject to certain limitations, 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 in addition to the
Lithotripsy Systems, or (ii) any other assets related to the provision of
lithotripsy services, the General Partner has the authority to establish
reserves or borrow funds on behalf of the Partnership to acquire such assets,
and may use Partnership assets and revenues to secure and repay such borrowings.
The Partnership's acquisition of the New Lithotripsy System, and any additional
lithotripsy systems, is subject to the prior approval of a Majority in Interest
of the Limited Partners. See the Partnership Agreement attached hereto as
Appendix A. 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 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. See "Risk Factors -
Operating Risks - Partnership Limited Resources and Risks of Leverage."
Hospital Contracts
The Partnership has entered into four Hospital Contracts with
four Contract Hospitals to operate the Lithotripsy Systems at the Contract
Hospitals. The Contract Hospitals are:
Dearborn County Hospital, Lawrenceburg, IN
▇▇▇▇▇ Memorial Hospital, New Albany, IN
King's Daughters' Hospital, Madison, IN
St. ▇▇▇▇▇▇▇ Hospital, Beech Grove, IN
Three 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, nurse and
certain ancillary services such as scheduling necessary for the lithotripsy
procedures. The Contract Hospitals generally pay the Partnership a fee for each
lithotripsy procedure performed at that health care facility; however, the
Partnership does directly bill and collect for services from some patients or
their third-party payors. All of the Hospital Contracts provide for automatic
renewal on a year-to-year basis. Two of the Hospital Contracts are terminable
without cause at any time by either party on 60 days notice, and two Hospital
Contracts may be terminated without cause upon 60 days or less written notice by
either party prior to any renewal date. The Partnership also leases the Existing
Lithotripsy System to Prime Lithotripter Operations, Inc. d/b/a Tennessee Valley
Lithotripter ("TVL"), an Affiliate of the General Partner. TVL pays the
Partnership a per procedure rental fee and uses the Existing Lithotripsy System
to provide lithotripsy services at Suburban Hospital in Louisville, Kentucky.
See "Conflicts of Interest." The General Partner believes it has a good
relationship with 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." The
Partnership is attempting to negotiate similar agreements to the existing
Hospital Contracts with additional treatment centers in the Service Area. There
can be no assurance that the Partnership will be able to enter into any new
agreements.
Reimbursement Agreements. Prime and the General Partner have
negotiated third-party reimbursement agreements with certain national and local
commercial third-party payors. The national agreements are negotiated by Prime
and the General Partner apply to all the lithotripsy partnerships which are
Affiliates of the General Partner, including the Partnership, to the extent such
entities directly bill and collect from patients or their third-party payors.
Some of the national and local payors have agreed to pay a fixed price for
lithotripsy services. For the most part, the agreements may be terminated by
either party on 60 to 120 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 Systems
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 Systems 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 Systems 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 will endeavor to the best of its
abilities to require that physicians using the General Partner's Lithotripsy
Systems comply with the Partnership's quality assurance and outcome analysis
programs in order to maintain the highest quality of patient care. In addition,
the Partnership reserves the right to request that (i) physicians (or members of
their practice groups) treat only their own patients with the Lithotripsy
Systems; and (ii) physician Limited Partners disclose to their patients in
writing their financial interest in the Company prior to treatment, if it
determines that such practices are advisable under applicable law. The former
practice is required under Kentucky law. See "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
Systems. Thus, local qualified physicians who are not Limited Partners will be
given the same opportunity to treat their patients using the Lithotripsy Systems
as provided above.
Management
The Partnership has entered into a management agreement (the
"Management Agreement") with the General Partner whereby the General Partner is
obligated to supervise and coordinate the management and administration of the
operation of the Lithotripsy Systems on behalf of the Partnership in exchange
for a monthly management fee equal to the greater of 7.5% of Partnership Cash
Flow per month or $8,000 per month. See "Compensation and Reimbursement to the
General Partner and its Affiliates." The General Partner's services under the
Management Agreement include arranging for the 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 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 Systems. Costs incurred by the
General Partner in performing its duties under the Management Agreement are the
responsibility of the Partnership. The General Partner'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 General Partner performs its duties under the Management Agreement.
The Management Agreement is in the last year of its first 5-year renewal term
and will be automatically renewed for two additional five-year terms unless
terminated by the Partnership or the General Partner. The General Partner has
also appointed a Physician Advisory Board made up of representative local
physicians. The General Partner consults with the Physician Advisory Board from
time to time, as needed, on matters including the Partnership's Quality
Assurance Program, utilization review, outcome analysis, patient scheduling and
certain Partnership expenditures.
Employees
The Partnership employs as full time employees two registered
technicians and two registered nurses. The Partnership anticipates that an
additional technician will be hired for staffing the New Lithotripsy System.
Prime provides group medical, dental, long-term disability, accidental death and
dismemberment and life insurance benefits. The Partnership also provides paid
holidays, sick leave, and vacation benefits and other miscellaneous benefits
including bereavement, military reserves, jury duty and educational assistance
benefits.
FINANCIAL CONDITION OF THE PARTNERSHIP
Set forth on the following pages are the Partnership's
internally prepared accrual based (i) Income Statements for the four-month
periods ended April 30, 2000 and April 30, 1999, and the years ended December
31, 1997, December 31, 1998 and December 31, 1999; (ii) Balance Sheets as of
April 30, 2000, April 30, 1999, December 31, 1997, December 31, 1998 and
December 31, 1999; (iii) Cash Flow Statements for the four-month periods ended
April 30, 2000 and April 30, 1999, and the years ended December 31, 1997,
December 31, 1998 and December 31, 1999; and (iv) Statements of Partner's Equity
for the four-month periods ended April 30, 2000 and April 30, 1999, and the
years ended December 31, 1997, December 31, 1998 and 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.
[The remainder of this page is intentionally left blank]
INDIANA LITHOTRIPTERS LIMITED PARTNERSHIP I
INCOME STATEMENTS*
------------------------------------- ------------------------------------------
Four Months Ended April 30, Years Ended December 31,
2000 1999 1999 1998 1997
----- -------------- -------------- -------------- -------------- --------------
-----------------------------------------
Revenues $379,553 $813,634 $1,870,242 $2,161,840 $2,369,077
-----------------------------------------
-----------------------------------------
Operating Expenses:
-----------------------------------------
Employee
compensation
and benefits 82,897 96,602 255,999 231,446 230,442
-----------------------------------------
Equipment
maintenance
and repairs 11,155 37,144 119,321 122,946 141,086
-----------------------------------------
Depreciation
and
amortization 67,191 67,026 201,334 194,044 190,883
-----------------------------------------
Management
fees 44,501 33,514 108,680 129,301 117,751
-----------------------------------------
Overhead
fees 11,096 24,674 72,552 55,337 81,270
Other
operating
expenses 20,870 25,723 73,954 139,049 123,803
----- -------------- -------------- -------------- -------------- --------------
Total
operating
expenses 237,710 284,683 831,840 872,123 885,235
-----------------------------------------
-----------------------------------------
Operating
income 141,843 528,951 1,038,402 1,289,716 1,483,842
-----------------------------------------
-----------------------------------------
Other
income
(expense):
-----------------------------------------
Interest
and
other
income 3,695 2,878 8,329 15,477 15,953
Interest
Expense 0 0 0 (13) 0
-----------------------------------------
-------------- -------------- -------------- -------------- --------------
Total
other
income
(expense) 3,695 2,878 8,329 15,464 15,953
-------------- -------------- -------------- -------------- --------------
-----------------------------------------
Net
income $145,538 $531,829 $1,046,731 $1,305,181 $1,499,795
===== ============== ============== ============== ============== ==============
*See notes to financial statements, attached
hereto as Appendix D.
