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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
_____ to _____
Commission File Number: 0-22392
-------------------------
PRIME MEDICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2652727
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1301 Capital of Texas Highway, Austin, Texas 78746
(Address of principal executive offices) (Zip Code)
(512) 328-2892
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. YES X NO
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K or
any amendment to this Form 10-K. _____
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within 60 days prior
to the date of filing.
Aggregate Market Value at March 30, 1999: $130,334,000
Indicate the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Number of Shares Outstanding at
Title of Each Class March 30, 1999
------------------- --------------
Common Stock, $.01 par value 17,234,267
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's definitive proxy material for the
1999 annual meeting of shareholders are incorporated by reference into Part III
of the Form 10-K.
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PRIME MEDICAL SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
PART I
ITEM 1. BUSINESS.
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Prime Medical Services, Inc., a Delaware corporation ("Prime" or the
"Company"), is the largest provider of lithotripsy services in the United
States. Lithotripsy is a non-invasive procedure for the treatment of kidney
stones, typically performed on an outpatient basis, that eliminates the need for
lengthy hospital stays and extensive recovery periods associated with surgery.
The Company has 62 lithotripters of which 55 are mobile and seven are fixed
site. The Company's lithotripters performed approximately 37,000 procedures in
the United States in 1998 through a network of approximately 450 hospitals and
surgery centers in 34 states. In addition, the Company has over 270 contracts
with managed care organizations.
Lithotripters fragment kidney stones by use of extracorporeal shock wave
lithotripsy. The Company provides services related to the operation of the
lithotripters, including scheduling, staffing, training, quality assurance,
maintenance, regulatory compliance and contracting with payors, hospitals and
surgery centers. Medical care is rendered by the urologists utilizing the
lithotripters. Management believes that the Company has collected the industry's
largest and most comprehensive lithotripsy database, containing detailed
treatment and outcomes data on over 150,000 lithotripsy procedures. The Company
and its associated urologists utilize this database in seeking to provide the
highest quality of lithotripsy services as efficiently as possible.
From 1992 through 1998, the Company completed 12 acquisitions involving 57
lithotripter operations and internally developed five new operations. Since
1992, the Company has substantially divested its original non-lithotripsy
businesses.
The Company has two reportable segments, the medical segment, which
includes lithotripsy and prostatherapy services, and cardiac rehabilitation
services, and manufacturing segment. See Note O to the consolidated financial
statements for segment disclosures.
Lithotripsy Industry Overview
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Kidney stones develop from crystals made up primarily of calcium which
separate from urine and build up on the inner surfaces of the kidney. The exact
cause of kidney stone formation is unclear, and there is no known preventative
cure in the vast majority of cases. Approximately 25% of all kidney stones do
not pass spontaneously and therefore require medical or surgical treatment.
Kidney stone treatments used by urologists include lithotripsy, drug therapy,
endoscopic extraction or open surgery. While the nature and location of a kidney
stone impacts the choice of treatment, the Company believes the majority of all
kidney stones that require treatment are treated with lithotripsy because it is
non-invasive, typically requires no general anesthesia, and rarely requires
hospital stays. After fragmentation by lithotripsy, the resulting kidney stone
fragments pass out of the body naturally. Recovery from the procedure is usually
a matter of hours.
Kidney stone disease is most prevalent in the southern United States. Men
are afflicted with kidney stones more than twice as frequently as women, with
the highest incidence occurring in men 45 to 64 years of age.
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Kidney Stone Treatment Methods
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A number of kidney stone treatments are used by urologists ranging from
non-invasive procedures, such as drug therapy or lithotripsy, to invasive
procedures, such as endoscopic extraction or open surgery. The type of treatment
a urologist chooses depends on a number of factors, such as the size and
chemical make-up of the stone, the stone's location in the urinary system and
whether the stone is contributing to other urinary complications such as
blockage or infection.
Certain types of less common kidney stones may be dissolved by drugs which
allow normal passage from the urinary system. Stones located in certain areas of
the urinary tract may be extracted endoscopically. These procedures commonly
require general or local anesthesia and can injure the involved areas of the
urinary tract. Frequently, kidney stones are located where they are not
accessible by an endoscopic procedure. Prior to the development of lithotripsy,
stones lodged in the upper urinary tract were often treated by open surgery or
percutaneous stone removal, both major operations requiring an incision to gain
access to the stone. After such procedures, the patient typically spends several
days in the hospital followed by a convalescence period of three to six weeks.
As the technology for treating kidney stones has improved, there has been a
shift from more expensive and complicated invasive procedures to safer, more
cost efficient and less painful non- invasive procedures, such as lithotripsy.
Extracorporeal Shock Wave Lithotripsy
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General. The lithotripter has dramatically changed the course of kidney
stone disease treatment since lithotripsy is normally performed on an outpatient
basis, often without general anesthesia. Recovery times are generally only a few
hours, and most patients can return to work the next day. There are three basic
types of lithotripsy treatment currently available: electromagnetic, spark-gap
and piezoelectric. A decision regarding which type is used in any instance may
depend on several factors, among which are the treating physician's preferences,
treatment times, stone location, and anesthesia considerations. The Company has
41 electromagnetic machines, 20 spark-gap machines and one piezoelectric
machine.
Electromagnetic Technology. Most new lithotripters utilize an
electromagnetic shock wave component that eliminates the need for disposable
electrodes. The use of lithotripters employing electromagnetic technology allows
for more precise focusing of shock wave energy and more predictable energy
delivery than other lithotripsy technologies, which eliminates the need for
anesthesia in most cases. Utilization of systems employing electromagnetic
technology usually results in fragmentation of the kidney stone in between 60
and 90 minutes.
Spark Gap Technology. With these lithotripsy systems, shock waves generated
by a disposable high-voltage spark electrode are focused on a kidney stone.
Utilization of systems employing spark gap technology usually results in
fragmentation of the kidney stone in less than 60 minutes. The use of spark-gap
technology often requires the administration of sedatives or intravenous
anesthesia care and in some cases requires general anesthesia.
Piezoelectric Technology. Lithotripters applying piezoelectric technology
focus shock waves on the kidney stone using a linear array of ceramic elements.
This technology has not been widely adopted, and there are only a few
lithotripters utilizing piezoelectric technology operating in the United States.
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Other Lines of Business:
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Medical segment
In October 1997, the Company began providing thermotherapy services for the
treatment of benign prostatic hyperplasia (''BPH''). BPH is the non-cancerous
enlargement of the prostate, a condition common in men over age 60.
Thermotherapy uses microwaves to apply heat to the prostate, resulting in relief
of the symptoms of BPH without damaging surrounding tissues. Thermotherapy
relieves the symptoms of BPH without incurring the risks of complications often
associated with surgery and more invasive procedures. The Company operates one
mobile thermotherapy device servicing hospitals and surgery centers in eastern
North Carolina, and a second mobile system in southern California. The Company
intends to evaluate the success of its thermotherapy operations and may expand
such operations in the future. The Company received approximately 1% of its
revenues from thermotherapy operations in 1998.
