____________________________ _______________________________
Name of Prospective Investor Memorandum No.
TENNESSEE VALLEY LITHOTRIPTER LIMITED PARTNERSHIP
A Limited Partnership Formed Under the Laws of Tennessee
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM
Up to $729,120 in Cash
Up to 80 Units
of Limited Partnership Interest
THIS MEMORANDUM IS PROVIDED TO THE PROSPECTIVE INVESTOR WHOSE
NAME APPEARS ABOVE SUBJECT TO THE TERMS OF A CONFIDENTIALITY
AGREEMENT WHICH PROHIBITS DISTRIBUTION OF THIS MEMORANDUM BY
SUCH PERSON TO ANYONE OTHER THAN PERSONS RETAINED BY THE INVESTOR
TO PROVIDE ADVICE WITH RESPECT TO THE MATTERS HEREIN ADDRESSED.
MEDTECH INVESTMENTS, INC.
Exclusive Sales Agent
2008 Litho Place
Fayetteville, North Carolina 28304
▇-▇▇▇-▇▇▇-▇▇▇▇
The Date of this Memorandum is October 24, 1998
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TENNESSEE VALLEY LITHOTRIPTER LIMITED PARTNERSHIP
Up to $729,120 in Cash
Up to 80 Units of Limited Partnership Interest
at $9,114 in Cash per Unit
Tennessee Valley Lithotripter Limited Partnership, a Tennessee limited
partnership (the "Partnership"), organized by its General Partner, Prime
Lithotripter Operations, Inc., a New York corporation, d/b/a Tennessee Valley
Lithotripter (the "General Partner"), hereby offers on the terms set forth
herein up to 80 units of limited partnership interest (the "Units") in the
Partnership (the "Offering"). The purpose of the Partnership is to operate the
mobile lithotripsy business currently operated by the General Partner (the
"Business") at various locations primarily in northern Alabama, northeastern
Arkansas, western Kentucky, Tennessee and other areas determined by the General
Partner (the "Service Area"). Upon the closing of the Offering, the General
Partner will transfer substantially all the operating assets and rights and
obligations under certain contracts related to the Business to the Partnership
in exchange for a minimum initial 80% interest in the Partnership. See "Proposed
Activities."
The Units are divided into 80 Units offered at a per Unit cash price of
$9,114. Prospective Investors who meet certain requirements may be able to fund
a portion of their Unit purchase price with the proceeds of certain third-party
financing. See "Terms of the Offering - Limited Partner Loans." Each Unit
represents a 0.25% economic interest in the Partnership. The Offering will
terminate on the earlier of the date all 80 Units are sold or December 4, 1998
unless, in the discretion of the General Partner, it is sooner terminated or
extended for a period of up to 180 days. The Unit cash price is due at
subscription except for the portion to be funded with proceeds from the loans
described above.
_______________
The purchase of Units involves significant 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 (1) the Partnership
faces severe competition in the Service Area and (2) the health care industry is
undergoing significant government regulatory reforms. See "Risk Factors" and
"Terms of the Offering - Suitability Standards."
Net
Cash Selling Cash
Offering Price Commissions(1) Proceeds (2)
Per Unit (3) $9,114 $ 250 $ 8,864
Total Maximum (4) $729,120 $ 20,000 $709,120
(See Footnotes on Back of Cover Page)
See Glossary for capitalized terms used herein and not otherwise defined.
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(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 and a member of the National Association of Securities
Dealers, Inc. (the "Sales Agent"). MedTech is an Affiliate of the General
Partner. The Partnership will pay the Sales Agent a $250 commission for
each Unit sold and will reimburse the Sales Agent for its out of pocket
offering costs (not to exceed $15,000). The Partnership has agreed to
indemnify the Sales Agent against certain liabilities, including
liabilities under 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" and "Compensation and
Reimbursement to the General Partner and its Affiliates." The price per
Unit ($9,114) is payable in cash in full at subscription; provided, that
prospective Investors who meet certain requirements may be able to fund a
portion of their Unit purchase price with the proceeds of certain
third-party financing. The Partnership has arranged for financing of a
portion of the Units' purchase price with First-Citizens Bank & Trust
Company, Fayetteville, North Carolina (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 upon delivery of their
Subscription Packets, at least $2,500 cash and a Limited Partner Note in a
maximum principal amount of up to $6,614 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 Bank Commitment as Exhibits A, B and C,
respectively, which is attached hereto as Appendix C and the UCC's attached
as part of the Subscription Packet.
(3) Each Investor may purchase no less than one Unit.
(4) All subscription funds and Loan Documents will be held in an interest
bearing escrow account with First-Citizens Bank & Trust Company, with
offices in Fayetteville and Raleigh, North Carolina, until the Closing or
the termination of the Offering. The Partnership seeks by this Offering to
sell up to 80 Units for up to $729,120 in cash ($709,120 net of Sales
Agent's commissions). In the event one or more complete subscriptions are
timely received and accepted by the General Partner, the subscription funds
(plus interest) in escrow will be released to the Partnership and the Loan
Documents will be released to the Bank. If no subscriptions are received
and accepted, the Offering will be terminated and all subscriptions
canceled. In the event of termination, all subscription funds (together
with interest), Loan Documents and other subscription documents will be
promptly returned to the Investors. Neither the General Partner nor any of
its Affiliates will purchase any Units.
______________
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THE UNITS ARE BEING OFFERED PURSUANT TO: (1) AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, PROVIDED IN
SECTION 4(2) THEREOF AND RULE 506 OF REGULATION D PROMULGATED THEREUNDER, AS
AMENDED; (2) AN EXEMPTION FROM REGISTRATION PROVIDED IN THE ALABAMA SECURITIES
ACT, AS AMENDED, AND A POLICY STATEMENT ISSUED BY THE ALABAMA SECURITIES
COMMISSION; (3) AN EXEMPTION FROM REGISTRATION PROVIDED IN SECTION 23-42-509(c)
OF THE ARKANSAS CODE OF 1957 ANNOTED, AS AMENDED, AND RULE 509.01(B) OF THE
REGULATIONS PROMULGATED THEREUNDER, AS AMENDED; (4) AN EXEMPTION FROM
REGISTRATION PROVIDED IN THE SECURITIES ACT OF KENTUCKY, AS AMENDED; AND (5) AN
EXEMPTION FROM REGISTRATION PROVIDED IN SECTIONS 48-2-102(14)(F)(iv) AND
48-2-125(b) OF THE TENNESSEE CODE ANNOTATED, AS AMENDED, AND RULE
0780-4-2-.12(1)(c) OF THE REGULATIONS PROMULGATED THEREUNDER, AS AMENDED. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS NOT BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
______________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE REGULATORY
BODY HAS PASSED UPON THE VALUE OF THE SECURITIES, MADE ANY RECOMMENDATIONS AS TO
THEIR PURCHASE, APPROVED OR DISAPPROVED THE OFFERING, OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
______________
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE
AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND UNDER APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. NO PUBLIC OR OTHER MARKET EXISTS OR WILL
DEVELOP FOR THE UNITS. UNITS ARE NOT TRANSFERABLE 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 - LIMITED TRANSFERABILITY AND
ILLIQUIDITY OF 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.
______________
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IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE TERMS OF THE
OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT
BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY
AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE
ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
______________
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 OR ANY OF ITS 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, HIS INVESTMENT, TAX OR OTHER ADVISORS, AND HIS ACCOUNTANTS OR LEGAL
COUNSEL.
______________
NO OFFERING LITERATURE OR ADVERTISING IN WHATEVER FORM WILL OR MAY BE
EMPLOYED IN THE OFFERING OF UNITS, EXCEPT FOR 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.
______________
THE GENERAL PARTNER WILL MAKE AVAILABLE, PRIOR TO THE CLOSING, TO EACH
PROSPECTIVE INVESTOR OR HIS REPRESENTATIVES, OR BOTH, THE OPPORTUNITY TO ASK
QUESTIONS OF, AND RECEIVE ANSWERS FROM, THE GENERAL PARTNER OR A PERSON ACTING
ON ITS BEHALF CONCERNING THE TERMS AND CONDITIONS OF THIS OFFERING, THE
PARTNERSHIP, THE GENERAL PARTNER OR ANY OTHER RELEVANT MATTERS, AND TO OBTAIN
ANY ADDITIONAL INFORMATION, TO THE EXTENT THAT THE GENERAL PARTNER POSSESSES
SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR EXPENSE,
NECESSARY TO VERIFY THE ACCURACY OF THE INFORMATION HEREIN SET FORTH, SUBJECT TO
CERTAIN CONFIDENTIALITY RESTRICTIONS CONTAINED IN VARIOUS CONTRACTS WITH THIRD
PARTIES.
______________
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THIS MEMORANDUM CONTAINS SUMMARIES, BELIEVED BY THE GENERAL PARTNER TO BE
ACCURATE, OF CERTAIN TERMS OF CERTAIN DOCUMENTS, BUT REFERENCE IS ▇▇▇▇▇▇ MADE TO
THE ACTUAL DOCUMENTS, COPIES OF WHICH ACCOMPANY THIS MEMORANDUM OR ARE AVAILABLE
FROM THE GENERAL PARTNER UPON REQUEST, SUBJECT TO CERTAIN CONFIDENTIALITY
RESTRICTIONS CONTAINED IN VARIOUS CONTRACTS WITH THIRD PARTIES. ALL SUCH
SUMMARIES ARE QUALIFIED IN THEIR ENTIRETY BY THIS REFERENCE.
______________
THIS OFFER CAN BE WITHDRAWN AT ANY TIME BEFORE CLOSING AND IS SPECIFICALLY
MADE SUBJECT TO THE TERMS DESCRIBED IN THIS MEMORANDUM. SUBJECT TO SPECIFIC
RESTRICTIONS PROVIDED FOR HEREIN, THE GENERAL PARTNER RESERVES THE RIGHT TO
REJECT ANY SUBSCRIPTION IN WHOLE OR IN PART OR TO ALLOT TO ANY INVESTOR LESS
THAN THE NUMBER OF UNITS SUBSCRIBED FOR BY SUCH INVESTOR. SEE "TERMS OF THE
OFFERING."
______________
THIS MEMORANDUM HAS BEEN PREPARED SOLELY FOR THE BENEFIT OF INVESTORS
INTERESTED IN THE PROPOSED PRIVATE PLACEMENT OF THE UNITS AND CONSTITUTES AN
OFFER ONLY IF THE NAME OF AN OFFEREE APPEARS IN THE APPROPRIATE SPACE PROVIDED
ON THE COVER PAGE HEREOF. DISTRIBUTION OF THIS MEMORANDUM TO ANY PERSON OTHER
THAN SUCH OFFEREE AND THOSE PERSONS RETAINED TO ADVISE HIM WITH RESPECT THERETO
IS UNAUTHORIZED, AND ANY REPRODUCTION OF THIS MEMORANDUM, IN WHOLE OR IN PART,
OR THE DIVULGENCE OF ANY OF ITS CONTENTS, WITHOUT THE PRIOR WRITTEN CONSENT OF
THE GENERAL PARTNER, IS PROHIBITED. EACH OFFEREE, BY ACCEPTING DELIVERY OF THIS
MEMORANDUM, AGREES TO RETURN IT AND ALL RELATED APPENDICES AND OTHER DOCUMENTS
TO THE GENERAL PARTNER, ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇
▇▇▇▇▇. IF THE OFFEREE DOES NOT INTEND TO SUBSCRIBE FOR THE PURCHASE OF THE
UNITS, THE OFFEREE'S SUBSCRIPTION IS NOT ACCEPTED OR THE OFFER IS TERMINATED.
______________
NEITHER THE DELIVERY OF THIS MEMORANDUM NOR ANY SALES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, IMPLY THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE PARTIES DESCRIBED HEREIN SINCE THE DATE HEREOF, OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME AFTER THE DATE OF THIS MEMORANDUM.
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY
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STATE TO ANY PERSON TO WHOM SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
______________
THE BUSINESS OF THE PARTNERSHIP INVOLVES CONFLICTS OF INTEREST. SEE
"CONFLICTS OF INTEREST."
______________
AFFILIATES OF THE GENERAL PARTNER WILL RECEIVE FEES WHETHER OR NOT THE
PARTNERSHIP EARNS ANY INCOME. SEE "COMPENSATION AND REIMBURSEMENT TO THE GENERAL
PARTNER AND ITS AFFILIATES."
____________
THE GENERAL PARTNER BELIEVES THIS OFFERING IS AN ECONOMIC INVESTMENT
OPPORTUNITY; THUS, INVESTORS SHOULD NOT PURCHASE UNITS IN ANTICIPATION OF TAX
BENEFITS.
______________
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TABLE OF CONTENTS
Page
SUMMARY .....................................................................1
RISK FACTORS..................................................................6
Operating Risks......................................................6
Tax Risks...........................................................12
Other Investment Risks..............................................14
GLOSSARY ....................................................................17
TERMS OF THE OFFERING........................................................23
General ...........................................................23
Limited Partner Loans...............................................25
Offering Exemptions.................................................26
Suitability Standards...............................................27
How to Invest.......................................................28
Restrictions on Transfer of Units...................................29
PLAN OF DISTRIBUTION.........................................................30
PROPOSED ACTIVITIES..........................................................31
Purpose ...........................................................31
Treatment Methods For Kidney Stone Disease..........................31
The Asset Contribution..............................................33
History of the Business.............................................34
Description of the Assets...........................................34
Anticipated Partnership Expenditures................................36
Operation of the Mobile Lithotripsy Systems.........................36
Funding for Partnership Activities..................................37
Acquisition of Additional Assets....................................38
Management and Administration.......................................38
Financial Projections...............................................40
FINANCIAL CONDITION OF THE BUSINESS..........................................41
Selected Financial Data of the Business.............................41
Management's Discussion and Analysis................................43
SOURCES AND APPLICATIONS OF FUNDS............................................45
COMPENSATION AND REIMBURSEMENT TO THE
GENERAL PARTNER AND ITS AFFILIATES..................................46
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GENERAL PARTNER..............................................................48
MANAGEMENT AGENT.............................................................49
CONFLICTS OF INTEREST........................................................51
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER..............................53
COMPETITION..................................................................53
REGULATION...................................................................55
State Regulation....................................................61
PRIOR ACTIVITIES.............................................................64
TAX ASPECTS OF THE OFFERING..................................................71
Partnership Status..................................................72
Effect of Classification as Corporation.............................73
Partners, Not Partnership, Subject to Tax...........................73
Affiliated Service Groups...........................................74
Passive Income and Losses...........................................77
Depreciation........................................................81
Partnership Allocations.............................................81
Tax Treatment Of Certain Fees and Expenses Paid By The Partnership..83
Partnership Elections...............................................86
Taxable Income......................................................86
Cash Distributions and Determination of Basis.......................87
Sale of Partnership Units...........................................88
Further Changes in Tax Laws.........................................88
Local and State Taxes...............................................88
SUMMARY OF THE PARTNERSHIP AGREEMENT.........................................88
Formation...........................................................89
Description of the Units............................................89
Contribution of the General Partner.................................89
Dilution Offerings..................................................89
Fundamental Changes.................................................90
Profits, Losses and Distributions...................................92
Management of the Partnership.......................................95
Powers of the General Partner.......................................95
Rights and Liabilities of the Limited Partners......................96
Restrictions on Transfer of Partnership Interests...................97
Dissolution and Liquidation.........................................97
Optional Purchase of Limited Partner Interests......................98
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Arbitration.........................................................99
Power of Attorney...................................................99
Records ..........................................................100
LEGAL MATTERS...............................................................100
ADDITIONAL INFORMATION......................................................100
APPENDICES
Appendix A FINANCIAL PROJECTIONS
Appendix B AGREEMENT OF LIMITED PARTNERSHIP OF
TENNESSEE VALLEY LITHOTRIPTER LIMITED PARTNERSHIP
Appendix C LOAN COMMITMENT
Appendix D FORM OF MANAGEMENT AGREEMENT
Appendix E FORM OF OPINION OF ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ & ▇▇▇▇, A
PROFESSIONAL LIMITED LIABILITY COMPANY
Appendix F FINANCIAL STATEMENTS
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SUMMARY
This summary of certain provisions of the Memorandum is intended for a
quick reference and is not complete. The Memorandum and accompanying Appendices
must be read and understood in their entirety by Investors. See the "Glossary"
for terms used in this Memorandum and not otherwise defined.
The Units and Subscription Price. Tennessee Valley Lithotripter Limited
Partnership, a limited partnership formed under the laws of the State of
Tennessee, hereby offers up to 80 Units of limited partner interest in the
Partnership. Each Unit represents a 0.25% economic interest in the Partnership.
Investors should note that their initial Percentage Interests in the Partnership
may be reduced by future Dilution Offerings. See "Summary of the Partnership
Agreement - Dilution Offerings" and the form of the Partnership Agreement
attached hereto as Appendix B. The price for each Unit is $9,114 and is payable
in cash in full at subscription; provided, that prospective Investors who meet
certain requirements may be able to fund a portion of their Unit purchase price
with the proceeds of certain third-party financing. The Partnership has arranged
for financing of a portion of the Units' purchase price with First-Citizens Bank
& Trust Company, Fayetteville, North Carolina (the "Bank"). Therefore, in lieu
of paying the entire purchase price in cash, prospective Investors may execute
and deliver to the Sales Agent upon delivery of their Subscription Packets, at
least $2,500 in cash and a Limited Partner Note in a maximum principal amount of
up to $6,614 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 Bank Commitment as Exhibits A,
B and C, respectively, which is attached hereto as Appendix C and the UCC's
attached as part of the Subscription Packet. Each Investor may purchase not less
than one Unit. The General Partner may, in its sole discretion, reject in whole
or in part any subscription. See "Terms of the Offering."
The Offering. By this Offering the Partnership seeks to sell up to 80 Units
for up to $729,120 in cash ($709,120 net of Sales Agent's commissions). In the
event complete subscriptions for one or more Units are received and accepted by
the General Partner, all subscription funds (plus interest) and Loan Documents
held in escrow will be released to the Partnership. If no subscriptions are
received and accepted by the end of the subscription period as defined in
"Subscription Period" below, the Offering will be terminated. The General
Partner and its Affiliates do not intend to purchase Units in the Offering. See
"Terms of the Offering - General." All subscription funds and Loan Documents
will be held in escrow by the Escrow Agent until the Closing or the termination
of the Offering.
Subscription Period. The subscription period will commence on the date
hereof and will terminate at 5:00 p.m., Central time on December 4, 1998 (or
earlier, in the discretion of the General Partner, upon the sale of all 80 Units
as provided herein), unless sooner terminated by the General Partner or unless
extended for an additional period up to 180 days. See "Terms of the Offering -
General - Subscription Period."
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Anticipated Benefits to Investors. The primary objectives of the
Partnership are (i) to improve the provision of health-care in the Partnership's
Service Area by taking advantage of the technological innovations inherent in
its Mobile Lithotripsy Systems and the Partnership's quality assurance and
outcome analysis programs, and (ii) to make cash Distributions to its Partners
from revenues generated from the operation of the Mobile Lithotripsy Systems.
Each Unit represents an initial 0.25% interest in Partnership income, loss and
cash Distributions. It is anticipated that cash Distributions will be made
quarterly following the Closing. There is no assurance that the Partnership's
cash Distribution objective can be met. See "Proposed Activities" and "Risk
Factors." The General Partner represents that Investors should not invest in the
Partnership for purposes of obtaining deductions, losses or other tax benefits,
because it is anticipated by the General Partner that taxable income will be
reportable by the Limited Partners along with their receipt of cash
Distributions. To the extent available, the General Partner will use its best
efforts to distribute cash from operations to enable the Partners to pay their
income tax liabilities on their respective shares of Partnership taxable income.
The Partnership's projected statements of taxable income (loss), cash flow,
sources and uses of funds and projected statements of return per Unit, are set
forth in Appendix A hereto. The Financial Projections are based on assumptions
set forth therein and in this Memorandum and are included for the information
and convenience of Investors and their professional advisors. THE PROJECTED DATA
ARE THE GENERAL PARTNER'S ESTIMATE OF REASONABLE, BUT NOT NECESSARILY THE MOST
LIKELY, RESULTS OF THE PARTNERSHIP'S OPERATIONS AND REPRESENT A PREDICTION OF
FUTURE EVENTS BASED ON ASSUMPTIONS THAT MAY OR MAY NOT OCCUR, AND SHOULD NOT BE
RELIED UPON TO INDICATE THE ACTUAL RESULTS THAT WILL BE OBTAINED. Further, no
assurance can be given that the financial results of the Partnership will be
comparable to the historical financial results of the Business as operated by
the General Partner and the differences could be materially adverse. See "Risk
Factors - Other Investment Risks- Financial Projections."
Proposed Activities. It is anticipated that the Partnership will operate
the Business in a manner similar to the manner in which it is presently
conducted by the General Partner. The Partnership will use the proceeds of the
Offering, to the extent funds are available, to (i) recondition three trailers
(estimated at $65,000 each), and (ii) purchase three used tractors (up to
$40,000 each). Offering proceeds will also be used to fund syndication and
working capital costs and other Partnership expenses. See "Sources and
Application of Funds" and "Proposed Activities - Other Partnership
Expenditures." See also "Risk Factors - Operating Risks - Partnership Limited
Resources and Risks of Leverage," "Compensation and Reimbursement to the General
Partner and its Affiliates" and the Financial Projections attached hereto as
Appendix A.
The Partnership is a party to an agreement (the "Contribution Agreement")
which provides that the General Partner will contribute substantially all of the
assets, including five Mobile Lithotripter Systems, and rights and certain
contractual obligations under approximately 30 lithotripsy services contracts
(the "Hospital Contracts"), related to its lithotripsy operations (the
"Business") to the Partnership in exchange for at least an 80% interest in the
Partnership (the "Asset Contribution"). The Partnership Interest of the General
Partner will increase 0.25% per unsold Unit.
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Consummation of the Asset Contribution is conditioned on the successful Closing
of the Offering and the receipt of certain consents and releases. See "Proposed
Activities - The Asset Contribution." The Partnership will have no separate
operations prior to the Closing and plans thereafter to operate the Business.
In connection with the Asset Contribution, the Partnership will succeed to
the rights and obligations of the General Partner with respect to the Hospital
Contracts. While many of the Hospital Contracts are terminable without cause by
either party on short notice, the General Partner believes it has a good
relationship with many of the contracting parties and does not anticipate
significant cancellations. There is no assurance, however, that cancellations
will either not occur or that the resulting impact to the Partnership would not
be materially adverse. See " Risk Factors - Operating Risks - Contract Terms
and Termination." The Hospital Contracts generally provide for the provision of
services which are "wholesale" in nature, i.e. the Partnership will primarily
supply the lithotripter, certain personnel and maintenance services for a per
procedure fee. Generally, the hospitals and outpatient centers are solely
responsible for billing and collection, on their own behalf, the technical
component of the lithotripsy procedure. In addition to the existing Hospital
Contracts, the General Partner intends to pursue additional lithotripsy service
opportunities throughout the Service Area. The travel schedule for the
Partnership's Mobile Lithotripsy Systems is expected to be influenced by the
number of treating physicians and patients in particular areas and the
Partnership's arrangements with various hospitals and outpatient surgery centers
located throughout the Service Area, including existing scheduling arrangements
under the Hospital Contracts. See "Proposed Activities - Operation of the
Business."
The Partnership will enter into a separate Management Agreement with
Lithotripters, Inc., a North Carolina corporation and Affiliate of the General
Partner (the "Management Agent"). Pursuant to the Management Agreement, the
Management Agent generally will (i) manage all operations of the Mobile
Lithotripsy Systems and (ii) conduct quality assurance and outcome analysis
programs. See "Proposed Activities - Operation of the Mobile Lithotripsy
Systems" and the form of the Management Agreement attached hereto as Appendix D.
Qualified physicians desiring to treat patients with the Lithotripters
typically will make appropriate arrangements with the hospitals and outpatient
surgery centers serviced by the Partnership. See "Tax Aspects of the Offering -
Affiliated Service Groups" and "Proposed Activities - Operation of the Mobile
Lithotripsy Systems." Generally, all qualified physicians desiring to treat
their own patients on a lithotripter may do so after they have received the
necessary training as prescribed by the rules of the applicable hospital or
outpatient surgery center. In addition, the General Partner reserves the right
to request physicians (or members of their practice group) to treat only their
own patients with a lithotripter if it determines that such practice is
advisable under applicable law. See "Regulation." The treating qualified
physicians will be solely responsible for billing and collecting on their own
behalf the professional component of the lithotripsy procedure.
In the event the General Partner determines in the future that it is in the
best interest of the Partnership, it may cause the Partnership (i) to acquire
one or more additional fixed base or mobile lithotripter systems (or any other
renal stone treatment equipment) for the treatment of renal
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stones in such location(s) as the General Partner may determine, in its sole
discretion, to be in the best interests of the Partnership; (ii) to acquire an
interest in any business entity, including, without limitation, a limited
partnership, limited liability company or corporation, that engages in any such
business activity; and (iii) to engage in any and all activities incidental or
related to the foregoing (including without limitation bilary lithotripsy if the
same is ever approved by the FDA), upon and subject to the terms and conditions
of the Partnership Agreement; and/or (iv) to engage in Dilution Offerings on
behalf of the Partnership to accomplish such goals, and may use Partnership
assets and revenues to secure and repay such borrowings.
Organization of the Partnership. Tennessee Valley Lithotripter Limited
Partnership, a Tennessee limited partnership (the "Partnership"), was organized
and created under the Act on October 16, 1998. The Asset Contribution will occur
upon the successful Closing of the Offering. The general partner of the
Partnership is Prime Lithotripter Operations, Inc., a Delaware corporation,
d/b/a Tennessee Valley Lithotripter, and wholly-owned subsidiary of Prime
Medical Services, Inc. See "The General Partner." Upon consummation of the Asset
Contribution, the General Partner will acquire at least an 80% interest in the
Partnership. The Partnership Interest of the General Partner will increase by
0.25% for each unsold Unit. The address of the principal office of the
Partnership is ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇. The
Partnership will contract with the Management Agent pursuant to the Management
Agreement to manage the Partnership's day-to-day business operations. Following
the Asset Contribution, the Partnership will operate five Mobile Lithotripsy
Systems throughout the Service Area. See the form of the Partnership Agreement
attached as Appendix B and "Summary of the Partnership Agreement" below.
Limited Liability. Other than the purchase price for a Unit, no capital
assessments will be requested of or imposed on the Limited Partners. Provided a
Limited Partner does not participate in the management or control of the
Partnership, he will not incur any liability with respect to obligations of the
Partnership, except to the extent of his (i) capital contributions and (ii)
obligation to return certain Distributions made to him constituting a return of
capital contributions in accordance with the Act. See "Risk Factors - Other
Investment Risks - Limited Partners' Obligation to Return Certain
Distributions." See also, the form of Opinion of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ &
▇▇▇▇, a Professional Limited Liability Company attached hereto as Appendix E.
Investors funding their Unit purchase price with the proceeds of a loan from the
Bank will be personally liable to the Bank as provided in the Loan Documents.
See "Terms of the Offering - Limited Partner Loans."
Optional Purchase of Limited Partner Interests. Upon the occurrence of
certain events with respect to a Limited Partner, such as (i) death, (ii) a
domestic proceeding, (iii) insolvency or (iv) direct or indirect ownership of an
interest in a competing venture (including the lease or sublease of competing
technology), the Partnership Interest of such Limited Partner may, in the
discretion of the General Partner, be sold. In addition, in the event existing
or newly enacted laws or regulations or any other legal developments adversely
affect (or potentially adversely affect) the operation of the Partnership or the
business of the Partnership (e.g. any prohibitions on provider ownership or
exclusions from public insurance programs), the General Partner is obligated to
either
-4-
purchase the Partnership Interests of all of the Limited Partners or dissolve
the Partnership. The purchase price in the case of any forced divestiture of a
Limited Partner Partnership Interest is likely to be nominal. See "Summary of
the Partnership Agreement - Optional Purchase of Limited Partner Interests."
Investment of the General Partner. The General Partner will acquire its
entire general partner Partnership interest (80% assuming the sale of all 80
Units) upon consummation of the Asset Contribution. The General Partner will be
responsible for the operation of the Partnership and intends to delegate the
day-to-day management of the Partnership's lithotripsy operations to the
Management Agent. See "General Partner" and "Proposed Activities - Management
and Administration."
Compensation and Reimbursement of the General Partner and its Affiliates.