INDIANA LITHOTRIPTERS LIMITED PARTNERSHIP I
BALANCE SHEETS*
-------------- --------------- ---------------- ---------------- ---------------
April 30, 2000 April 30, 1999 December 31, December 31, December 31,
1999 1998 1997
-------------- --------------- ---------------- ---------------- ---------------
ASSETS
------------------------------------
------------------------------------
Cash $167,672 $158,107 $376,462 $544,324 $701,364
------------------------------------
Accounts
receivable,
net 397,821 790,741 663,118 579,188 466,550
Other
current
assets 86,187 13,997 66,026 12,378 8,462
-------------- --------------- ---------------- ---------------- ---------------
Total
current
assets 651,680 962,845 1,105,606 1,135,890 1,176,376
------------------------------------
------------------------------------
Equipment
1,942,432 1,933,030 1,942,432 1,882,655 1,882,655
Accumulated
depreciation
(1,758,835) (1,557,336) (1,691,644) (1,490,310) (1,296,266)
-------------- --------------- ---------------- ---------------- ---------------
183,597 375,694 250,788 392,345 586,389
------------------------------------
------------------------------------
Other
assets 0 0 0 0 0
------------------------------------
-------------- --------------- ---------------- ---------------- ---------------
Total
assets
$835,277 $1,338,539 $1,356,394 $1,528,235 $1,762,765
============== =============== ================ ================ ===============
------------------------------------
LIABILITIES
------------------------------------
Accounts
payable
$50,510 $21,741 $47,607 $45,602 $68,262
------------------------------------
Accrued
expenses
11,416 41,297 22,384 73,961 41,012
Distributions
payable
0 0 335,000 465,000 650,000
-------------- --------------- ---------------- ---------------- ---------------
Total
current
liabilities
61,926 63,038 404,991 584,563 759,274
------------------------------------
------------------------------------
PARTNERS' EQUITY
------------------------------------
Capital
contributions
(64,244) 64,244 64,244 64,244 64,244
------------------------------------
Purchase
of partners'
interests
(104,034) 0 0 0 0
Distributions
paid
(12,848,004) (11,789,448) (12,628,448) (11,589,448) (10,224,448)
Accumulated
earnings
13,661,145 13,000,705 13,515,607 12,468,876 11,163,695
-------------- --------------- ---------------- ---------------- ---------------
Total
partners'
equity
773,351 1,275,501 951,403 943,672 1,003,491
====================================
Total
liabilities
and
partners'
equity
$835,277 $1,338,539 $1,356,394 $1,528,235 $1,762,765
============== =============== ================ ================ ===============
*See notes to financial statements, attached
hereto as Appendix D.
INDIANA LITHOTRIPTERS LIMITED PARTNERSHIP I
STATEMENTS OF CASH FLOWS*
---- -------------------------------- ------------------------------------------
Four Months Ended April 30, Years Ended December 31,
2000 1999 1999 1998 1997
---------------- --------------- -------------- ------------- -------------
Cash flows from Operating Activities:
Net
income $145,538 $531,829 $1,046,731 $1,305,181 $1,499,795
------------------------------------------
Adjustments to reconcile net income To cash provided by operating Activities:
------------------------------------------
Depreciation
and
amortization 67,191 67,026 201,334 194,044 190,883
------------------------------------------
------------------------------------------
Change
in operating
assets and
------------------------------------------
Accounts
receivable 265,297 (211,553) (83,930) (112,638) (32,689)
------------------------------------------
Other
current
assets (20,161) (1,619) (53,648) (3,916) 2,893
------------------------------------------
Accounts
payable 2,903 (23,861) 2,005 (22,660) 46,825
Accrued
expenses (10,968) (32,664) (51,577) 32,949 20,777
---- ---------------- --------------- -------------- ------------- -------------
Net cash
provided by
operating
activities 449,800 329,158 1,060,915 1,392,960 1,728,484
---- ---------------- --------------- -------------- ------------- -------------
------------------------------------------
Cash flows from Investing Activities:
Purchase of equipment, furniture &
fixtures 0 (50,375) (59,777) 0 0
---- ---------------- --------------- -------------- ------------- -------------
Net Cash (used in)
investing
activities 0 (50,375) (59,777) 0 0
---- ---------------- --------------- -------------- ------------- -------------
------------------------------------------
Cash flows from Financing Activities:
------------------------------------------
Purchase of
partners' interests
(104,034) 0 0 0 0
Distributions to
partners (554,556) (665,000) (1,169,000) (1,550,000) (1,850,000)
---- ---------------- --------------- -------------- ------------- -------------
Net cash
(used in)
financing
activities (658,590) (665,000) (1,169,000) (1,550,000) (1,850,000)
---- ---------------- --------------- -------------- ------------- -------------
Net increase
(decrease)
in cash during
the period (208,790) (386,217) (167,862) (157,040) (121,516)
---- ---------------- --------------- -------------- ------------- -------------
Cash, beginning
of period 376,462 544,324 544,324 701,364 822,880
---- ---------------- --------------- -------------- ------------- -------------
------------------------------------------
Cash,
end of
period $167,672 $158,107 $376,462 $544,324 $701,364
---- ---------------- --------------- -------------- ------------- -------------
*See notes to financial statements, attached
hereto as Appendix D.