Prime Cardiac Rehabilitation Services, Inc. ("Prime Cardiac"), a
wholly-owned subsidiary of the Company, provides non-medical management services
for two cardiac rehabilitation centers, pursuant to agreements with physicians,
clinics and hospitals ("Medical Providers"). The Medical Providers have absolute
authority over the medical services provided at the centers, fees charged to
patients and the collection practices of the facility. Prime Cardiac's fees are
generally based on collected revenues of the centers. The Company has
substantially reduced its cardiac rehabilitation business over the last three
years, which accounted for less than 1% of the Company's total revenues for the
year ended December 31, 1998.
Manufacturing segment
In September 1997, the Company, through its acquisition of a 75% interest
in AK Associates, L.L.C. ("AK"), began providing manufacturing services and
installation, upgrade, refurbishment and repair of major medical equipment for
mobile medical services providers. The Company paid $4.8 million for this
interest, plus an earn-out of $1.1 million, which was paid in February 1999. The
remaining 25% of AK is owned by certain members of AK management. The Company
received approximately 11% of its revenues from the manufacturing segment in
1998.
Potential Liabilities-Insurance
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All medical procedures performed in connection with the Company's business
activities are conducted directly by, or under the supervision of physicians,
who are not employees of the Company. The Company does not provide medical
services to any patients. However, patients being treated at health care
facilities at which the Company provides its non-medical services could suffer a
medical emergency resulting in serious injury or death, which could subject the
Company to the risk of lawsuits seeking substantial damages.
The Company currently maintains general and professional liability
insurance with a total limit of $1,000,000 per loss event and $3,000,000 policy
aggregate and an umbrella excess limit of $10,000,000, with a deductible of
$25,000 per occurrence. In addition, the Company requires medical professionals
who utilize its services to maintain professional liability insurance. All of
these insurance policies are subject to annual renewal by the insurer. If these
policies were to be canceled or not renewed, or failed to provide sufficient
coverage for the Company's liabilities, the Company might be forced to
self-insure against the potential liabilities referred to above. In that event,
a single incident might result in an award of damages which might have a
material adverse effect on the operations of the Company.
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Government Regulation and Supervision
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The Company is subject to extensive regulation by both the federal
government and the states in which the Company conducts its business. The
Company is subject to Section 1128B of the Social Security Act (known as "the
Illegal Remuneration Statute"), which imposes civil and criminal sanctions on
persons who solicit, offer, receive or pay any remuneration, directly or
indirectly, for referring, or arranging for the referral of, a patient for
treatment that is paid for in whole or in part by Medicare, Medicaid or similar
government programs. The federal government has published regulations that
provide exceptions or a ''safe harbor'' for certain business transactions.
Transactions that are structured within the safe harbors are deemed not to
violate the Illegal Remuneration Statute. Transactions that do not satisfy all
elements of a relevant safe harbor do not necessarily violate the Illegal
Remuneration Statute, but may be subject to greater scrutiny by enforcement
agencies. The arrangements between the Company and the partnerships and other
entities in which it owns an indirect interest and through which the Company
provides most of its lithotripsy services (and the corresponding arrangements
between such partnerships and other entities and the treating physicians who own
interests therein and who use the lithotripsy facilities owned by such
partnerships and other entities) could potentially be questioned under the
illegal remuneration prohibition and may not fall within the protection afforded
by these safe harbors. Many states also have laws similar to the Federal Illegal
Remuneration Statute. While failure to fall within the safe harbors may subject
the Company to scrutiny under the Illegal Remuneration Statute, such failure
does not constitute a violation of the Illegal Remuneration Statute.
Nevertheless, these illegal remuneration laws, as applied to activities and
relationships similar to those of the Company, have been subjected to limited
judicial and regulatory interpretation, and the Company has not obtained or
applied for any opinion of any regulatory or judicial authority that its
business operations and affiliations are in compliance with these laws.
Therefore, no assurances can be given that the Company's activities will be
found to be in compliance with these laws if scrutinized by such authorities.
In addition to the Illegal Remuneration Statute, Section 1877 of the Social
Security Act ("Stark II") imposes certain restrictions upon referring physicians
and providers of certain designated health services under the Medicare, Medicaid
and Champus Programs ("Government Programs"). Subject to certain exceptions,
Stark II provides that if a physician (or a family member of a physician) has a
financial relationship with an entity: (I) the physician may not make a referral
to the entity for the furnishing of designated health services reimbursable
under the Government Programs; and (ii) the entity may not bill Government
Programs, any individual or any third-party payor for designated health services
furnished pursuant to a prohibited referral under the Government Programs. The
prohibitions of Stark II only apply to the treatment of Government Program
patients, and have no application to services performed for non-government
program patients. Entities and physicians committing an act in violation of
Stark II will be required to refund amounts collected in violation of the
statute and also are subject to civil money penalties and exclusion from the
Government Programs. Urologists are investors in 44 of the Company's 62
lithotripsy operations, and the two Company affiliates engaged in thermotherapy
services have urologist-investors (the Company lithotripsy and thermotherapy
affiliates with physician-investors are referred to herein as the "Company
Physician Entities").
Many key terms in Stark II are not adequately defined and the statute is
silent regarding its application to vendors, such as the Company Physician
Entities, contracting ''under arrangements'' with hospitals for the provision of
outpatient services. Prior to the publication of the Proposed Stark Regulations
described below, the Company interpreted Stark II consistently with the informal
view of the General Counsel for Health and Human Services, and concluded that
the statute did not apply to its method of conducting business. Based upon a
reasonable interpretation of Stark II, by referring
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a patient to a hospital furnishing the outpatient lithotripsy or thermotherapy
services ''under arrangements'' with the Company Physician Entities, a physician
investor in a Company Physician Entity is not making a referral to an entity
(the hospital) in which they have an ownership interest.
On January 9, 1998, the federal government published proposed regulations
under Stark II (the "Proposed Stark Regulations"). By clarifying certain
ambiguities and defining certain statutory terms, the Proposed Stark Regulations
and accompanying commentary apply the physician referral prohibitions of Stark
II to the Company Physician Entities' practice of contracting ''under
arrangements'' with hospitals for treatment and billing of Government Program
patients. Only hospitals can bill the Government Programs for lithotripsy and
thermotherapy services; thus contracting under arrangements with hospitals was
the way the Company Physician Entities economically participated in the
treatment of Government Program patients. Absent a restructuring of traditional
operations, to comply with the government's interpretation of Stark II, the
physician- investors will be prohibited from referring Government Program
patients to the hospitals contracting with the Company Physician Entities. The
Company cannot predict when final Stark II regulations will be issued or the
substance of the final regulations, but the interpretive provisions of the
Proposed Stark Regulations may be viewed as the federal government's interim
enforcement position until final regulations are issued. Restructuring
traditional operations may reduce Company revenues and limit future growth by
(I) reducing or eliminating revenues attributable to the treatment of Government
Program patients by the Company Physician Entities, (ii) reducing revenues from
the treatment of non-government patients by Company Physician Entities due to
physician, hospital and third-party payor anxiety and concern created by Stark
II, (iii) requiring the Company Physician Entities to restructure their
operations to comply with Stark II, (iv) restricting the acquisition or
development of additional lithotripsy or thermotherapy operations that will both
treat Government Program patients and have referring physician-investors, (v)
impairing the Company's relationship with urologists and (vi) otherwise
materially adversely impacting the Company.