The Management Agent, an Affiliate of the General Partner, will receive a
monthly management fee equal to the greater of $8,000 or 7.5% of Partnership
Cash Flow per month pursuant to the Management Agreement. The General Partner
and its Affiliates will receive interest on loans, if any, they make to the
Partnership. 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 Management Agent and the
General Partner are also entitled to reimbursement from the Partnership for all
costs incurred by them in managing the Partnership. Upon the successful
completion of this Offering, the Sales Agent, an Affiliate of the General
Partner, will receive up to $20,000 in sales commissions from the Partnership
for the sale of Units and may be reimbursed for up to $15,000 in out-of-pocket
offering expenses. The General Partner intends to cause the Partnership to pay
AK Associates, an Affiliate of the General Partner, an aggregate of $195,000
from the proceeds of this Offering to refurbish three trailers and to contract
in the future with AK Associates for similar services. In addition, the General
Partner anticipates causing the Partnership to rent "loaner" trailer-
lithotripter units from Affiliates of the General Partner at a cost of $35,000
per month per unit while the Partnership's trailers are being refurbished. The
General Partner and its Affiliates will receive no development fee or other
compensation for organizing or operating the Partnership except as otherwise
provided herein. See "Proposed Activities - Management and Administration,"
"Proposed Activities - Funding for Partnership Activities," "Plan of
Distribution," "Compensation and Reimbursement to the General Partner and its
Affiliates" and "Conflicts of Interest."
Plan of Distribution. Subscriptions for Units will be solicited on a "best
efforts" any or all basis by the Sales Agent. Upon the successful completion of
this Offering, the Partnership will pay the Sales Agent a $250 commission for
each Unit sold and will reimburse the Sales Agent for out-of-pocket expenditures
incurred in connection with this Offering (not to exceed $15,000). See "Plan of
Distribution" and "Conflicts of Interest."
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Eligible Investors. Generally, this offer is made only to qualified
investors acceptable to the General Partner and, if applicable, approved by the
Bank for purposes of the Limited Partner Loans. See "Terms of the Offering -
Suitability Standards" and "Limited Partner Loans."
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
Lack of Operating History; General Risks of Operations. The Partnership was
formed under the laws of the State of Tennessee on October 16, 1998 and is
expected to have no operations prior to the Asset Contribution. Although the
General Partner, the Management Agent and their personnel have significant
experience in managing lithotripsy enterprises, whether the Partnership can
effectively operate and expand the 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 Mobile 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
its Mobile Lithotripsy Systems difficult or unattractive. Other factors that may
adversely affect the operation of its Mobile 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. Although managed
care has yet to become a major factor in the delivery of lithotripsy services,
the General Partner anticipates that managed care programs, including capitation
plans, may 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 following
the Asset Contribution will be to operate the Mobile 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.
-6-
Impact of Insurance Reimbursement. The Partnership's revenues are expected
to be derived from the equipment rental fees paid by the Contract Hospitals. The
Partnership will not directly bill and collect for services from patients or
their third-party payors. Rental rates received from contracting hospitals may
be subject to renegotiation depending on the reimbursement received by the
Contract Hospitals. Such reimbursement may be reduced as a result of the
introduction of an outpatient prospective payment system regarding Medicare
patients, which in turn could lower reimbursement available from private health
insurers. The Partnership's revenues could be adversely affected. See
"Regulation." These developments could have an adverse impact on proposed
Partnership operations.
Reliability and Efficacy of the Partnership's Lithotripters. Upon
consummation of the Asset Contribution, the Partnership will own five Dornier
HM3 lithotripters. The HM3 has a United States operating history of
approximately 14 years. The General Partner has experience with the HM3, and in
the General Partner's opinion, the HM3 has proven to be reliable and dependable
medical equipment. The General Partner estimates that the HM3 has a 7-10%
overall retreatment rate. Investors should note that some studies indicate that
lithotripsy may cause high blood pressure and tissue damage. The General Partner
questions the reliability of these studies and believes lithotripsy has become a
widely accepted method for the treatment of renal stones. Also, "downtime"
periods necessitated by maintenance and repairs of one or more Mobile
Lithotripsy Systems will adversely effect Partnership revenues. It is
anticipated that, subject to availability, the General Partner or its Affiliates
will rent the Partnership one of its mobile lithotripters in the event of
substantial downtime problems. See "Compensation and Reimbursement to the
General Partner and Its Affiliates."
Technological Obsolescence. The history of lithotripsy of kidney stones as
an accepted treatment procedure is relatively recent, with the first clinical
trials being conducted in West Germany beginning in 1980 and the first premarket
approval for a renal lithotripter in the United States being granted by the FDA
in December 1984. Today, lithotripsy is the treatment procedure of choice for
kidney stone disease, having replaced other treatment methods. Published reports
indicate that certain researchers are attempting to improve a laser technology
to more easily eradicate kidney stones, and pharmaceutical companies and
researchers have attempted to develop a safe drug that can be used to dissolve
kidney stones in all cases. The General Partner cannot predict the outcome of
ongoing research in these areas, and any one or more developments could reduce
or eliminate lithotripsy as an acceptable procedure or treatment method of
choice for the treatment of kidney stones.
Partnership Limited Resources and Risks of Leverage. The 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 are not be
sufficient to fund all anticipated expenses, it may be necessary in order to
meet current or projected expenses, to supplement Partnership funds with the
proceeds of debt financing. See "Proposed Activities - Other Partnership
Expenditures," " Proposed Activities - Funding for Partnership Activities" 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
-7-
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. See
"Proposed Activities - Funding For Partnership Activities" and the Financial
Projections attached to this Memorandum as Appendix A.
Acquisition of Additional Assets. If in the future the General Partner
determines that it is in the best interest of the Partnership to acquire one or
more additional fixed base or Mobile Lithotripter Systems (or any other renal
stone treatment equipment) for the treatment of renal stones, the General
Partner has the authority (without obtaining the Limited Partners' consent) 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 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." 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 competing fixed-site and mobile lithotripters are
currently operating in and around the Service Area in direct competition with
the Business. The competing lithotripsy service providers generally have
existing contracts with hospitals and other facilities. There is no assurance
that other parties will not, in the future, operate fixed-site or mobile
lithotripters in and around the Service Area. The ability of certain former
owners of the Business to compete with the General Partners had been limited
under noncompetition agreements which only recently expired. Whether and to what
extent any of such persons may elect to compete with the Partnership and the
resulting impact on proposed Partnership operations cannot be accurately
predicted by the General Partner. See "Proposed Activities - History of the
Business." To the General Partner's knowledge, no manufacturers are restricted
from selling their lithotripters to other parties in the Service Area. In
addition, except as provided by law, none of the General Partner, the Management
Agent or their respective Affiliates are prohibited from engaging in any
business or arrangement that may compete with the Partnership. Four ventures
affiliated with the General Partner either currently provide or are planning to
provide lithotripsy services in or near the Service Area. See "Prior Activities"
and "Competition." Affiliates of the General Partner are planning and
-8-
conducting other joint venture offerings that would operate lithotripters in
other states. In addition, the Partnership will be competing with facilities and
individual medical practitioners who offer conventional treatment (e.g.,
surgery) for kidney stones. In order to be successful, the Partnership must
convince physicians and potential patients of the quality of the treatment it
can provide, its reasonable equipment rental charges, the superiority of its
lithotripters to other lithotripters and the advantages of lithotripsy over
conventional surgery and other treatment methods. The Partnership Agreement
severely restricts the ability of the Limited Partners to own interests in
competing equipment or ventures. The enforceability of these noncompetition
agreements is generally a matter of state law and is evolving over time. There
is no assurance that one or more Limited Partners may not successfully compete
with the Partnership. See "Proposed Activities - Treatment Methods for Kidney
Stone Disease" and "Competition."
Government Regulation. All facets of the healthcare industry are highly
regulated and will become more so in the future. The ability of the Partnership
to operate legally and be profitable may be adversely affected by changes in
governmental regulations, including expected changes in reimbursement, Medicare
and Medicaid certification regulations, 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 and may subject the
General Partner and all Limited Partners to governmental scrutiny and/or
prosecution for felony charges and punishment in the form of large monetary
fines, loss of licensure, imprisonment and exclusion from Medicare and Medicaid.
Recent changes in Medicare and Medicaid law have limited 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, in January, 1998, the Health Care Financing
Administration ("HCFA"), the federal agency responsible for administering the
Medicare program, published proposed ▇▇▇▇▇ II regulations. The proposed
regulations outline the requirements that must be met for the Partnership's
proposed operations to comply with ▇▇▇▇▇ II. 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 guidance, then the Partnership and its
physician Limited Partners may be in violation of ▇▇▇▇▇ II, as all of the
proposed regulations' requirements may not be currently met. 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 Partnership's arrangements with
contracting hospitals to serve as an equipment vendor have to be restricted to
comply with ▇▇▇▇▇ II. However, there is no assurance that such restructuring
could be accomplished on terms acceptable to the Partnership.
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
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or CHAMPUS. The law has been broadly interpreted to include any payments which
may induce or influence a physician to refer patients. One of the federal
agencies that enforces the Anti- Kickback Statute has issued several "safe
harbors" which, if complied with, mean the payment or transaction will be deemed
not to violate the law. To the knowledge of the General Partner, 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, fines and/or exclusion from
the Medicare and Medicaid programs.
In addition to the ▇▇▇▇▇ II and Anti-Kickback laws, an unfavorable
interpretation of other existing laws, or enactment of future laws or
regulations, could potentially adversely affect the operation of the
Partnership. If this occurs, the General Partner is obligated either to purchase
or cause the sale of the Partnership Interests of all of the Limited Partners or
to dissolve the Partnership. See "Summary of the Partnership Agreement -
Optional Purchase of Membership Interests."
State laws will affect the operation of the Partnership as well.
Certificates of Need ("CONs") are ordinarily required to acquire lithotripters
or initiate lithotripsy services in Tennessee, Alabama and Kentucky. The General
Partner already has the necessary CONs for the Mobile Lithotripsy Systems in
Alabama and Kentucky. In order to transfer the CONs to the Partnership, the
General Partner must provide written notice to the respective CON agencies
thirty (30) days before consummating the transaction. The General Partner's CON
is currently subject to challenge by another potential lithotripsy equipment
vendor in Alabama; the General Partner believes the challenge will not be
successful. The General Partner does not hold CONs for lithotripsy services in
Tennessee; rather, they are held by the individual contracting hospitals.
Arkansas does not require a CON for the acquisition of lithotripters or
initiation of lithotripsy services. Various licensure and registration
requirements must be met for the Partnership to provide mobile lithotripsy
services in Tennessee, Alabama, Arkansas and Kentucky. The Partnership will
comply with such requirements. Physicians licensed in Tennessee and Kentucky
must treat their own patients on the Mobile Lithotripsy Systems. See "Regulation
- State Regulation."
Contract Terms and Termination. Pursuant to the Contribution Agreement,
concurrent with the Closing of the Offering, the General Partner will assign to
the Partnership all its rights and obligations under approximately 30 Hospital
Contracts. With one exception, none of the Hospital Contracts requires the
consent of the Contract Hospital prior to such assignment. The General Partner
does not intend to obtain any consents, and there is no assurance that one or
more Contract Hospitals will not react unfavorably to such assignment and seek
to terminate. Many of the Hospital Contracts are terminable without cause by
either party on short notice. Four hospitals
-10-
have terminated lithotripsy services agreements with the General Partner within
the last year. See "Proposed Activities - Operation of the Business - Hospital
Contracts." The General Partner does not anticipate significant cancellations
and believes it has a good relationship with many of the contracting parties.
There is no assurance, however, that cancellations will either not occur or that
the resulting impact to the Partnership would not have a material adverse effect
on Partnership operations. It is expected that most new lithotripsy service
contracts would have one-year terms and be automatically renewed unless either
party elects to cancel prior to the end of the term. In addition, many of the
existing contracts have, and any new contracts are expected to have, a provision
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. Thus,
there is no assurance that Partnership operations as planned on the date of this
Memorandum will occur as herein described or contemplated and the cancellation
of a significant number of service contracts or the Partnership's inability to
secure new ones could have a material negative impact on the financial condition
and results of the Partnership. In addition, competing vendors may attempt to
cause certain Contract Hospitals to contract with them instead of the
Partnership. The loss of Contract Hospitals to competition will adversely affect
Partnership revenues and such effect could be material. See "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."
Year 2000 Compliance. The now familiar "Year 2000 Issue" arose because many
existing computer programs use only the last two digits to refer to a year.
Therefore, such computer programs do not properly recognize a year that begins
with "20" instead of "19." If not corrected, many computer applications could
fail or create erroneous results on January 1, 2000. The extent of the potential
impact of the Year 2000 Issue is not yet known, and if not timely corrected, it
could affect the global economy. The General Partner has made an assessment of
the Partnership's Year 2000 Issue risks and has concluded that the risks include
the following: (i) operation of the Mobile Lithotripsy Systems may be adversely
affected; (ii) third party payors may be adversely affected resulting in delays
in payment to the Partnership; (iii) facilities served by the Mobile Lithotripsy
Systems may be adversely affected resulting in a cessation of service to the
affected facilities; and (iv) the Partnership's internal information systems,
including its accounting system, may be adversely affected resulting in record
keeping and accounting delays. Dornier, the manufacturer of the HM3
lithotripter, has not assured Prime that its HM3 lithotripters will be Year 2000
compliant, in all necessary respects, i.e., that they will continue to operate
normally after January 1, 2000. The General Partner cannot predict with
certainty whether such will be the case or the effects of noncompliance. The
General Partner has not inquired as to the Year 2000 readiness of any Contract
Hospital, vendor or other third party related to the operation of the Business,
but is relying that such parties will be Year 2000 compliant. The General
Partner anticipates that the internal information systems, including accounting
systems, that it will use for Partnership purposes will be Year 2000
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compliant by the end of 1999, although no assurance can be given that such will
be the case. The Partnership currently has no contingency plans in the event
that any of the above-described risks is realized. In the event that any of the
above-described risks are realized, or any other, unanticipated Year 2000 Issue
problems arise, the Partnership could be forced to cease its operations for an
indefinite period of time while the Year 2000 problems are remedied, at a cost
which cannot be accurately predicted at this time. Any such interruption in
Partnership operations would adversely affect Partnership revenues.
Tax Risks
Investors should note that the General Partner anticipates no significant
tax benefits associated with the operation of the Mobile Lithotripsy Systems or
the Partnership. No ruling will be sought from the Service on the United States
federal income tax consequences of any of the matters discussed in this
Memorandum or any other tax issues affecting the Partnership or the Limited
Partners. The Partnership is relying upon an opinion of its Counsel with respect
to certain material United States federal income tax issues. Counsel's opinion
is not binding on the Service as to any issue, and there can be no assurance
that any deductions, or the period in which deductions may be claimed, will not
be challenged by the Service. Each Investor should carefully review the
following risk factors and consult his 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 E TO THE MEMORANDUM) AND TO THE DISCUSSION UNDER THE CAPTION
"TAX ASPECTS OF THE OFFERING" HEREIN FOR A MORE DETAILED DISCUSSION OF SUCH
RISKS. IT IS STRONGLY RECOMMENDED THAT EACH INVESTOR INDEPENDENT LY CONSULT HIS
PERSONAL TAX COUNSEL CONCERNING THE TAX CONSEQUENCES ASSOCIATED WITH HIS
OWNERSHIP OF AN INTEREST IN THE PARTNERSHIP. THE CONCLUSIONS REACHED IN THE TAX
OPINION ARE RENDERED WITHOUT ASSURANCE THAT SUCH CONCLUSIONS HAVE BEEN OR WILL
BE ACCEPTED BY THE SERVICE OR THE COURTS.
THIS MEMORANDUM AND THE TAX OPINION DO NOT DISCUSS, NOR WILL COUNSEL BE
RENDERING AN OPINION REGARDING, ANY ESTATE AND GIFT TAX OR STATE AND LOCAL
INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP. FURTHERMORE,
INVESTORS SHOULD NOTE THAT THE ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES OF AN
INVESTMENT IN THE PARTNERSHIP MAY BE ADVERSELY AFFECTED BY FUTURE CHANGES IN THE
FEDERAL INCOME TAX LAWS, WHETHER BY FUTURE ACTS OF CONGRESS OR FUTURE
ADMINISTRATIVE OR JUDICIAL INTERPRETATIONS OF APPLICABLE FEDERAL INCOME TAX
LAWS. ANY OF THE FOREGOING MAY BE GIVEN RETROACTIVE EFFECT.
-12-
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. See
"Tax Aspects of the Offering - Further Changes in Tax Laws."
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 legal counsel to the Partnership 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. See "Tax Aspects of the Offering - Affiliated Service
Groups."
Partnership Allocations. The Partnership Agreement contains certain
allocations of profits and losses that could be reallocated by the Service if it
were determined that the allocations did not have "substantial economic effect."
On December 31, 1985, the Treasury Regulations dealing with the propriety of
partnership allocations were finalized. As a general rule, allocations of
profits and losses must have "substantial economic effect." Based upon current
law, Counsel is of the opinion that, if the question were litigated, it is more
probable than not that the allocation of profits and losses set forth in the
Partnership Agreement would be sustained for federal income tax purposes. This
opinion is subject to certain assumptions and qualifications and each Investor
should read the complete discussion of this issue at "Tax Aspects of the
Offering - Partnership Allocations." 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
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maintain certain cash reserves deemed necessary by the General Partner. The
Partnership will also incur significant up-front capital costs that may have to
be paid out of the Partnership's revenues. Because of the circumstances outlined
above, if Partnership cash flow falls substantially below the estimates as set
forth in the Financial Projections, 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. See
"Tax Aspects of the Offering - Taxable Income."
Other Investment Risks
Conflicts of Interest. The activities of the Partnership involve numerous
immediate 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," "General Partner," "Competition" and
"Conflicts of Interest."
No Participation in Management. The General Partner and the Management
Agent will have full authority to supervise the business and affairs of the
Partnership pursuant to the Partnership Agreement and the Management Agreement.
The Limited Partners will have no right to participate in the management or
conduct of the Partnership's business and affairs. The General Partner, the
Management Agent, their employees and their Affiliates are not required to
devote their full time to the Partnership's affairs and intend to continue
devoting substantial time and effort in organizing and operating partnerships
and other ventures throughout the United States that are similar to the
Partnership. The General Partner and the Management Agent will devote such time
to the Partnership's business and affairs as they deem necessary and appropriate
in the exercise of reasonable judgment. The participation by any Limited Partner
in the management or control of the Partnership's affairs could render him
generally liable for the liabilities of the Partnership that could not be
satisfied by assets of the Partnership. See the Form of Legal Opinion of ▇▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ & ▇▇▇▇, a Professional Limited Liability Company, attached
hereto as Appendix E.
Ability of the General Partner to Unilaterally Effect Fundamental Changes.
The General Partner has the authority under the Partnership Agreement to effect,
without Limited Partner consent, transactions that could result in the
termination or reorganization of the Partnership, a total or partial dilution of
the Limited Partners' interests in the Partnership, and/or the exchange of
interests in another enterprise for the limited partnership interests held by
the Limited Partners. See "Summary of the Partnership Agreement - Fundamental
Changes."
Limited Partners' Obligation to Return Certain Distributions. Except as
provided by other applicable law and provided that a Limited Partner does not
participate in the management 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 Distribution received from the Partnership if the
Limited Partner knew at the time of the Distribution that, after giving effect
to the Distribution, all liabilities of the Partnership, other than liabilities
to Partners on account of their Partnership interests and liabilities for which
the recourse of creditors is limited to specific Partnership property, exceed
the fair value of the assets of the Partnership, except that the fair value
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which the recourse of creditors is limited shall of Partnership property that is
subject to a liability for which the recourse of creditors is limited shall be
included in assets only to the extent that the fair value of such property
exceeds such liability.
Dilution of Limited Partners' Interests. The General Partner has the
authority under the Partnership Agreement to cause the Partnership to issue,
offer and sell additional limited partnership interests in the future (a
"Dilution Offering"). Upon the successful closing of 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 financing 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 such 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 his
counsel and financial advisors. Neither the Partnership nor the General Partner
endorses or recommends to the prospective Investors the desirability of
obtaining financing from the Bank nor does the summary of the Loan Documents
provided herein constitute legal advice. A Limited Partner's liability under a
Limited Partner Note continues regardless of whether the Limited Partner remains
a limited partner in the Partnership. As a consequence, such liability cannot be
avoided by claims, defenses or set-offs the Limited Partner may have against the
Partnership, the General Partner or their Affiliates. In addition to the
suitability requirements discussed below, any prospective Investor applying for
a Bank loan to fund a portion of his Unit purchase must be approved by the Bank
for purposes of his delivery of the Limited Partner Note. The Bank has
established its own criteria for approving the creditworthiness of a prospective
Investor and has not established objective minimum suitability standards.
Instead, the Bank is empowered to accept or reject prospective Investors.
Financial Projections. The Financial Projections contain data that are the
General Partner's estimate of possible, but not necessarily the most likely,
results of the Partnership's operations and represent a prediction of future
events based on assumptions that may or may not occur and should not be relied
upon to indicate the actual results that will be attained. Further, there is no
assurance that the financial results of the Partnership will favorably compare
to the historical financial results of the Business and the differences could be
materially adverse. The Financial Projections begin on the Closing Date and
reflect five full twelve-month tax years; thus, they will not accurately reflect
the consequences of the first tax year of operations, which will be less than a
full twelve-month period. Investors should carefully review the notes to the
Financial Projections, which contain various assumptions and other information
concerning the data therein. The General Partner believes that the underlying
assumptions provide a reasonable basis for the projections, but some assumptions
inevitably will not materialize and unanticipated events and circumstances may
occur subsequent to the date of the Financial Projections. Accordingly, the
actual results achieved during the projected periods will vary from the
Financial Projections and the variations may be material. Furthermore, to the
extent the Financial Projections reflect taxable income and loss, Service audit
adjustments could adversely affect the timing and the amount of
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deductions that the Partnership plans to claim. See "Proposed Activities -
Operation of the Mobile Lithotripsy Systems" and the Financial Projections
attached hereto as Appendix A.
Long-term Investment. The General Partner anticipates that the Partnership
will continue to operate the Mobile 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. Accordingly, the
purchase of Units must be considered a long-term and illiquid investment. See
"Tax Aspects of the Offering - Sale of Partnership Units."
Arbitrary Offering Price. The offering price of the Units has been
determined by the General Partner based upon valuation of the Business conducted
by an independent third party and a related initial valuation of the Partnership
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, except for those involving 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. 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 will be amended to include the Partnership and
the General Partner
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believes that coverage limits of these policies are within acceptable norms for
the extent and nature of the risks covered. The Partnership will be 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 its Mobile Lithotripsy Systems 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 (which it may assign
to the Partnership in its sole discretion) to purchase all the interest of a
Limited Partner who (i) dies, (ii) becomes the subject of a domestic proceeding,
(iii) becomes insolvent or (iv) acquires a direct or indirect ownership of an
interest in a competing venture (including the lease or sublease of competing
technology). The option purchase price is an amount equal to the lesser of the
fair market value of the Partnership Interest to be purchased or the Limited
Partner's share of the Partnership's book value, if any, as reflected by the
Limited Partner's capital account in the Partnership (unadjusted for any
appreciation in Partnership assets and as reduced by depreciation deductions
claimed by the Partnership for tax purposes). The option purchase price is
likely to be considerably less than the fair market value of a Limited Partner's
interest in the Partnership. Because losses, depreciation deductions and
Distributions reduce capital accounts, and because appreciation in assets is not
reflected in capital accounts, it is the opinion of the General Partner that the
option purchase price may be nominal in amount. In addition, in the event
existing or newly enacted laws or regulations or any other legal developments
adversely affect (or potentially adversely affect) the operation of the
Partnership or the business of the Partnership (e.g., any prohibitions on
provider ownership), the General Partner, in its sole discretion, is obligated
to either (i) purchase the Partnership Interests of all of the Limited Partners
for an amount equal to the greater of a multiple of recent distributions or book
value or (ii) dissolve the Partnership. See the form of the Partnership
Agreement attached hereto as Appendix B and "Summary of the Partnership
Agreement - Optional Purchase of Limited Partner Interests."
GLOSSARY
Certain terms in this Memorandum shall have the following meanings:
Act. The Act means the Tennessee 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.
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Asset Contribution. The contribution to the Partnership by the General
Partner of substantially all of the operating assets related to the Business and
rights and obligations under approximately 30 Hospital Contracts, pursuant to
the Contribution Agreement.
Bank. First-Citizens Bank & Trust Company.
Business. The lithotripsy services business currently operated by the
General Partner.
Capital Account. The Partnership capital account of a Partner as computed
pursuant to Article XI 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. The assets
contributed to the Partnership by the General Partner pursuant to the
Contribution Agreement will be considered Capital Contributions.
Capital Transaction. Any transaction which, were it to generate proceeds,
would produce Partnership Sales Proceeds or Partnership Refinancing Proceeds.
Closing. The admission to the Partnership as Limited Partners of Investors
subscribing for Units.
Closing Date. The date of the Closing, which is scheduled to occur on
December 4, 1998 (or earlier, in the discretion of the General Partner, upon the
sale of all 80 Units as provided herein), unless extended at the discretion of
the General Partner for a period up to 180 days.
Code. The Internal Revenue Code of 1986, or corresponding provisions of
subsequent, superseding revenue laws.
Contract Hospitals. Any hospital or other health care facility that
contracts directly with the Partnership for the provision of lithotripsy
services.
Contributed Assets. The assets to be transferred to the Partnership by the
General Partner pursuant to the Contribution Agreement, consisting of five
Mobile Lithotripsy Systems, rights and obligations under approximately 30
Hospital Contracts and all other operating assets related to the Business.
Contribution Agreement. The Contribution Agreement dated October 23, 1998
between the Partnership and the General Partner which provides for the transfer
of the Contributed Assets to the Partnership by the General Partner.
Counsel. Counsel to the Partnership, ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ & ▇▇▇▇, a
Professional Limited Liability Company, P.O. Drawer 84, Winston-Salem, North
Carolina 27102.
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Dilution Offering. Pursuant to the terms of the Partnership Agreement, the
future offering of additional limited partnership interests in the Partnership
by the General Partner. Any such offering generally will proportionally reduce
the existing Percentage Interests of the then current Partners in the
Partnership.
Distributions. Cash or other property, from any source, distributed to
Limited Partners.
Escrow Agent. First-Citizens Bank & Trust Company.
FDA. The United States Food and Drug Administration.
Financial Projections. Projections of Partnership revenue, cash flow,
income, loss, and sources and uses of funds, and of Partnership return per Unit,
attached hereto as Appendix A, which have been prepared by the General Partner
based upon the assumptions stated therein.
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 or extend credit to the
Investor, respectively.
General Partner. The general partner of the Partnership, Prime Lithotripter
Operations, Inc., a Delaware corporation, d/b/a Tennessee Valley Lithotripter,
and wholly-owned subsidiary of Prime.
Hospital Contracts. The lithotripsy services contracts the General Partner
has entered into with the Contract Hospitals, substantially all of which
contracts will be assigned to the Partnership pursuant to the Contribution
Agreement.
Investors. Potential purchasers of Units of the Partnership.
Lenders. The commercial lending syndicate and certain other holders of
Prime indebtedness.
Limited Partner Loans. The loans to Investors to fund a portion of the
purchase price of their Units as described in, and subject to the terms of, the
Loan Commitment.
Limited Partner Note. The note attached as an Exhibit to the Loan
Commitment which upon execution and acceptance will represent a Limited Partner
▇▇▇▇ made to an Investor.
Limited Partners. The Limited Partners will be those Investors who purchase
Units and are admitted to the Partnership, and any person admitted as a Limited
Partner in accordance with the provisions of the Partnership Agreement.
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Loan Commitment. The commitment to the Partnership dated October 23, 1998
attached hereto as Appendix C, pursuant to which the Bank has agreed to fund the
Limited Partner Loans.
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.
Memorandum. This Confidential Private Placement Memorandum, including all
Appendices hereto, and any amendment or supplement hereto.
Mobile Lithotripsy Systems. The five tractor trailer transport systems with
installed and operational lithotripters to be contributed to the Partnership by
the General Partner pursuant to the Contribution Agreement.
Net Gains from Capital Transactions. The gains realized by the Partnership
as a result of or upon any sale, exchange, condemnation or other disposition of
the capital assets of the Partnership (which assets shall include Code Section
1231 assets) or as a result of or upon the damage or destruction of such capital
assets.
Nonrecourse Deductions. A deduction as set forth in Treasury Regulations
Section 1.704-2(b)(1). The amount of Nonrecourse Deductions for a given Year
equals the excess, if any, of the net increase, if any, in the amount of
Partnership Minimum Gain during such Year over the aggregate amount of any
Distributions during such Year of proceeds of a Nonrecourse Liability that are
allocable to an increase in Partnership Minimum Gain, determined according to
the provisions of Treasury Regulations Section 1.704-2(h).
Nonrecourse Liability. Any Partnership liability (or portion thereof) for
which no Partner bears the "economic risk of loss," within the meaning of
Treasury Regulations Sections 1.704-2(b)(3), 1.752-1(a)(2) and 1.752-2.
Offering. This offering of Units.
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
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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. Tennessee Valley Lithotripter Limited Partnership, a Tennessee
limited partnership.