INDIANA LITHOTRIPTERS LIMITED PARTNERSHIP I
STATEMENTS OF PARTNERS' EQUITY*
---- ----------------------------- ---------------------------------------------
Period ended April 30 Years ended December 31,
==========================================
2000 1999 1999 1998 1997
---- -------------- -------------- -------------- --------------- --------------
-------------- -------------- -------------- --------------- --------------
Beginning
partners'
equity $951,403 $943,672 $943,672 $1,003,491 $1,253,696
------------------------------------------
------------------------------------------
------------------------------------------
Net
income 145,538 531,829 1,046,731 1,305,181 1,499,795
------------------------------------------
------------------------------------------
Purchase
of partners'
interests
(104,034) 0 0 0 0
------------------------------------------
Distributions
to
partners (219,556) (200,000) (1,039,000) (1,365,000) (1,750,000)
---- -------------- -------------- -------------- --------------- --------------
-------------- -------------- -------------- --------------- --------------
------------------------------------------
------------------------------------------
Ending
partners'
equity $773,351 $1,275,501 $951,403 $943,672 $1,003,491
------------------- -------------- -------------- --------------- --------------
*See notes to financial statements attached
hereto as Appendix D.
MANAGEMENT'S DISCUSSION ANDANALYSIS OF THE RESULTS OF OPERATIONS
Four Months Ended April 30, 2000 and April 30, 1999
Revenues. Total revenues decreased $434,081 (53%) for the four
months ended April 30, 2000 compared to the same period in 1999 due to a 61%
decrease in the number of procedures performed and partially offset by an
increase in the revenue per procedure.
Operating Expenses. Operating expenses decreased by $46,973
(17%) for the four months ended April 30, 2000 compared to the same period in
1999. This decrease is due primarily to a decrease of $25,989 in equipment
maintenance and repairs due to changing from fixed cost service contracts on the
lithotripter to a service call basis with a stop loss insurance arrangement and
a decrease of $13,705 in employee compensation and benefits due to a decrease in
incentive compensation based on lower income.
Other Income (Expense). Total other income (expense), net increased by $817
(28%) due to an increase in interest income.
Year Ended December 31, 1999 and December 31, 1998
Revenues. Total revenues decreased $291,598 (13%) for the year
ended December 31, 1999 compared to the same period in 1998 due to a 3% decrease
in the number of procedures performed and an increase in the estimate of the
beginning of year allowance for contractual adjustments due to the availability
of improved information.
Operating Expenses. Operating expenses decreased by $40,283
(5%) for the year ended December 31, 1999 compared to the same period in 1998,
primarily due to a decrease in other operating expenses due to nonrecurring
equipment rental charges of $42,978 incurred in 1998 while the Coach was being
refurbished.
Other Income (Expense). Total other income (expense), net decreased by
$7,135 (46%) due to the decrease in interest income.
Year Ended December 31, 1998 and December 31, 1997
Revenues. Total revenues decreased $207,237 (9%) for the year
ended December 31, 1998 compared to the same period in 1997 due to a 14%
decrease in the number of procedures performed, which resulted from a 24%
decline in procedures at hospitals with contracts during both years and
partially offset by the Partnership providing service to TVL, and a 6% increase
in revenue per case.
Operating Expenses. Operating expenses decreased by $13,112
(1%) for the year ended December 31, 1998 compared to the same period in 1997,
due to a decrease of $25,933 in overhead allocation related to the decline in
overhead costs incurred by the General Partner, and a $18,140 decline in
equipment maintenance and repair, which declined due to the renegotiation of the
equipment service contract. These declines were partially offset by an increase
of other operating expenses of $15,246, which was due to the rental of a loaner
unit from the General Partner while the Partnership's Coach was refurbished in
late 1998, and an increase in management fees of $11,550, which was due to
higher collections in 1998.
Other Income (Expense). Total other income (expense), net decreased by $476
(3%) due to the decrease in interest income.
[The remainder of this page is intentionally left blank]
SOURCES AND APPLICATIONS OF FUNDS
The following table sets forth the funds expected to be
available to the Partnership from this Offering if all 25 Units are sold and
their anticipated and estimated uses.
----------------------------- --------------------------------------------------
Sources of Funds Sale of 25 Units
Offering Proceeds(1) $279,075 ( 100%)
------- -----
TOTAL SOURCES $279,075 ( 100%)
======= ====
Application of Funds
Syndication Costs(2) $33,750 (12%)
Capital Reserve(3) $245,325 (88%)
------- ---
TOTAL APPLICATIONS $279,075 ( 100%)
======= ====
----------------------------- -------------------- -----------------------------
Notes to Sources and Applications of Funds Table
(1) Assumes all 25 Units are purchased by qualified Investors.
(2) Includes $3,750 in commissions payable to the Sales Agent,
reimbursement of $5,000 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) It is anticipated that upon receiving the requisite prior
approval of the Limited Partners, and after the successful Closing of this
Offering, the Partnership will purchase (i) a new transportable lithotripter
(estimated cost of $425,000), (ii) a new mobile truck (estimated cost of
$80,000), and (iii) pay applicable state sales taxes on the New Lithotripsy
System (estimated at $25,250). In addition, the Partnership will pay the
expenses associated with upgrading its Lithostar(TM) at an estimated cost of
$56,500. See "Business Activities - Acquisition of the New Lithotripsy System"
and " - Upgrade of the Existing Lithotripsy System." The Capital Reserve
represents proceeds of the Offering that will be used to pay a portion of such
costs. The proceeds of this Offering cannot be accurately determined until the
Closing has occurred and the number of Units sold has been calculated. In the
event such proceeds will not be sufficient to fund all anticipated expenses (a
certainty in the case the acquisition of the New Lithotripsy System is
approved), the remainder of such costs will be financed through Partnership Cash
Flow, reserves and/or borrowings. In the view of risks associated with leverage
and a desire to conserve Partnership resources, it is not expected that the
Partnership will acquire the New Lithotripsy System unless sufficient business
opportunities with treatment centers are anticipated by the General Partner to
be available. See "Risk Factors - Company Limited Resources and Risks of
Leverage." During the time period in which the Offering Proceeds are held in the
Partnership's reserves, they will be subject to the potential claims of the
Partnership's creditors. Although the General Partner maintains good
relationships with certain commercial lending institutions, the Partnership has
not obtained a loan commitment from any party in any amount and whether one
would timely be forthcoming on terms acceptable to the Partnership cannot be
assured.
THE GENERAL PARTNER
General. The General Partner of the Partnership is
Lithotripters, Inc., a North Carolina corporation formed in November 1987 for
the purpose of sponsoring medical service limited partnerships in the United
States (the "General Partner"). On April 26, 1996, the General Partner became a
wholly-owned subsidiary of Prime. The principal executive office of the General
Partner is located at ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇-▇▇▇, ▇▇▇▇▇▇, ▇▇▇▇▇
▇▇▇▇▇, (▇▇▇) ▇▇▇-▇▇▇▇. The General Partner's assets are illiquid in nature. The
primary assets of the General Partner are equity interests in other medical
ventures. The General Partner also has substantial potential financial exposure
as a guarantor of certain Prime indebtedness. Further information regarding the
financial condition of the General Partner will be made available to Investors
upon request.