Many states currently have laws similar to Stark II that restrict a
physician with a financial relationship with an entity from referring patients
to that entity. Often these laws contain statutory exceptions for circumstances
where the referring physician, or a member of his practice group, treats their
own patients. States also commonly require physicians to disclose to patients
their financial relationship with an entity. The Company believes that it is in
material compliance with these state laws. Nevertheless, these state
self-referral laws, as applied to activities and relationships similar to those
of the Company, have been subjected to limited judicial and regulatory
interpretation, and the Company has not obtained or applied for any opinion of
any regulatory or judicial authority that its business operations and
affiliations are in compliance with these laws. Therefore, no assurances can be
given that the Company's activities will be found to be in compliance with these
laws if scrutinized by such authorities.
In addition, upon the occurrence of changes in the law that may adversely
affect operations, the Company is required to purchase the interests of
physician-investors for certain of the Company Physician Entities. These
mandatory purchase obligations require the payment by the Company of a multiple
of earnings similar to multiples used by the Company in pricing the original
acquisition of such interests. To the extent the Company is required to purchase
such interests, such purchases might cause a default under the terms of the
Company's senior credit facility and senior subordinated notes, impair the
Company's relationship with urologists and otherwise have a material adverse
impact on the Company. Regulatory developments, such as Stark II, might also
dictate that the Company purchase all the interests of its physician-investors,
regardless of any contractual requirements to do so, or substantially alter its
business and operations to remain in compliance with applicable laws.
Accordingly, there can be no assurance that the Company will not be required to
change its business
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practices or its investment relationships with urologists or that the Company
will not experience a material adverse effect as a result of any challenge made
by a federal or state regulatory agency. In addition, there can be no assurance
that physician-investors who, voluntarily or otherwise, divest of their
interests in Company Physician Entities will continue to refer patients at the
same rate or at all.
Some states require approval, usually in the form of a certificate of need
("CON"), prior to the purchase of major medical equipment exceeding a
predesignated capital expenditure threshold or for the commencement of certain
clinical health services. Such approval is generally based upon the anticipated
utilization of the service and the projected need for the service in the
relevant geographical area of the state where the service is to be provided. CON
laws differ in many respects, and not every state's CON law applies to the
Company. Most of the Company's operations originated in states which did not
require a CON for lithotripsy services, and the Company has obtained a CON in
states where one is required. Some states also require registration of
lithotripters with the state agency which administers its CON program. Such
registration is not subject to any required approval, but rather is an
administrative matter imposed so that the state will be aware of all existing
clinical health services. The Company registers in those states which require
these filings.
All states in which the Company operates require registration of the
fluoroscopic x-ray tubes which are utilized to locate the kidney stones treated
with the Company's lithotripters. The registration requirements are imposed in
order to facilitate periodic inspection of the fluoroscopic tubes.
Some states have regulations that require facilities such as mobile
lithotripters to be licensed and to have appropriate emergency care resources
and qualified staff meeting the stated educational and experience criteria. The
Company's lithotripsy equipment is subject to regulation by the U.S. Food & Drug
Administration, and the motor vehicles utilized to transport the Company's
mobile lithotripsy equipment are subject to safety regulation by the U.S.
Department of Transportation and the states in which the Company conducts its
mobile lithotripsy business. The Company believes that it is in material
compliance with these regulations.
Except as provided herein, the Company believes it complies in all material
respects with the foregoing laws and regulations, and all other applicable
regulatory requirements; however, these laws are complex and have been broadly
construed by courts and enforcement agencies. Thus, there can be no assurance
that the Company will not be required to change its practices or its
relationships with treating physicians who are investors in the Company
Physician Entities, or that the Company will not experience material adverse
effects as a result of any investigations or enforcement actions by a federal or
state regulatory agency.
A number of proposals for healthcare reform have been made in recent years,
some of which have included radical changes in the healthcare system. Healthcare
reform could result in material changes in the financing and regulation of the
healthcare business, and the Company is unable to predict the effect of such
changes on its future operations. It is uncertain what legislation on healthcare
reform, if any, will ultimately be implemented or whether other changes in the
administration or interpretation of governmental healthcare programs will occur.
There can be no assurance that future healthcare legislation or other changes in
the administration or interpretation of governmental healthcare programs will
not have a material adverse effect on the results of operations of the Company.
6
Equipment
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The Company purchases its lithotripter equipment and maintenance is
generally provided pursuant to service contracts with the manufacturer or other
service companies. The cost of a new lithotripter ranges from $400,000 to
$1,000,000. For mobile lithotripsy, the Company either purchases or leases the
tractor, usually for a term up to five years, and purchases the trailer or a
self contained coach.
Employees
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As of March 15, 1999, the Company employed approximately 310 full-time
employees and approximately 38 part-time employees.
Competition
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The market to provide lithotripsy services is highly fragmented and
competitive. The Company competes with other private facilities and medical
centers that offer lithotripsy services and with hospitals, clinics and
individual medical practitioners that offer conventional medical treatment for
kidney stones. Certain of the Company's current and potential competitors have
substantially greater financial resources than the Company and may compete with
the Company for acquisitions and development of operations in markets targeted
by the Company. A decrease in the purchase price of lithotripters as a result of
the development of less expensive lithotripsy equipment could decrease the
Company's competitive advantage. Most of the Company's lithotripsy services
agreements have matured past their initial terms and are now in annual renewal
terms or are on a month-to-month basis. Another significant provider of
lithotripsy services is also a manufacturer of lithotripsy equipment, which may
create different incentives for such provider in pricing lithotripsy services.
Moreover, while the Company believes that lithotripsy has emerged as the
superior treatment for kidney stone disease, the Company competes with
alternative kidney stone disease treatments.
ITEM 2. PROPERTIES.
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The Company's principal executive office is located in Austin, Texas in an
office building owned by American Physicians Service Group, Inc. ("APS"). The
Company pays APS approximately $8,000 per month, which includes rental payment
for approximately 5,600 square feet of office space, reception and telephone
services, and certain other services and facilities. The office space lease
expires in December 1999.
The Company leases approximately 11,000 square feet of office space in
Fayetteville, NC under two leases expiring in 2001. The current monthly lease
amount is approximately $10,000.
The Company's manufacturing subsidiary owns a building containing
approximately 78,000 square feet of manufacturing and office space in Harvey,
Illinois.
ITEM 3. LEGAL PROCEEDINGS.
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From time to time, the Company may be named as a party to litigation
proceedings incidental to its business. The Company does not believe the outcome
of any such litigation is likely to have
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a material adverse effect on its business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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NONE.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCK HOLDER MATTERS.
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The following table sets forth the high and low closing prices for the
Company's common stock in the over-the-counter market as reported by the
National Association of Securities Dealers, Inc., Automated Quotations System,
for the years ended December 31, 1998 and 1997 (NASDAQ Symbol "PMSI").