Partnership Agreement. The Partnership's Agreement of Limited Partnership,
a copy of which is attached to this Memorandum as Appendix B, 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.
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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 initially in the case of a Limited Partner acquiring his Partnership
Interest in the Offering by reference to his Unit ownership. Immediately
following the Asset Contribution, the General Partner will hold approximately an
80% interest in the Partnership in that capacity and the Limited Partners of the
Merging Partnerships collectively will hold up to a 20% (approximate) interest
in the Partnership. The Percentage Interest may be set forth in 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. The Percentage
Interest of the Partners will be reduced in the event of a future Dilution
Offering.
Prime. Prime Medical Services, Inc., a publicly held Delaware corporation
and the sole shareholder of the General Partner.
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.
Profit. The net income of the Partnership for each year as determined by
the Partnership for federal income tax purposes.
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.
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, and
member of the National Association of Securities Dealers, Inc. The Sales Agent
is an Affiliate of the General Partner.
SEC. The United States Securities and Exchange Commission.
Securities Act. The Securities Act of 1933, as amended.
Service. The Internal Revenue Service.
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Service Area. The geographic region in which Partnership operations will be
conducted and which consists primarily of Tennessee and portions of Alabama,
Arkansas and Kentucky. The General Partner reserves the right to change or
expand the Service Area.
Subscription Agreement. The Subscription Agreement, included in the
Subscription Packet accompanying this Memorandum, to be executed by the Limited
Partners in connection with their purchase of Units.
Subscription Packet. The packet of subscription materials to be distributed
to and completed by Investors in connection with their subscription for Units.
Units. The 80 equal limited partner interests in the Partnership offered
pursuant to this Memorandum for a price per Unit of $9,114 in cash, up to $6,614
of which may be funded with the proceeds of a Limited Partner Loan by certain
Investors acceptable to the Bank.
TERMS OF THE OFFERING
General
The Partnership was recently formed under the laws of the State of
Tennessee. The General Partner intends to contribute to the Partnership
substantially all of the operating assets related to the Business and rights and
obligations under approximately 30 Hospital Contracts pursuant to the
Contribution Agreement upon the Closing in exchange for at least an initial 80%
interest in the Partnership. The General Partner of the Partnership is Prime
Lithotripter Operations, Inc. See "General Partner." The Partnership expects to
operate five mobile lithotripters which it will acquire from the General Partner
as provided above. See "Proposed Activities." The principal executive offices of
the General Partner and the Partnership are located at ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇
▇▇▇, ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇.
The Units and Subscription Price. Tennessee Valley Lithotripter Limited
Partnership, a limited partnership formed under the laws of the State of
Tennessee, hereby offers up to 80 Units of limited partner interest in the
Partnership. Each Unit represents a 0.25% economic interest in the Partnership.
Investors should note that their initial Percentage Interests in the Partnership
may be reduced by future Dilution Offerings. See "Summary of the Partnership
Agreement - Dilution Offerings" and the form of the Partnership Agreement
attached hereto as Appendix B. The price for each Unit is $9,114 and is payable
in cash in full at subscription; provided, that prospective Investors who meet
certain requirements may be able to fund a portion of their Unit purchase price
with the proceeds of certain third-party financing. The Partnership has arranged
for financing of a portion of the Units' purchase price with First-Citizens Bank
& Trust Company, Fayetteville, North Carolina (the "Bank"). Therefore, in lieu
of paying the entire Unit purchase price in cash, prospective Investors may
execute and deliver to the Sales Agent upon delivery of their Subscription
Packets, at least $2,500 cash and a Limited Partner Note in a maximum principal
amount of up to $6,614 per Unit to be purchased, a Loan and Security Agreement,
Security
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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 Loan Commitment as Exhibits A,
B and C, respectively, which is attached hereto as Appendix C and the UCC's
attached as part of the Subscription Packet. Each Investor may purchase not less
than one Unit. The General Partner may, in its sole discretion, reject in whole
or in part any subscription. Rejected subscription funds (without interest) and
the executed Loan Documents will be returned promptly to the rejected Investor.
The Offering. By this Offering the Partnership seeks to sell up to 80 Units
for up to $729,120 in cash ($709,120 net of Sales Agent's commissions). In the
event subscriptions for one or more Units are received and accepted by the
General Partner on the Closing Date and the Lenders release as collateral all of
the assets and/or consent to the Asset Contribution as required by the terms of
the Contribution Agreement, all subscription funds (plus interest) and Loan
Documents held in escrow will be released to the Partnership. See "Proposed
Activities - The Asset Contribution." If no subscriptions are received and
accepted during the subscription period as defined in "Subscription Period"
below or the necessary consents and/or releases are not secured, the Offering
will be terminated and all subscription funds (plus interest), Loan Documents
and other subscription documents will be returned to the Investors. The General
Partner and its Affiliates do not intend to purchase Units in the Offering;
provided, however, that the interest of the General Partner will increase by
0.25% for each unsold Unit. All subscription funds will be held in an interest
bearing escrow account until the Closing or the termination of the offering. See
"Risk Factors" and the Loan Commitment attached hereto as Appendix C.
Subscription Period. The subscription period will commence on the date
hereof and will terminate at 5:00 p.m., Central time, on December 4, 1998 (or
earlier, in the discretion of the General Partner, upon the sale of all 80 Units
as provided herein and the consummation of the Asset Contribution), unless
sooner terminated by the General Partner or unless extended for an additional
period up to 180 days. See "Plan of Distribution."
Acceptance of Subscriptions. To enable the Bank and the General Partner to
make credit and investor decisions, respectively, the 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 whose subscription is
received and accepted will become a Limited Partner in the Partnership on the
Closing Date provided the conditions to Closing as provided above under "The
Offering" are met. Subscriptions may be rejected in whole or in part by the
General Partner and need not be accepted in the order received. The General
Partner reserves the right to reduce any subscriptions and to allocate
subscriptions received in the event the Units are oversubscribed. If a
prospective Investor finances a portion of his Unit purchase price with the
proceeds of a Limited Partner Note, the General Partner's decision to issue and
sell a Unit to such Investor and the admission of such Investor to the
Partnership as a Limited Partner will be further conditioned upon the Bank's
acceptance of the Investor and funding
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of the proceeds of the Limited Partner Note at the Closing to the Partnership.
To the extent the General Partner reduces an Investor's subscription as provided
above, the Investor's cash Unit purchase price will be proportionately refunded
and reduced and, if applicable, the principal amount of his Limited Partner Note
will be reduced. If the General Partner elects to terminate the Offering or the
conditions to Closing as provided above under "The Offering" are not met, all
subscription funds (plus interest), Loan Documents and other subscription
documents will be returned in full within 30 days of such termination. Notice of
acceptance of an Investor's subscription to purchase Units and the Investor's
Percentage Interest in the Partnership will be furnished promptly after the
Closing.
Closing Date. On the Closing Date, Investors whose subscriptions were
accepted will be admitted as Limited Partners to the Partnership, and the
subscription funds and Loan Documents will be released from escrow to the
Partnership.
Limited Partner Loans
The purchase price for the Units is payable in cash with the prospective
Investor's personal funds and/or in part with the proceeds of a Limited Partner
Loan. Financing under the Limited Partner Loans was arranged by the Partnership
with the Bank as provided in the Loan Commitment, attached hereto as Appendix C.
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 and Note Addendum,
the form of which are attached as Exhibit A to the Loan Commitment, a Loan and
Security Agreement, the form of which is attached as Exhibit B to the Loan
Commitment, a Security Agreement, the form of which is attached as Exhibit C to
the Loan Commitment and two UCC-1's, the form of which are attached to the
Subscription Packet (collectively, the "Loan Documents"). In no event may the
maximum amount borrowed per Unit exceed $6,614. The Limited Partner Note is
repayable in twelve (12) predetermined installments in the respective amounts
set forth in the Loan Commitment. The installments are payable on each January
15th, April 15th, June 15th and September 15th commencing on April 15, 1999
(assuming the Closing occurs in 1998), with a thirteenth (13th) and final
installment in an amount equal to the principal balance then owed on the Limited
Partner Note and all accrued, unpaid interest thereon due and payable on the
third anniversary of the first installment date. Interest accrues at the Bank's
"Prime Rate," as the same may change from time to time. The Prime Rate refers to
that rate of interest established by the Bank and identified as such in
literature published and circulated within the Bank's offices. Such term is used
as a means of identifying a rate of interest index and not as a representation
by the Bank that such rate is necessarily the lowest or most favorable rate of
interest offered to borrowers of the Bank generally. A prospective Investor will
have no claim or right of action based on such premise. See the form of the
Limited Partner Note attached as Exhibit A to the Loan Commitment.
The Limited Partner Note will be secured by the cash flow distributions
payable with respect to the prospective Investor's Partnership Interest as
provided in the Loan and Security Agreement and the Security Agreement and as
evidenced by the UCC-1s. By executing the Loan and Security Agreement, the
prospective Investor requests the Bank to extend the Loan Commitment
-25-
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 the Partnership to acknowledge
receipt thereof and (ii) the Partnership to remit funds directly to the Bank out
of the prospective Investor's share of any Distributions represented by the
prospective Investor's percentage Partnership Interest to fund installment
payments due on the prospective Investor's Limited Partner Note. See the form of
the Loan and Security Agreement attached as Exhibit B to the Loan Commitment
which is attached hereto as Appendix C.
If the prospective Investor is approved by the Bank and is acceptable to
the General Partner, the Escrow Agent will, upon Closing, 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 Loans."
Offering Exemptions
The Units are being offered and will be sold in reliance on: (1) an
exemption from the registration requirements of the Securities Act of 1933, as
amended, provided in Section 4(2) thereof and Rule 506 of Regulation D
promulgated thereunder, as amended; (2) an exemption from registration provided
in the Alabama Securities Act, as amended, and a policy statement issued by the
Alabama Securities Commission; (3) an exemption from registration provided in
Section 23-42- 509(c) of the Arkansas Code of 1957 Annotated, as amended, and
Rule 509.01(b) of the regulations promulgated thereunder, as amended; (4) an
exemption from registration provided in the Securities Act of Kentucky, as
amended; and (5) an exemption from registration provided in Sections 48-2-
102(14)(F)(iv) and 48-2-125(b) of the Tennessee Code Annotated, as amended, and
Rule 0780-4-2- .12(1)(c) of the regulations promulgated thereunder, as amended.
Only a limited number of investors other than accredited investors, as such term
is defined under Regulation D of the Securities Act of
-26-
1933, as amended, may purchase Units hereunder. The suitability standards set
forth below have been established in order to comply with the terms of these
registration exemptions.
Suitability Standards
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. For purposes of analyzing his investment in the Partnership, each
Investor should regard his exposure with respect to his investment to be his
cash subscription including, if applicable, the amount for which he is
personally liable under his Limited Partner Note. See "Terms of the Offering -
Limited Partner Loans." An Investor should not purchase a Unit if he does not
have resources sufficient to bear the loss of this entire amount. The General
Partner anticipates selling Units only to individual Investors; however, the
General Partner reserves the right to sell Units to entities. See "Terms of the
Offering - General - The Offering." Because of the risks involved, the General
Partner anticipates selling the Units only to Investors residing in Alabama,
Arkansas, Kentucky and Tennessee who it reasonably believes are "accredited
investors" as that term is defined in Rule 501 under the Securities Act, but
reserves the right to sell to a limited number of Investors who do not meet
these criteria. Certain institutions and the following individuals are
"accredited investors":
(1) An individual whose net worth (or joint net worth with 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 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.
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 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 or the Bank'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 "Risk
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Factors" and "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
accompanying this Memorandum. 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, which will be made
available to an Investor upon request.
How to Invest
Investors who meet the qualifications for investment in the Partnership and
who wish to subscribe for Units may do so as follows:
a. By completing, dating, signing and acknowledging the Subscription
Agreement and the Counterpart Signature Page to the Partnership Agreement (the
forms of which are included in the Subscription Packet accompanying this
Memorandum);
b. By completing, dating and signing the Purchaser Questionnaire (the form
of which is included in the Subscription Packet accompanying this Memorandum);
c. By having any Purchaser Representative who has acted on behalf of the
Investor in connection with this Offering complete, date and sign the Purchaser
Representative Questionnaire (a copy of which is available upon request to the
General Partner);
d. By completing, dating and signing the Purchaser Financial Statement (the
form of which is included in the Subscription Packet accompanying this
Memorandum), or in lieu thereof, substituting the Investor's own personal
executed financial statement, as long as such substitute statement contains the
same information as provided in the form, and attaching to the Purchaser
Financial Statement or substitute statement, as the case may be, pages one and
two of the Investor's most recently filed Form 1040 U.S. Individual Income Tax
Return;
e. If the prospective Investor is financing a portion of his purchase
pursuant to a Limited Partner Loan, by completing and signing (on the front and
the back), but not dating, a Limited Partner Note and signing the form of Note
Addendum attached thereto (the form of which Limited Partner Note (including the
Note Addendum) is included in the Subscription Packet and is attached as Exhibit
A to the Loan Commitment);
f. If the prospective Investor is financing a portion of his purchase
pursuant to a Limited Partner Loan, by completing and signing (but not dating)
the Loan and Security
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Agreement (the form of which is included in the Subscription Packet and is
attached as Exhibit B to the Loan Commitment);
g. If the prospective Investor is financing a portion of his purchase
pursuant to a Limited Partner Loan, by completing and signing (but not dating)
the Security Agreement (the form of which is included in the Subscription Packet
and is attached as Exhibit C to the Loan Commitment);
h. If the prospective Investor is financing a portion of his purchase
pursuant to a Limited Partner Loan, by completing and signing two copies of the
UCC-1 (the form of which is included in the Assignment Packet);
i. By delivering or mailing all of the foregoing, together with a check in
the appropriate amount payable to "First-Citizens as Escrow Agent for TVLLP," to
the Sales Agent at 2008 Litho Place, Fayetteville, North Carolina 28304.
All information provided by Investors, including the information in the
Loan Documents, the Purchaser Questionnaire and the Purchaser Financial
Statement, 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.
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
-29-
the General Partner, or the consent of a Majority in Interest of the Limited
Partners (except the assignor Limited Partner) and the General Partner, (ii) the
submission of certain documents and (iii) the payment of expenses incurred by
the Partnership in effecting the substitution. An assignee, regardless of
whether he becomes a substituted Limited Partner, will be subject to and bound
by all the terms and conditions of the Partnership Agreement with respect to the
assigned Units. See "Summary of the Partnership Interest - Restrictions on
Transfer of Partnership Assets."
PLAN OF DISTRIBUTION
Subscriptions for Units will be solicited by MedTech Investments, Inc., the
Sales Agent. The Sales Agent 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 will not
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 may be engaged in other similar
offerings on behalf of the Affiliates of the General Partner during the pendency
of this Offering and in the future. 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 $250 for each Unit sold. No commission is payable to the Sales Agent
unless a successful Closing has occurred. 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 $15,000. 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 or her decision to purchase Units.
The subscription period will commence on the date hereof and will terminate
at 5:00 p.m., Central time, on December 4, 1998 (or earlier, in the discretion
of the General Partner, upon the sale of all 80 Units as provided herein),
unless extended at the discretion of the General Partner for an additional
period not to exceed 180 days. No minimum number of Units must be sold in order
for this Offering to close.
An Investor whose subscription is received and accepted will become a
Limited Partner in the Partnership on the Closing Date provided all closing
conditions are satisfied. See
-30-
"Terms of the Offering - The Offering." Subscriptions may be rejected in whole
or in part by the Partnership and need not be accepted in the order received.
The Partnership reserves the right to reduce any subscriptions and to allocate
subscriptions received in the event the Units are oversubscribed. See "Terms of
the Offering - General - Acceptance of Subscriptions." If the General Partner
elects to terminate the Offering, or no Units are timely purchased as provided
herein, all subscription funds (plus interest), Loan Documents and other
subscription documents will be returned within 30 days of such termination.
Notice of acceptance of an Investor's subscription to purchase Units and his
initial Percentage Interest in the Partnership will be furnished promptly after
the Closing. To the extent the Partnership reduces an Investor's subscription as
provided above, the Investor's cash Unit purchase price will be proportionally
refunded and reduced and, if applicable, the principal amount of his Limited
Partner Note will be reduced. All subscription funds will be held in an interest
bearing escrow account with the Escrow Agent until the Closing or the
termination of the Offering.
PROPOSED ACTIVITIES
Purpose
The primary purposes of the Partnership are (i) to improve the provision of
health- care in the Service Area by taking advantage of the technological
innovations offered by the Mobile Lithotripsy Systems and the Partnership's
quality assurance and outcome analysis programs, and (ii) to make cash
distributions to its Partners from revenues generated from the operation of the
Mobile Lithotripsy Systems. There is no assurance that these efforts will be
successful. See "Risk Factors." Following the Closing, the Partnership expects
to continue the current operations of the General Partner. See "The Asset
Contribution" and "Operation of the Business" below.
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. A number of methods currently are used to treat kidney
stones. These methods range from drug therapy to dissolve the stone to an open
surgical procedure for stone removal. Approximately 75 percent 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. 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 following is a
brief discussion of current treatment methods.
Drug Therapy. Grain-sized stones usually pass spontaneously in the urine
and the patient can be treated with drugs to reduce discomfort and to prevent
further stone recurrence. Larger stones of uric acid also can be dissolved by
appropriate drugs to allow normal passage from
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the urinary system. Drug therapy is used to institute therapeutic measures to
lower the concentration of stone-forming ions such as calcium and oxalate in the
urine.
Cystoscopic Procedures. Stones that form or lodge in the lower urinary
tract and bladder and that cannot be excreted spontaneously sometimes can be
extracted through the urethra with a standard cystoscope combined with either a
stone basket (for a stone in the ureter) or a special stone removal forceps (for
a stone in the bladder). Occasionally, this procedure can injure the ureter.
Unlike stones in the lower urinary tract, stones in the upper urinary tract (in
the ureter, renal pelvis and the kidney) are not accessible with a standard
cystoscope.
Ureteroscopic Procedures. Ureteroscopy may be an alternative surgical
method for the removal of stones from the urinary tract. Various forms of
ureteroscopes that use fiber optics can be inserted through the bladder and
ureter to allow a surgeon to view the internal recesses of the upper urinary
tract and the kidney. When a stone is observed, the surgeon can remove it with
special grapples that pass through the ureteroscope. If the stone's size does
not permit it to be extracted, a laser fiber, electrohydraulic probe or
ultrasound probe can be inserted into the ureteroscope to disintegrate the
stone. Stones that are lodged within the kidney, however, cannot normally be
treated by this method.
Percutaneous Lithotripsy. Percutaneous lithotripsy allows surgeons to
remove stones from the kidney, renal pelvis and upper urinary tract through a
nephrotomy, a percutaneous channel established through the patient's skin. Under
fluoroscopic control a long, fine needle is inserted into the kidney's urine
collection system through a small puncture in the patient's side. The needle
tract is progressively widened with dilators and tubes until a nephroscope can
be inserted. The nephroscope provides direct vision and direct access into the
recesses of the kidney and the renal pelvis. When a stone is located, the
working channel of the nephroscope can accommodate various stone removal
attachments such as loops, baskets or forceps to extract small stones. When a
stone wider than the working channel of the nephroscope is encountered, an
ultrasonic lithotrite, laser fiber, or electrohydraulic probe can be inserted
into the working channel to disintegrate the stone.
Laser Procedures. Laser technology is a fairly new method of destroying
urinary stones found in the bladder and the ureter. In this procedure a laser
light that fragments urinary stones is conducted through a fiber-optic tube
inserted through an instrument. In June 1988, the FDA approved the use of laser
technology to fragment urinary stones in the ureter through the insertion of a
fiber-optic fiber. Laser procedures are generally done through endoscopes such
as ureteroscopes or nephroscopes.
Open Surgery. The traditional open surgical procedure, widely used before
the development of lithotripsy, is a major operation that requires a large
incision into the kidney or ureter to gain access to the stone. The patient
spends as long as two weeks in the hospital followed by a convalescence period
of four to six weeks. In addition to the risk associated with the open surgical
procedure, another stone can form in the kidney or renal pelvis that would
necessitate performing another surgical procedure that could result in loss of
the kidney.
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Extracorporeal Shock-Wave Lithotripsy. 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 with lithotripsy. Lithotripsy involves the use of
shock-waves to disintegrate kidney stones noninvasively.
HM3 lithotripters employ a special water bath to maintain the pressure of
shock- waves. With these systems, a patient is immersed in a special tank of
water and shock-waves generated by a disposable high-voltage underwater spark
electrode are focused on a kidney stone. A fluoroscopic X-ray system is used to
position the patient accurately over the shock-wave generator in the water bath.
While the patient is under conscious sedation, usually 500 to 2,000 shock-waves
of short duration pass through the water, penetrate the flesh and impact the
hard, crystalline kidney stone, causing it to disintegrate. The shock-waves are
regulated by an ECG monitor that monitors cardiac function and prevents the
generation of the shock-wave during the sensitive period of the patient's
cardiac cycle. Disintegration of the kidney stone occurs in about thirty
minutes. During the procedure and for several days thereafter, stone fragments
are passed with the urine. Some newer lithotripters employ a different
shock-wave component which does not require the use of a water bath or, in most
cases, general anesthesia. The Partnership's lithotripters are first generation,
but have been upgraded to eliminate the need for general anesthesia and, in the
experience of the General Partner, produce lower retreatment rates than second
generation machines. See "Description of the Assets" below.
The Asset Contribution
The following description of the Asset Contribution summarizes certain
provisions of the Contribution Agreement, is not a complete statement of the
rights and obligations set forth therein and is qualified in its entirety by
reference to the complete text of the Contribution Agreement, a copy of which is
available upon request from the General Partner.
Concurrent with the Closing of the Offering, the General Partner and the
Partnership will effect the contribution of the Contributed Assets to the
Partnership in exchange for the General Partner's Partnership Interest pursuant
to the terms of the Contribution Agreement. Because certain of the Contributed
Assets have been pledged as collateral for certain obligations of Prime, both
the consummation of the transactions contemplated by the Contribution Agreement
and the Closing of the Offering are conditioned upon the release of all liens
against such Assets by the Lenders and/or the consent of the Lenders to the
transfer of such Assets from the General Partner to the Partnership. See "Terms
of the Offering - The Offering" and "- Description of the Assets" under this
section.
The General Partner will receive at least an 80% interest in the
Partnership in exchange for the contribution of the Assets. The Partnership
Interest of the General Partner will increase by 0.25% per unsold Unit.
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History of the Business
The General Partner purchased the Business from three separate groups of
physicians in October 1993. In connection with the acquisition, each of the
selling physicians entered into a noncompetition agreement with the General
Partner. All of such noncompetition agreements expired on October 15, 1998. The
General Partner anticipates that certain former owners may elect to compete with
the Business since they are no longer subject to the terms of these agreements.
Whether and to what extent such may be the case cannot be accurately predicted
by the General Partner. Significant additional competition would adversely
impact proposed Partnership operations, and the effect could be material. See
"Risk Factors - Operating Risks - Competition" and "Risk Factors - Other
Investment Risks - Financial Projections." At the time of its acquisition by the
General Partner, the Business operated three Mobile Lithotripsy Systems and one
fixed-base lithotripter, which was converted to a Mobile Lithotripsy System in
early 1995. A fifth Mobile Lithotripsy System was added in June 1996.
Description of the Assets
The equipment used in the Business consists of five Dornier HM3
Lithotripters, five trailers upfitted to house the lithotripters, five tractors
to transport the trailers from site to site and other miscellaneous medical
equipment and supplies. Descriptions of the principle items of equipment appear
below.
Lithotripters. Three Dornier HM3 lithotripters were acquired by the General
Partner in April 1991, and two more were acquired in October 1992 and June 1996,
respectively. Each of the Dornier HM3 units consists of a stainless steel water
tub, patient positioning unit, shock-wave generator, radiological localization
system, hydraulic supply system, water treatment system and control cabinet. The
localization system, which employs two image intensifiers, allows normal and
high-current fluoroscopy. The control cabinet contains control units for both
image intensifiers, TV monitors and video image memory. After positioning the
patient in the tub, the image intensifiers are swung by hand into the centered
position and are moved along the cental beams by motor.
The shock-wave generation system consists of the capacitor charging unit,
the pulse generator, shock-wave generator, ECG-trigger unit, ellipsoid reflector
and underwater electrode. The underwater electrode is mechanically linked to the
reflector and is positioned in such a way that the electric energy is discharged
exactly in the lower focus. The shock-wave energy, which can be controlled
within defined limits, is taken from the charging unit and stored in the
shock-wave generator. The spark pulses are released synchronously to the R-waves
of the ECG-signals via the ECG triggering unit. The spark pulses cause energy
discharges in the form of arcs between the electrode tips of the underwater
electrode leading to explosive vaporizations of the water in the zone of the
arc. The resulting shock-waves are reflected by the ellipsoid wall and
concentrated in the upper focus where the kidney stone is located. The patient
positioning unit enables the exact line-up of the kidney stone in the upper
focus of the reflector. The patient is placed on a support which makes possible
the optimum application of the shock-waves in accordance with the individual
anatomic conditions. The movement of the patient support in the three
coordinates is performed by
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a positioning unit, which is guided by a guideway installed on the ceiling of
the trailer. The positioning procedure is performed hydraulically and controlled
via the control cabinet.
Each of the lithotripters to be contributed to the Partnership has been
upgraded by the (i) installation of a larger ellipsoid and 40 nanofarad
generator which enables treatment without the need for general anesthesia; (ii)
installation of a Stryker Frame and manual gantry controls which enable
treatment stones in the distal third of the ureter; and (iii) conversion of the
imaging system from analogue to digital. Each of the lithotripters has been in
operation for more than twelve years, and other than the upgrades described
above, typically require only routine maintenance and repair.
Tractor Trailers. The trailers consist of (i) a 1986 Calumet trailer, (ii)
a 1991 Calumet trailer, (iii) a 1992 Calumet trailer, (iv) a 1995 Ti-Brook
trailer and (v) a 1996 Best Trailer. With the exception of the 1986 Calumet
trailer which was acquired in April 1994, all the trailers were purchased new.
Each trailer is upfitted to house an HM3 lithotripter. Each trailer contains a
generator and an HVAC system, is fully wired and is fitted with expanding sides
to accommodate operation of the lithotripter. Each of the three oldest trailers
each has been refurbished once, and the General Partner anticipates that they
will either have to be replaced or substantially refurbished and redesigned
within the next three years. The trailers are transported from site to site by
the tractors. See "- Anticipated Partnership Expenditures" in this Section.
The tractors consist of (i) two 1988 Kenworth tractors, (ii) two 1989
Kenworth tractors and (iii) a 1993 Freightliner tractor. Each of the tractors
was used when purchased. The General Partner anticipates that the four oldest
tractors will have to be replaced within the next three years. See "-
Anticipated Partnership Expenditures" in this Section.
Hospital Contracts. The General Partner is party to separate contracts for
the provision of lithotripsy services (the "Hospital Contracts") to 31 hospitals
in the Service Area (the "Contract Hospitals"). Eighteen Hospital Contracts
grant the General Partner the exclusive right to deliver lithotripsy services to
the relevant Contract Hospital. The Hospital Contracts generally require the
General Partner to make a lithotripter available at the Contract Hospitals for
use by physicians making appropriate arrangements with the Contract Hospitals.
The General Partner also generally provides a technician and certain ancillary
services such as scheduling and disposable medical products necessary for the
lithotripsy procedure. The Hospital Contracts provide that the General Partner
receives a per procedure fee. The hospitals and clinics are responsible for
billing and collecting their own fees from all insurance payors. See "Risk
Factors - Operating Risks - Impact of Insurance Reimbursement" and
"Competition." Pursuant to the Contribution Agreement, the General Partner will
contribute to the Partnership the General Partner's rights and obligations with
respect to all of the Hospital Contracts except the Lake Cumberland Regional
Hospital agreement which the General Partner is obligated to assign to one of
its Affiliates.
Most of the Hospital Contracts provide that they are automatically renewed
on a year-to-year basis unless notice is given 90 days prior to the end of the
relevant renewal term. In addition, most of the Hospital Contracts are
terminable upon 90 days written notice by either party without cause and/or upon
the occurrence of customary events of default. Certain Hospital Contracts
-35-
have continued beyond their stated terms and applicable renewal periods and
could be canceled at any time. ▇▇▇▇▇▇ Memorial Hospital (contracted with
competing vendor), Middle Tennessee Medical Center (leased its own equipment
with plans to purchase in 1999), Columbia Outpatient Surgery, Inc. (contracted
with competing vendor) and North Side Hospital (acquired its own equipment) each
have terminated lithotripsy services contracts with the General Partner within
the last year. The General Partner believes it has a good relationship with many
of the contracting parties and does not anticipate significant cancellations.