Management. The following table sets forth the names and
respective positions of the individuals serving as executive officers and
directors of the General Partner, many of whom were shareholders of the General
Partner prior to its acquisition by Prime and/or are current shareholders and/or
management personnel of Prime.
Name Office
▇▇▇▇▇▇ ▇▇▇▇▇▇▇, M.D. President, Chief Executive Officer
and Director
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ Director
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ Vice President and Director
▇▇▇▇▇ ▇▇▇▇, M.D. Vice President
▇▇▇▇ ▇▇▇▇▇▇▇ Vice President
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ Secretary and Treasurer
▇▇▇▇▇ ▇▇▇▇▇ Assistant Secretary
Supervision of the day-to-day management and administration of the
Partnership will be the responsibility of the General Partner in its capacity as
the management agent. The General Partner itself is managed by a three-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 the General Partner.
▇▇▇▇▇▇ ▇▇▇▇▇▇▇, M.D. was recently elected Vice Chairman of the Board of
Directors of Prime and served as the President and Chief Executive Officer of
Prime from April 1996 until June 2000. From May 1990 until December 1991, ▇▇.
▇▇▇▇▇▇▇ was a Vice President of the General Partner and previously practiced
urology in Washington, North Carolina. ▇▇. ▇▇▇▇▇▇▇ has been President of the
General Partner since 1992 and is a member of its Board of Directors. ▇▇.
▇▇▇▇▇▇▇ is a board certified urologist and is a founding member, a
past-president and currently a Director of the American Lithotripsy Society.
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ has been Chairman of the Board and a
Director of Prime since October 1989 and was elected a Director of the General
Partner following Prime's acquisition of all of the General Partner'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.
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ is a Vice President and Director of the General Partner 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.
▇▇▇▇ ▇▇▇▇▇▇▇ is a Vice President of the General Partner and President of
Sun Medical Technologies, Inc. ("Sun") (an affiliate of the General Partner)
since November 1995. ▇▇. ▇▇▇▇▇▇▇ was the Chief Financial Officer of Sun from
1990 to 1995. ▇▇. ▇▇▇▇▇▇▇ was also recently appointed a Group Vice President of
Prime.
▇▇▇▇▇ ▇▇▇▇, M.D. is a Vice President of the General Partner. ▇▇. ▇▇▇▇
received his medical degree in 1984. ▇▇. ▇▇▇▇ developed and operated various
outpatient centers throughout the United States from 1986 to 1995 and was
recently appointed a Group Vice President of Prime.
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ is the Secretary and Treasurer of the General Partner,
having previously served as a Vice President since 1989. ▇▇. ▇▇▇▇▇▇▇ is a
Certified Public Accountant licensed in the state of Pennsylvania. From 1980
through February 1989, ▇▇. ▇▇▇▇▇▇▇ served as Plant Controller for the
Westinghouse Motor Control and Enclosed Control Product Lines. ▇▇. ▇▇▇▇▇▇▇ is
also a Director, the Vice President, the Treasurer and the Secretary of MedTech
Investments, Inc., the Sales Agent.
▇▇▇▇▇ ▇. ▇▇▇▇▇ is Assistant Secretary of the General Partner. ▇▇. ▇▇▇▇▇ 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 THEGENERAL 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
Systems. 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
General Partner 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 the greater of $8,000 or 7.5% of Partnership
Cash Flow per month. All costs incurred by the General Partner in performing its
duties under the Management Agreement are the responsibility of, and are paid
directly or reimbursed by, the Partnership. The General Partner is the
management agent for various affiliated lithotripsy ventures. As a consequence,
many of the General Partner's employees provide various management and
administrative services for numerous ventures, including the Partnership. In
order to properly allocate the costs of the General Partner'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 last year of its first five-year renewal term. The Management
Agreement will be automatically renewed for up to two additional successive
five-year terms unless it is earlier terminated by the Partnership or the
General Partner. The General Partner is reimbursed by the Partnership for all of
its out-of-pocket costs associated with the operation of the Partnership and the
Lithotripsy Systems (excluding the costs of employing one or more local
physicians to supervise the management and administration of the Lithotripsy
Systems), 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 or its Affiliates for managing the Partnership other than
the management fee payable to the General Partner as provided in the Management
Agreement. The Partnership may, however, 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.
2. Partnership Distributions. In its capacity as general
partner of the Partnership, the General Partner is entitled to its distributable
share (approximately 25.82%, before dilution) of Partnership Cash Flow,
Partnership Sales Proceeds and Partnership Refinancing Proceeds as provided by
the Partnership Agreement. The General Partner also owns approximately an 8.65%
(before dilution) limited partner interest in the Partnership and is entitled to
Distributions on account of such interest. See "Summary of the Partnership
Agreement - Profits, Losses and Distributions" and the Partnership Agreement
attached as Appendix A. The General Partner will also receive its proportionate
share of any Offering proceeds distributed to the Initial Limited Partners. See
"Sources and Applications of Funds."
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 $150 for each Unit sold (up to an
aggregate of $3,750). If this 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 $5,000. See "Plan of
Distribution" and "Conflicts of Interest."
4. New Truck. It is anticipated that the Company will also use a portion of
the Offering proceeds and/or debt financing to acquire a new mobile truck to
transport the new lithotripter from AK Associates, L.L.C., an Affiliate of the
General Partner, at a cost of approximately $80,000. See "Business Activities -
Acquisition of the New Lithotripsy System."
5. 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 Partnership 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. See "Risk
Factors - Operating Risks - Partnership Limited Resources and Risks of
Leverage."
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 General Partner and its Affiliates will receive management
fees and broker-dealer sales commissions in connection with the business
operations of the Partnership and the sale of the Units that will be paid
regardless of whether any sums hereinafter 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." It
is anticipated that the Partnership will purchase a new mobile truck from AK
Associates, L.L.C., an Affiliate of the General Partner to transport the new
lithotripter. See "Compensation and Reimbursement to the General Partner and its
Affiliates" and "Business Activities - Acquisition of the New Lithotripsy
System."