Year Ended December 31, 1998 High Low
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First Quarter $13.38 $ 9.88
Second Quarter 12.06 8.62
Third Quarter 9.06 7.00
Fourth Quarter 8.00 6.88
Year Ended December 31, 1997 High Low
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First Quarter $12.38 $ 9.75
Second Quarter 11.81 8.94
Third Quarter 14.75 10.25
Fourth Quarter 14.69 11.75
On March 15, 1999, the Company had approximately 700 holders of record of
its common stock.
The Company has not declared any cash dividends on its common stock during
the last two years and has no present intention of declaring any cash dividends
in the foreseeable future. In addition, the Company is not permitted by its
current credit facility and terms of senior subordinated notes to declare or
make any payments for dividends. It is the present policy of the Board of
Directors to retain all earnings to provide funds for the growth of the Company.
The declaration and payment of dividends in the future will be determined by the
Board of Directors based upon the Company's earnings, financial condition,
capital requirements, loan covenants and such other factors as the Board of
Directors may deem relevant.
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ITEM 6. SELECTED FINANCIAL DATA.
($ in thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Revenues:
Lithotripsy $ 92,053 $ 93,113 $ 71,602 $ 22,153 $ 14,843
Other 12,583 2,866 802 1,042 9,925
Total $104,636 $ 95,979 $ 72,404 $ 23,195 $ 24,768
Income:
Net income $ 10,794 $ 14,856 $ 8,961 $ 7,204 $ 4,504
Diluted earnings per share:
Net income $ 0.57 $ 0.76 $ 0.49 $ 0.48 $ 0.31
Dividends per share None None None None None
Total assets $241,119 $225,826 $202,534 $ 77,627 $ 53,861
Long-term obligations $100,987 $ 71,198 $ 70,910 $ 22,323 $ 12,734
</TABLE>
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Quarterly Data
($ in thousands, except share amounts)
3/31 6/30 9/30 12/31
---- ---- ---- -----
1998
Revenues $22,795 $25,029 $28,936 $27,876
Net income (loss) ( 1,168) 3,517 3,941 4,505
Per share amounts (basic):
Net income (loss) (0.06) 0.18 0.21 0.25
Weighted average shares
outstanding 19,313 19,088 18,437 17,781
Per share amounts (diluted):
Net income (loss) (0.06) 0.18 0.21 0.25
Weighted average shares
outstanding 19,313 19,223 18,561 17,890
1997
Revenues $20,899 $23,220 $26,361 $25,509
Net income 2,876 3,670 4,520 3,790
Per share amounts (basic):
Net income .15 .19 .23 .20
Weighted average shares
outstanding 19,218 19,277 19,299 19,306
Per share amounts (diluted):
Net income .15 .19 .23 .19
Weighted average shares
outstanding 19,395 19,435 19,483 19,496
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- - ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS.
------------------------------------
Forward-Looking Statements
- - --------------------------
The statements contained in this Report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Readers should not place undue
reliance on forward-looking statements. All forward-looking statements included
in this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements. It is important to note that the Company's actual results could
differ materially from those in such forward-looking statements. In addition to
any risks and uncertainties specifically identified in the text surrounding such
forward- looking statements, the reader should consult the Company's reports on
Form 10-Q and other filings under the Securities Act of 1933 and the Securities
Exchange Act of 1934, for factors that could cause actual results to differ
materially from those presented.
The forward-looking statements included herein are necessarily based on
various assumptions and estimates and are inherently subject to various risks
and uncertainties, including risks and uncertainties relating to the possible
invalidity of the underlying assumptions and estimates and possible changes or
developments in social, economic, business, industry, market, legal and
regulatory circumstances and conditions and actions taken or omitted to be taken
by third parties, including customers, suppliers, business partners and
competitors and legislative, judicial and other governmental authorities and
officials. Assumptions related to the foregoing involve judgements with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Any of such
assumptions could be inaccurate and therefore, there can be no assurance that
the forward-looking statements included in this Report on Form 10-K
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will prove to be accurate.
Year ended December 31, 1998 compared to the year ended December 31, 1997
- - -------------------------------------------------------------------------
Total revenues increased $8,657,000 (9%) as compared to the same period in
1997. Revenues from lithotripter operations decreased by $1,060,000 (1%)
primarily due to a decline in average reimbursement per procedure. Manufacturing
revenue increased by $8,708,000 (369%) due to the fact that the 1998 revenues
were for the full year while 1997 revenues were for four months of operations.
The Company acquired the trailer manufacturer in September 1997. Prostatherapy
revenues rose $1,207,000 due to the fact that 1998 revenues were for the full
year for one entity and a partial year for another entity, while 1997 revenues
included one entity which began operations in the fourth quarter. Revenues from
cardiac and other decreased $198,000 primarily due to four discontinued/sold
cardiac centers.
Costs and expenses (excluding depreciation and amortization) increased from
35% to 38% of revenues and increased $6,188,000 (19%) in absolute terms,
compared to the same period in 1997. Cost of services associated with
lithotripter operations decreased $2,707,000 (10%) in absolute terms and from
27% to 25% of lithotripter revenues. Cost of services associated with
manufacturing increased $7,461,000 (428%), due to full year of operations in
1998 while 1997 costs represent four months of operations. Cost of services
associated with prostatherapy increased $803,000 due to a full year of
operations for the first time in 1998. Cost of services associated with cardiac
centers decreased $229,000 (48%) primarily due to four discontinued/sold cardiac
centers. Corporate expenses decreased from 6% to 5% of revenues as the Company
was able to successfully grow without proportionately adding overhead. Corporate
expenses decreased $757,000 (13%) primarily due to a consolidation of corporate
functions.
Other deductions increased $4,635,000 primarily due to (i) the increase of
$4,618,000 for the writeoff in fees paid to lenders to obtain financing, and
(ii) an increase in interest expense of $992,000 due to an increase in new
borrowings in March 1998 related to the $100 million senior subordinated notes
offering. The increased deductions were offset partially by an increase in
interest income of $677,000.
Minority interest in consolidated income decreased $251,000 primarily due
to the decline in revenue discussed above in certain of the Company's
subsidiaries. Earnings before interest, taxes, depreciation, and amortization
(EBITDA) attributable to minority interests was $28,077,000 for the year ended
December 31, 1998 compared to $28,591,000 for the same period in 1997. EBITDA is
not intended to represent net income or cash flows from operating activities in
accordance with generally accepted accounting principles and should not be
considered a measure of the Company's profitability or liquidity.
Income tax expense for the year ended December 31, 1998 increased
$1,582,000, despite the 12% reduction in pretax earnings, compared to the same
period in 1997 as the 1997 provision included the effect of a reduction in the
Company's valuation allowance related to net operating loss carryforwards.
Year ended December 31, 1997 compared to the year ended December 31, 1996
- - -------------------------------------------------------------------------
For the year ended December 31, 1997, total revenues increased $23,575,000
(33%) as compared to the same period in 1996. Revenues from lithotripter
operations increased by $21,511,000 (30%) primarily due to the acquisitions of
(I) one lithotripter entity that owned or managed 31 lithotripters throughout
the U.S. effective May 1996, (ii) additional interests in 10
11
<PAGE>
partnerships in January 1997, (iii) one company that owned two lithotripters
effective June 1997 and (iv) a 38.25% interest in a lithotripter unit effective
May 1997. Revenues from manufacturing were $2,358,000, related to the
acquisition of the trailer manufacturer on September 1, 1997. Revenues from
cardiac centers decreased $294,000 (37%) primarily due to the one sold cardiac
center.