There is no assurance, however, that such cancellations will not occur. With the
exception of the Cumberland Medical Center Agreement, none of the Hospital
Contracts requires the General Partner to obtain the consent of a Contract
Hospital prior to assigning its Hospital Contract to the Partnership. The
General Partner does not intend to obtain any consents, and there is no
assurance that one or more Contract Hospitals will not react unfavorably to the
assignment of the Hospital Contracts to the Partnership and seek to terminate.
See "Risk Factors - Operating Risks - Contract Terms and Termination."
Twenty-three Contract Hospitals are located in Tennessee, six Contract
Hospitals are located in Kentucky, one Contract Hospital is located in Alabama
and one Contract Hospital is located in Arkansas.
Anticipated Partnership Expenditures
Three of the Calumet trailers are scheduled to be refurbished in 1999 at an
estimated cost of approximately $65,000 per trailer, which amount would be paid
to AK Associates, an Affiliate of the General Partner engaged in the
refurbishment of medical equipment trailers and coaches. See "Compensation and
Reimbursement to the General Partner and its Affiliates." In addition, the
General Partner anticipates refurbishing the remaining trailers in 2000 and
2001, respectively. Refurbishment of a trailer typically takes six to eight
weeks and consists of removal and reinstallation of the lithotripter,
replacement of the interior floors, cabinets and wall coverings, exterior body
work, repainting and re-decaling the exterior and service to the expanding wall
slide- outs. During the time a trailer is being refurbished, the Partnership
would likely rent a replacement mobile lithotripter from the General Partner or
one of its Affiliates at an estimated per month rate of $35,000. Any necessary
trailer maintenance is likely to be performed by an Affiliate of the General
Partner at customary rates. See "Compensation and Reimbursement to the General
Partner and its Affiliates." In addition, in 1999 the General Partner plans to
replace the three oldest tractors with used tractors at an estimated cost of
approximately $40,000 per tractor. The General Partner also anticipates
replacing at least one of the remaining tractors in 2000.
Operation of the Mobile Lithotripsy Systems
It is anticipated that the Partnership will continue to provide services
under the Hospital Contracts and, where possible, enter into similar lithotripsy
service agreements with other hospitals and outpatient surgery centers
throughout the Service Area. See "Risk Factors - Operating Risks - Contract
Terms and Termination." The services offered by the Partnership under the
Hospital Contracts will be "wholesale" in nature, i.e. the Partnership will
primarily supply the lithotripter, certain personnel and maintenance services
for a per procedure fee. The Contract
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Hospitals are solely responsible for billing and collecting on their own behalf
the technical component of the lithotripsy procedure.
It is anticipated that the Partnership will have a Physician Advisory Board
consisting of five physician Limited Partners appointed by the General Partner.
The Physician Advisory Board will meet two to four times per year, and each
member of the Physician Advisory Board will receive a fee of $250 per meeting
attended. In addition, it is anticipated that the General Partner will appoint a
local Medical Director at a cost to the Partnership of approximately $60,000 per
year. After consultation with the Medical Director and the Physician Advisory
Board, the Management Agent will determine the travel itinerary of the Mobile
Lithotripsy Systems. See "Proposed Activities - Management and Administration."
The travel schedule is expected to be influenced by the scheduling obligations
under the Hospital Contracts, the number of treating physicians and patients in
particular areas and Partnership arrangements with any new hospitals and
outpatient surgery centers located in the Service Area. The General Partner
anticipates the Partnership will be able to obtain new pad site space and
utility hook-ups at little or no charge from any local hospitals and surgical
centers which enter into new arrangements with the Partnership. The General
Partner, in its sole discretion, has the authority to expand Partnership
lithotripsy operations throughout, and outside of, the Service Area.
The General Partner anticipates that, over time, technical innovations that
make lithotripsy simpler and less costly will put downward pressure on the fees
the Partnership charges for its services. A 2,000 page report released by the
Health Care Financing Agency indicates that the professional component of
Medicare payments for lithotripsy procedures may soon be greatly reduced because
of the relative simplicity and risk-free nature of the procedure. See "Risk
Factors - Operating Risks - Dependence on Insurance Reimbursement" and
"Regulation."
Funding for Partnership Activities
The General Partner intends that funding for the Partnership's
refurbishment of three trailers and acquisition of three used tractors
(including payment of the applicable use and sales taxes) and the Partnership's
start-up, syndication, Asset Contribution, organization and working capital
expenses will come primarily from the cash proceeds of this Offering. The
proceeds of this Offering cannot be accurately determined until the Closing has
occurred and the number of Units sold has been calculated. If fewer than all 80
Units are sold, such proceeds may not be sufficient to fund all anticipated
expenses. The General Partner anticipates funding any shortfall with Partnership
Cash Flow and/or the proceeds of indebtedness as determined by the General
Partner. See "Risk Factors - Operating Risks - Partnership Limited Resources and
Risks of Leverage," "Proposed Activities - Anticipated Capital Expenditures" and
"Sources and Application of Funds."
The Partnership has no commitment from any lender to provide debt
financing, although Affiliates of the General Partner maintain good
relationships with certain commercial lenders. There is no assurance that a loan
would be available at the time, in an amount and on terms acceptable to the
Partnership. The General Partner and/or its Affiliates may, but are not
obligated to, lend money to the Partnership, and it cannot be determined at this
time if they would be willing
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and able to do so on terms acceptable to the Partnership. Any advances made by
the General Partner or an Affiliate to the Partnership will not obligate the
General Partner, any such Affiliate or any other Affiliate of the General
Partner to make future advances to the Partnership. The Partnership may not make
loans to the General Partner or any of its Affiliates. Borrowings by the
Partnership must be used solely for the benefit of the Partnership. See
"Conflicts of Interest."
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 Facors - Operating Risks, Partnership Limited
Resources and Risks of Leverage" and the Financial Projections attached to this
Memorandum as Appendix A.
Acquisition of Additional Assets
Pursuant to the Partnership Agreement, the General Partner has the
authority at any time (without obtaining the Limited Partners' consent) to
establish reserves or borrow additional funds on behalf of the Partnership to
acquire one or more fixed base or Mobile Lithotripsy Systems (or any other renal
stone treatment equipment), and may use Partnership assets and revenues to
secure and repay such borrowings. The acquisition of such assets likely would
result in higher operating costs for the Partnership. Except as provided herein,
the General Partner does not anticipate acquiring additional Partnership assets
unless projected Partnership Cash Flow or proceeds from a Dilution Offering are
sufficient to finance such acquisitions. See "Sources and Application of Funds."
No Limited Partner would be personally liable on any Partnership indebtedness
without such Limited Partner's prior written consent. There is no assurance that
financing would be available to the Partnership to acquire additional assets or
to fund any additional working capital requirements. A default by the
Partnership under any such loan could severely and negatively impact the
Partnership. See "Risk Factors - Operating Risks - Partnership Limited Resources
and Risks of Leverage."
Management and Administration
Management Fee. Pursuant to the Management Agreement, the Management Agent,
an Affiliate of the General Partner, will contract with the Partnership to
supervise and coordinate the management and administration of the day-to-day
operations of the Mobile Lithotripsy Systems for a monthly fee equal to the
greater of $8,000 or 7.5% of Partnership Cash Flow per month. See "Compensation
and Reimbursement to the General Partner and its Affiliates" and "Management
Agent." The General Partner may, in its sole discretion, engage at the
Partnership's expense one or more local Medical Directors to provide
consultation regarding patient needs and treatment. It is expected that one
medical director will be engaged at an annual estimated cost of $60,000. All
costs incurred by the Management Agent in performing its duties under the
Management Agreement will be the responsibility of, and will be paid directly or
reimbursed to the Manager by the Partnership.
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The Management Agent is the management agent for various affiliated lithotripsy
ventures. As a consequence, many of its employees provide management and
administrative services for numerous ventures, including the Partnership. In
order to properly allocate the costs of the Management Agent's employees and
other overhead expenses among the entities for which they provide services, such
costs will be divided among them based upon the relative number of patients
treated by each. The General Partner believes that the sharing of Management
Agent personnel costs among the various ventures will result in significant cost
savings for the Partnership.
Management Duties. Investors are urged to review carefully the form of the
Management Agreement, a copy of which is attached as Appendix D. The Management
Agent's services under the Management Agreement generally will include the
provision of lithotripsy related services, housekeeping, laundry, equipment
maintenance, medical and office supply inventory and other incidental services
necessary for efficient operation of the Mobile Lithotripsy Systems, as well as,
the supervision and coordination of any necessary lithotripsy training of
qualified physicians and the continuing education of qualified physicians in
lithotripsy techniques. The Management Agent will also be responsible for
implementing and overseeing the Partnership's quality assurance and outcome
analysis programs. In addition, the Management Agent will employ on behalf of
the Partnership all nonphysician personnel reasonably necessary to staff and
operate the Mobile Lithotripsy Systems, including, without limitation, drivers,
lithotripsy technicians, nurses, secretary/receptionists and office managers.
All such personnel will be the employees and the financial responsibility of the
Partnership, and the Management Agent may increase or decrease Mobile
Lithotripsy System personnel to the extent the Management Agent deems it would
benefit the Partnership's operations. See "Proposed Activities - Employees and
Benefits" below. The Management Agent generally will also be responsible for the
billing and collection of Contract Hospital accounts.
The Management Agent's engagement by the Partnership under the Management
Agreement will be as an independent contractor, and neither the Partnership nor
its Limited Partners will have any authority or control over the method or
manner in which the Management Agent performs its duties pursuant to the
Management Agreement. The Management Agreement vests in the Management Agent
full operational control of all aspects of management and administration of the
Mobile Lithotripsy Systems. The term of the Management Agreement is for five
years and will be automatically renewed for up to three successive five-year
terms unless terminated by the Partnership or the Management Agent.
In order for the Partnership to be responsive to the concerns of the local
physicians who will use its Mobile Lithotripsy Systems, the General Partner
expects to appoint a local Medical Director (or Directors) and a Physician
Advisory Board made up of representative local physicians. The General Partner
will consult with the Physicians Advisory Board from time to time on such
matters as instituting its detailed quality assurance program, utilization
review, outcome analysis and patient scheduling. The fees and expenses of the
Medical Director and the Physician Advisory Board will be the responsibility of
the Partnership. See "Proposed Activities - Operation of the Mobile Lithotripsy
Systems."
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Except as otherwise provided below, the Management Agent will be
responsible for maintaining on behalf of the Partnership complete books and
records for the management of the Mobile Lithotripsy Systems. The Management
Agreement provides that all funds furnished by the Partnership as working
capital together with all Partnership revenues will be accounted for separately.
Such funds will be disbursed by the Management Agent on behalf of the
Partnership to pay all expenses associated with the operation of the Mobile
Lithotripsy Systems, including, without limitation, the management fee payable
to the Management Agent under the Management Agreement and reimbursements to the
General Partner and the Management Agent for all of their out-of-pocket costs
incurred in the operation of the Mobile Lithotripsy Systems. The Management
Agent and its Affiliates will receive no compensation under the Management
Agreement other than its management fee and reimbursement for its out-of-pocket
costs incurred in fulfilling its responsi bilities under the Management
Agreement.
Consultation and Education. The local Medical Director will communicate
regularly with officers of the Management Agent, who will remain available for
consultation by phone and who plan to regularly visit all the Mobile Lithotripsy
Systems. The Management Agent will continually monitor progress in technological
developments in renal lithotripsy and advise the Partnership and the physicians
who use the Partnership's lithotripters regarding the nature of these
developments and its recommended course of action.
Employees and Benefits. The General Partner currently employs 11 employees.
The Partnership anticipates that it will continue to employ such employees. All
active full-time employees of the Partnership are eligible to participate in
Prime's benefit plans. Prime provides group medical, dental, long-term
disability, accidental death and dismemberment and life insurance benefits.
Through its cafeteria plan, Prime provides eligible employees with the
opportunity to pay premiums for coverage under such group insurance plans on a
pre-tax basis and to receive reimbursement for certain qualifying dependent care
and medical expenses. In addition, Prime sponsors a 401(k) retirement plan that
allows eligible employees to save for their retirement on a pre- tax basis and,
in the discretion of Prime, to receive matching contributions on their savings.
The Partnership likely will also provide paid holidays, sick leave, and vacation
benefits and other miscellaneous benefits including bereavement, military
reserves, jury duty and educational assistance benefits. Finally, for 1998 only,
certain employees of the Partnership may be eligible to receive an incentive
bonus based on their performance.
Financial Projections
Investors are urged to review the Financial Projections and assumptions
thereto attached as Appendix A. The Financial Projections contain data supplied
by the General Partner that is based upon the General Partner's estimate of
reasonable, but not necessarily the most likely, results of Partnership
operations. The data in the Financial Projections includes the General Partner's
estimate of projected Unit sales, Partnership expenses and revenues, and also
assumptions regarding the anticipated number of lithotripsy procedures that will
be performed at the Mobile Lithotripsy Systems each year. Because the Financial
Projections represent a prediction of future events based on certain assumptions
that may or may not occur, Investors should not rely on the
-40-
Financial Projections as an indication of the actual results that will be
attained. Some assumptions inevitably will not materialize and unanticipated
events and circumstances may occur subsequent to the date of the Financial
Projections. The actual results achieved during the period covered by the
Financial Projections will vary from the projected results and these variations
may be material. Furthermore, no assurance can be given that the results of
current or future operations will favorably compare with the historical results
of the Business. See "Risk Factors - Other Investment Risks - Financial
Projections" and the Financial Projections (with accompanying assumptions and
notes) attached hereto as Appendix A. A significant increase in competition
would also adversely impact proposed Partnership operations. See "Proposed
Activities - History of the Business."
FINANCIAL CONDITION OF THE BUSINESS
Selected Financial Data of the Business
The selected financial data of the Business set forth below should be read
in conjunction with the Financial Statements of the Business attached hereto as
Exhibit F and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Business" below. All the financial statements are
unaudited.
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-41-
Management's Discussion and Analysis of the Results of Operations for Prime
Lithotriper Operations, Inc., a New York corporation, d/b/a Tennessee Valley
Lithotripter
Nine Months Ended September 30, 1998 and September 30, 1997
Revenues. Total revenues increased $417,000 (8%) for the nine months ended
September 30, 1998 compared to the same period in 1997 related to a 7% rise in
the number of procedures performed, primarily due to the addition of two new
hospitals, and a less than 1% rise in revenue per case.
Operating Expenses. Operating expenses declined by $172,000 (12%) for the
nine months ended September 30, 1998 compared to the same period in 1997. The
decline is related to: (1) certain expenses totaling $105,000 (primarily
compensation and travel) related to the management of the office in Nashville
have been excluded from the 1998 amounts due to a restructuring of operations by
Prime Medical in late 1997, and (2) a decline in depreciation and amortization
expenses of $90,000, which is attributable to certain equipment having become
fully depreciated resulting in lower depreciation expense in 1998, (3) equipment
maintenance and repairs declined $40,000 due to favorable renewal of maintenance
contracts on the lithotripter equipment. Offsetting the above listed reductions
was a $81,000 increase in other operating expenses which is attributable to
increased costs to handle the increase in procedures performed.
Other Income (Expense). Other income, net increased by $7,000 (185%) due an
increase in interest and other income.
Year Ended December 31, 1997 and December 31, 1996
Revenues. Total revenues increased $741,000 (12%) for the year ended
December 31, 1997 compared to the same period in 1996 related to a 8% rise in
the number of procedures performed, primarily due to higher procedures at
existing hospitals, and a 4% rise in revenue per case.
Operating Expenses. Operating expenses decreased by $7,000 (less than 1%)
for the year ended December 31, 1997 compared to the same period in 1996. The
decline is related to (1) an increase of $104,000 in the intercompany
lithotripter rental expense, which permitted the Business to provide additional
service to its existing hospitals and (2) $70,000 in expenses (primarily
compensation and travel) to manage the Business and other businesses owned by
the Affiliates of the General Partner have been excluded in the 1997 amounts.
This was partially offset by a decline in depreciation and amortization expenses
of $34,000, which is attributable to certain equipment having become fully
depreciated.
Other Income (Expense). Other income, net increased by $400 (9%) due to an
increase in interest and other income.
-42-
Year Ended December 31, 1996 and December 31, 1995
Revenues. Total revenues increased $667,000 (12%) for the year ended
December 31, 1996 compared to the same period in 1995, related to a 14% rise in
the number of procedures performed, primarily due to 2 contracts, which were
entered into in mid-1995, had a full year of activity in 1996, and a 2% decline
in revenue per case.
Operating Expenses. Operating expenses increased by $105,000 (5%) for the
year ended December 31, 1996 compared to the same period in 1995, due to an
increase of $86,000 in the employee compensation and benefits related to an
increase in staff.
Other Income (Expense). Other income, net increased by $3,000 (561%) due to
an increase in interest and other income.
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SOURCES AND APPLICATIONS OF FUNDS
The following table sets forth the funds expected to be available to the
Partnership from this Offering if all 80 Units are sold and other sources and
their anticipated and estimated uses.
Sources of Funds Sale of 80 Units
Offering Proceeds(1) $729,120 (100.00%)
-- -------- -------
TOTAL SOURCES $729,120 (100.00%)
Application of Funds
Refurbishment of Three Trailers(2) $195,000 ( 26.74%)
Purchase of Three Used Tractors(2) $120,000 ( 16.46%)
Loaner Rental Costs(2) $210,000 ( 28.80%)
Organizational Start-Up Costs and Working $139,120 ( 19.08%)
Capital(3)
Syndication Costs(4) $ 65,000 ( 8.91%)
-- -------- - ----
TOTAL APPLICATIONS $729,120 ( 100.00%)
======== = ======
Notes to Sources and Applications of Funds Table
(1) Assumes all 80 Units are purchased by qualified Investors. In addition
to the cash proceeds of the Offering, the Partnership will acquire the
Contributed Assets from the General Partner.
(2) It is anticipated that the General Partner will cause the Partnership
to contract with AK Associates, an Affiliate of the General Partner, to
refurbish the Partnership's three oldest trailers at an estimated per trailer
cost of $65,000. In connection with the refurbishments, the General Partner will
also cause the Partnership to purchase three used tractors at an estimated per
vehicle cost of $40,000. During the time of each refurbishment (estimated at 6 -
8 weeks), the General Partner will cause the Partnership to rent a "loaner"
trailer-lithotripter unit at an estimated per month cost of $35,000. The table
assumes that each refurbishment will take two months. See "Proposed Activities -
Anticipated Partnership Expenditures" and "- Funding for Partnership
Activities."
(3) This amount includes the General Partner's estimate of (i) legal and
accounting costs associated with organizing the Partnership, preparing the
Partnership Agreement, the Management Agreement and other ancillary Partnership
documents; (ii) all out-of-pocket expenses incurred by the General Partner and
its Affiliates associated with the initial start-up of the
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Partnership's operations; (iii) legal and accounting costs associated with
the Asset Contribution and (iv) working capital needs. To the extent the
proceeds of the Offering are insufficient to fund the foregoing costs or such
costs exceed the estimated amounts, it is anticipated that Partnership Cash Flow
and/or the proceeds of debt financing will fund such costs. There is no
assurance that Partnership Cash Flow or debt financing will be available for
such purpose. See "Risk Factors - Operating Risks - Partnership Limited
Resources and Risks of Leverage."
(4) Includes $20,000 in commissions payable to the Sales Agent,
reimbursement of $15,000 to the Sales Agent for out-of-pocket expenses incurred
in selling the Units and $30,000 in legal and accounting costs associated with
the preparation of this Memorandum.
COMPENSATION AND REIMBURSEMENT TO THE
GENERAL PARTNER AND ITS AFFILIATES
The following summary describes the types and, where determinable, the
estimated amounts of reimbursements, compensation and other benefits the General
Partner and its Affiliates will receive in connection with the organization,
operation and management of the Partnership and the Mobile 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 "Proposed Activities - Management and Administration" and
"Plan of Distribution."
1. Partnership Interest. Provided the necessary consents and releases are
obtained under the Contribution Agreement, the General Partner will contribute
the Contributed Assets to the Partnership in exchange for at least an initial
80% General Partner interest in the Partnership. See "Proposed Activities - The
Asset Contribution." The Percentage Interest of the General Partner will
increase by 0.25% for each unsold Unit. There is no assurance that the value to
be received by the General Partner in connection with the Asset Contribution is
fair to the Investors.
2. Organizational Expenses. The General Partner will be reimbursed by the
Partnership for all its out-of-pocket costs associated with the organization of
the Partnership, the Asset Contribution and all expenses of this Offering. No
other fees or compensation will be payable to the General Partner or its
Affiliates, except for the Management Fee and related reimbursements (described
below), for managing the Partnership.
3. Management Fee. Pursuant to the Management Agreement, the Management
Agent will contract 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 Management Agent in performing
its duties under the Management Agreement will be the responsibility of, and
will be paid directly or reimbursed by, the Partnership. The Management Agent is
the management agent for various affiliated lithotripsy ventures. As a
consequence, many of the Management
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Agent's employees provide various management and administrative services for
numerous ventures, including the Partnership. In order to properly allocate the
costs of the Management Agent's employees and other overhead expenses among the
entities for which they provide services, such costs will be divided among all
the ventures based upon the relative number of patients treated by each. The
General Partner believes that the sharing of personnel costs among various
entities results in significant costs savings for the Partnership. Investors are
urged to review carefully the Management Agreement, the form of which is
attached hereto as Appendix D. The management fee for any given month will be
payable on or before the 30th day of the next succeeding month and will begin to
accrue immediately following the Closing Date. The term of the Management
Agreement is for five years, and will be automatically renewed for up to three
successive five-year terms unless terminated by the Partnership or the
Management Agent. The Management Agent and the General Partner will be
reimbursed by the Partnership for all of their out-of-pocket costs associated
with the operation of the Partnership and the Mobile Lithotripsy Systems, and
the Partnership will pay or reimburse to the General Partner all expenses
related to the organization of the Partnership, the Asset Contribution and 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 Management Agent 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.
4. Partnership Distributions. In its capacity as general partner of the
Partnership, the General Partner is entitled to its distributable share of
Partnership Cash Flow, Partnership Sales Proceeds and Partnership Refinancing
Proceeds as provided by the Partnership Agreement. Although neither the General
Partner nor its Affiliates intend to purchase Units in this Offering, they would
also receive Partnership Distributions in respect of any Limited Partner
Partnership Interests they hereafter acquire. The amount of such Distributions
to the General Partner, if any, cannot be determined at this time. See "Summary
of the Partnership Agreement - Profits, Losses and Distributions," the Financial
Projections attached as Appendix A and the form of the Partnership Agreement
attached as Appendix B.
5. 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 $250 for each Unit sold (up to an aggregate of $20,000). If
the offering is successful, the Sales Agent will also be reimbursed by the
Partnership for its out-of-pocket expenses associated with its sale of the Units
in an amount not to exceed $15,000. See "Plan of Distribution" and "Conflicts of
Interest."
6. Refurbishment of Trailers. It is anticipated that the General Partner
will cause the Partnership to contract with AK Associates, an Affiliate of the
General Partner, to refurbish three of the Partnership's trailers in 1999 and
the Partnership's two remaining trailers in 2000 and 2001, respectively, at an
estimated per trailer cost of $65,000. In addition, it is anticipated that the
General Partner will cause the Partnership to contract with Affiliates of the
General Partner to rent
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"loaner" trailer-lithotripter units during the time the Partnership's trailers
are being refurbished at an estimated per month price of $35,000 per unit.
Refurbishment is expected to take six to eight weeks. Accordingly, it is
anticipated that the Partnership will pay an aggregate of $350,000 to Affiliates
of the General Partner for loaner units over the next three years. The
Partnership may require additional loaner units or rental time in the event any
of the Partnership's Mobile Lithotripsy Systems experience substantial down time
for other maintenance or repairs. See "Proposed Activities - Anticipated
Partnership Expenditures."
7. 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" and the Financial
Projections attached to this Memorandum as Appendix A.
GENERAL PARTNER
The General Partner of the Partnership is Prime Lithotripter Operations,
Inc., a New York corporation and wholly-owned subsidiary of Prime (the "General
Partner"). Prime is a publicly held company engaged in the ownership, operation
and management of medical service and related ventures. The principal executive
office of the General Partner is located at ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇,
▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇. The General Partner's assets are illiquid in nature.
Upon the Closing, the primary assets of the General Partner will be its interest
in the Partnership. The General Partner also has substantial potential financial
exposure as a guarantor of certain Prime indebtedness.
Management. The following table sets forth the names and respective
positions of the individuals serving as the executive officers and the sole
director of the General Partner, many of whom are current management personnel
of Prime.
Name Office
---- ------
▇▇▇▇▇▇ ▇▇▇▇▇▇▇, M.D. President
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ Treasurer and sole Director
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Ph.D. Vice President
▇▇▇▇▇ ▇▇▇▇▇ Secretary
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Descriptions of the background of the key executive officers and directors
of the General Partner appear below.
▇▇▇▇▇▇ ▇▇▇▇▇▇▇, M.D. was recently elected President of the General Partner.
▇▇. ▇▇▇▇▇▇▇ has been President and Chief Executive of the Management Agent since
April 1996. From May 1990 until December 1991, ▇▇. ▇▇▇▇▇▇▇ was a Vice President
of the Management Agent and previously practiced urology in Washington, North
Carolina. ▇▇. ▇▇▇▇▇▇▇ has been President of the Management Agent since 1992 and
was recently elected to is Board of Directors. ▇▇. ▇▇▇▇▇▇▇ is a board certified
urologist and is a founding member, the immediate past-president and currently a
Director of the American Lithotripsy Society.
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ is the sole Director and Treasurer of the General Partner.
▇▇. ▇▇▇▇▇▇▇▇ also is a Vice President and Director of the Management Agent 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. ▇▇. ▇▇▇▇▇▇▇▇ also
serves as the sole Director and Treasurer of the General Partner.
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Ph.D. has been Vice President of the General Partner
since 1994. ▇▇. ▇▇▇▇▇▇ is an experienced medical practice consultant and has
served as a director of Southern Medical Imaging, Inc. (1988-1993), First Choice
Health Plan, Inc. (1986-1988) and Tampa Bay Health Plan, Inc. (1985-1986). In
addition, ▇▇. ▇▇▇▇▇▇ is an accomplished health care scholar and was a member of
the teaching faculty at Florida Neurological Institute School of EEG Technology
from 1980 to 1984. ▇▇. ▇▇▇▇▇▇ received a faculty appointment to the Surgery
department (renal transplant surgery) of the University of Florida College of
Medicine and taught there from 1977 to 1979. ▇▇. ▇▇▇▇▇▇ received a Ph.D. in
Medical/Social Change Theory, Concentration: Ambulatory Medical Delivery Systems
from ▇▇▇▇▇▇ University, Institute for Advanced Studies in Minneapolis, Minnesota
in 1984.
▇▇▇▇▇ ▇▇▇▇▇ has been Secretary of the General Partner since January 30,
1998. He is currently tax manager and Secretary or Assistant Secretary for the
majority of Prime's subsidiaries. Prior to January 30, 1998, he was controller
in ERISA Administration Services, a privately held company.
MANAGEMENT AGENT
The Management Agent of the Company is Lithotripters, Inc., a North
Carolina corporation formed in November 1987 for the purpose of sponsoring and
managing medical service limited partnerships and limited liability companies in
the United States (the "Management Agent"). The Management Agent was founded by
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, M.D. and on April 26, 1996 became a wholly-owned subsidiary
of Prime. The principal executive office of the Management Agent is located at
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ and its phone number is
(800) ▇▇▇- ▇▇▇▇. The Management Agent's assets are illiquid in nature. The
primary assets of the Management Agent are partnership interests in other
lithotripsy entities.
Management. The following table sets forth the names and respective
positions of the individuals serving as executive officers and directors of the
Management Agent, many of whom were shareholders of the Management Agent 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
▇. ▇▇▇▇ ▇▇▇▇▇ Chief Financial Officer
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ Vice President and Director
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ Secretary and Treasurer
Supervision of the day-to-day management and administration of the
Partnership will be the responsibility of the Management Agent. The Management
Agent itself is managed by a three-member Board of Directors composed of ▇▇.
▇▇▇▇▇▇▇, ▇▇. ▇▇▇▇▇▇▇ and ▇▇. ▇▇▇▇▇▇▇▇. The Management Agent is a wholly-owned
subsidiary of Prime.
Descriptions of the background of the key executive officers and directors
of the Management Agent appear below or under "General Partner."
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ has been Chairman of the Board and a Director of Prime
since October 1989 and was recently elected a Director of the Management Agent
following Prime's acquisition of all of the Management Agent'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.
▇. ▇▇▇▇ ▇▇▇▇▇ has been Chief Financial Officer of the Management Agent
since 1991. In August, 1986, ▇▇. ▇▇▇▇▇ joined The May Department Stores Company
at their corporate headquarters in St. Louis, where he held several financial
management positions until October, 1987, when he was transferred to one of
May's largest divisions, Caldor, Inc., as Vice President of Finance. He remained
in that capacity until June, 1990, when he became Chief Operating Officer for
the Management Agent and served in that capacity until April 1996.