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 the General Partner 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 their 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. See the Partnership Agreement attached hereto as Appendix
A. The General Partner, its Affiliates (including affiliated limited
partnerships) and employees of the General Partner engage in medical service
activities for their own accounts. See "Prior Activities." The General Partner
may serve as a general partner of other limited partnerships that are similar to
the Partnership and does not intend to devote its entire financial, personnel
and other resources to the Partnership. Except as set forth in the Partnership
Agreement or 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 and its Affiliates
are also obligated to act in a fiduciary manner with respect to the management
of the Partnership and any other medical venture in which they have management
responsibilities. The General Partner has several Affiliates which provide
lithotripsy services in or near the Service Area. TVL provides mobile
lithotripsy services in the Service Area at a hospital in Louisville, Kentucky
pursuant to a rental agreement with the Partnership. Western Kentucky
Lithotripters Limited Partnership uses a ▇▇▇▇▇▇▇ ▇▇-3 and Modulith(R) SLX-T to
provide mobile lithotripsy services to treatment centers near the Service Area
in the following Kentucky counties: Christian County, Daviess County, ▇▇▇▇▇▇▇▇▇
County, ▇▇▇▇▇▇▇ County, ▇▇▇▇▇▇▇▇▇ County and ▇▇▇▇▇▇ County. Kentucky I
Lithotripsy, LLC uses a ▇▇▇▇▇▇▇ ▇▇-3 to provide mobile lithotripsy services in
central and eastern Kentucky, and TVL also operates several ▇▇▇▇▇▇▇ ▇▇-3
lithotripters in Tennessee. See "Competition-Affiliated Competition." Because
other ventures controlled by the General Partner or its Affiliates operate in or
near the Service Area, an issue may arise as to whether a particular lithotripsy
service opportunity belongs to the Partnership or to another Affiliate. 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 or members of such Affiliates or the Limited
Partners themselves, may not challenge the decision of the General Partner on
fiduciary grounds. See "Competition" and "Prior Activities." The General Partner
is planning other limited partnership offerings that would operate lithotripsy
businesses in other states. See "Competition." The General Partner through its
ownership of limited partner interest in the Partnership is able to influence
any vote on matters requiring Limited Partner approval. See "Summary of the
Partnership Agreement."
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 Investors
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 Indiana and Kentucky, including lithotripters owned by other
enterprises affiliated with the General Partner. The General Partner has several
Affiliates which currently provide and will continue to provide lithotripsy
services in or near the Service Area. Prime Lithotripter Operations, Inc. d/b/a
Tennessee Valley Lithotripter ("TVL") rents the Existing Lithotripsy System from
the Partnership to provide services at Suburban Hospital in Louisville,
Kentucky. Western Kentucky Lithotripters Limited Partnership uses a ▇▇▇▇▇▇▇ ▇▇-3
and Modulith(R) SLX-T to provide mobile lithotripsy services to treatment
centers near the Service Area in the following Kentucky counties: Christian
County, Daviess County, ▇▇▇▇▇▇▇▇▇ County, ▇▇▇▇▇▇▇ County, ▇▇▇▇▇▇▇▇▇ County and
▇▇▇▇▇▇ County. Kentucky I Lithotripsy, LLC operates a ▇▇▇▇▇▇▇ ▇▇-3 in central
and eastern Kentucky, and TVL also operates several ▇▇▇▇▇▇▇ ▇▇-3 lithotripters
in Tennessee. See "Conflicts of Interest."
Other Competition
Besides lithotripsy services provided by the General Partner's
Affiliates, various hospitals and other facilities in the Service Area have
access to lithotripters which are in direct competition with the Partnership.
The General Partner is aware of two fixed-site lithotripters operating in
Louisville, Kentucky: a ▇▇▇▇▇▇▇ ▇▇-4 at Suburban Hospital, and a Lithostar(TM)
at Alliant Medical Pavillion. In addition, the General Partner is aware of a
physician-owned venture (consisting in part of former Limited Partners)
providing transportable lithotripsy services in Indianapolis, Indiana using a
Healthtronics Lithotron. There may be other existing fixed-base or mobile
lithotripsy services in the Service Area which will directly compete with the
Partnership's Lithotripsy Systems, but the General Partner is not familiar with
these other competitors. The General Partner is generally unfamiliar with the
cost of the lithotripsy procedures offered by the Partnership's competitors.
Although the General Partner anticipates that the Partnership
will continue to operate primarily in the Service Area, the actual itinerary for
the Lithotripsy Systems is expected to be influenced by the number of patients
in particular areas and arrangements with various hospitals and health care
centers including the Contract Hospitals. See "Business Activities - Operation
of the Lithotripsy Systems."
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 Systems 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 assurance 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 Systems competitively obsolete. See "Risk Factors - Operating Risks
- Technological Obsolescence." In addition, except within the State of Indiana,
the General Partner and its Affiliates are not restricted from engaging in
lithotripsy ventures associated with the Partnership which may compete with the
Partnership. See the Partnership Agreement, attached hereto as Appendix A.
No manufacturer of the Lithotripsy Systems is under any
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 has dramatically increased the number of lithotripters in
the United States, increased competition for lithotripsy procedures and created
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 either charges Contract
Hospitals a fee for use of the Existing Lithotripsy System or directly bills and
collects from patients a fee for lithotripsy services provided using its
Existing Lithotripsy System. The amount of the fee charged to Contract Hospitals
and patients is dependent on the amount that governmental and commercial third
party payors are willing to reimburse hospitals and patients 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 General Partner expects that the level of reimbursement
under Medicare for lithotripsy procedures may continue to decline. As required
by the Balanced Budget Act of 1997, the Health Care Financing Administration
("HCFA"), the federal agency that administers the Medicare program, has
established a prospective payment system for outpatient procedures. One of the
goals of the prospective payment system is to lower medical costs paid by the
Medicare program. HCFA has issued regulations which reduce the reimbursement
rate currently paid for lithotripsy procedures performed on Medicare patients at
hospitals to a base rate of $2,265. 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 $2,265 reimbursement rate
is scheduled to be implemented on July 1, 2000. In some cases, reimbursement
rates payable to the Partnership and some Affiliates of the General Partner from
commercial third-party payors are less than the new HCFA rate.
The Partnership does not currently provide services at any
ambulatory surgery center, however the General Partner retains the discretion to
make the Lithotripsy Systems available at ambulatory surgery centers ("ASCs") in
the future. 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 - Operating
Risks - 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 Systems. 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.
The Medicaid programs in Indiana and Kentucky are jointly
sponsored by the federal and state governments to reimburse service providers
for medical services provided to Medicaid recipients, who are primarily the
indigent. The Medicaid programs in Indiana and Kentucky currently provide
reimbursement for lithotripsy services. The federal Personal Responsibility and
Work Opportunity Reconciliation Act of 1996 requires state Medicaid health plans
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 is unable to predict whether the Medicaid
programs in Indiana and Kentucky 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 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 do not and 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 assurance
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. 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 general prohibition on physician
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 TRICARE (formerly known as 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 some of the Limited Partners are 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.
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 Systems 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 Systems; 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.
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 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. 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 operations violate the
Anti-Kickback Statute. No assurance can be given, however, that the 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 TRICARE. A prospective
Investor with questions concerning these matters should seek advice from his 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 private 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 ruled on May 22, 2000 that private plaintiffs have standing to
bring suits under the False Claims Act. It is unknown how this decision by the
U.S. Supreme Court will affect the case which is pending in the Fifth Circuit.
However, because the Supreme Court's decision will allow private plaintiffs to
continue to bring suit under the False Claims Act, 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.