For the year ended December 31, 1997, costs and expenses (excluding
depreciation and amortization) increased from 34% to 35% of revenues, and
increased $8,486,000 (34%) in absolute terms, compared to the same period in
1996. Costs of services associated with lithotripter operations increased
$5,459,000 (27%) in absolute terms primarily due to the acquisitions discussed
above, and decreased from 28% to 27% of lithotripter revenues. Expenses from
manufacturing were $1,743,000. Cost of services associated with cardiac centers
decreased $322,000 (51%) primarily due to the sale of one cardiac center.
Corporate expenses were 6% of revenues for both years as the Company was able to
successfully grow without proportionately adding overhead. Corporate expenses
increased $1,438,000 (34%) primarily due to the additional corporate expenses
associated with the acquisitions discussed above.
For the year ended December 31, 1997, other deductions decreased $1,592,000
primarily due to $3,535,000 in debt issuance and canceled stock offering costs
in 1996, compared to only $360,000 which were recorded in 1997, partially offset
by an increase in interest expense of $1,500,000 due to borrowings in 1997
related to the acquisitions discussed above.
Minority interest in consolidated income increased $5,498,000 primarily due
to the limited partners' ownership interest associated with 21 partnerships in
which Lithotripters, Inc. holds a controlling interest. The Company concluded
the Lithotripters, Inc. acquisition effective May 1, 1996.
Provision for income taxes increased $3,799,000 due to the increase in
income before income taxes partially offset by the Company fully utilizing its
net operating loss and other carryforwards in 1997, which resulted in a
reduction in the beginning of year valuation allowance of $2,399,000.
Liquidity and Capital Resources
- - -------------------------------
Cash was $40,146,000 and $23,770,000 at December 31, 1998 and 1997,
respectively. Cash provided by operations was $45,551,000 for the year ended
December 31, 1998 and $51,693,000 for the year ended December 31, 1997. The
Company's subsidiaries generally distribute all of their available cash
quarterly, after establishing reserves for estimated capital expenditures and
working capital. For the years ended December 31, 1998 and 1997, the Company's
subsidiaries distributed cash of approximately $25,799,000 and $28,667,000,
respectively, to minority interest holders.
Cash used by investing activities for the year ended December 31, 1998 was
$2,142,000 primarily due to $5,213,000 for the purchase of equipment and
leasehold improvements, partially offset by $2,532,000 in distributions from
investments. Cash used by investing activities for the year ended December 31,
1997 was $22,949,000 primarily due to expenditures of $20,217,000 associated
with acquisitions and $4,546,000 for the purchase of equipment and leasehold
improvements. This was partially offset by $1,690,000 in distributions from
investments.
Cash used in financing activities for the year ended December 31, 1998 was
$27,033,000,
12
<PAGE>
primarily due to distributions to minority interests of $25,799,000, $16,439,000
of purchases of treasury stock and debt issuance costs of $4,417,000, offset by
net borrowings of $19,541,000. Cash used in financing activities for the year
ended December 31, 1997 was $25,070,000, which was primarily due to
distributions to minority interests of $28,667,000 offset by net borrowings of
$873,000 and contributions received from holders of minority interests related
to new partnership formations totaling $2,381,000.
The Company's existing credit facility is comprised of a revolving line of
credit. The revolving line of credit has a borrowing limit of $100 million, none
of which was drawn at December 31, 1998 and March 15, 1999.
On March 27, 1998, the Company completed an offering of $100 million of
senior subordinated notes due 2008 (the "Notes") to qualified institutional
buyers. The net proceeds from the offering of approximately $96 million was used
to repay all outstanding indebtedness under the Company's bank facility, with
the remainder to be used for general corporate purposes, including acquisitions.
In connection therewith, the Company recorded a charge to earnings of
approximately $4.4 million for debt issuance costs associated with the Notes.
The Notes bear interest at 8.75% and interest is payable semi-annually on April
1st and October 1st. Principal is due April 2008.
The Company is currently evaluating its alternatives in light of the
Proposed Stark Regulations. While the Company believes the changing regulatory
environment may benefit the Company by creating new lithotripsy acquisition
opportunities, the Company is reevaluating its historical model for providing
lithotripsy and thermotherapy services through operations which include
physician-investors.
The Company intends to increase the number of its lithotripsy operations
primarily through acquisitions. The Company believes that the fragmented nature
of the lithotripsy industry, combined with operational challenges created by
increasing regulatory and business complexities, including Stark II, the Illegal
Remuneration Statute and similar state laws, will provide significant
lithotripsy acquisition opportunities. Where appropriate, the Company will seek
to increase its ownership interest in current lithotripsy operations by
purchasing interests of urologists and other investors who desire to divest due
to concerns over regulatory issues, a desire to realize a return on their
investment or retirement. The Company intends to fund the purchase price for
future acquisitions using borrowings under its senior credit facility, proceeds
from the offering of the Notes and cash flow from operations. In addition, the
Company may use shares of its common stock in such acquisitions where
appropriate.
During 1998, the Company announced a stock repurchase program of up to
$25.0 million of common stock. From time to time, the Company may purchase
additional shares of its common stock where, in the judgment of management,
market valuations of its stock do not accurately reflect the Company's past and
projected results of operations. The Company intends to fund any such purchases
using available cash, cash flow from operations and borrowings under its senior
credit facility. The Company has purchased 2,120,000 shares of stock for a total
of $18,605,000 as of March 30, 1999.
13
<PAGE>
The Company's ability to make scheduled payments of principal of, or to pay
the interest on, or to refinance, its indebtedness, or to fund planned capital
expenditures will depend on its future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond its control. Based upon the current level of
operations and anticipated cost savings and revenue growth, management believes
that cash flow from operations and available cash, together with available
borrowings under its senior credit facility, will be adequate to meet the
Company's future liquidity needs for at least the next several years. However,
there can be no assurance that the Company's business will generate sufficient
cash flow from operations, that anticipated revenue growth and operating
improvements will be realized or that future borrowings will be available under
the senior credit facility in an amount sufficient to enable the Company to
service its indebtedness or to fund its other liquidity needs.
Impact of Inflation
- - -------------------
The assets of the Company are not significantly affected by inflation
because the Company is not required to make large investments in fixed assets.
However, the rate of inflation will affect certain of the Company's expenses,
such as employee compensation and benefits.
Year 2000 Compliance
- - --------------------
The "Year 2000 " issue refers to the phenomenon whereby computer programs,
having been written using two digits rather than four to define the applicable
year, may erroneously recognize a date using "00" as the year 1900 rather than
the year 2000. This error could potentially result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in similar
normal business activities.
The Company formed a Year 2000 Committee in mid 1998. The Committee was
charged with examining (1) internal hardware and software systems; (2) medical
equipment (3) physical facilities;
14
<PAGE>
and (4) outside suppliers, as these items relate to potential problems that
could be caused by the inability to process dates beyond December 31, 1999.