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ recently became the Secretary and Treasurer of the
Management Agent, 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.
-48-
CONFLICTS OF INTEREST
The organization and operation of the Partnership involve numerous
conflicts of interest between the Partnership and the General Partner and their
Affiliates. Because the Partnership will be operated by the General Partner,
such conflicts will not be 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 its
employees will in good faith attempt to resolve potential conflicts of interest
with the Partnership, and the General Partner will act in a manner that it
believes to be in or not opposed to the best interests of the Partnership.
The Management Agent and the Sales Agent, both Affiliates of the General
Partner, will receive management fees and broker-dealer sales commissions,
respectively, in connection with the sale of the Units that will be paid
regardless of whether any sums 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 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. It is anticipated that the Partnership will
pay substantial amounts of money to Affiliates of the General Partner in
connection with the refurbishment of the Partnership's trailers. The General
Partner will also receive interest on loans, if any, it makes to the
Partnership. See "Compensation and Reimbursement to the General Partner and its
Affiliates."
The General Partner and its Affiliates, including the Management Agent,
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 the General Partner's and its Affiliates'
responsibilities to the Partnership. The General Partner and its Affiliates may
engage for their own account, or for the account of others, in other business
ventures, related to medical services or otherwise, and neither the Partnership
nor the holders of any of the Units shall be entitled to any interest therein.
The General Partner, its Affiliates (including affiliated limited partnerships),
and their employees engage in medical related service activities for their own
accounts. See "Prior Activities." The Management Agent serves as a general
partner and/or management agent 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 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. Also,
Affiliates of the General Partner act as general partners of competing ventures
in Arkansas and Kentucky and are planning other limited partnership offerings
that would operate lithotripsy businesses in other states. See "Competition" and
"Prior Activities."
-49-
The Management Agent or its Affiliates closed on twenty-three other limited
partnership offerings for partnerships which respectively operate in (i) North
Carolina, (ii) Utah, Idaho, Wyoming and Nevada, (iii) in southwestern North
Carolina and northwestern South Carolina, (iv) in eastern South Carolina, (v) in
Arizona, (vi) in Louisiana and Texas, (vii) in Virginia and North Carolina,
(viii) in Arkansas, (ix) in the San Diego, California area, (x) in Tennessee,
(xi) in the Orange County, California area, (xii) in the southeastern Texas
area, (xiii) in the south central Texas area, (xiv) in Las Vegas, (xv) in the
Santa ▇▇▇▇▇▇▇ and Ventura, California area, (xvi) in north central Florida,
(xvii) in Billings, Montana, (xviii) in the northwestern Texas area, (xix) in
Indiana, Kentucky and Ohio, (xx) in Colorado, New Mexico and Wyoming, (xxi) in
Hawaii, (xxii) in the Austin and Round Rock areas of Texas, and (xxiii) in
Wisconsin. The North Carolina partnership began treating patients in
Fayetteville, North Carolina in October 1985. The Utah, Idaho, Wyoming and
Nevada limited partnership began treating patients in July 1989. The
southwestern North Carolina and northwestern South Carolina limited partnership
began treating patients in late August 1989 and the eastern South Carolina
limited partnership began treating patients in mid-September 1989. The Arizona
limited partnership began treating patients in December 1989. The Louisiana and
Texas limited partnership began operations in May 1990, and the Virginia and
North Carolina partnership began operating in Virginia in July 1990. The
Arkansas partnership began treating patients in July 1990. The San Diego,
California area partnership began treating patients in January 1991. The
Tennessee partnership began treating patients in late April 1991 and the Orange
County, California partnership began treating patients in early April 1991. Two
of the other Texas partnerships began lithotripsy operations in August 1991. The
Indiana, Kentucky and Ohio partnership began treating patients in May 1991 and
the Santa ▇▇▇▇▇▇▇ and Ventura, California partnership began treating patients in
August 1991. The Las Vegas partnership began operating in August 1991 and the
Florida partnership in October 1991. The Billings, Montana partnership began
treating patients in August 1992. The northwestern Texas partnership began
operations in January 1993. The Colorado, New Mexico and Wyoming partnership
began operations in July 1995. The Hawaii partnership began operations in Hawaii
last year. The Austin and Round Rock, Texas partnership commenced operations in
October 1997 and the Wisconsin partnership is preparing to commence operations
in the near future.
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 its Affiliates.
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FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER
The General Partner is accountable to the Partnership as a fiduciary and
consequently must exercise good faith in handling Partnership affairs. This is a
rapidly developing and changing area of the law and Limited Partners who have
questions concerning the duties of the General Partner should consult with their
counsel.
Under the Partnership Agreement, the General Partner and its Affiliates
will 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 Part nership and such course of conduct did not constitute gross negligence
or willful misconduct of the General Partner or its Affiliates. Accordingly,
Limited Partners will have a more limited right of action than they otherwise
would have 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 competing fixed-site and mobile extracorporeal shock-wave
lithotripters are currently operating in and around the Service Area. The
competing lithotripsy service providers generally have existing contracts with
hospitals, or are operated by hospitals themselves. The following discussion
identifies the existing competitors in the Service Area, to the best knowledge
of the General Partner.
Within the Nashville metropolitan area, Baptist Hospital and the Columbia
Surgery Center on the Centennial Medical Center campus provide lithotripsy
services. Baptist utilizes two lithotripters, a ▇▇▇▇▇▇▇ ▇▇-3 and a Dornier
MFL-5000, both of which are fixed-based. The Columbia Surgery Center utilizes a
fixed-base ▇▇▇▇▇▇▇ ▇▇-3. In eastern Tennessee, Park West Hospital in Knoxville
owns and operates a fixed-based ▇▇▇▇▇▇▇ ▇▇-3. The University of Tennessee
Medical Center operates a ▇▇▇▇▇ ▇▇-20. St. Mary's Hospital in Knoxville operates
a lithotripter (brand unknown); in addition, the General Partner believes a
group of Knoxville-area urologists has purchased a new Dornier SubCompact S
which is presently based at St. Mary's. In northeast Tennessee, there is a
fixed-based unit located at Northside Regional Hospital in ▇▇▇▇▇▇▇ City believed
by the General Partner to be a Dornier SubCompact S. The ▇▇▇▇▇▇▇ City area is
also served by a ▇▇▇▇▇▇▇ ▇▇-4 mobile unit which is based in Bristol, Tennessee.
The ownership of the unit is unknown. In western Tennessee, an Affiliate of the
General Partner, Tennessee Lithotripters Limited
-51-
Partnership I, operates a Siemens LithostarTM in the Memphis area. It delivers
services as far east as Dyersburg, Tennessee. In Arkansas, an Affiliate of the
General Partner, Fayetteville Lithotripters Limited Partnership - Arkansas I,
owns and operates a Siemens Lithostar on a mobile basis.
In north Alabama, the Partnership's Service Area includes Muscle Shoals. An
Affiliate of the General Partner, Alabama Lithotripsy Services, operates a
mobile Doli in Huntsville, Alabama.
In Kentucky, to the best knowledge of the General Partner, ▇▇▇▇▇▇-▇▇▇▇▇▇▇▇
County Hospital in Murray and ▇.▇. ▇▇▇▇▇▇ Community Hospital in Glasgow operate
fixed-base extracorporeal shock-wave lithotripters; the General Partner does not
know the brand of either unit. A provider called Stone Burst services
Elizabethtown and Campbellsville, Kentucky; the General Partner is not familiar
with more details related to this provider. An Affiliate of the General Partner,
Prime Kidney Stone Treatment, Inc., is currently forming a lithotripsy venture
with investors in Kentucky that will service the central Kentucky area. This
venture would compete with the Partnership in Somerset; however, the General
Partner plans to assign its contract with Lake Cumberland Regional Hospital in
Somerset to the new lithotripsy venture. While this assignment will have an
adverse affect on the Partnership's revenues, the impact is not expected to be
material.
There is no assurance that the list of competitors identified above is
complete. There may be other providers of extracorporeal shockwave lithotripsy
services in and near the Service Area of which the General Partner is unaware.
Their services may adversely affect the Partnership's revenues. Other hospitals
in and around the Service Area may operate lithotripters which are not
extracorporeal shock-wave lithotripters but rather use lasers or
electrohydraulic lithotripters which have not been upgraded in the same fashion
as the lithotripters to be acquired from the General Partner. The General
Partner believes that these machines are qualitatively inferior to the
Partnership's Mobile Lithotripsy Systems because such machines are capable of
treating stones only in the ureter and because anesthesia is generally required
prior to treatment. The General Partner believes that the Mobile Lithotripsy
Systems can be used on stones in locations other than the ureter and that
anesthesia is generally not required. See "Proposed Activities - Treatment
Methods for Kidney Stone Disease."
New competing lithotripsy operations may open in the future, or innovations
in lithotripters or other treatment methods for kidney stone disease may make
the Mobile Lithotripsy Systems competitively obsolete. See "Risk Factors -
Operating Risk - Technological Obsolescence." None of the General Partner, the
Management Agent or their respective Affiliates are prohibited from engaging in
any business arrangement that may compete with the Partnership. There is no
assurance the Partnership will be able to successfully compete with existing
providers, including facilities that offer traditional methods of treatment for
kidney stone disease. See "Proposed Activities - Treatment Methods of Kidney
Stone Disease." The ability of certain former owners of the Business to compete
with General Partner had been limited under noncompetition agreements which only
recently expired. Whether and to what extent any of such persons may elect to
compete with the Partnership and the resulting impact on proposed Partnership
operations cannot be accurately predicted by the General Partner. See "Proposed
Activities - History of the Business."
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Siemens, Dornier and other lithotripsy equipment manufacturers are under no
obligation to the General Partner or the Partnership to refrain from selling
lithotripter systems to urologists, hospitals or other persons for use in the
Service Area or elsewhere. In addition, several medical equipment manufacturers
are expected to offer lower-priced lithotripters for sale, which could
dramatically increase the number of lithotripters in the United States, increase
competition for lithotripsy procedures and create downward pressure on the
prices the Partnership can charge for its equipment. Lithotripters can be
obtained from manufacturers other than Siemens and Dornier. Many current and
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 will be 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 imprisonment, fines or
exclusion from participation in Medicare or Medicaid. Therefore, adverse reviews
of the Partnership operations at any of the various regulatory levels may
adversely affect the operations and profitability of the Partnership.
Reimbursement. As the Partnership will serve primarily as an equipment
vendor for contracting hospitals and will not directly bill or collect from any
patients for lithotripsy services provided using its equipment, the Partnership
will not be directly affected by changing third-party reimbursement rates for
lithotripsy services. However, the Partnership's revenues may be indirectly
affected by such reimbursement, as explained below.
The Balanced Budget Act of 1997 required HCFA to establish a prospective
payment system for outpatient procedures. In that connection, HCFA issued
proposed regulations on September 8, 1998. HCFA proposes a base rate of $2,612
for outpatient lithotripsy procedures, which 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 various
adjustments depending on criteria applicable to each individual contracting
hospital. The proposed regulations state that HCFA plans to implement the
outpatient prospective payment system sometime after January 1, 2000 (although
the Balanced Budget Act contemplated implementation by January 1, 1999). The
General Partner believes that implementation of the proposed base rate for
lithotripsy procedures, which is low, may have an adverse effect on the
Partnership's revenues.
Although the Partnership does not currently plan to make the Mobile
Lithotripsy Systems available at ambulatory surgery centers, the Partnership may
consider such a step in the future. Proposed HCFA rules issued on June 12, 1998
setting the ambulatory surgery center rate for various procedures include
lithotripsy among those procedures approved for Medicare reimbursement. 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.
-53-
However, the proposed rules' commentary discusses the history of previous
attempts by HCFA in proposed rules (published on December 7, 1990 and on
December 31, 1991) to authorize Medicare reimbursement for lithotripsy at
ambulatory surgery centers that were enjoined by federal courts in litigation
initiated by the American Lithotripsy Society challenging the reimbursement
rates proposed by HCFA ($812 in 1990 and $1,150 in 1991). The proposal for
reimbursement contained in the June 1998 proposed rules assigns a Medicare
reimbursement rate of $2,107 for lithotripsy if the procedure is performed at an
ambulatory surgery center. Whether these proposed rules will become effective to
authorize Medicare reimbursement at ambulatory surgery centers and, if they do
become effective, whether the proposed reimbursement rate will remain unchanged,
is unknown to the General Partner.
HCFA's rates under the proposed outpatient prospective payment system and
ambulatory surgery center reimbursement are lower than many healthcare
institutions' typical charges for the procedure. It is possible the proposed
outpatient prospective payment system and ambulatory surgery center
reimbursement rates could affect the Partnership. Lower reimbursement rates
could cause contracting hospitals to seek to pay lower equipment rental rates
than expected by the General Partner. This could have a material adverse effect
on Partnership revenues.
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. Thus, changes in lithotripsy technology will be
subject to review by the Medicare program and potential future decreases in
reimbursement must be considered probable as the lithotripsy procedure has been
identified by the Medicare program as an overvalued one.
The Medicaid programs in Tennessee (TennCare), Alabama, Arkansas 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 each of these states currently
provide reimbursement for lithotripsy services. The federal Personal
Responsibility and Work Opportunity Reconciliation Act of 1996 requires state
health plans, such as the Medicaid programs in Tennessee, Alabama, Arkansas and
Kentucky, 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 believes such steps have been taken in Tennessee
with the establishment of the TennCare program; the General Partner does not
know whether the Medicaid programs in Alabama, Arkansas or Kentucky have taken
or will take such steps.
Self-Referral Restrictions. Health care entities and providers seeking
reimbursement for services covered by Medicare or Medicaid are subject to
federal regulation restricting referrals
-54-
by certain physicians. 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. Section 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 on the Partnership's equipment to all patients, including
Medicare and Medicaid patients, are billed by the contracting hospital in its
name and under its provider numbers. Accordingly, these lithotripsy services
would likely be considered inpatient or outpatient services under ▇▇▇▇▇ II.
Physicians Limited Partners may be deemed to have an indirect financial
relationship with the Partnership's contracting hospitals, as Limited Partners
will receive Distributions of the Partnership's profits which in turn are based
on the equipment rental charges paid by contracting hospitals. On January 9,
1998, the Health Care Financing Administration ("HCFA"), the federal agency
responsible for administering the Medicare program, published proposed
regulations designed to clarify certain ambiguities and define certain terms of
▇▇▇▇▇ II (the "Proposed ▇▇▇▇▇ II Regulations"). The Proposed ▇▇▇▇▇ II
Regulations and HCFA's accompanying commentary discuss the requirements that
equipment rental arrangements must meet in order to be protected transactions
under ▇▇▇▇▇ II. It is not clear whether the Partnership's planned arrangements
with contracting hospitals meet all the requirements. If the Proposed ▇▇▇▇▇ II
Regulations become final in their present form (or if, in the meantime, a
reviewing court adopts their positions as the proper interpretation of the ▇▇▇▇▇
II statute), then compliance ▇▇▇▇▇ II may be achieved by demonstrating the
leases with contracting hospitals are at fair market value and do not vary
depending on the volume or value of referrals generated by physician Limited
Partners. No assurance can be given, however, that such efforts would be
successful. In the event the General Partner is unable to devise a plan pursuant
to which the Partnership may operate in compliance with ▇▇▇▇▇ II and its final
regulations, the General Partner is obligated under the Partnership Agreement
either (i) to purchase the Partnership Interests of all the Limited Partners at
their Capital Account values or (ii) to dissolve and liquidate the Partnership.
See "Summary of the Partnership Agreement - Optional Purchase of Investment
Interests."
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's
planned operations may mean that the Partnership and its physician Limited
Partners may be in violation of ▇▇▇▇▇ II. The General Partner does not believe
either of the above instances will occur; however, no assurances can be made. In
either instance, however, 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.
▇▇▇▇▇ and Abuse. The provisions of the federal Social Security Act
addressing illegal remuneration (the "Anti-Kickback Statute") prohibit providers
and others from soliciting, receiving,
-55-
offering or paying, directly or indirectly, any remuneration in return for
either making a referral for a Medicare, Medicaid or CHAMPUS covered service or
ordering, arranging for or recommending any such covered service. Violations of
the Anti-Kickback Statute may be punished by a fine of up to $25,000 or
imprisonment for up to five (5) years, or both. In addition, violations may be
punished by substantial civil penalties and/or exclusion from the Medicare and
Medicaid programs. Regarding exclusion, the Office of Inspector General ("OIG")
of the Department of Health and Human Services may exclude a provider from
participation in the Medicare program for a 5-year period upon a finding that
the Anti-Kickback Statute has been violated. After OIG establishes a factual
basis for excluding a provider from the program, the burden of proof shifts to
the provider to prove the Anti-Kickback Statute has not been violated.
The Limited Partners are to receive cash Distributions from the
Partnership. Since it is anticipated that some of the Limited Partners will be
physicians or other entities 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. U.S. ▇. ▇▇▇▇▇▇, 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). Since none of these cases involved a
lithotripsy syndication or joint venture such as the Partnership, it is not
clear how a court would apply these holdings to the facts related to this
Offering.
The OIG has indicated that it is giving increased scrutiny to healthcare
joint ventures involving physicians and other referral sources. In May 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 healthcare 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. Any conduct that could be construed to be illegal after the
promulgation of the Safe Harbor regulations would have been illegal prior to the
publication of the regulations.
Prospective Limited Partners should note that the anticipated ownership and
operations of the Partnership may not fully comply with any Safe Harbor;
however, the preamble to the Safe Harbor regulations makes clear that the
failure to comply with a Safe Harbor does not mean the arrangement violates the
Anti-Kickback Statute. A Safe Harbor was adopted which
-56-
protects equipment leasing arrangements, and to the extent possible the
Partnership will comply with this Safe Harbor. However, it may not be possible
to comply with all the requirements of the Safe Harbor.
HCFA has stated that one of its primary concerns regarding self-referral
situations is the investing physician's ability to profit from any diagnostic
testing that is generated from the services he or she performs. It should be
pointed out that HCFA has stated, in discussions of potential Safe Harbors and
other enforcement guidance, that the potential for overutilization posed by
referrals for therapeutic services such as lithotripsy is not as significant as
referrals in other contexts, as the necessity for the therapeutic 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 is unclear. 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
fraud and abuse statute on proposed business transactions. The General Partner
has not requested the OIG to review this Offering and, to the knowledge of the
General Partner, the OIG has not been asked by anyone to review offerings of
this type. Thus, federal regulatory authorities could take the position that
this Offering is 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 may 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 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, under such facts may be challenged by the government as
constituting a violation of the Anti-Kickback
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Statute. Whether the offering of ownership interests to investors who may
refer patients for services on the Partnership's Mobile Lithotripsy Systems
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 fact
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 in compliance with legal requirements.
The General Partner 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 contemplated operations violate the Anti- Kickback Statute.
Consequently, the General Partner does not believe that strict compliance with a
Safe Harbor is necessary for its operations. No assurance can be given, however,
that the proposed activities of the Partnership will not be reviewed and
challenged by regulatory authorities empowered to do so, or that if challenged,
the Partnership will prevail.
If the activities of the Partnership were determined to violate these
provisions, the Partnership, the General Partner, officers and directors of the
General Partner, and each Limited Partner could be subject, individually, to
substantial monetary liability, felony prison sentences and/or exclusion from
participation in Medicare, Medicaid and CHAMPUS. For the reasons outlined above,
it is the opinion of the General Partner that the operations of the Partnership
will not violate the Anti-Kickback Statute. A prospective Limited Partner with
questions concerning these matters should seek advice from his or her
independent counsel.
New Legislation. The General Partner is not aware of any bill currently
before Congress which has been scheduled for committee hearings which, if
enacted into law, would have an adverse effect on the Partnership's operations
in a fashion similar to the ▇▇▇▇▇ II and the Anti- Kickback laws discussed
above. In the event that legislation adversely affecting the operation of the
Partnership's business is enacted, the General Partner is obligated either to
purchase the ownership interests of all the Limited Partners or to dissolve the
Partnership. See "Summary of the Operating Agreement - Optional Purchase of
Partnership Interests."
FTC Investigation. Issues relating to physician-owned health care
facilities have been investigated by the Federal Trade Commission ("FTC"), which
investigated two of the lithotripsy limited partnerships affiliated with the
General Partner, to determine whether they posed an unreasonable threat to
competition in the health care field. The 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 of its affiliates, including
this Partnership.
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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. Further, the American Medical
Association recognizes that there may be situations in which a needed facility
would not be built if referring physicians were prohibited from investing in the
facility. Therefore, physicians may invest in and refer to an outside facility,
whether or not such physician provides direct care or services at the facility,
if there is a demonstrated need in the community for the facility and
alternative financing is not available. Because physician Limited Partners 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 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
Tennessee. Tennessee requires a certificate of need ("CON") to initiate
lithotripsy services. In Tennessee, CONs for the lithotripsy services on the
Partnership's equipment are held not by the General Partner or the Partnership
but rather by the Contract Hospitals. As the Contract Hospitals hold the CONs,
the Partnership merely serves as an equipment vendor. Any of the Contract
Hospitals could at any time terminate their arrangements with the Partnership
and arrange for another lithotripsy equipment vendor to provide equipment,
without any prohibitions or impediments from the Tennessee CON agency. Such an
action by a Contract Hospital could have a material adverse effect on the
Partnership's revenues.
To the best knowledge of the General Partner, the Mobile Lithotripsy
Systems do not require licensure as health care institutions; rather, services
are deemed to be hospital services which are regulated under the contracting
hospital's license. Tennessee requires registration of x-ray machines. The
General Partner must comply with this and all other regulatory requirements.
Tennessee bars referrals of patients to entities in which the referring
physician has an ownership interest unless the referring physician performs
health care services at the entity. To ensure compliance with this law, patients
referred by physician Limited Partners for treatment on the Partnership's Mobile
Lithotripsy Systems must be treated by the referring physician. Tennessee
requires that physicians disclose their ownership interests in health care
facilities or equipment in which they have ownership interests. The Partnership
will require Limited Partners to comply with this requirement.
Alabama. Alabama requires a CON for the initiation of new institutional
health services, which include the provision of lithotripsy services. The
General Partner already has a CON for the lithotripsy services provided in
Alabama. In order to transfer the CON from the General Partner to the
Partnership, the General Partner must provide the Alabama CON agency with
written notice thirty (30) days before the proposed transfer. It is possible the
Alabama CON agency would
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conclude no transfer of the CON is necessary, since the General Partner will
fully manage the new Partnership. The General Partner either will provide the
CON agency with written notice of the transfer or will secure from the CON
agency written acknowledgment that the notice is not necessary on the ground
that there will be no transfer requiring such notice.
Prospective Limited Partners should be aware that the General Partner is
currently involved in a CON administrative proceeding in Alabama in which the
General Partner is opposing five separate CON applications filed by LithoMedTech
of Alabama, LLC ("LMTA") to provide mobile lithotripsy vendor services in the
majority of Alabama counties, including in the Partnership's Service Area. In
the course of this proceeding, LMTA has challenged the General Partner's status
as the proper holder of a CON authorized to serve as a lithotripsy vendor; if
the General Partner does not properly hold a CON for lithotripsy equipment, then
the General Partner cannot legally oppose LMTA's application for CONs. The basis
for LMTA's challenge is that the General Partner failed to timely give the
Alabama CON agency notice of its acquisition of the lithotripsy equipment in
1993.
In 1993, the General Partner acquired the lithotripsy equipment serving
Alabama, and the CON authorizing the purchase and establishment of such
equipment, from Tennessee Valley Lithotripter Ltd., ("TVL Ltd."), in whose name
the CON was issued in 1992. Under the regulations of the Alabama CON agency,
anyone intending to acquire major medical equipment already subject to a CON
must provide written notice to the CON agency 30 days in advance of the proposed
transaction. When the General Partner acquired the lithotripsy equipment from
TVL Ltd. in 1993, no such notice was filed. However, in September 1994, notice
was filed by the General Partner and approved by the CON agency.
In the course of the contested CON proceedings with LMTA, LMTA requested
that the administrative law judge ("ALJ") dismiss the General Partner's
opposition to LMTA's application on the basis that the failure to properly file
advance notice of change of ownership in strict compliance with the regulation
renders the CON void. The ALJ has not yet ruled regarding this request. The
General Partner believes it is unlikely the ALJ would invalidate the General
Partner's CON based on the grounds that CON agency routinely waives the
thirty-day advance filing requirement and the CON agency's express approval of
the General Partner's belated notice. If the General Partner's CON is
invalidated, then the Partnership would be prohibited from providing lithotripsy
equipment services in Alabama. This could have a material adverse affect on the
Partnership's revenues.
Radiation-producing machines such as the on-board x-ray must be registered
with the Alabama radiation protection agency. The General Partner is not aware
of any other legal requirements which would prohibit the Partnership from
operating or continuing to operate as planned.
Arkansas. In Arkansas, there is no CON requirement for major medical
equipment or mobile health services. Hospitals which wish to establish a new
health service must give notice
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to and obtain the prior approval of the Health Facility Services Division before
instituting the new service. The Division's review determines whether the
hospital has adequate policies and procedures in place to handle the service.
X-ray machines must be registered with the state Radiation Control Division.
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 $1,567,500. The General
Partner already has a CON for the lithotripsy services provided in Kentucky,
except at two sites, ▇▇▇▇▇▇▇ Hospital in Paducah and Owensboro-Mercy hospital
system in Owensboro. An existing CON may be transferred so long as the CON
agency is provided with written notice thirty (30) days before the transfer. The
General Partner will comply with this requirement. Regarding the equipment
services provided at ▇▇▇▇▇▇▇ and Owensboro- Mercy, as neither the Partnership
nor the General Partner holds the CON for lithotripsy services, the Partnership
will merely serve as an equipment vendor. Either of these contracting hospitals
could at any time terminate their arrangements with the Partnership and arrange
for another lithotripsy equipment vendor to provide equipment, without any
prohibitions or impediments from the Kentucky CON agency. Such an action by
either of these contracting hospitals could have a material adverse effect on
the Partnership's revenues.
The Mobile Lithotripsy Systems are licensed as mobile health services by
the Kentucky Division of Licensing and Regulation. Licensure requires a survey
of the Mobile Lithotripsy Systems and approval of the policies and procedures
related to the Mobile Lithotripsy Systems. The General Partner does not believe
continued compliance with the licensure requirement will prevent the Partnership
from operating as planned in Kentucky. Notice of transfer of ownership of a
licensed mobile health service must be provided to the regulatory agency after
the transfer. The General Partner will comply with this requirement.
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. To ensure compliance with this law,
all physician Limited Partners licensed in Kentucky who make referrals to the
Partnership's Mobile 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), this law
will not be violated. However, 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 must comply with this and all other
regulatory requirements in order to operate the Mobile Lithotripsy Systems in
Kentucky.
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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 OWN 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
Since 1985, the Management Agent and its Affiliates have been involved in
the formation of urological medical limited partnerships and have closed on over
thirty such limited partnership offerings.
For numerous reasons, including differences in equipment, financial
structure, program size, economic conditions and distribution policies,
operating results obtained by the Management Agent and its Affiliates should not
be considered as indicative of the operating results obtainable by the
Partnership. Moreover, it should not be assumed that Limited Partners will
experience returns on their investment comparable to those experienced by the
General Partner in connection with the operation of the Business or by its
Affiliates in any of these other ventures. See "Risk Factors - Other Investment
Risks - Financial Projections."
A summary of the twenty-three urological medical limited partnership
offerings that were sponsored by the Management Agent and its Affiliates and
which have closed is set forth below.
Carolina Lithotripsy, A Limited Partnership. ▇▇. ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, former
Chief Executive Officer and majority shareholder of the Management Agent prior
to its acquisition by Prime, organized Carolina Lithotripsy, A Limited
Partnership, a North Carolina limited partnership ("Carolina"), in 1984.
Carolina was formed to purchase an HM3 kidney lithotripter manufactured by
Dornier Systems GmbH and to operate a lithotripsy business. In a private
offering of units of limited partnership interest consummated in March 1985,
Carolina sold an aggregate of 41 units to 48 limited partners residing in
eastern North Carolina and northeastern South Carolina. Limited partners of
Carolina also guaranteed $2,925,000 of indebtedness incurred by Carolina to
purchase its lithotripter. All indebtedness incurred by Carolina to purchase its
lithotripter that was guaranteed by its limited partners was prepaid by
Carolina. ▇▇. ▇▇▇▇▇▇ has served as the managing general partner of Carolina
since its formation.
On October 5, 1988, Carolina purchased the first LithostarTM sold after FDA
approval. The LithostarTM was delivered to Fayetteville on October 10, 1988, and
was first used to treat patients on November 14, 1988. In July 1989, Carolina
purchased a mobile LithostarTM system
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located in a Calumet Mobile Coach. In 1992, the fixed-based LithostarTM was
changed to a mobile configuration and Carolina now operates two mobile units.