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 Abuste 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 Partnership believes the Offering and its operations are
appropriate under such laws; however, no assurance can be given that the
activities of the Partnership 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
Indiana. Indiana's certificate of need ("CON") law was
repealed in 1998. Therefore, a CON is not necessary to acquire or operate either
the Partnership's Lithostar(TM) or the transportable unit in Indiana. To the
best knowledge of the General Partner, the services provided by the Partnership
will not require licensure as a hospital or other health care facility. Indiana
requires that lithotripters be registered and inspected, and that radiologic
technologists be licensed. The General Partner will continue to comply with
these requirements.
Regarding physician referrals, a Medical Licensing Board of
Indiana regulation prohibits the receipt of compensation for referral of a
patient, except in association with an approved referral program. The Indiana
Medicaid statute prohibits the receipt of a fee or charge for referring a
patient for the furnishing of items or services. As the Partnership will not
compensate any physician for referrals (rather, all payments to physicians are
based on their equity interests in the Partnership), the General Partner
believes these laws will not be violated. The General Partner is not aware of
any other regulatory issues related to the provision of lithotripsy services in
Indiana.
Kentucky. Kentucky requires a certificate of need ("CON") to
establish a health facility, to make a substantial change in a health service,
or to purchase any capital equipment which costs more than $1,655,678. The
General Partner has sought and received a written opinion from the Certificate
of Need Office of the Kentucky Cabinet for Health Services that no CON is
necessary for mobile lithotripsy services similar to those discussed in this
Offering so long as the hospital establishes and provides the service; the
General Partner has confirmed this opinion is the same for transportable
lithotripters. To ensure that the hospital establishes and provides the service,
contracting hospitals will lease the Lithotripsy Systems and pay the Partnership
for the use of the equipment; the Partnership will not bill for the services
itself.
To the best knowledge of the General Partner, the
Partnership's mobile Lithostar(TM) must be licensed as a mobile health service
by the Division of Licensing and Regulation. Licensure requires a survey of the
Existing Lithotripsy System and approval of the policies and procedures related
to the Existing Lithotripsy System. The General Partner does not believe the
licensure requirement will prevent the Partnership from operating as planned in
Kentucky. The General Partner has sought and received a written determination
from the Division of Licensing and Regulation that transportable lithotripters
need not be licensed as a mobile health service.
Regarding physician referrals, Kentucky law incorporates the
American Medical Association's Code of Medical Ethics (discussed above) in
requiring physicians to provide services at entities in which they have an
ownership interest and to which they refer patients. Therefore, all physician
Limited Partners who make referrals to the Partnership's Lithotripsy Systems
must provide services on the lithotripter. Kentucky law prohibits physicians
from receiving any compensation in exchange for referrals of Medicare or
Medicaid patients. As the Partnership will not compensate any physician for
referrals (rather, all payments to physicians are based on their equity
interests in the Partnership), the General Partner believes this law will not be
violated. The law also provides that any conduct which violates the federal
▇▇▇▇▇ II and Anti-Kickback laws (discussed above) shall be deemed to violate
Kentucky law. Violations are punishable by criminal penalties, repayment of
Medicaid reimbursements which were in violation of the law and exclusion from
the Kentucky Medicaid program.
Kentucky requires registration of x-ray machines and
certification of radiologic technologists. The Partnership will seek to comply
with this and all other regulatory requirements in order to operate the
Lithostar(TM) or transportable unit.
Further regulations may be imposed in Indiana or Kentucky 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 Lithostar(TM) or transportable unit or to the physicians who invest in the
Partnership. Such restrictive regulations could 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
Prime, the sole shareholder of the General Partner, is the
largest and fastest growing provider of lithotripsy services in the United
States, providing lithotripsy services at over 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 or the General Partner 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 April 1996, Prime
acquired the General Partner. The General Partner operates over 30 lithotripters
serving approximately 200 locations in 19 states. The acquisition of the General
Partner provided Prime with complementary geographic coverage as well as
additional expertise in forming and managing lithotripsy operations. Prime and
the General Partner's lithotripters together performed approximately 38,000
lithotripsy procedures in 1999. Approximately 2,300 urologists utilized Prime
and the General Partner'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 as the general
partner of a limited partnership or through a subsidiary, as is the case with
the General Partner affiliated partnerships. 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 the General Partner 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's Affiliates in the lithotripsy field should not
be considered as indicative of the operating results obtainable by the
Partnership.
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 $11,163 is
required. The entire Unit purchase price is due in cash upon subscription;
however, certain qualified Investors may finance a portion of the purchase price
through either individually borrowed funds or through 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 proportionate share of
the undistributed profits of the Partnership; and (iii) the amount of certain
Distributions received from the Partnership as provided by the Act. See "Risk
Factors - Other Investment Risks - Limited Partners' Obligation to Return
Certain Distributions." See also form of Opinion of Counsel, attached hereto as
Appendix C.
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.
Because an understanding of the defined financial terms is essential to an
evaluation of the information presented below, Investors should carefully review
the definitions of the terms appearing in the Glossary.
1. Allocations of Profits and Losses.
(a) General. Generally, Profits and Losses, if any, for each
Year of the Partnership will be allocated proportionately among the Partners
based on their respective Percentage Interests in the Partnership; provided that
New Limited Partners will be allocated only Profits and Losses that accrue after
the date of their admission to the Partnership as Limited Partners.
(b) Allocations. Net gains and net losses from Capital
Transactions (a part of Profits and Losses), if any, shall be allocated first.
Each Partner will receive his pro rata share of Profits and Losses based upon
the number of days such Partner was a member of the Partnership during the Year
of the Partnership. Notwithstanding the foregoing, the Partnership's "allocable
cash basis items," as that term is used in Section 706(d)(2)(B) of the Code,
will be allocated as required by Section 706(d)(2) of the Code and the treasury
regulations promulgated thereunder.
(c) Qualified Income Offset. If any Limited Partner
unexpectedly receives an adjustment, allocation or distribution as described in
Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4) through (6) that causes such
Limited Partner to have a deficit Capital Account balance, such Limited Partner
will be allocated items of income and gain in an amount and manner sufficient to
eliminate such deficit balance as quickly as possible. This provision is
intended to be a "qualified income offset" as defined in Regulation Section
1.704-1(b)(2)(ii)(d).