The Committee divided its task into four parts - assessment, remediation
planning, implementation and testing and contingency planning. Assessment and
remediation planning have been substantially completed for all four phases of
the project. Implementation and testing and contingency planning are discussed
below.
Internal hardware and software systems: The Company has completed
substantially all of the needed upgrades to its hardware and software systems.
The remaining hardware and software upgrades/replacements are expected to be
complete by June 30, 1999.
Medical Equipment: A review of the Company's lithotripters has determined
that their operation is not affected directly by the Year 2000 issue. The
Company is currently reviewing the miscellaneous ancillary medical equipment to
determine compliance and expects to be completed by September 30, 1999.
Physical facilities: The Committee has evaluated its non-computer equipment
and has determined that, except for its telephone system, there are no devices
whose failure would materially affect the ability to carry out the business of
the Company. A compliant telephone system is expected to be installed by June
30, 1999. The outside managers of the Company's office buildings have reported
that all aspects of the physical facilities - elevators, fire and security
systems, etc. are compliant. Their further inquiry of those supplying public
utilities have produced assurances of best efforts but no guarantee of
performance.
Outside suppliers: The Company is currently inquiring about the state of
Year 2000 readiness of those outside suppliers who were determined to be
critical to the Company's ability to carry out its business. This survey is
expected to be complete by June 30, 1999.
Contingency planning: The Company cannot be certain that it has identified
and will be successful in bringing into compliance all Year 2000 issues within
its control. It can be even less certain of critical services being supplied by
third parties beyond its control. Upon completion of the implementation and
testing phases of the plan, the Company will formalize plans for carrying on its
business in the event of unanticipated Year 2000-related failures. Presently,
the Company believes that the most reasonably likely worst case scenario would
be a failure of relatively short duration of basic third party services such as
the power grid. With such a failure the Company's planning will be directed
toward a temporary suspension of operations followed by plans for resumption and
catch up operations. Due to the magnitude of the uncertainties related to Year
2000 issues, the Company is unable to fully assess the consequences of Year 2000
failures and, consequently, there could be a material adverse effect on the
Company's results of operations, financial position and cash flows.
To date, the Company has not experienced significant costs associated with
the Year 2000 issue and does not expect significant costs to be incurred in
order to correct the Year 2000 issue. The Company is reviewing its current
billing and collecting software to determine if the Company will replace it
prior to the Year 2000. If the system is replaced, it is considered part of the
ongoing operations of the Company and not related to the Year 2000 issue.
15
<PAGE>
ITEM 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- - -------- -----------------------------------------------------------
Interest Rate Risk:
The Company has long-term debt (including current portion) totaling
$101,877,000, of which $100 million has a fixed rate of interest of 8.75% and
$162,000 does not bear any interest. The remaining $1,715,000 bears interest at
the prime rate. The Company is exposed to some market risk due to the floating
interest rate on the $1,715,000. The Company makes monthly or quarterly payments
of principal and interest on the $1,715,000. A 1.50% rise in interest rates
would result in a $26,000 annual increase in interest expense on this existing
principal balance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- - ------- --------------------------------------------
The information required by this item is contained in Appendix A attached
hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- - ------- -------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
------------------------------------
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- - -------- ---------------------------------------------------
The information required by this item is contained in the definitive proxy
material of the Company to be filed in connection with its 1999 annual meeting
of shareholders, except for the information regarding executive officers of the
Company which is provided below. The information required by this item contained
in such definitive proxy material is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT.
As of March 15, 1999, the executive officers of the Company are as follows:
Name Age Position
Kenneth S. Shifrin 49 Chairman of the Board
Joseph Jenkins, M.D., J.D. 51 President, Chief Executive Officer
and Director
Stan Johnson 45 Vice President
Cheryl L. Williams 47 Chief Financial Officer, Vice
President-Finance, and Secretary
16
<PAGE>
The foregoing does not include positions held in the Company's
subsidiaries. Officers are elected for annual periods. There are no family
relationships between any of the executive officers and/or directors of the
Company.
Mr. Shifrin has been Chairman of the Board and a director of the Company
since October 1989. In addition, Mr. Shifrin has served in various capacities
with APS since February 1985, and is currently Chairman of the Board and Chief
Executive Officer of APS. Mr. Shifrin is a member of the Young Presidents'
Organization.
Dr. Jenkins has been President and Chief Executive Officer and a director
of the Company since April 1996. From May 1990 until December 1991, Dr. Jenkins
was a Vice President of Lithotripters, Inc. Since January 1992, Dr. Jenkins has
been President of Lithotripters, Inc. Dr. Jenkins is a board certified urologist
and is a founding member, a past president and currently a director of the
American Lithotripsy Society.
Mr. Johnson has been a Vice President of the Company and President of Sun
Medical Technologies, Inc. ("Sun"), a wholly-owned subsidiary of the Company,
since November 1995. Mr. Johnson was the Chief Financial Officer of Sun from
1990 to 1995.
Ms. Williams has been Chief Financial Officer, Vice President-Finance and
Secretary of the Company since October 1989. Ms. Williams was Controller of
Fairchild Aircraft Corporation from August 1988 to October 1989. From 1985 to
1988, Ms. Williams served as the Chief Financial Officer of APS Systems, Inc., a
wholly-owned subsidiary of APS.
ITEM 11. EXECUTIVE COMPENSATION.
- - -------- -----------------------
The information required by this item is contained in the definitive proxy
statement of the Company to be filed in connection with its 1999 annual meeting
of shareholders, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- - -------- ---------------------------------------------------------------
The information required by this item is contained in the definitive proxy
statement of the Company to be filed in connection with its 1999 annual meeting
of shareholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- - -------- -----------------------------------------------
The information required by this item is contained in the definitive proxy
statement of the Company to be filed in connection with its 1999 annual meeting
of shareholders, which information is incorporated herein by reference.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- - -------- -----------------------------------------------------------------
(a) 1. Financial Statements.
The information required by this item is contained in Appendix A attached
hereto.
2. Financial Statement Schedules.
None.
(b) Reports on Form 8-K.
None.
(c) Exhibits. (1)
3.1 Certificate of Incorporation of the Company. (2)
3.2 Bylaws of the Company. (2)
4.1 Specimen of Common Stock Certificate. (2)
10.1* Prime Medical Services, Inc. 1993 Stock Option Plan. (3)
10.2* First Amendment to the Prime Medical Services, Inc.
1993 Stock Option Plan. (12)
10.3* Second Amendment to the Prime Medical Services, Inc.
1993 Stock Option Plan. (12)
10.4* Third Amendment to the Prime Medical Services, Inc.