Fayetteville Lithotripters Limited Partnership-Utah I. Fayetteville
Lithotripters Limited Partnership-Utah I (the "Utah Partnership") sold 40 units
of limited partnership interest to 37 investors (including Affiliates of the
Management Agent) for an aggregate offering price of $78,250 in cash and
$1,517,480 in guaranties of partnership principal obligations. The Utah
Partnership acquired a LithostarTM located in a mobile Calumet Coach in July,
1989, and operated at a site in Salt Lake City exclusively until mid-September
1989 when it began traveling to other locations in Utah and Idaho. The Utah
Partnership began operations in Montana in November 1989 and began conducting
operations in Nevada in 1990 and thereafter began operating in Wyoming and
Idaho. The Utah Partnership no longer operates in Montana. As of the date of
this Memorandum, the Partnership has performed in excess of 1,000 procedures and
its financial success has exceeded projections.
Fayetteville Lithotripters Limited Partnership-South Carolina I.
Fayetteville Lithotripters Limited Partnership-South Carolina I ("South Carolina
I") sold 80 units of limited partnership interests to 34 investors (including
the Management Agent and its Affiliates) for an aggregate offering price of
$72,500 in cash and $1,318,000 in guaranties of partnership principal
obligations. South Carolina I acquired a LithostarTM located in a mobile Calumet
Coach in September 1989. It has been operating in the eastern and coastal areas
of South Carolina since mid- September 1989, and has performed in excess of
1,000 procedures and its financial success has exceeded projections.
Fayetteville Lithotripters Limited Partnership-South Carolina II.
Fayetteville Lithotripters Limited Partnership-South Carolina II ("South
Carolina II") sold 40 units of limited partnership interests to 30 investors
(including Affiliates of the Management Agent) for an aggregate offering price
of $77,500 in cash and $1,517,485 in guaranties of partnership principal
obligations. South Carolina II acquired a LithostarTM located in a mobile
Calumet Coach in August 1989. It has been operating in northwestern South
Carolina and southwestern North Carolina, and has performed in excess of 1,000
procedures and its financial success has exceeded projections.
Fayetteville Lithotripters Limited Partnership-Arizona I. Fayetteville
Lithotripters Limited Partnership-Arizona I (the "Arizona Partnership") sold 80
units of limited partnership interests to 31 investors (including the Management
Agent and its Affiliates) for an aggregate offering price of $72,500 in cash and
$1,318,000 in guaranties of partnership principal obligations. The Arizona
Partnership acquired a LithostarTM located in a mobile Calumet Coach and began
performing lithotripsy services in Arizona in December 1989. As of the date of
this Summary, the Arizona Partnership has performed in excess of 1,000
procedures and its financial success has exceeded projections.
Louisiana Lithotripsy Investment Limited Partnership. Louisiana Lithotripsy
Investment Limited Partnership (the Louisiana Partnership") sold 80 units of
limited partnership interests to 46 investors (including Affiliates of the
Management Agent) for an aggregate offering
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price of $79,437.50 in cash and $1,289,250 in guaranties of partnership
principal obligations. The Louisiana Partnership is the sole limited partner of
Fayetteville Lithotripters Limited Partnership- Louisiana I ("Louisiana I").
Louisiana I acquired a LithostarTM located in a mobile Calumet Coach and began
providing services in Louisiana and Texas in May 1990. As of the date of this
Memorandum, Louisiana I has performed in excess of 1,000 procedures and its
financial success has exceeded projections.
Fayetteville Lithotripters Limited Partnership-▇▇▇▇▇▇▇▇ ▇. Fayetteville
Lithotripters Limited Partnership-Virginia I ("Virginia I") sold 80 units of
limited partnership interests to 51 investors (including Affiliates of the
Management Agent) for an aggregate offering price of $77,662.50 in cash and
$1,289,250 in guaranties of partnership principal obligations. ▇▇▇▇▇▇▇▇ ▇ began
performing lithotripsy services in Virginia in July 1990. Virginia I also
services locations in northeastern North Carolina. As of the date of this
Memorandum, Virginia I has performed in excess of 1,000 procedures and its
financial success has exceeded projections.
Fayetteville Lithotripters Limited Partnership-Arkansas I. Fayetteville
Lithotripters Limited Partnership-Arkansas I ("Arkansas I") sold 80 Units of
limited partnership interests to 38 investors (including Affiliates of the
Management Agent) for an aggregate offering price of $77,500 cash and $1,337,000
in guaranties of partnership principal obligations. Arkansas I acquired a
LithostarTM located in a mobile Calumet Coach and began performing services in
Arkansas in July 1990. As of the date of this Memorandum, Arkansas I has
performed in excess of 1,000 procedures and its financial success has exceeded
projections.
San Diego Lithotripters Limited Partnership. San Diego Lithotripters
Limited Partnership (the "San Diego Partnership") sold 80 units of limited
partnership interests to 48 investors for an aggregate offering price of $80,000
in cash and $1,528,000 in guaranties of partnership principal obligations. In
January 1991, the San Diego Partnership acquired a LithostarTM located in a
Calumet Coach and began treating patients in the southwestern California area
(primarily in the San Diego area). As of the date of this Memorandum, the San
Diego Partnership has performed in excess of 1,000 procedures and its financial
success has exceeded projections.
Tennessee Lithotripters Limited Partnership I. Tennessee Lithotripters
Limited Partnership I ("Tennessee I") sold 80 units of limited partnership
interest to 49 investors for an aggregate offering price of $80,000 in cash and
$1,286,911 in guaranties of partnership principal obligations. Tennessee I
acquired a LithostarTM located in a Calumet Coach and began treating patients in
Memphis, Tennessee in late April 1991. As of the date of this Memorandum,
Tennessee I has performed in excess of 1,000 procedures and its financial
success has exceeded projections.
California Lithotripters Limited Partnership-II, L.P. California
Lithotripters Limited Partnership-II, L.P. ("California II") sold 80 units of
limited partner interest to 63 investors (including Affiliates of the Management
Agent) for an aggregate offering price of $79,375 in cash and $1,337,000 in
guaranties of partnership principal obligations. California II acquired a
LithostarTM located in a Calumet Coach and began treating patients in the Orange
County, California area in early April 1991. California II also entered into a
joint venture with California Lithotripters
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Limited Partnership-III, L.P. and jointly financed and acquired a second
LithostarTM located in a mobile self-propelled Calumet Coach. As of the date of
this Memorandum, California II has performed in excess of 1,000 procedures and
its financial success has exceeded projections.
Texas Lithotripsy Limited Partnership I L.P. Texas Lithotripsy Limited
Partnership I L.P. ("Texas I") sold 80 units of limited partner interest to 32
investors (including the Management Agent and its Affiliates) for an aggregate
offering price of $190,375 in cash and $1,483,428 in guaranties of partnership
principal obligations. Texas I acquired a LithostarTM located in a Calumet Coach
and began treating patients in the southeastern Texas area in August 1991. As of
the date of this Memorandum, Texas I has performed in excess of 1,000 procedures
and its financial success has exceeded projections.
Texas Lithotripsy Limited Partnership II L.P. Texas Lithotripsy Limited
Partnership II L.P. ("Texas II"), sold 80 units of limited partner interest to
41 investors (including the Management Agent and its Affiliates) for an
aggregate offering price of $196,625 in cash and $1,483,428 in guaranties of
partnership principal obligations. Texas II acquired a LithostarTM located in a
Calumet Coach and began treating patients in the Fort Worth metropolitan area of
Texas in July 1991. As of the date of this Memorandum, Texas II has performed in
excess of 1,000 procedures and its financial success has exceeded projections.
Texas Lithotripsy Limited Partnership-III L.P. Texas Lithotripsy Limited
Partnership-III L.P. ("Texas III") sold 78 units of limited partner interest to
41 investors (including the Management Agent and its Affiliates) for an
aggregate offering price of $188,630 in cash and $1,446,342 in guaranties of
partnership principal obligations. Texas III acquired a LithostarTM located in a
Calumet Coach and began treating patients in the south central Texas area in
August 1991. As of the date of this Memorandum, Texas III has performed in
excess of 1,000 procedures and its financial success has exceeded projections.
Indiana Lithotripters Limited Partnership I. Indiana Lithotripters Limited
Partnership I ("Indiana I") sold 80 units of limited partner interest to 34
investors for an aggregate offering price of $80,000 in cash and $1,672,000 in
guaranties of partnership principal obligations. Indiana I acquired a
LithostarTM located in a Calumet Coach and began treating patients in Indiana in
May 1991. As of the date of this Memorandum, Indiana I has performed in excess
of 1,000 procedures and its financial success has exceeded projections.
Las Vegas Lithotripters Limited Partnership. Las Vegas Lithotripters
Limited Partnership ("Las Vegas") sold 78 Units of limited partner interests to
26 investors (including the Management Agent and its Affiliates) for an
aggregate offering price of $111,800 in cash and $851,682 in guaranties of
partnership principal obligations. Las Vegas acquired a fixed-base LithostarTM
and began treating patients in Las Vegas, Nevada in August 1991. As of the date
of this Memorandum, Las Vegas has performed in excess of 500 procedures and its
financial success has exceeded projections.
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California Lithotripters Limited Partnership-III, L.P. California
Lithotripters Limited Partnership-III, L.P. ("California III") sold 26 Units of
limited partner interests to 23 investors (including Affiliates of the
Management Agent) for an aggregate offering price of $64,025 in cash and
$249,166 in guaranties of partnership principal obligations. California III
entered into a joint venture with California II, acquired a LithostarTM Mobile
System, and began treating patients in the Santa ▇▇▇▇▇▇▇ and Ventura, California
area in August 1991. As of the date of this Memorandum, California III has
performed in excess of 500 procedures and its financial success has exceeded
projections.
Florida Lithotripters Limited Partnership I. Florida Lithotripters Limited
Partnership I ("Florida I") sold 80 units of limited partner interest to 71
investors (including Affiliates of the Management Agent) for an aggregate
offering price of $198,750 in cash and $1,560,206 in guaranties of partnership
principal obligations. Florida I acquired a LithostarTM located in a mobile
self-propelled Calumet Coach and began treating patients in north central
Florida in October 1991. As of the date of this Memorandum, Florida I has
performed in excess of 1,000 procedures and its financial success has exceeded
projections.
Montana Lithotripters Limited Partnership I. Montana Lithotripters Limited
Partnership I ("Montana I") sold 160 units of limited partner interest to 31
investors (including Affiliates of the Management Agent) for $188,500 in cash
and $720,000 in guaranties of partnership principal obligations. Montana I
acquired a fixed-base LithostarTM and began treating patients in August 1992. As
of the date of this Memorandum, Montana I has performed in excess of 500
procedures and it has met financial projections.
Texas Lithotripsy Limited Partnership IV L.P. Texas Lithotripsy Limited
Partnership IV L.P. ("Texas IV"), sold 80 units of limited partner interest to
35 investors (including the Management Agent and its Affiliates) for $189,500 in
cash and $1,643,670 in guaranties of partnership principal obligations. Texas IV
acquired a LithostarTM Mobile System and began treating patients in July 1992.
As of the date of this Memorandum, Texas IV has performed in excess of 1,000
procedures and its financial success has exceeded projections.
Texas Lithotripsy Limited Partnership V L.P. Texas Lithotripsy Limited
Partnership V L.P. ("Texas V") sold 80 units of limited partner interest to 31
investors (including the Management Agent and its Affiliates) for $187,500 in
cash and $1,643,670 in guaranties of partnership principal obligations. Texas V
acquired a LithostarTM Mobile System and began treating patients in January
1993. As of the date of this Memorandum, Texas V has performed in excess of
1,000 procedures and its financial success has exceeded projections.
Mountain Lithotripsy Limited Partnership - I. Mountain Lithotripsy Limited
Partnership - I ("Mountain I") sold 31 units of limited partner interest to 16
investors (including Affiliates of the Management Agent) for $77,500 in cash and
$588,765 in guarantees of partnership principal obligations. In July 1995,
Mountain I acquired a LithostarTM Mobile System and has treated over 500
patients. The financial success of Mountain I has exceeded projections.
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Pacific Medical Limited Partnership. Pacific Medical Limited Partnership
("Pacific") sold 80 units of limited partner interest to 35 investors (including
Affiliates of the Management Agent) for $200,000 in cash and $1,321,611 in
guarantees of partnership principal obligations. Pacific recently obtained
approval to receive a CON in Hawaii and began operations last fall.
Texas Lithotripsy Limited Partnership VI, L.P. In September 1997, Texas
Lithotripsy Limited Partnership VI, L.P. ("Texas VI") received subscriptions and
closed on 160 units of limited partnership interest to 13 investors (including
Affiliates of the Management Agent) for $361,100 in cash. Texas VI began
operations in October 1997.
Great Lakes Lithotripsy Limited Partnership. In October 1997, Great Lakes
Lithotripsy Limited Partnership ("Great Lakes") received subscriptions and
closed on 80 units of limited partnership interest to 23 investors for $200,000
in cash and $844,800 in guaranties of partnership principal obligations. Great
Lakes expects to begin operations in the near future.
A summary of the urological medical venturers currently owned and operated
directly by Prime, which owns all the stock of the Management Agent and
indirectly owns all of the stock of the General Partner, is set forth below.
Alabama Renal Stone Institute. This fixed site ▇▇▇▇▇▇▇ ▇▇-3 lithotripter
operation was purchased in April 1992. The lithotripter, which is located on the
campus of Brookwood Hospital, exclusively provides lithotripsy services in the
Birmingham, Alabama area and services all local physicians. Alabama has a
restrictive CON law limiting the number of lithotripters in the state. The
lithotripter has treated over 1,000 patients.
Alabama Lithotripsy Services. This mobile lithotripter operation was
purchased from a hospital and a group of 22 local physicians in August 1994. The
service area includes five cities in the northern/central Alabama area where the
company provides exclusive lithotripsy services to hospitals and physicians. The
lithotripter has treated over 1,000 patients.
Tennessee Valley Lithotripter. This operation consists of 5 mobile ▇▇▇▇▇▇▇
▇▇-3 units serving hospitals throughout Tennessee, Kentucky and northern
Alabama. Prime acquired this entity in July 1993, from over 200 physicians that
held interests in three separate partnerships. Due to the size and scope of
coverage of this operation, it is the largest mobile lithotripsy provider in
Tennessee and Kentucky.
Prime Kidney Stone Treatment, Inc. This mobile lithotripter operation
consists of two mobile ▇▇▇▇▇▇▇ ▇▇-4 lithotripters serving over 20 locations in
Wisconsin, Illinois, Indiana, West Virginia, Maryland and Pennsylvania. Prime
purchased these machines in January 1994. The lithotripters have treated over
1,000 patients.
Metro Atlanta Stonebusters G.P. Prime purchased a 60% equity in this mobile
Siemens LithostarTM operation in April 1994, from a group of 15 local urologists
that retained a 40%
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equity interest. This venture services five healthcare facilities in the
Atlanta, Georgia area. The lithotripter has treated over 1,000 patients.
Texas Litho, Inc. This wholly owned subsidiary was purchased in December
1994, from Maxum and provides management services as well as holding general
partner and limited partner equity interests in Texas ESWL/Laser Lithotripter,
Ltd. Over 30 investors hold the remaining equity interest in Texas ESWL, some of
whom acquired their interest in a recent dilution offering. Limited partner
units sold for $4,400 each in the 1991 offering which raised approximately
$286,000 from new investors. Units sold for $12,500 in the 1997 offering. The
economic participation of a unit in ESWL is a function of the number of units
outstanding from time to time. This venture utilizes a Mobile Dornier MFL5000
lithotripter servicing accounts Texas, Oklahoma, and Arkansas. The lithotripter
has treated over 1,000 patients.
Ohio Litho, Inc. This wholly owned subsidiary was purchased in December
1994, from Maxum Health Services Corp. and performs management services as well
as holding a 16.73% general partner equity interest and 0.90% limited partner
position in Ohio Mobile Lithotripter Ltd. This entity operates a mobile ▇▇▇▇▇▇▇
▇▇-3 lithotripter servicing four hospitals in the northeastern Ohio area.
Approximately 43 physicians own the remaining equity interest in Ohio Mobile
Lithotripter LTD. The lithotripter has treated over 1,000 patients. Ohio Litho,
Inc. also owns approximately 43% of, and serves as the general partner of, Ohio
Mobile Lithotripter II Ltd., an Ohio limited partnership formed in 1996 ("Ohio
Mobile II"). Ohio Mobile II operates a Dornier HM4 under lease from PKST and
services 2 hospitals. 41 physician limited partners own the remaining equity
interest in Ohio Mobile II, which performed 120 procedures last year.
R.R. Litho, Inc. This wholly owned subsidiary was purchased in December
1994 from Maxum Health Services Corp. and performs management services as well
as holding a 19.25% general partner interest in Arklatx Mobile Lithotripter Ltd.
This entity utilizes a mobile Siemens LithostarTM to serve eight locations in
the Louisiana area. Approximately 31 physicians hold the remaining equity in
Arklatx. The lithotripter has treated over 1,000 patients.
Southern California Stone Center L.L.C. This fixed site Siemens LithostarTM
lithotripsy operation is located in ▇▇▇▇▇▇▇ Oaks, California. The company
purchased a 32.5% equity interest in this entity in June 1995, with the
remaining 67.5% equity being held by local physician investors. The lithotripter
has treated over 1,000 patients.
Kidney Stone Center of South Florida. Prime purchased a 70% equity stake in
this fixed site ▇▇▇▇▇▇▇ ▇▇-3 lithotripsy operation in July 1995. The remaining
30% ownership equity is held by local physicians in the Miami/Fort Lauderdale
area. The lithotripter has treated over 1,000 patients.
Sun Medical Technologies, Inc. Prime purchased this operation which
consists of eight fixed and mobile lithotripters operating in Arizona,
Washington, Wyoming, Montana and New Mexico in October 1995. Four of the
machines are operated in two partnership structures which include area physician
investors with Sun providing management services and holding 50% as the
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general partner. The remaining four machines are wholly owned and operated by
Prime. The lithotripters have treated over 1,000 patients.
Tenn-Ga Stone Group Two, L.P. Prime purchased a 38.25% equity interest in
this mobile lithotripsy operation in May 1997. The partnership's lithotripter
has been in operation since 1993 and currently services various locations in
Tennessee and Georgia. The remaining 61.75% equity interest in the partnership
is held primarily by local physicians in Tennessee and Georgia.
Executive Medical Enterprises, Inc. Pursuant to a stock purchase, this
Company became a wholly owned subsidiary of Prime in July 1997. This venture
operates a mobile lithotripter which services locations in California and
Oregon, and one fixed site lithotripter which provides treatment services in
Washington.
Certain additional financial information regarding the urological medical
ventures formed or operated by the Management Agent and its Affiliates will be
made available upon request. The Management Agent and its Affiliates plan to
continue forming and/or acquiring ventures similar to the one proposed in this
Offering across the United States. See "Management Agent."
TAX ASPECTS OF THE OFFERING
INVESTORS SHOULD NOTE THAT THE UNITS ARE BEING MARKETED BY THE GENERAL
PARTNER AS AN ECONOMIC INVESTMENT AND THAT THE GENERAL PARTNER ANTICIPATES AND
INTENDS NO SIGNIFICANT TAX BENEFITS FROM AN INVESTMENT IN THE UNITS. SEE
"PASSIVE INCOME AND LOSSES" IN THIS SECTION. THE INVESTMENT IN UNITS IS A
LONG-TERM INVESTMENT. INVESTORS SHOULD NOT INVEST IN THE PARTNERSHIP TO ACHIEVE
TAX BENEFITS AS THE GENERAL PARTNER ANTICIPATES, AND THE FINANCIAL PROJECTIONS
FORECAST, SIGNIFICANT PARTNERSHIP TAXABLE INCOME THROUGHOUT THE TERM OF THE
PARTNERSHIP.
The following general summary of certain United States federal income tax
aspects relating to an investment in the Partnership is based upon the Code,
applicable Treasury Regulations (the "Regulations"), current published
administrative positions of the Service contained in Revenue Rulings and Revenue
Procedures, and existing judicial decisions. Investors should note that the Tax
Reform Act of 1986 substantially revised the tax consequences of an investment
in an entity such as the Partnership. No assurance can be given that legislative
or administrative changes or court decisions may not be forthcoming that could
significantly modify the statements in this summary. Any such changes may or may
not be retroactive with respect to transactions effected prior to the date of
such changes.
Moreover, the Investors should note that the discussion below is
necessarily general and the applicability or effect of matters discussed below
may vary depending on an Investor's individual circumstances. Thus, it is
impractical to comment definitively on all aspects of federal income tax law
which may affect each Investor. THEREFORE, EACH INVESTOR SHOULD
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▇▇▇▇▇▇▇ HIMSELF AS TO THE INCOME AND OTHER TAX CONSEQUENCES OF HIS PARTICIPATION
IN THE PARTNERSHIP BY OBTAINING ADVICE FROM HIS OWN TAX COUNSEL. Furthermore,
while the Partnership will furnish each Limited Partner with the necessary
information to enable him to file the tax returns for which he may be liable,
the preparation and filing of such returns will be the personal responsibility
of the Limited Partner. The following discussion, however, may be useful to the
Investors with respect to their evaluation of an investment.
The Partnership will receive the legal opinion of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
& ▇▇▇▇, PLLC, a Professional Limited Liability Company ("Counsel"), regarding
certain federal income tax aspects of the offering and certain other matters.
This opinion is subject to important qualifications and limitations, however,
and should be read thoroughly by each Investor and his counsel. A copy of the
form of this opinion is attached to the Summary as Appendix E. Although the
Partnership intends to rely on the legal opinion, the Service will not be bound
thereby, and the Partnership could be subjected to substantial legal expenses in
defending its position if the Service should take a position contrary to that
set forth in the opinion. Counsel for the Partnership is providing no legal
opinion regarding the Financial Projections attached to the Summary as Appendix
A.
Partnership Status
The Partnership 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 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. See "Effect of Classification as
Corporation" below.
Counsel's opinion discussed above relies upon recently promulgated Treasury
Regulations. Treasury Regulation Section 301.7701-2 provides that certain
business entities will be treated as associations taxable as corporations for
federal income tax purposes. These business entities include corporations
denominated as such under applicable state law, associations, joint- stock
companies, insurance companies, organizations that conduct certain banking
activities, organizations wholly owned by a State, other organizations that are
taxable as corporations under another provision of the Code, and certain
organizations formed under the laws of a foreign jurisdiction. According to the
Treasury Regulations, business entities not classified as corporations are
eligible to choose their classification for federal income tax purposes.
Domestic eligible entities with at least two members may choose to be classified
as either a partnership or a corporation for federal income tax purposes.
Partnerships formed pursuant to state law will be considered domestic eligible
entities and may choose their classification for federal income tax purposes. If
an eligible
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entity does not make an election to be treated as a corporation, then the entity
will be treated as a partnership for federal income tax purposes.
As the Partnership will have at least two members and will be formed
pursuant to the Act, the Regulations will treat the Partnership as a domestic
entity eligible that may chose partnership status for federal income tax
purposes. Therefore, it is anticipated that on the Closing Date, Counsel will
render its opinion that as long as the Partnership does not elect otherwise, the
Partnership will be treated for federal income tax purposes as a partnership and
not as an association taxable as a corporation. See the form of legal opinion of
counsel attached hereto at Appendix E.
Effect of Classification as Corporation
If during any taxable year there is a material change in the law or in the
circumstances surrounding the Partnership, the Partnership may be classified as
an association taxable as a corporation. If that occurs, the Partnership could
be taxed on its profits and at rates which may be higher than those imposed on
individuals. Any Partnership losses would only be deductible by the Partnership,
rather than being allocated among the Partners and deductible by Limited
Partners on their federal income tax returns. See "Passive Income and Losses."
Cash Distributions to Limited Partners would be treated as dividends to the
extent of current and accumulated earnings and profits of the Partnership, and
Distributions in excess thereof would be treated as a nontaxable return of
capital to the extent of the Limited Partner's basis in his Partnership
interest, while the remainder would be treated as capital gain, provided the
Limited Partner's interest in the Partnership is a capital asset.
Partners, Not Partnership, Subject to Tax
Under the Code, the Partnership, as an entity, is not subject to federal
income tax. Instead, each Limited Partner will report on his federal income tax
return his allocable share, as determined by the Partnership Agreement, of
profits and losses realized by the Partnership, whether or not any cash
Distributions are made to the Limited Partner during the taxable year. For the
allocation of profits and losses among Partners, see "Summary of the Partnership
Agreement - Profits, Losses and Distributions" and the Partnership Agreement
attached as Appendix B. The character of any item of profit and loss (as capital
gain or ordinary income and as capital loss or ordinary loss) will be the same
to the Limited Partner as it is to the Partnership.
In addition, subject to the passive loss rules discussed below, a Limited
Partner is entitled to deduct on his federal income tax return his allocable
share of any Partnership losses to the extent the Partner is at-risk and has
basis in his Partnership interest at the end of the Partnership year in which
such loss occurs.
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.
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The accrual method of accounting generally records income and expenses when
they are accrued or economically incurred.
Affiliated Service Groups
Purchase of Units in the Partnership may cause certain Limited Partners,
certain Contract Hospitals and the Partnership to be treated under
Section 414(m) of the Code as an "affiliated service group." Consequently,
employees of each member of any such affiliated service group would be treated
as employed in the aggregate by a single employer for purposes of minimum
coverage, participation, nondiscrimination and other employee benefit plan
qualification requirements imposed by the Code. In contrast, an employer not
affiliated with another employer under Section 414(m) of the Code need only
consider its own employees in determining whether its employee pension benefit
plans satisfy the Code qualification requirements.
Aggregation of employers could cause the retirement plans of certain
Limited Partners and related entities to fail to satisfy the minimum coverage or
other qualification requirements imposed by the Code, potentially resulting in
the disqualification of the plans for favorable tax treatment. Disqualification
of the retirement plan of a Limited Partner would require, among other things,
the value of the vested retirement benefit of a highly compensated employee who
is a participant in such disqualified plan to be included in his gross income,
regardless of whether the employee is a Limited Partner. In the event the
Service attempted to disqualify the retirement plan of a Limited Partner on
account of the affiliated service group rules, the disqualification of the plan
could potentially be avoided through negotiation with the Service of a closing
agreement providing for correction of the disqualifying defect and payment of a
nondeductible sanction to the United States Treasury.
Section 414(m) of the Code and Proposed Regulations thereunder provide
three tests for determining whether aggregation of all employees is required;
satisfaction of any one of these tests would require aggregation. Under the
first test, a service organization ("First Service Organization" or "FSO") will
be aggregated with any other service organization (an "A Organization") if the A
Organization (i) is a partner or shareholder in the FSO, and (ii) regularly
performs services for the FSO, or is regularly associated with the FSO in
performing services for third persons. Whether the A Organization regularly
performs services for the FSO, or is regularly associated with the FSO in
performing services for third persons, is determined on the basis of facts and
circumstances, including the amount of income derived from the performance of
such services.
Under the second test, an FSO will be aggregated with any other
organization (a "B Organization") if (i) a significant portion of the B
Organization's business is the performance of services for the FSO, for one or
more A Organizations with respect to the FSO, or for both, where services are of
a type historically performed in such service field by employees on December 13,
1980; and (ii) ten percent or more of the interest in the B Organization is
held, in the aggregate, by persons who are officers, highly compensated
employees, or the common owners of the FSO or an A Organization.
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An A Organization, a B Organization, or an FSO includes a sole
proprietorship, partnership, corporation or any other type of entity, regardless
of how it is legally formed. An organization may be deemed to own an interest in
an FSO under the constructive ownership rules of Section 318(a) of the Code. In
general, these rules provide that a Partnership interest owned by or for a
Limited Partner is considered as owned by any other partnership in which he has
an interest (e.g. a medical practice partnership) (for this purpose, an S
corporation is treated as a partnership). In addition, if a Limited Partner owns
fifty percent or more in value of the stock in a corporation, such corporation
is deemed to own Partnership interests owned by or for such person. Indirect
ownership (e.g., ownership through a subsidiary corporation) is considered in
applying the foregoing rules. Under these rules, individual ownership by a
Limited Partner in the Partnership may be attributed to the medical practice of
such Limited Partner. This situation will occur when the Limited Partner is (i)
a sole proprietor of his medical practice, (ii) a partner in a medical practice
partnership, or (iii) an owner of fifty percent or more in value of the stock of
a professional corporation which constitutes his medical practice. There will be
no attribution of a Limited Partner's individual ownership in the Partnership to
a professional corporation (that is not an S corporation) of which the Limited
Partner is less than a fifty percent shareholder.
The persons or entities with a risk of aggregation as A Organizations are
Limited Partners who are sole proprietors, medical practice partnerships or S
corporations having a Limited Partner as a partner or shareholder, or
professional corporations having a Limited Partner as a fifty percent or more
shareholder. In addition, to be an A Organization, such persons or entities must
regularly perform services for the Partnership, or be regularly associated with
the Partnership in performing services for third persons.