2. Distributions.
(a) Non-liquidation Distributions. Partnership Cash Flow for
each Year of the Partnership, to the extent available, will be distributed
within 60 days after the end of each Year of the Partnership, or earlier in the
discretion of the General Partner, proportionately among the Partners based on
their respective Percentage Interests in the Partnership at the time of
distribution. Partnership Sales Proceeds and Partnership Refinancing Proceeds
will be distributed within 60 days of the Capital Transaction giving rise to
such proceeds, or earlier in the discretion of the General Partner,
proportionately among the Partners based on their respective Percentage
Interests in the Partnership as of the date of the Capital Transaction giving
rise to such proceeds. The New Limited Partners have no rights to receive any
distributions in the future that are made out of the Initial Limited Partners'
and General Partner's accrued but undistributed Partnership Cash Flow as of the
date the New Limited Partners are admitted to the Partnership. New Limited
Partners will be entitled only to Partnership Cash Flow that accrues after the
date of their admission to the Partnership as Limited Partners
(b) 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 liquidate the assets of the
Partnership. The proceeds of such liquidation will be applied and distributed in
the following order of priority: (a) first, to the payment of the debts and
liabilities of the Partnership, and the expenses of liquidation; (b) second, to
the creation of any reserves which the General Partner or the representative 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 (c) third, the balance, if any, will be distributed to
the Partners in accordance with the Partners' positive capital account balances.
Any General Partner with a negative capital account following the distribution
of liquidation proceeds or the liquidation of its interest must contribute to
the Partnership an amount equal to such negative capital account on or before
the end of the Partnership's taxable year (or, if later, within ninety days
after the date of liquidation). Any capital so contributed shall 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.
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 a Majority in Interest of the Limited
Partners is required for any sale of the Lithotripsy Systems or the purchase of
additional lithotripsy systems by the Partnership. The General Partner may
refinance the Lithotripsy Systems or purchase other assets related to the
provision of lithotripsy services without the consent of the Limited Partners.
The General Partner will oversee the day-to-day affairs of the Partnership
pursuant to the Management Agreement. 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 of gross negligence or willful misconduct
in the performance of its duties under the terms of the Partnership Agreement,
the General Partner may be removed and another substituted with the consent of a
Majority in Interest of the Limited Partners. The General Partner may also be
removed without cause and another party substituted with the consent of the
Limited Partners who hold at least 75% of the Limited Partner Percentage
Interests. The General Partner may transfer all or a portion of its Partnership
Interest only if, in the opinion of the Partnership's accountant, the new
general partner has sufficient net worth and meets other requirements to assure
that the Partnership will continue to be treated as a partnership for federal
tax purposes. 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.
Powers of the General Partner
Except as otherwise provided in the Partnership Agreement, the
General Partner may, in its sole 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, employ such persons as it deems necessary for
the operation of the Partnership and deposit, withdraw, invest, pay, retain
(including the establishment of reserves) and distribute the Partnership's
funds. See "Management of the Partnership" above. 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,
including the Lithotripsy Systems, for other than Partnership purposes; (ii)
admitting Limited Partners or General Partners except as provided in the
Partnership Agreement; (iii) performing any act (other than an act required by
the Partnership Agreement or any act taken in good faith reliance upon legal
counsel's opinion) which would, at the time such act occurred, subject any
Limited Partner to liability as a general partner in any jurisdiction; (iv)
performing any act in contravention of the Partnership Agreement or which would
make it possible to carry on the ordinary business of the Partnership; and (v)
confessing a judgment against the Partnership.
Rights and Liabilities of the Limited Partners
The Limited Partners do not have any right to participate in
the management of the business of the Partnership and will not transact business
for 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 to the extent (i) his Capital Contribution and liability
under a Limited Partner Loan, if any; (ii) his proportionate share of the
undistributed profits of the Partnership; and (iii) the amount of certain
Distributions received from the Partnership as provided by the Act. See "Risk
Factors - Other Investment Risks - Limited Partners Obligations to Return
Certain Distributions."
The Limited Partners may not participate in or own an interest
in any competing lithotripsy venture, except with the approval of the General
Partner. See "Noncompetition Agreement and Protection of Confidential
Information" below. The General Partner may elect to treat participation or
ownership by a Limited Partner in a competing venture as an event of default,
and such Limited Partner may be required to sell his Partnership Interest. See
"Optional Purchase of Limited Partner Interests" below.
Restrictions on Transfer of Partnership Interests
After acquisition of Units by Investors, no Partnership
Interest nor any Units may be transferred without the prior written consent of
the General Partner, which approval may be granted or withheld in its sole
discretion, 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 cause the termination of the Partnership, would violate federal or
state securities laws, would prevent the Partnership from being entitled to use
any method of depreciation which the Partnership might otherwise be entitled to
use, or would adversely affect the status of the Partnership as a partnership
for federal income tax purposes. In addition, the Partnership Agreement
prohibits the holding or transfer of a Partnership interest by or to a "tax
exempt entity" (as defined in Code Section 168(h)) which would affect the method
or manner in which the Partnership may depreciate Partnership assets. No
transferee of the Units will automatically become a Limited Partner. Admission
of a transferee to the Partnership as a Limited Partner requires the fulfillment
of other obligations enumerated in the Partnership Agreement, including either
the approval of all 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 or her personal liability under a
Limited Partner Loan, unless otherwise specifically agreed by the Bank.
Noncompetition Agreement and Protection of Confidential Information
The Partnership Agreement provides that each Limited Partner
(other than Units held by the General Partner of its Affiliates) is prohibited
from having a direct or indirect ownership of an interest in a competing venture
(including the lease or sublease of competing technology) (the "Outside
Activities"). While they are Limited Partners in the Partnership, each Limited
Partner is precluded from engaging in any Outside Activities. In the event that
a Limited Partner's Partnership Interest is terminated or transferred upon the
occurrence of certain events as provided in the Partnership Agreement, such
Partner is precluded, for a period of two (2) years following the date of such
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.
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;
2. The expiration of its term on December 31, 2040;
3. The bankruptcy or occurrence of certain other events with respect to the
General Partner;
4. The election to dissolve the Partnership made by the General Partner and
a Majority in Interest of the Limited Partners; or
5. Any other reason which under the laws of the State of Indiana would
cause a dissolution.
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, all 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, the General Partner
has the option to purchase all the interest of a Limited Partner in the
Partnership upon the occurrence with respect to the Limited Partner of (i)
death, (ii) bankruptcy or insolvency, or (iii) direct or indirect ownership of
an interest in a competing venture. The General Partner may, in its sole
discretion, assign to the Partnership its purchase option rights. Except in the
case of a competing ownership interest, upon the occurrence of one or more of
the preceding events, the withdrawing Limited Partner, or his personal
representative, will have a brief period within which to sell his entire
Partnership Interest to a purchaser approved of by the General Partner. If the
withdrawing Limited Partner is unable to sell his Partnership Interest as
provided above, the General Partner (or the Partnership) will then have the
option to purchase such Partnership Interest. If the General Partner or Limited
Partners elect to exercise their respective options, the option purchase price
will be equal to the withdrawing Limited Partner's share of the Partnership's
book value, if any, as reflected by such 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 withdrawing Limited Partner will not be released from his obligations under
any Limited Partner Loan unless so agreed by the Bank. Furthermore, sale of his
Partnership Interest may constitute an event of default under any outstanding
Limited Partner Loan incurred by the selling Limited Partner. See "Terms of the
Offering - Limited Partner Loans." There can be no assurance that the option
purchase price will represent the fair market value of a Limited Partner's
interest in the Partnership. Because Partnership losses, depreciation deductions
and Distributions reduce capital accounts, and because appreciation in
Partnership assets is not reflected in capital accounts, it is the opinion of
the General Partner that the option purchase price will be nominal in amount.