1993 Stock Option Plan. (13)
10.5 Rights Agreement dated October 18, 1993 between the
Company and American Stock Transfer and Trust Company. (3)
10.6 Form of Indemnification Agreement dated October 11, 1993
between the Company and certain of its officers and
directors. (3)
10.7 Partnership Agreement of Metro Atlanta Stonebusters, G.P.
(5)
10.8 Management Agreement dated July 28, 1994 between the
Alabama Renal Stone Institute, Inc. and Alabama Kidney
Stone Foundation, Inc. (6)
18
<PAGE>
10.9 Asset Purchase Agreement, dated August 30, 1994, between
Prime Lithotripter Operations, Inc. and Alabama
Lithotripsy Joint Venture. (7)
10.10 Asset Purchase Agreement, dated August 30, 1994, between
Prime Lithotripter Operations, Inc. and Baptist Medical
Center - Montclair. (7)
10.11 Promissory Note, dated August 30, 1994, issued by Prime
Lithotripter Operations, Inc. to Baptist Medical Center -
Montclair. (7)
10.12 Management Agreement, dated August 30, 1994, between Prime
Lithotripter Operations, Inc. and Alabama Lithotripsy
Associates, Inc. (7)
10.13 Security Agreement dated August 30, 1994, between Prime
Lithotripter Operations, Inc. and Baptist Medical Center -
Montclair. (7)
10.14 Amended and Restated Joint Venture Agreement dated April
1989, betweenPrime Diagnostic Imaging Services, Inc. and
The Shasta Diagnostic Imaging Medical Group. (4)
10.15 Not used
10.16 Not used
10.17 Not used
10.18 Not used
10.19 Third Amended and Restated Loan Agreement dated April 20,
1998 between Prime Medical Services, Inc., Bank Boston,
N.A., NationsBank of Texas,N.A., and Nationsbanc
Montgomery Securities LLC, as agent. (13)
10.20 Revolving Credit Note, dated April 20, 1998 in the amount
of $20,000,000.00 issued by the Company to NationsBank of
Texas, N.A., as agent. (13)
10.21 Revolving Credit Note, dated April 20, 1998 in the amount
of $20,000,000.00 issued by the Company to The First
National Bank of Boston, as agent. (13)
10.22 Revolving Credit Note, dated April 20, 1998 in the amount
of $10,000,000.00 issued by the Company to Bank One,
Texas, N.A., as agent. (13)
10.23 Revolving Credit Note, dated April 20, 1998 in the amount
of $10,000,000.00 issued by the Company to Imperial Bank,
as agent. (13)
10.24 Revolving Credit Note, dated April 20, 1998 in the amount
of $10,000,000.00 issued by the Company to Credit Lyonnais
New York Branch, as agent. (13)
19
<PAGE>
10.25 Revolving Credit Note, dated April 20, 1998 in the amount
of $10,000,000.00 issued by the Company to Fleet National
Bank, as agent. (13)
10.26 Revolving Credit Note, dated April 20, 1998 in the amount
of $10,000,000.00 issued by the Company to LaSalle
National Bank, as agent.(13)
10.27 Revolving Credit Note, dated April 20, 1998 in the amount
of $10,000,000.00 issued by the Company to Cooperatieve
Centrale Raiffeisen - Boeren Leenbank B.A. "Rabobank
Nederland", as agent. (13)
10.28 Operating Agreement for Southern California Stone Center,
L.L.C. (9)
10.29 Lease Agreement dated July 1, 1995 between Kidney Stone
Center of South Florida, L.C. and Madorsky and Pinon
Kidney Stone Center of South Florida, P.A. (9)
10.30* Employment Agreement dated October 8, 1997 between Prime
Medical Services, Inc. and Robert Bachman. (12)
10.31* Employment Agreement dated October 8, 1997 between Prime
Medical Services, Inc. and Larry Sodomire. (12)
10.32 Partnership Interest Purchase Agreement dated May 1, 1997
among Prime Lithotripter Operations, Inc., Tenn-Ga Stone
Group Two, L.P., NGST, Inc. and all the shareholders of
NGST, Inc. (12)
10.33 Stock Purchase Agreement dated June 1, 1997 between Sun
Medical Technologies, Inc. and Executive Medical
Enterprises, Inc. (12)
10.34 Contribution Agreement dated October 8, 1997 between Prime
Medical Services, Inc. and AK Associates. (12)
10.35 Confidential Assignment Summary for Pacific Medical
Limited Partnership.(14)
10.36 Limited Partnership Agreement for Texas Lithotripsy VII,
L.P. (14)
10.37 Agreement and Plan of Merger of Texas Lithotripsy Limited
Partnership II, L.P., Texas Lithotripsy Limited
Partnership IV, L.P. and Texas ESWL/Laser Lithotripter,
Ltd. (14)
10.38 Limited Partnership Agreement for Big Sky Urological
Limited Partnership.(14)
20
<PAGE>
10.39 Operating Agreement for Kentucky I Lithotripsy, LLC. (14)
10.40 Confidential Private Placement Memorandum for Tennessee
Valley Lithotripter Limited Partnership. (14)
10.41 Confidential Private Placement Memorandum for Fayetteville
Lithotripters Limited Partnership - Arkansas I. (14)
10.42 Confidential Private Placement Memorandum for Texas
Lithotripsy Limited Partnership I, L.P. (14)
10.43 Operating Agreement for Washington Urological Services,
LLC. (14)
10.44* Amended and Restated 1993 Stock Option Plan, as amended
June 10, 1998. (10)
10.45 Agreement of Limited Partnership of Wyoming Urological
Services, L.P. (14)
10.46 Indenture Agreement dated March 27, 1998 between Prime
Medical Services, Inc. and State Street Bank and Trust
Company of Missouri, N.A. (8)
12 Computation of ratio of earnings to fixed charges (14)
21.1 List of subsidiaries of the Company. (14)
23.1 Independent Auditors' Consent of KPMG LLP. (14)
27 Financial Data Schedule (14)
______________
* Executive compensation plans and arrangements.
(1) The exhibits listed above will be furnished to any security holder upon
written request for such exhibit to Cheryl L. Williams, Prime Medical Services,
Inc., 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746. The
Securities and Exchange Commission (the "SEC") maintains a website that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC at "http://www.sec.gov".
(2) Filed as an Exhibit to the Registration Statement on Form S-4
(Registration No. 33-56900) of the Company and incorporated herein by reference.
(3) Filed as an Exhibit to the Current Report on Form 8-K of the Company
dated October 18, 1993 and incorporated herein by reference.
(4) Filed as an Exhibit to the Annual Report on Form 10-K of Old Prime,
Commission File Number 0-9963, for the year ended December 31, 1992 and
incorporated herein by reference.
(5) Filed as an Exhibit to the Current Report on Form 8-K dated May 5, 1994
of the Company and incorporated herein by reference.
(6) Filed as an Exhibit to the Current Report on Form 8-K dated July 28,
1994 of the Company and incorporated herein by reference.
21
<PAGE>
(7) Filed as an Exhibit to the Current Report on Form 8-K dated September
13, 1994 of the Company and incorporated herein by reference.
(8) Filed as an Exhibit to the Quarterly Report on Form 10Q for the period
ended June 30, 1998.
(9) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1995.
(10) Filed as an Exhibit to the Registration Statement on Form S-8
(Registration No. 333- 62245) of the Company and incorporated herein by
reference.
(11) Not used.
(12) Filed as an Exhibit to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1997.
(13) Filed as an Exhibit to the Quarterly Report on Form 10Q for the period
ended September 30, 1998.
(14) Filed herewith.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRIME MEDICAL SERVICES, INC.