Those persons or entities with a risk of aggregation as B Organizations
would be organizations performing services for or on behalf of the Partnership
that are owned at least ten percent in the aggregate by highly compensated
employees of the Partnership or of a Limited Partner. The only persons or
entities which the General Partner believes could fall into this category are
the Contract Hospitals through which service arrangements are made, although
there can be no assurance that others will not be in this category or otherwise
be subject to a substantial risk of aggregation currently or in the future.
Aggregation of any Contract Hospital will turn on whether the highly compensated
employees of the Partnership (if any) or of any A Organization described above
are also ten percent or more owners of such Contract Hospitals. The Partnership
does not intend to have any highly compensated employees.
Under the third test, an organization the "principal purpose" of which is
performing on a regular and continuing basis "management functions" for one
organization (or for one organization and other organizations aggregated with
such organization under Code Section 414) (the "Management Organization") will
be aggregated with the organization (and organizations aggregated with such
organization under Code Sections 144(a)(3) and 414) for which such management
functions are performed (the "Recipient Organization"). The only guidance with
respect to the meaning of management functions was provided in former Temporary
Regulations. In 1992, those Temporary Regulations were withdrawn by the Service.
The Temporary Regulations provided that management functions include only those
services and activities which have been
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historically performed by employees in the business field of the Recipient
Organization on September 3, 1982. Such services and activities include
determining, implementing or supervising daily business operations, personnel,
employee compensation and benefits, short-and-long-range business planning,
organizational structure and ownership, and any professional services (e.g.,
medical services) that relate to the foregoing services and activities.
Generally, an organization's principal business will be management functions if
the performance of management functions and other services for a Recipient
Organization during the current and preceding taxable year constitutes more than
50% of the Management Organization's business activities. Those persons or
entities with a risk of aggregation as Management Organizations would be
organizations performing management functions for the Partnership where more
than 50% of the gross receipts of the organization for the relevant two-year
period stem from the performance of such functions for the Partnership. The
General Partner does not believe that a physician Limited Partner's medical
practice will fall into this category.
By enacting Section 414(m), Congress attempted to prohibit the exclusion of
nonprofessional employees from the employee benefit plans of certain
professional organizations. Section 414(m)(1) provides that regulations
thereunder may limit the extent to which all employees of the members of an
affiliated service group will be treated as employed by a single employer. The
Preamble to the Proposed Regulations recognizes that Section 414(m) and such
regulations may require aggregation in situations in which there has been no
attempt to avoid the employee benefit requirements listed in Section 414(m). The
Proposed Regulations provide that the Commissioner of Internal Revenue may
determine that certain organizations, or types of organizations, should not be
considered as subject to the requirements of Section 414(m) even though they
otherwise meet the conditions for aggregation. The General Partner and legal
counsel to the Partnership do not believe that the contemplated arrangements
among the Partnership, Limited Partners, General Partner and Contract Hospitals
is the type of arrangements that Section 414(m) is intended to address; the
General Partner and legal counsel to the Partnership 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 arrangements; and in the
experience of the General Partner and legal counsel to the Partnership, the
Service has not attempted to apply the affiliated service group rules to similar
arrangements in the past. The informal discussions with the Service, however,
are not binding on the Service, and there is no guarantee that the Service will
not apply the affiliated service group rules to the arrangement.
As the provisions of Code Section 414(m) and the Proposed Regulations
thereunder are complex and may apply differently to each Investor depending on
his or her own circumstances, Investors are urged to consult with their own tax
advisers before investing in 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.
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Passive Income and Losses
The Partnership expects and the Financial Projections forecast that the
Partnership will realize taxable income and not taxable losses during its first
five full years of operation. Nevertheless, if certain assumptions upon which
the Financial Projections are based do not materialize, there can be no
assurance that the Partnership will not realize taxable losses, in which event
the use of such losses by the Limited Partners will generally be limited by Code
Section 469. See "Risk Factors - Other Investment Risks - Financial
Projections."
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 except against income from passive
activities.
The passive activity rules apply to individuals (which includes individuals
who are partners in partnerships or shareholders in S corporations), estates,
trusts, "personal service corporations" and "closely held" C corporations. A
"personal service corporation" is defined as a corporation whose principal
activity is the performance of personal services substantially performed by
employee-owners, but only if the employee-owners in the aggregate own more than
10% of the stock of the corporation by value (not number of shares). A "closely
held " corporation is defined for purposes of these rules as a corporation where
5 or fewer shareholders own, directly or indirectly, more than 50% of the stock
value of the corporation, at any time during the last half of the taxable year.
A special rule applies to closely-held C corporations which are not personal
service corporations; these corporations can offset passive losses against any
income except portfolio income.
Recently promulgated Regulations set forth rules for grouping trade or
business activities and rental activities for purposes of applying the passive
activity rules. One or more trade or business, or rental activity will be
treated as a single activity if the activities constitute an "appropriate
economic unit" for the measurement of gain or loss. All of the relevant facts
and circumstances are to be examined to determine if an appropriate economic
unit exists. A taxpayer may use any reasonable method of applying the relevant
facts and circumstances in grouping activities; however, a rental activity may
not be grouped with a trade or business activity unless one of the activities is
insubstantial in relation to the other activity. The Regulations state that five
factors, not all of which are necessary for a taxpayer to treat more than one
activity as a single activity, are given the greatest weight in determining
whether activities constitute an appropriate economic unit. Those five factors
are: 1) similarities and differences in types of businesses; 2) the extent of
common control; 3) the extent of common ownership; 4) geographical location; and
5) interdependence between the activities.
Once a taxpayer has grouped activities into appropriate economic units, the
taxpayer may not regroup or separate the activities in subsequent taxable years
unless the original grouping was clearly inappropriate or there has been a
material change in the facts and circumstances that makes the original grouping
clearly inappropriate. The Service may regroup activities if: a) the
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taxpayer's grouping fails to reflect one or more appropriate economic units and
b) one of the primary purposes of the taxpayer's grouping is to circumvent the
passive loss rules.
A limited partnership is required to group its activities and its partners
are bound by the grouping done at the partnership level. A partner must then
group the partnership activity with activities he conducts directly or
indirectly through other partnerships or S corporations, if the activities
constitute an appropriate economic unit.
The passive activity limitations apply only to a trade, business or rental
activity in which the taxpayer does not materially participate. Code Section 469
provides generally that a limited partner's interest in a limited partnership is
always a passive activity interest because a limited partner can never
materially participate in the trade or business of the partnership. Regulations
provide two important exceptions to this general rule for individual limited
partners. First, a partnership interest is not treated as a limited partnership
interest if the individual also owns an interest in such partnership as a
general partner at all times during the partnership's taxable year. Second, a
limited partner is treated as materially participating in an activity if he (i)
participates in the activity for more than 500 hours during the taxable year,
(ii) materially participated in the activity for any five taxable years during
the preceding ten taxable years, or (iii) materially participated for any three
preceding taxable years in a personal service activity. For purposes of this
rule, an activity refers to a single activity or appropriate economic unit if it
involves the performance of personal services in the fields of health, law,
engineering, architecture, accounting, actuarial science, performing arts or
consulting or any other trade or business in which capital is not a material
income producing factor. "Participation" generally means any work done by an
individual in connection with an activity in which he owns, directly or
indirectly, an interest at the time the work is done. The capacity in which the
individual performs the work is immaterial.
The General Partner plans to treat the Partnership business as a single
activity. While certain qualified physician Limited Partners will perform
services using the Partnership's Mobile Lithotripsy Systems (see "Proposed
Activities - Operation of the Mobile Lithotripsy System"), the
General Partner does not anticipate that any such Limited Partner will spend
more than 500 hours during a taxable year in the performance of such services.
The General Partner expects, however, that certain physician Limited Partners
will be engaged in a trade or business activity outside the Partnership. Each
Limited Partner must determine, based on all of the relevant facts and
circumstances, whether the Partnership business and any other activities of the
Limited Partner should be combined into a single activity. The Regulations
provide that a physician's own medical practice and income derived through a
limited partnership may constitute a single activity, particularly if
substantially all of the partnership's services are provided to the doctors or
their patients and such services are provided to the patients in roughly the
same proportion as the doctors' interests in the Partnership. The services
provided by the Partnership will not be limited to patients of the physician
Limited Partners. Furthermore, the Partnership will not be providing services to
patients of physician Limited Partners based upon the ownership interests of the
physician Limited Partners. Both of these factors would tend to argue against
grouping the Partnership activity with the individual medical practice activity
of a physician Limited Partner. Due to the factual nature of the inquiry and
lack of authority in this area, Counsel is unable to give an opinion as to
whether an
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individual physician Limited Partner will be required to treat the Partnership
trade or business and his own medical practice as a single activity.
If a physician Limited Partner must combine his separate activities and the
Partnership activity into a single activity, the hours of participation of the
physician Limited Partner in his separate medical practice would have to be
aggregated with his hours of participation in the Partnership. The General
Partner expects that the physician Limited Partner's total hours will exceed 500
since the physician Limited Partner will have spent more than 500 hours in his
own private practice. Thus, such a Limited Partner will be deemed to materially
participate in the Partnership for the taxable year and, as a consequence, the
Partnership income allocable to such Partner will be active income.
Even if the 500 hour threshold is not met, the material participation rules
may apply to certain Limited Partners. Regulation Section 1.469-5(j) provides
that for purposes of the rules regarding material participation in five of the
preceding ten taxable years and material participation in a personal service
activity for any three preceding taxable years, an individual has materially
participated in an activity for a preceding taxable year if such activity
includes significant activities that are substantially the same as significant
activities that were included in an activity in which the taxpayer materially
participated for such preceding taxable year. The Regulations do not define a
significant activity nor do the Regulations specify when such an activity will
be substantially the same as a prior year's activity for purposes of determining
whether material participation exists.
The General Partner realizes that the physician Limited Partners have spent
more than 500 hours in, and thus have materially participated in, their own
private practices in preceding taxable years and will continue to do so in
future taxable years. Due to the factual nature of the inquiry into the prior
activities of individual Limited Partners and the lack of regulations or other
authority explaining when an activity is substantially the same as a prior
year's activity, Counsel is unable to give an opinion as to whether any Limited
Partners will be deemed to be materially participating in the Partnership under
the provisions of Regulation Section 1.469-5(j).
In the event that a Limited Partner is deemed to materially participate in
the Partnership, such Limited Partner's share of Partnership Profits will be
active income which cannot be used to offset passive activity losses, and his
share of Partnership Losses, if any, may be used to offset income from
nonpassive activity sources, such as active business income, salary income or
portfolio income (i.e., gross income from interest, dividends, annuities or
royalties not derived in the ordinary course of a trade or business). On the
other hand, if the Limited Partner has not materially participated in the
Partnership, Code Section 469 will generally prohibit such Limited Partner from
using Partnership Losses, if any, to offset income from other nonpassive
activity sources. Disallowed passive losses are deferred and carried forward
indefinitely until the taxpayer has passive income to offset.
Upon the taxable disposition to an unrelated party of all of a passive
activity, or a substantial part of a passive activity that may be treated as a
separate activity, any unused deferred loss allocable to that passive activity,
or to that substantial part of the passive activity that is treated
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as a separate activity, can be used to reduce any gain realized upon such
disposition, with any excess loss available for deduction first against any
other passive income and then in full against any other income or gain from any
source. The Regulations do not specify what constitutes the disposition of a
substantial part of an activity for purposes of this rule. Investors should note
that an investment in Units is a long-term investment and that the General
Partner anticipates that the Partnership will operate the Mobile Lithotripsy
Systems for an indefinite period of time. Investors should also note that there
is no market for the resale of Units, and that any such resale will be subject
to various restrictions imposed by federal and state securities laws and the
Partnership Agreement. See the form of the Partnership Agreement attached as
Appendix B and "Summary of the Partnership Agreement - Restrictions on Transfer
of Partnership Interests."
The General Partner expects and the Financial Projections forecast that the
Partnership will realize taxable income beginning in the first full year of
operations, and for each year thereafter during the projected five-year period.
Thus, it is expected that the Partnership will provide the Limited Partners who
do not materially participate in the Partnership with passive activity income
which can generally be used by the Limited Partners to offset passive activity
losses from other sources and previously disallowed Partnership passive losses,
if any.
Investors should note, however, that the Temporary Regulations contain
special rules which recharacterize passive activity income as active income.
Specifically, Section 1.469-2T(f)(2) requires the recharacterization of an
amount of the passive activity gross income from each "significant participation
passive activity" ("SPA" ) if the taxpayer's passive activity gross income from
all SPAs in which the taxpayer owns an interest for the taxable year exceeds the
taxpayer's passive activity deductions from all such activities for such year.
For purposes of this rule, a SPA is an activity in which the taxpayer
participates for more than 100 hours but does not materially participate. The
interest of a Limited Partner who will perform services using a Partnership
Lithotripter under arrangements with an Contract Hospital (see "Proposed
Activities - Operation of the Mobile Lithotripsy Systems") will be a SPA
interest if such Limited Partner spends more than 100 hours during each year in
the performance of such services. The same conclusion is valid for any physician
Limited Partner that the General Partner hires to be a Medical Director of any
Mobile Lithotripsy System. Also, if a Limited Partner is required to combine the
Partnership activity and other activities into a single activity, Limited
Partners who have performed more than 100 but less than 500 hours of service for
the combined activity annually will be deemed to own an SPA interest in the
Partnership. The importance of this rule is that it will treat the affected
Limited Partners' shares of Partnership income as active income which cannot be
offset against passive activity losses, but their shares of Partnership Losses,
if any, will be treated as passive activity losses subject to the Code Section
469 limitations.
THE PASSIVE ACTIVITY LOSS RULES WILL AFFECT EACH INVESTOR DIFFERENTLY,
DEPENDING ON HIS OWN TAX SITUATION. EACH INVESTOR SHOULD CONSULT WITH HIS OWN
TAX ADVISOR TO DETERMINE THE EFFECT OF THESE RULES ON THE INVESTOR IN LIGHT OF
THE INVESTOR'S INDIVIDUAL FACTS AND CIRCUMSTANCES.
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Depreciation
The Financial Projections assume that the Partnership will use the Modified
Accelerated Cost Recovery System ("MACRS") to depreciate the cost of any newly
acquired equipment. Further, the Financial Projections assume that any additions
or improvements to the Mobile Lithotripsy Systems and any newly purchased
equipment will be completed and placed into service after January 1, 1999 but
prior to October 1, 1999, and that the mid-year convention will apply. It is
assumed that any additions or improvements to any Mobile Lithotripsy System, as
well as the cost of any newly purchased equipment, will also be depreciated over
a five year term under the MACRS method of depreciation using the 200% declining
balance method, switching to the straight-line method to maximize the
depreciation allowance. In such case, the Partnership will claim only a half
year of depreciation for these items in its first year of operations. The
Partnership will depreciate the Contributed Assets, including the Mobile
Lithotripsy Systems being contributed, utilizing a carryover basis over the
remainder of their useful lives and pursuant to MACRS using the 200% declining
method of depreciation, switching to the straight-line method to maximize the
depreciation allowance.
As under prior law, the 1986 Act provides that the full amount of
depreciation on personal property (such as the Mobile 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 Allocations
The Partnership Agreement specifies the Partners' shares of Profits, Losses
and Distributions, and the Financial Projections are based upon the
effectiveness of the allocations so specified. See "Summary of Partnership
Agreement - Profits, Losses and Distributions." The Tax Reform Act of 1976
amended Section 704(b) of the Code to provide that special allocations of
income, gain, loss, deduction or credit, or items thereof, will be disregarded
if such allocations do not have "substantial economic effect." While the
Congressional Committees' reports do not extensively define "substantial
economic effect," the Senate Finance Committee Report indicates that generally
an allocation has "substantial economic effect" if it may actually affect the
dollar amount of the partners' shares of the total partnership income or loss
independent of tax consequences. If an allocation lacks substantial economic
effect, such allocation will be reallocated on the basis of each partner's
proportionate interest in the partnership in question, "based on all the facts
and circumstances." According to the staff of the Joint Committee on Taxation,
"General Explanation of the TRA of 1976," 94th Cong. 2d Sess. 95 N.6 (1976), the
capital accounts of the partners are to be utilized to determine whether a
special allocation has substantial economic effect if the allocation is
reflected as an increase or decrease in a partner's capital account and the
capital accounts of the partners actually reflect the dollar amounts that the
partners will receive upon liquidation of the partnership.
The Treasury Department issued final Regulations under Section 704(b) of
the Code, effective December 31, 1985, which offer objective criteria for
determining whether an allocation
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has "substantial economic effect" and will be respected. While the final
Regulations are quite complex and could be interpreted such that the
Partnership's allocations would not be sustained, it is Counsel's opinion that,
if litigated, it is more likely than not that the allocations as provided in the
Partnership Agreement would be sustained.
Investors are cautioned that the foregoing analysis and conclusions are
based upon extremely complex final Regulations which have not been construed or
interpreted by the courts. The Partnership Agreement authorizes the General
Partner to make amendments as necessary in order to permit the Partnership
allocations to be sustained for federal income tax purposes, but only if such
amendments do not materially affect adversely the rights and obligations of the
Limited Partners. Otherwise, any amendment must be approved by the vote of the
General Partner and a Majority in Interest of the Limited Partners. If an
amendment to the Partnership Agreement were required in order to sustain the
Partnership allocations for federal income tax purposes, there is no assurance
that such an amendment would be possible or, if it were, that the rights and
obligations of the Limited Partners might not be adversely affected in some
manner which cannot be ascertained at this time. Investors should be aware of
the risks which are inherent in this complex and developing area of the law.
The Code prohibits the allocation of items of income, gain, loss,
deductions or credits to a partner where such items are earned, incurred, or
accrued prior to the time such partner became a partner. This varying interest
rule effectively prohibits partnerships from retroactively allocating a full
share of partnership items for a taxable year to persons who were partners in
the partnership for only a portion of the taxable year. Section 706(d) of the
Code limits rules which otherwise permit the partnership to amend the allocation
provisions of the Partnership Agreement for a taxable year until the due date
for the partnership tax return for that year. Regulations provide that if a
change in the partners' interests in the partnership occurs as a result of a
partner's sale of his entire interest in the partnership, the partnership's
taxable year closes with respect to the transferor partner. Thus, the transferor
partner has no interest in partnership items incurred after he disposes of his
interest; conversely, the transferee partner has no interest in partnership
items incurred before that date. Although, the partnership's taxable year does
not close with respect to a partner who sells or exchanges less than his entire
interest or whose interest is reduced by an event such as the entry of a new
partner into the partnership or a gift of a partner's interest to another
person, the varying interest rule requires allocations of partnership items to
old and new partners to reflect the changes in their percentage interests.
Regulations sets forth two methods for taking into account the partners'
varying interests in a partnership in cases where a partner disposes of his
entire interest in a partnership (in which case the partnership taxable year
closes as to him). The legislative history to the 1976 revisions to the varying
interest rule states that new regulations "are to apply" the same two
alternative methods of computing allocations for purposes of the varying
interest rule where no partner disposes of his entire interest.
In the case of a disposition of a partner's entire partnership interest by
sale, exchange, or liquidation, the Regulations provide that the allocation
between transferor and transferee may be
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made by actually closing the partnership books and calculating the exact taxable
income or loss for the period ending on the date of the transfer. The interim
closing allows tracing of partnership items to the segment of the partnership
taxable year in which they were incurred. Under this method, a person who was a
partner for only a portion of the taxable year would be allocated his
distributive share of only those items that actually were incurred during the
time he was a member of the partnership.
The Regulations provide that a partnership can avoid an interim closing of
the books if the partners agree to permit the transferor partner to take into
account a pro rata amount of the items he would have included in his taxable
income if he had remained a partner for the entire taxable year. The Regulations
state that the proration may be based on the portion of the taxable year that
elapsed before the change in interests, but that the partnership may use "any
other method that is reasonable."
The Partnership Agreement provides that items of income, gain, loss,
deductions, and credits will be allocated between the transferor partner and the
transferee partner under the proration method described above. That is, the
items of income, gain, loss, deductions and credits will be allocated in the
same ratio as the number of days in the year before and after the date of the
transfer or admission, unless the Partnership has sold any of its asset in the
year of the transfer or admission. If the Partnership has sold any of its assets
in the year of the transfer or admission, then the General Partner may elect, in
its sole discretion, to use the interim closing of the books method described
above. Accordingly, Investors may be allocated items of income and loss which
may be accrued prior to the Investor becoming a Limited Partner.
Tax Treatment Of Certain Fees and Expenses Paid By The Partnership
In General. 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.
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Several amendments to the Code enacted by the Tax Reform Act of 1984 alter
established tax accounting principles. One or more of these amendments may
affect the federal income tax treatment of fees and expenses, particularly fees
paid or incurred by a partnership for services. In particular, new Code Section
461(h) now provides that an expense or fee paid to a service provider may not be
accrued for federal income tax purposes prior to the time "economic performance"
occurs. "Economic performance" occurs as (and no sooner than) the service
provider provides the required services.
All expenditures of the Partnership must constitute ordinary and necessary
business expenses in order to be deducted by the Partnership when paid or
incurred, unless the deduction of any such item is otherwise expressly permitted
by the Code (e.g., taxes). Expenditures must also be reasonable in amount. The
Service could challenge a fee deducted by the Partnership on the ground that
such fee is a capital expenditure, which must either be amortized over an
extended period or indefinitely deferred, rather than deducted as an ordinary
and necessary business expense. The Service could also challenge the deduction
of any fee on the basis that the amount of such fee exceeds the reasonable value
of the services performed, the goods acquired or the other benefits to the
Partnership.
Under Section 482 of the Code, the Service has broad discretion to
reallocate income, deductions, credits or allowances between entities with
common ownership or control if it is determined that such reallocation is
necessary to prevent the evasion of taxes or to reflect the income of such
entities. The Partnership and the General Partner are entities to which Section
482 applies and it is possible that the Service could contend that certain items
should be reallocated in a manner that would change the Partnership's proposed
tax treatment of such items. See the Financial Projections attached as Appendix
A.
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 to the Partnership
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 to the Partnership cannot express an opinion as to the
outcome of the reasonableness of the amount of any fee should the issue be
litigated.
The Partnership will incur certain legal, accounting, and other expenses
related to the Asset Contribution and its formation. Under current Federal
income tax law, no deduction is allowed for expenses relating to the foregoing
and such expenses must be capitalized. Consequently, no Partner will be
allocated any portion of such capitalized expenses. It is expected that these
expenses will be paid out of the proceeds of the Offering and Partnership Cash
Flow.
Organizational and Syndication Expenses. Section 709 of the Code permits
certain costs relating to the organization of a partnership to be amortized over
a period of not less than 60
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months, but prohibits a partnership from deducting or amortizing those costs of
forming the partnership that do not strictly relate to the organization of the
partnership, or that are incurred to promote the sale of partnership interests
(i.e., syndication expenses). The Regulations provide definitions for
organizational expenses that are deductible and syndication expenses that must
be capitalized and explain how the amortization election is made. Organizational
expenses include legal fees for services incident to the organization of a
partnership, such as negotiation and preparation of a partnership agreement,
accounting fees for services incident to the organization of the partnership and
filing fees. 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.
The Partnership intends to amortize, over a 60-month period, that portion
of the costs of forming the Partnership that is attributable to the organization
of the entity, pursuant to the Regulations. The Service may take the position
that some portion or all of these costs relate to matters other than the
organization of the Partnership and fail to qualify as amortizable expenses
under Section 709 and, therefore, must be capitalized rather than deducted. The
General Partner believes that the various expenses have been properly
characterized. Because the allocation of these expenses is a factual question,
Counsel to the Partnership cannot predict the outcome should the character of
certain expenses be challenged on audit.
Investors will economically bear their respective proportionate share of
organizational and syndication expenses as these costs likely will be paid out
of proceeds from the Offering. These costs will be borne irrespective of their
amount, timing and ability of the Partnership to deduct these costs for tax
purposes.
Start-Up Expenditures. Section 195 of the Code permits costs relating to
the investigation and establishment of an active trade or business to be
amortized over a period of not less than 60 months. The Partnership intends to
amortize, over a 60-month period, that portion of the costs incurred by the
Partnership prior to the time the business of the Partnership commences that are
attributable to the investigation and establishment of such business. The
Service may take the position that some portion or all of these costs relate to
matters other than the investigation and establishment of the Partnership's
business and fail to qualify as amortizable expenses under Section 195 and,
therefore, must be capitalized rather than deducted. The General Partner
believes that the various expenses have been properly characterized. Because the
allocation of these expenses is a factual question, Counsel to the Partnership
cannot predict the outcome should the character of certain expenses be
challenged on audit.
Investors will economically bear their respective proportionate share of
start-up expenditures as these costs likely will be paid out of proceeds from
the Offering. These costs will be borne irrespective of their amount, timing and
ability of the Partnership to deduct these costs for tax purposes.
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Management Fee to General Partner. The Partnership will pay the General
Partner a monthly management fee equal to the greater of $8,000 or 7.5% of
Partnership Cash Flow per month. The management fee will be paid to the General
Partner for the time and attention to be devoted by it for supervising and
coordinating the management and administration of the day-to-day operations of
the Mobile Lithotripsy Systems pursuant to the terms of the Management Agreement
attached as Appendix D. See "Compensation and Reimbursement to the General
Partner and its Affiliates." The Partnership intends 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.
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
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 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.
The Code requires partnerships having partners who contribute property with
a basis different than the property's fair market value on the date of
contribution to eliminate that disparity utilizing any one of three methods
described in Treasury Regulations promulgated under Code Section 704(c) - the
traditional method, the curative method, or the curative method with remedial
allocations. In the case of the Partnership, the General Partner has contributed
the Contributed Assets which in the aggregate have a tax basis greater than
their fair market value. However, certain of the Contributed Assets may have a
tax basis less than their fair market value. Code Section 704(c) and the
Regulations thereunder provide for methods by which to eliminate, or attempt to
eliminate, these disparities. They also govern the allocation of depreciation
with respect to contributed property where the tax basis of the property does
not equal its fair market value. They will require the Partnership to attempt to
eliminate these differences utilizing any one of the above three methods. The
General Partner, in its discretion, may elect which of the three methods to
utilize to account for the difference in tax basis and fair market value of the
Contributed Assets in the aggregate and on an individual basis.
Taxable Income
The Partnership Agreement provides that in each year of the Partnership,
annual Distributions may be made to the Partners. Excluded from the definition
of cash available for
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Distributions, however, is the amount of funds necessary to amortize Partnership
debts and to maintain certain cash reserves deemed necessary by the General
Partner. See "Proposed Activities - Funding for Partnership Activities." The
Partnership will also incur significant up-front capital costs that may have to
be paid out of Partnership revenues. Thus, taxable income may very well exceed
cash available for distribution in the Partnership's initial year of operations.
Because of the circumstances outlined above, if Partnership cash flow falls
substantially below the estimates as set forth in the Financial Projections, 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 cash to pay the Limited Partner's tax
with respect to such income.
Cash Distributions and Determination of Basis
Under the Partnership Agreement, the Partnership will distribute to the
Partners cash flow realized from the operation of the Mobile Lithotripsy Systems
and sales proceeds realized on a sale of Partnership property, if any. See
"Summary of Partnership Agreement."
Generally, a Distribution of cash by the Partnership to a Limited Partner
will be taxable to the Limited Partner only to the extent that the Distribution
exceeds the Limited Partner's basis for his Partnership Interest. Any
Distribution of cash in excess of a Limited Partner's basis for his Partnership
Interest will generally be taxable as capital gain assuming that the Partnership
Interest constitutes a capital asset in the hands of the Limited Partner. A
Limited Partner's basis for his Partnership Interest is equal to the amount of
cash contributed by the Limited Partner to the Part nership through the purchase
of his Partnership Interest increased by Profits allocated to such interest and
decreased by Losses allocated to such interest and all Distributions with
respect to such interest.
The General Partner anticipates that Partnership Cash Flow distributions
will not exceed the Limited Partners' basis in their Partnership Interests,
thus, under such circumstances, the Limited Partners should avoid taxable gain
upon receipt of Partnership Cash Flow distributions and constructive receipt of
their share of the deemed distributions, if any. There can be no assurance,
however, that the Partnership will not realize any Losses or that Distributions
will not exceed the amounts forecast, or that Profits will be less than the
amounts forecast, in which event the Limited Partners may not have sufficient
tax basis in their Partnership Interests to avoid taxable gain from receipt of
Partnership Distributions and constructive receipt of their share of any deemed
distributions.
THE REGULATIONS ARE VERY COMPLEX. THE GENERAL PARTNER URGES EACH INVESTOR
TO CONSULT WITH HIS OWN TAX ADVISOR TO DETERMINE THE EFFECT OF THE REGULATIONS
ON THE TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP, PARTICULARLY IN THE
EVENT THE PARTNERSHIP PROFITS ARE LESS THAN THE AMOUNTS FORECAST OR THE
PARTNERSHIP REALIZES LOSSES.