Dilution Offerings
The General Partner has the authority to periodically offer
and sell additional limited partnership interests in the Partnership through
Dilution Offerings to local investors who are not Limited Partners in the
Partnership ("Qualified Investors"). The primary purpose of Dilution Offerings
would be (i) to raise additional capital for any legitimate Partnership purpose;
and (ii) to assure the highest quality of patient care by admitting Qualified
Investors to the Partnership who will be dedicated and motivated as owners to
follow the Partnership's treatment protocol, and comply with its quality
assurance and outcome analysis programs.
Any sale of limited partnership interests in a Dilution
Offering will result in the 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. The Limited Partner interests offered in a Dilution Offering will be
sold in the manner and according to terms in the best interest of the
Partnership, as prescribed in the sole discretion of the General Partner. Any
additional limited partnership interests offered in a Dilution Offering will be
sold for a price no lower than their fair market value as determined by the
General Partner, in its sole discretion, at the time of the Dilution Offering.
Arbitration
The Partnership Agreement provides that disputes arising
thereunder shall be resolved by submission to arbitration in Indianapolis,
Indiana in accordance with the then prevailing commercial arbitration rules of
the American Arbitration Association.
Power of Attorney
Each Investor, by executing the Subscription Agreement,
irrevocably appoints ▇▇. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ to act as attorney-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 ▇▇.
▇▇▇▇▇▇ ▇▇▇▇▇▇▇, to act as his attorney-in-fact to make, execute, swear to and
file any documents 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 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 and books of account maintained by persons engaged
in business of a like character. The Partnership books and records will be kept
according to the method of accounting determined by the General Partner. The
Partnership's fiscal year will be the calendar year. The books and records will
be located at the office of the General Partner, and will be open to the
reasonable inspection and examination of the Limited Partners or their duly
authorized representatives during normal business hours.
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 Investors 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 Indiana Revised Uniform 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.
AK Associates. AK Associates, L.L.C., a subsidiary of Prime. It is
anticipated that the Partnership will purchase one new mobile truck from AK
Associates with a portion of the proceeds of this Offering and/or Partnership
debt financing.
Bank. First-Citizens Bank & Trust Company.
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Capital Account. The Partnership capital account of a Partner as computed
pursuant to Article XII of 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 to 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 August 9, 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.
Coach. A self-propelled Calumet Coach which houses the
Lithostar(TM)currently operated by the Partnership.
Code. The Internal Revenue Code of 1986, or corresponding provisions of
subsequent, superseding revenue laws.
Compact. The transportable Tripter X-1 Compact extracorporeal shock-wave
lithotripter and accessories manufactured by Medirex.
Contract Hospitals. The four hospitals to which the Partnership provides
lithotripsy services pursuant to four separate Hospital Contracts.
Counsel. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ & ▇▇▇▇, a Professional Limited Liability
Company, P.O. Drawer 84, Winston-Salem, North Carolina 27102.
Dilution Offering. The issuance, offering and sale by the Partnership of
additional partnership interests in the future.
Distributions. Cash or other property, from any source, distributed to
Partners.
Escrow Agent. First-Citizens Bank & Trust Company.
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Existing Lithotripsy System. The Coach with the installed and operational
Lithostar(TM)currently operated by the Partnership.
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, Lithotripters,
Inc., a North Carolina corporation, and a wholly owned subsidiary of Prime.
Hospital Contracts. The four separate lithotripsy services agreements the
Partnership has entered into with the Contract Hospitals.
Initial Limited Partners. The Individuals who were Limited Partners prior
to the commencement of this Offering.
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 $8,663 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 Limited Partner Loan
Commitment which is attached hereto as Appendix B.
Limited Partners. The Limited Partners are those Investors in
the Units admitted to the Partnership and any person admitted as a substitute
Limited Partner in accordance with the provisions of the Partnership Agreement.
Lithostar(TM). The Lithostar(TM)model extracorporeal shock wave
lithotripter manufactured by Siemens and currently owned by the Partnership.
Lithotripsy Systems. The Existing Lithotripsy System and the New
Lithotripsy System, collectively.
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 form of Bank Commitment
which is attached hereto as Appendix B.
Loan Documents. The form of Limited Partner Loan Commitment, the Limited
Partner Note, the Loan and Security Agreement, the Security Agreement and UCC-1,
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.
Medirex. Medirex Systems Corp. and its Affiliates.
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Memorandum. This Confidential Private Placement Memorandum, including all
Appendices hereto, and any amendment or supplement hereto.
Modularis(TM). The Modularis(TM)Uro Plus transportable lithotripter with
accessories manufactured by Siemens.
Modulith(R) SLX-T. The Modulith(R) SLX-T transportable
lithotripter with accessories manufactured by Storz.
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.
New Limited Partner. Any Investor admitted to the Partnership as a Limited
Partner.
New Lithotripsy System. The new transportable lithotripter
together with the new mobile truck which will be purchased with the proceeds of
the Offering and other financing and which will be owned and operated by the
Partnership.
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. Indiana Lithotripters Limited Partnership I, an Indiana
limited partnership.
Partnership Agreement. The Partnership's Agreement of Limited
Partnership, a copy of which is attached hereto as Appendix A, as the same 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 from 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 the 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 opposite his name set forth in Schedule A to the Partnership
Agreement. Each Unit sold pursuant to this Offering represents an initial 1%
economic interest. 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 General Partner and the 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
certain members of the General Partner's management personnel.
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 Limited Partner 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 southern
Indiana and the area within a 100-mile radius of Louisville, Kentucky. The
General Partner has sole discretion to expand the Service Area subject to
fiduciary duties owed by the General Partner to its Limited Partners.
Siemens. Siemens Medical Systems, Inc. and its Affiliates.
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Storz. ▇▇▇▇ ▇▇▇▇▇ Lithotripsy-America, Inc. and its Affiliates.
Subscription Agreement. The Subscription Agreement, included
in the Subscription Packet accompanying this Memorandum, to be executed by the
Investors 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 25 equal units of limited partner interest in the Partnership
offered pursuant to this Memorandum for a price per Unit of $11,163 in cash.
Year of the Partnership. An annual accounting period ending on December 31
of each year during the term of the Partnership.