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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 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.
Further Changes in Tax Laws
In the foregoing discussion, an attempt has been made to summarize the
effects of certain provisions of recent tax legislation which would appear to
affect the tax consequences to an Investor in the Partnership. It is, of course,
not possible to discuss all of the changes in the Code effected by all
amendments enacted over the last several years which might adversely affect a
Limited Partner. Consequently, each Investor is urged to consult his own tax
counsel in this regard. It should also be noted that other proposals for changes
in the Code have been made which might be adopted at some later date and could
have an adverse impact on the Limited Partners.
Local and State Taxes
The Partnership is organized under the laws of the State of Tennessee and
its operations are anticipated to take place primarily within Alabama, Arkansas,
Kentucky and Tennessee. Investors are anticipated to be residents only of
Alabama, Arkansas, Kentucky and Tennessee.
Each Investor should consult his own attorney or tax advisor regarding the
effect of state taxes on his personal situation.
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
form of the form of the Partnership Agreement is set forth as Appendix B to this
Memorandum, and Investors are urged to read the Partnership Agreement in its
entirety and to review it with their counsel and advisors.
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Formation
The Partnership was formed on October 16, 1998 as a limited partnership
under the laws of the State of Tennessee and has had no operations to date. The
Initial Limited Partner will withdraw from the Partnership upon the Closing. The
General Partner of the Partnership is Prime Lithotripter Operations, Inc., a New
York corporation, d/b/a Tennessee Valley Lithotripter. See "General Partner."
Description of the Units
Investors will acquire their interests in the Partnership in the form of
Units. Upon the successful completion of the Offering, each purchaser of the
Units whose subscription is accepted by the General Partner will become a
Limited Partner in the Partnership. For each Unit purchased, a payment of $9,114
is required; provided, that prospective Investors who meet certain requirements
may be able to fund a portion of their Unit purchase price with the proceeds of
a Limited Partner Loan. See "Terms of the Offering - Limited Partner Loans." The
per Unit cash purchase price and execution and delivery of any Loan Documents
are due upon subscription. 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, (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.
Limited Partners financing a portion of the purchase price of their Units will
also be liable to the Bank as provided in the Loan Documents. See "Risk Factors
- Other Investment Risks - Liability Under Limited Partner Loans" and "Risk
Factors - Other Investment Risks - Limited Partners' Obligation to Return
Certain Distributions." See also Form of Legal Opinion of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇ & ▇▇▇▇, a Professional Limited Liability Company, attached hereto as
Appendix E.
Contribution of the General Partner
Concurrent with the Closing of the Offering, the General Partner will
contribute to the Partnership the Contributed Assets. See "Proposed Activities -
Contribution of Assets." In exchange, the General Partner will receive at least
an initial 80% Partnership Interest. The General Partner's Partnership Interest
will increase by 0.25% for each unsold Unit.
Dilution Offerings
The General Partner has the authority to periodically offer and sell
additional limited partnership interests in the Partnership (a "Dilution
Offering") to local investors who are not investors in the Partnership
("Qualified Investors"). The primary purpose of Dilution Offerings is expected
to be to raise additional capital for any legitimate Partnership purpose. Money
raised in a Dilution Offering could also be distributed to the Partners as
determined by the General Partner. Any sale of limited partnership interests in
a Dilution Offering will result in proportionate dilution of the Partnership
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
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will be proportionately reduced as a result of a successful Dilution Offering.
Unless otherwise agreed by the General Partner and a Majority in Interest of the
Limited Partners at the time, any additional limited partnership interests
offered in a Dilution Offering will be sold for a price no lower than the
highest price for which proportionate limited partnership interests in the
Partnership have been previously sold by the Partnership.
Fundamental Changes
Under the terms of the Partnership Agreement, the General Partner may cause
the Partnership to engage in certain transactions in the future without any
approval by the Limited Partners, any of which transactions could result in the
termination or reorganization of the Partnership and a partial or total dilution
of all Limited Partners' interests in the Partnership. The General Partner could
adopt a plan providing for the merger or consolidation of the Partnership with
another entity; the sale of all or substantially all of the Partnership's assets
to another entity; or any other reorganization, reclassification or exchange of
the Partnership Interests, including without limitation the exchange of
Partnership Interests for equity interests in another entity or for cash or
other consideration. In such event, the Limited Partners are obligated by the
terms of the Partnership Agreement to take or refrain from taking, as the case
may be, such actions as the plan may provide, including, without limitation,
executing such instruments, and providing such information as the General
Partner may reasonably request. Any such plan may also result in an amendment to
the Partnership Agreement or the adoption of a new partnership agreement in
connection with the merger of the Partnership with another entity. The plan may
also provide that the General Partner and its affiliates will receive fees for
services rendered in connection with the operation of the Partnership or any
successor entity following the consummation of the transactions described in the
plan, and neither the Partnership nor the Limited Partners will have any right
by virtue of the Partnership Agreement in the fees to be derived therefrom. Any
securities or other consideration to be distributed to the Partners pursuant to
any such plan shall be distributed in the manner set forth in the Partnership
Agreement as though the Partnership were being liquidated. Moreover, because the
General Partner has the sole right to approve the transactions described above,
the General Partner may be entitled to complete such transactions without
providing the Limited Partners information that might otherwise be required to
be disclosed to the Limited Partners prior to completing the transaction,
including but not limited to information concerning the risks and effect of the
proposed transaction; the fairness of the proposed transaction to the
Partnership and the Limited Partners; comparative distributions to the General
Partner under the Partnership operations and under the proposed reorganization;
the method of valuing the Partnership in the proposed transaction and the method
of allocating value among various participants in the proposed transaction; the
background, reasons for and alternatives to the transaction; and conflicts of
interest of the General Partner in the proposed reorganization.
In December 1993, Congress passed legislation amending portions of the
Securities Exchange Act of 1934 to afford new protections to limited partnership
investors in the context of certain limited partnership mergers and
reorganizations commonly known as partnership rollups. The law, known as the
"Limited Partnership Rollup Reform Act of 1993" (the "Reform Act"), became
effective on December 17, 1994, and applies to certain rollup transactions
proposed after
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such date. The Reform Act and the Rules promulgated thereunder are applicable
only to certain types of partnership rollups and, when applicable, provide
limited partners with the following protections:
(i) allows and facilitates communication between limited partners during
their consideration of a proposed rollup;
(ii) allows the limited partners to obtain a list of the other limited
partners involved in the rollup;
(iii) prohibits the practice of compensating persons soliciting the limited
partners' approval of the rollup based on the number of approvals received;
(iv) requires greater disclosure to the limited partners of the terms of
the rollup and its effects on the limited partners including (a) the reason for
the rollup and consideration of the alternatives; (b) the method of allocating
interests in the successor entity to the limited partners and why such method
was chosen; (c) comparative information including changes in limited partner
voting rights, changes in distributions to the limited partners and changes in
compensation to the general partner; (d) conflicts of interest of the general
partner; (e) changes in the partnership's business plan; (f) the valuation of
the limited partnership interests; (g) any significant difference between the
exchange values of the limited partnerships and the trading price of the
securities to be issued in the rollup transaction; (h) the risks and effects of
the proposed rollup transaction; (i) a statement by the general partner of the
fairness of the rollup and the general partner's basis for such opinion; (j)
full disclosure of any opinion (other than opinions of counsel) or appraisal
received by the general partner related to the proposed transaction, or if no
such opinion or appraisal was sought by the general partner, an explanation of
why no such opinion or appraisal is necessary to permit the limited partners to
make an informed decision regarding the proposed transaction; (k) the rights of
the limited partners to exercise dissenters' or appraisal rights or similar
rights; (l) the method for allocating rollup consideration to the limited
partners and an explanation why such method was chosen; and (k) tax consequences
of the rollup; and
(v) requires a minimum 60 day offering period during which the limited
partners may consider the proposed rollup (or such shorter period as required by
state law).
Further, the Reform Act also provides that related Rules of Fair Practice
will be amended to prohibit exchanges and national securities associations from
listing securities issued in connection with a rollup unless the limited
partners are afforded the following protections:
(i) dissenting limited partners must have the right to one of the
following: (a) to receive an appraisal and compensation; (b) to retain a
security under substantially similar terms as the original issue; (c) to approve
of the rollup by a vote of not less than 75% of the outstanding securities of
each participating partnership, or; (d) to use an independent committee to
negotiate the terms of the transaction.
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(ii) not to have their voting power unfairly reduced or abridged.
(iii) not to bear an unfair proportion of the costs of the rollup
transaction.
The Reform Act applies only to certain types of rollup transactions, and
there is no certainty that any plan considered by the Partnership at any time
would be subject to the Reform Act. Thus Investors must assume in making an
investment in the Units that their Limited Partnership Interest will be subject
to the provisions of the Partnership Agreement permitting fundamental changes
which could result in the termination or reorganization of the Partnership and a
partial or total dilution of all Limited Partners' interests in the Partnership
without the consent of, or disclosure of detailed information concerning the
transaction to, the Limited Partners.
Profits, Losses and Distributions
The following is a summary of certain provisions of the Partnership
Agreement relating to the allocation and distribution of the Profits, Losses,
Partnership Cash Flow, Partnership Refinancing Proceeds, Partnership Sales
Proceeds, and cash upon dissolution of the Partnership. Investors should note
that the Percentage Interests referenced in the discussion below could change as
a consequence of a future Dilution Offering. Because an understanding of the
defined financial terms is essential to an evaluation of the information
presented below, Investors are urged to review carefully the definitions of the
terms appearing in the Glossary.
1. Allocations.
Losses. After giving effect to the special allocations set forth below, the
Partnership's Losses, if any, for each Year generally will be allocated to the
Partners in accordance with their respective Percentage Interests.
Profits. After giving effect to the special allocations set forth below,
the Partnership's Profits for any Year generally will be allocated to the
Partners in accordance with their respective Percentage Interests.
All items of income, gain, loss, deduction, or credit will be allocated
among the Partners proportionately. Further, notwithstanding the foregoing,
after giving effect to certain special allocations, the General Partner must be
allocated at least 1% of all items of income, gain, loss, deduction or credit.
2. Special Allocations. The following special allocations shall be made in
the following order:
(i) Partnership Minimum Gain Chargeback. If there is a net decrease in
Partnership Minimum Gain during any Year, each Partner shall be specially
allocated items of Partnership income and gain for such Year (and, if necessary,
subsequent Years) in an amount equal to such Partner's share of the net decrease
in Partnership Minimum Gain, determined in accordance
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with Treasury Regulations Section 1.704-2(g)(2). Allocations made pursuant to
the previous sentence will be made in proportion to the respective amounts
required to be allocated to each Partner pursuant to that section of the
Regulations. This provision relating to Partnership Minimum Gain Chargebacks is
intended to comply with Treasury Regulations Section 1.704-2(f) and will be
interpreted and applied in a manner consistent with that Regulation.
(ii) Partner Minimum Gain Chargeback. If there is a net decrease in Partner
Minimum Gain attributable to a Partner Nonrecourse Debt during any Year, each
Partner who has a share of the Partner Minimum Gain attributable to such Partner
Nonrecourse Debt shall be specially allocated items of Partnership income and
gain for such Year (and, if necessary, subsequent Years) in an amount equal to
such Partner's share of the net decrease in Partner Minimum Gain attributable to
such Partner Nonrecourse Debt, to the extent required and determined in
accordance with Treasury Regulations Section 1.704-2(i)(4). Allocations pursuant
to the previous sentence will be made in proportion to the respective amounts
required to be allocated to each Partner pursuant to that section of the
Regulations. This provision relating to Partner Minimum Gain Chargebacks is
intended to comply with Regulation Section 1.704-2(i)(4) and will be interpreted
and applied in a manner consistent with that Regulation.
(iii) Qualified Income Offset. If a Partner unexpectedly receives any
adjustments, allocations or distributions described in Treasury Regulations
Sections 1.704-1(b)(2)(ii)(d)(4) through (6) which causes or increases a deficit
balance in such Partner's Capital Account (as adjusted pursuant to Treasury
Regulations Section 1.704-1(b)(2)(ii)(d)), items of Partnership income and gain
will be specially allocated to each such Partner in an amount and manner
sufficient to eliminate, to the extent required by the Regulations, the deficit
Capital Account of such Partner as quickly as possible, provided that an
allocation pursuant to this provision shall be made only if and to the extent
that such Partner would have a deficit Capital Account after all other
allocations have been tentatively made as if this provision were not in the
Partnership Agreement. This provision is intended to be a "qualified income
offset," as defined in Regulation Section 1.704-1(b)(2)(ii)(d).
3. Allocations Between Transferor and Transferee. In the event of the
transfer of all or any part of a Partner's interest (in accordance with the
provisions of the Partnership Agreement) in the Partnership at any time other
than at the end of a year, or the admission of a new Partner (in accordance with
the provisions of the Partnership Agreement), the transferring or new Partner's
share of the Partnership's income, gain, loss, deductions and credits, as
computed both for accounting purposes and for federal income tax purposes, will
be allocated between the transferor Partner and the transferee Partner (or
Partners), or the new Partner and the other Partners, as the case may be, in the
same ratio as the number of days in such year before and after the date of the
transfer or admission; provided, however, that if there has been a sale or other
disposition of the assets of the Partnership (or any part thereof) during such
year, then upon the mutual agreement of all the Partners (excluding the new
Partner and the transferring Partner), the Partnership may in its sole
discretion treat the periods before and after the date of the transfer or
admission as separate years and allocate the Partnership's net income, gain, net
loss, deductions and credits for each of such deemed separate years.
Notwithstanding the foregoing, the Partnership's "allocable cash basis items,"
as that term is used in Section 706(d)(2)(B) of the Code, shall be allocated as
required by Section 706(d)(2) of
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the Code and the Regulations thereunder. See "Tax Aspects of the Offering -
Partnership Allocations."
4. Incoming Partner Allocations. The Code prohibits the retroactive
allocation of a full share of partnership items to persons who were partners for
less than the entire year. As provided above, the Partnership Agreement provides
that items of income, gain, loss, deductions and credits will be allocated
between a transferor Partner and a transferee Partner in the same ratio as the
number of days in the year before and after the date of the transfer or
admission, unless the Partnership has sold any of its assets in the year of the
transfer or admission. If the Partnership has sold any of its assets in the year
of the transfer or admission, then the General Partner may elect, in its sole
discretion, to use the interim closing of the books method described above. See
"Tax Aspects of the Offering - Partnership Allocations."
5. Distributions.
The Limited Partnership Agreement authorizes the following Distributions to
be made to the Partners:
Distribution of Partnership Cash Flow. Partnership Cash Flow will be
distributed to the Partners within 60 days after the end of each year of the
Partnership, or earlier in the discretion of the General Partner, in accordance
with their respective Percentage Interests. Subject to the availability of
Partnership Cash Flow and the financial obligations of the Partnership, it is
anticipated that quarterly distributions will be made to the Partners. There is
no assurance, however, that such will be the case.
Distribution of Partnership Sales Proceeds and Partnership Refinancing
Proceeds. Partnership Sales Proceeds and Partnership Refinancing Proceeds will
be distributed to the Partners within 60 days after the transactions giving rise
to such proceeds, or earlier in the discretion of the General Partner, in
accordance with their respective Percentage Interests.
Distribution Upon Dissolution. Upon the dissolution and termination of the
Partnership, the General Partner, or if there is none, a representative of the
Limited Partners, will cause the cancellation of the Partnership's Certificate
of Limited Partnership, liquidate the assets of the Partnership, and apply and
distribute the proceeds of such liquidation in the following order of priority:
(i) First, to the payment of debts and liabilities of the Partnership, and
the expenses of liquidation;
(ii) Second, to the creation of any reserves that the General Partner or
the representatives of the Limited Partners may deem reasonably necessary for
the payment of any contingent or unforeseen liabilities or obligations of the
Partnership or of the General Partner arising out of or in connection with the
business and operation of the Partnership; and
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(iii) Third, the balance, if any, will be distributed to the Partners in
accordance with the Partners' positive Capital Account balances after such
Capital Accounts are adjusted as provided in the Partnership Agreement, and any
other adjustments required by the final Regulations under Section 704(b) of the
Code. Any general partner with a negative Capital Account following distribution
of the liquidation proceeds or the liquidation of its interest in the
Partnership must contribute to the Partnership an amount equal to such negative
capital account on or before the later of the end of the Partnership's taxable
year or within 90 days after the date of liquidation. Any capital so contributed
will be (i) distributed to those Partners with positive capital accounts until
such capital accounts are reduced to zero, and/or (ii) used to discharge
recourse liabilities. It is intended that Capital Accounts will allow for
liquidation distributions consistent with the manner in which Partnership Sales
Proceeds and Partnership Refinancing Proceeds are distributed; however, there
can be no assurance that such will be the case.
Tax Withholding. The Partnership is authorized to pay, on behalf of any
Partner, any amounts to any federal, state or local taxing authority, as may be
necessary for the Partnership to comply with tax withholding provisions of the
Code or the income tax or revenue laws of any taxing authority. To the extent
the Partnership pays any such amounts that it may be required to pay on behalf
of a Partner, such amounts will be treated as a cash Distribution to such
Partner and will reduce the amount otherwise distributable to him.
Management of the Partnership
The General Partner has the sole right to manage the business of the
Partnership and at all times is required to exercise its responsibilities in a
fiduciary capacity. The consents of the Limited Partners is not required for any
sale or refinancing of the Mobile Lithotripsy Systems or the purchase of new
lithotripsy-related equipment by the Partnership. Following the Asset
Contribution, the Partnership will contract with the Management Agent to manage
and administer the day-to-day operations of the Mobile Lithotripsy Systems. See
"Proposed Activities - Management and Administration" and the Management
Agreement, the form of which is attached as Appendix D.
Under the Partnership Agreement, if the General Partner is adjudged by a
court of competent jurisdiction to be liable to the Limited Partners or the
Partnership for acts or omissions of gross negligence or constituting willful
misconduct, the General Partner may be removed and another substituted with the
consent of all of the Limited Partners.
Powers of the General Partner
1. General.
The General Partner may, in its absolute discretion, borrow money, acquire,
encumber, hold title to, pledge, sell, release or otherwise dispose of, all or
any part of the Partnership's assets, when and upon such terms as it determines
to be in the best interest of the Part nership and employ such persons as it
deems necessary for the operation of the Partnership. The
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General Partner, however, is expressly prohibited from, among other things:
(i) possessing Partnership assets or assigning the rights of the Partnership in
Partnership assets or the Mobile Lithotripsy Systems for other than Partnership
purposes; (ii) admitting Limited Partners except as provided in the Partnership
Agreement; and (iii) performing any act (other than an act required by the
Partnership Agreement or any act taken in good faith reliance upon Counsel's
opinion) which would, at the time such act occurred, subject any Limited Partner
to liability as a general partner in any jurisdiction.
2. Tax Matters.
(i) Elections. The General Partner will, in its sole discretion, make for
the Partnership any and all elections for federal, state and local tax purposes
including, without limitation, any election, if permitted by applicable law, to
adjust the basis of the Partnership's property pursuant to Code Sections 754,
734(b) and 743(b), or comparable provisions of state or local law, in connection
with transfers of interests in the Partnership and Partnership Distributions.
(ii) Tax Matters Partner. The Partnership Agreement designates the General
Partner as the Tax Matters Partner (as defined in Section 6231 of the Code) and
authorizes it to act in any similar capacity under state or local law. As the
Tax Matters Partner, the General Partner is authorized (at the Partnership's
expense): (i) to represent the Partnership and Partners before taxing
authorities or courts of competent jurisdiction in tax matters affecting the
Partnership or Partners in their capacity as Partners; (ii) to extend the
statute of limitations for assessment of tax deficiencies against Partners with
respect to adjustments to the Partnership's federal, state or local tax returns;
(iii) to execute any agreements or other documents relating to or affecting such
tax matters, including agreements or other documents that bind the Partners with
respect to such tax matters or otherwise affect the rights of the Partnership
and Partners; and (iv) to expend Partnership funds for professional services and
costs associated therewith. In its capacity as Tax Matters Partner, the General
Partner shall oversee the Partnership tax affairs in the manner which, in its
best judgment, are in the interests of the Partners. Moreover, the General
Partner will, in its sole discretion, not make an election pursuant to Treasury
Regulation 301.7701.3 to be treated as an association taxable as a corporation.
Rights and Liabilities of the Limited Partners
The Limited Partners do not have any right to participate in the management
of the business of the Partnership. Limited Partners are not required to make
any capital contributions to the Partnership except amounts agreed by them to be
paid, or pay or be personally liable for, any expense, liability or obligation
of the Partnership, except (i) to the extent of their respective interests in
the Partnership, (ii) for the obligation to return certain Distributions made to
them as provided by the Act, and (iii) to the extent of their liabilities
pursuant to their respective Limited Partner Loan Obligations. See "Risk Factors
- Other Investment Risks - Limited Partners' Obligations to Return Certain
Distributions" and "Liability Under Limited Partner Loans."
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Restrictions on Transfer of Partnership Interests
No Partnership Interest nor any Units may be transferred without the prior
written consent of the General Partner, which approval may be granted or denied
in the sole discretion of the General Partner, and subject to the satisfaction
of certain other conditions set forth in the Partner ship Agreement. The
Partnership Agreement contains additional limitations on transfer, including
provisions prohibiting transfer that would violate federal or state securities
laws. No transferee of the Units will automatically become a Limited Partner.
Admission of a transferee requires the fulfillment of other obligations
enumerated in the Partnership Agreement, including either the approval of a
Majority in Interest of the Limited Partners (except the assignor Limited
Partner) and the General Partner, or the approval of the assignor Limited
Partner and the General Partner. Any transferee of a Partnership Interest who
has not been admitted to the Partnership as a Partner shall not be entitled to
any of the rights, powers or privileges of his transferor except the right to
receive and be credited or debited with his proportionate share of Partnership
income, gains, profits, losses, deductions, credits or distributions. A
transferor Limited Partner will not be released from his or her personal
liability under any Limited Partner Note upon the transfer of his or her
Partnership Interest, unless otherwise specifically agreed by the Bank at the
time of the transfer. Unauthorized transfers may constitute a default under a
Limited Partner Note. See "Risk Factors - Other Investment Risks - Liability
Under Limited Partner Loan."
The General Partner may transfer all or a portion of its Partnership
Interest only with the consent of a Majority in Interest of the Limited Partners
before the transferee can be admitted as a Substitute General Partner.
Notwithstanding the foregoing, the Partnership Agreement gives the General
Partner the authority to transfer all or part of its General Partner interest to
any transferee controlled by it or one or more of its Affiliates without
obtaining the Limited Partners' consent. Any such transferee would automatically
be a substitute general partner. Both the admission of any new shareholder and
the withdrawal of any shareholder from the General Partner may be done without
the approval of the Limited Partners.
Dissolution and Liquidation
The Partnership will dissolve and terminate for any of the following
reasons:
1. The sale, exchange or disposition of all or substantially all of the
property of the Partnership without making provision for the replacement thereof
(except to the extent otherwise provided in a reorganization plan approved by
the General Partner as described above);
2. The expiration of its term on December 31, 2048;
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, in
its sole discretion, including pursuant to a reorganization plan approved by the
General Partner; or
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5. The election to dissolve the Partnership made by the General Partner in
the event of certain legislation, case law or regulatory changes which adversely
affect the operation of the Partnership.
The retirement, resignation, bankruptcy, assignment for the benefit of
creditors, dissolution, death, disability or legal incapacity of a general
partner will not result in a termination of the Partnership if the remaining
general partner or general partners, if any, elect to continue the business of
the Partnership, or if no general partner remains, if within 90 days of the
occurrence of one of such events, a Majority in Interest of the Limited Partners
elect in writing to continue the Partnership and, if necessary, designate a new
general partner.
Upon dissolution, the General Partner or, if there is none, a
representative of the Limited Partners, will liquidate the Partnership's assets
and distribute the proceeds thereof in accordance with the priorities set forth
in the Partnership Agreement. See "Profits, Losses and Distributions -
Distributions - Distribution upon Dissolution" above and "Optional Purchase of
Limited Partner Interests" below.
Optional Purchase of Limited Partner Interests
As provided in the Partnership Agreement, the General Partner, or if the
General Partner elects, the Partnership, 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) a domestic proceeding, (iii)
insolvency, or (iv) direct or indirect ownership of an interest in a competing
venture (including the lease or sublease of competing technology). If the
General Partner and the Partnership decline to exercise the option, the
withdrawing Limited Partner or his representative, as the case may be, shall
continue to hold the Partnership Interest pursuant to the terms of the
Partnership Agreement. If the General Partner (or the Partnership) elects to
exercise the option, the option purchase price will be equal to the lesser of
the Limited Partner's share of the Partnership's book value, if any, as
reflected by the Limited Partner's capital account in the Partnership
(unadjusted for any appreciation in Partnership assets and as reduced by
depreciation deductions claimed by the Partnership for tax purposes) or the fair
market value of such interests. The book value is likely to be considerably less
than the fair market value of the Limited Partner's interest in the Partnership
and may not provide any positive return on the Limited Partner's investment.
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.
In addition, if state or federal regulations or laws are enacted or
applied, or if any other legal developments occur, which, in the opinion of the
General Partner, adversely affect (or potentially adversely affect) the
operation of the Partnership or the business of the Partnership (e.g., any
prohibition on physician ownership), the General Partner, in its sole discretion
is required either to (i) purchase the Partnership Interests of all the Limited
Partners at a price equal to the lesser of (y) the fair market value of the
Partnership Interests, or (z) the book value price set out above, or
(ii) dissolve and liquidate the Partnership. See "Regulation."
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Noncompetition Agreement and Protection of Confidential Information
The Partnership Agreement provides that each Partner (other than the
General Partner and its Affiliates) is prohibited from having a direct or
indirect ownership interest in a competing venture (including the lease or
sublease of competing technology) (the "Outside Activities"). While they own
Partnership Interests, each Partner is precluded from engaging in any Outside
Activities. In the event that a 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
Partner engaged in an Outside Activity as provided in the Partnership Agreement.
See "Optional Purchase of Limited Partner Interests" in this Section, and the
form of the Partnership Agreement attached hereto as Appendix B.
In addition, the Partnership Agreement provides that each Partner
acknowledges and agrees that such Partner's 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 Partners (other than the General Partner and its Affiliates)
are precluded from disclosing such confidential information during their
participation as Partners or thereafter unless required by law or with the prior
written consent of the Partners.
Arbitration
The Partnership Agreement provides that disputes arising thereunder shall
be resolved by submission to arbitration in accordance with the provisions of
Tennessee law.
Power of Attorney
Each Investor, by executing the Subscription Agreement, irrevocably
appoints ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, M.D. and ▇▇▇▇▇▇ ▇▇▇▇▇▇, Ph.D., severally, to act as
attorneys-in-fact to execute the Partner ship 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 ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, M.D. and ▇▇▇▇▇▇ ▇▇▇▇▇▇, Ph.D.,
severally, to act as his attorneys-in-fact to make, execute, swear to and file
any document necessary to the conduct of the Partnership's business, such as
deeds of conveyance of real or personal property as well as any amendment to the
Partnership Agreement or to any certificate of limited partnership which
accurately reflects actions properly taken by the Partners.
Reports to Limited Partners
Within 90 days after the end of each Year of the Partnership, the General
Partner will send to each person who was a Limited Partner at any time during
such year such tax information, including, without limitation, Federal Tax
Schedule K-1, as will be reasonably necessary for the
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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, books and accounts maintained by persons engaged in businesses of
a like character. Pursuant to applicable law, the Partnership books and records
will be kept on the accrual method basis of accounting. The Partnership's fiscal
year will be the calendar year. The books and records will be located at the
Partnership's office, and will be open to the reasonable inspection and
examination of the Limited Partners or their duly authorized representatives
during normal business hours as provided by the Act.
LEGAL MATTERS
Certain legal matters in connection with the Units offered hereby will be
passed upon for the Partnerships by ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ & ▇▇▇▇, a
Professional Limited Liability Company, of Winston-Salem, North Carolina. See
"Conflicts of Interest." On the Closing Date, ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ & ▇▇▇▇, a
Professional Limited Liability Company, will render an opinion, the form of
which is attached as Appendix E to this Memorandum, with respect to certain
federal income tax consequences of an investment in Units. See "Tax Aspects of
the Offering."
ADDITIONAL INFORMATION
The Partnership will make available to you the opportunity to ask questions
of its management and to obtain information to the extent it possesses such
information or can acquire it without an unreasonable effort or expense, which
is necessary to verify the accuracy of the information contained herein or which
you or your professional advisors desire in evaluating the merits and risks of
an investment in the Partnership. Copies of certain Hospital Contracts may not,
however, be available due to confidentiality restrictions contained therein.
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