By /s/ Joseph Jenkins, M.D., J.D.
---------------------------------
Joseph Jenkins, M.D., J.D., President,
Chief Executive Officer and Director
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Kenneth S. Shifrin
--------------------------
Kenneth S. Shifrin
Chairman of the Board
Date: March 31, 1999
By: /s/ Cheryl L. Williams
--------------------------
Cheryl L. Williams
Vice President of Finance, Secretary
and Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: March 31, 1999
By: /s/ Joseph Jenkins
----------------------
Joseph Jenkins, M.D., President,
Chief Executive Officer and Director
Date: March 31, 1999
23
<PAGE>
By: /s/ Paul Butrus
- - -------------------
Paul Butrus, Director
Date: March 31, 1999
By: /s/ William E. Foree
- - ------------------------
William E. Foree, M.D., Director
Date: March 31, 1999
By: /s/ John McEntire
- - ---------------------
John McEntire, Director
Date: March 31, 1999
By: /s/ William A. Searles
- - --------------------------
William A. Searles, Director
Date: March 31, 1999
By: /s/ Michael Spalding
- - ------------------------
Michael Spalding, M.D., Director
Date: March 31, 1999
24
<PAGE>
APPENDIX A
INDEX
Page
Independent Auditors' Report A-2
Consolidated Financial Statements:
Consolidated Statements of Income for the years
ended December 31, 1998, 1997 and 1996. A-3
Consolidated Balance Sheets at December 31, 1998 and 1997. A-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996. A-6
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996. A-7
Notes to Consolidated Financial Statements. A-11
A-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Prime Medical Services, Inc.:
We have audited the accompanying consolidated financial statements of Prime
Medical Services, Inc. and subsidiaries ("Company") as listed in the
accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Prime
Medical Services, Inc. and subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Austin, Texas
March 1, 1999
A-2
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
<TABLE>
<S> <C> <C> <C>
Years Ended December 31,
1998 1997 1996
-------- ------- -------
Fee Revenue:
Lithotripsy:
Fee revenues $ 83,879 $84,537 $65,138
Management fees 5,284 6,237 4,698
Equity income 2,890 2,339 1,766
-------- ------- -------
92,053 93,113 71,602
Manufacturing 11,066 2,358 --
Prostatherapy 1,207 -- --
Cardiac and other 310 508 802
-------- ------- -------
Total fee revenue 104,636 95,979 72,404
-------- ------- -------
Cost of services and general and
administrative expenses:
Lithotripsy 22,674 25,381 19,922
Manufacturing 9,204 1,743 --
Prostatherapy 803 -- --
Cardiac and other 249 478 632
Corporate 4,926 5,683 4,245
Nonrecurring development and other costs 1,617 -- --
-------- ------- -------
39,473 33,285 24,799
Depreciation and amortization 10,476 9,911 8,422
-------- ------- -------
Total operating expenses 49,949 43,196 33,221
-------- ------- -------
Operating income 54,687 52,783 39,183
Other income (deductions):
Interest and dividends 1,417 740 459
Interest expense (8,469) (7,477) (5,977)
Loan fees and stock offering costs (4,978) (360) (3,535)
Other, net 304 6 370
-------- ------- -------
(11,726) (7,091) (8,683)
Income before provision for income taxes
and minority interest 42,961 45,692 30,500
Minority interest in consolidated income 24,790 25,041 19,543
Provision for income taxes 7,377 5,795 1,996
-------- ------- -------
Net income $ 10,794 $14,856 $ 8,961
======== ======= =======
Basic earnings per share:
Net income $0.58 $0.77 $0.51
===== ===== =====
Weighted average shares outstanding 18,650 19,275 17,633
====== ====== ======
Diluted earnings per share:
Net income $0.57 $0.76 $0.49
===== ===== =====
Weighted average shares outstanding 18,783 19,461 18,638
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
A-3
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
<TABLE>
<S> <C> <C>
December 31,
1998 1997
--------- ---------
ASSETS
Current assets:
Cash $ 40,146 $ 23,770
Accounts receivable, less allowance
for doubtful accounts of $966 in 1998
and $811 in 1997 22,321 19,387
Other receivables 2,228 1,103
Deferred income taxes 2,330 1,506
Prepaid expenses and other current assets 2,774 1,776
--------- ---------
Total current assets 69,799 47,542
--------- ---------
Property and equipment:
Equipment, furniture and fixtures 34,485 32,673
Building and leasehold improvements 2,073 531
--------- ---------
36,558 33,204
Less accumulated depreciation and
amortization (18,471) (13,497)
--------- ---------
Property and equipment, net 18,087 19,707
--------- ---------
Other investments 11,491 12,305
Goodwill, at cost, net of amortization 140,863 143,823
Other noncurrent assets 879 2,449
--------- ---------
$241,119 $225,826
======== ========
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
A-4
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
($ in thousands)
<TABLE>
<S> <C> <C>
December 31,
1998 1997
--------- ---------
LIABILITIES:
Current liabilities:
Current portion of long-term debt $ 890 $ 11,138
Accounts payable 6,208 5,386
Accrued distributions to minority interests 8,951 8,655
Accrued expenses 12,051 12,204
--------- ---------
Total current liabilities 28,100 37,383
Long-term debt, net of current portion 100,987 71,198
Deferred income taxes 4,789 5,809
--------- ---------
Total liabilities 133,876 114,390
Minority interest 17,493 19,372
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
1,000,000 shares authorized;
none outstanding -- --
Common stock, $.01 par value,
40,000,000 shares authorized;
19,350,267 issued in 1998 and
19,306,267 issued in 1997 194 193
Capital in excess of par value 87,380 84,050
Accumulated earnings 18,615 7,821
Treasury stock, at cost, 1,845,200 shares (16,439) --
--------- ---------
Total stockholders' equity 89,750 92,064
--------- ---------
$ 241,119 $ 225,826
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
A-5
<PAGE>
PRIME MEDICAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
($ in thousands, except share data)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Issued Capital in Accumulated
Common Stock Excess of Earnings Treasury Stock
Shares Amount Par Value (Deficit) Shares Amount Total
---------- ------ ----------- ------------ ---------- --------- ---------
Balance, January 1, 1996 14,729,663 $147 $58,700 $( 15,996) 30,000 $( 101) $42,750
Net income for the year -- -- -- 8,961 -- -- 8,961
Issuance of stock 1,636,364 17 14,903 -- -- -- 14,920
Exercise of stock options
including tax benefit of
$130 on non-qualifying
exercises 477,666 5 488 -- -- -- 493
Debt converted to stock 921,415 9 5,241 -- -- -- 5,250
Exercise of warrants 1,343,825 13 4,040 -- -- -- 4,053
Retirement of treasury
stock (30,000) -- (101) -- (30,000) 101 --
---------- ------- ----------- ------------ ----------- -------- ---------
Balance, December 31, 1996 19,078,933 191 83,271 (7,035) -- -- 76,427
Net income for the year -- -- -- 14,856 -- -- 14,856
Exercise of stock options
including tax benefit of
$438 on non-qualifying
exercises 227,334 2 779 -- -- -- 781
----------- ------- ----------- ------------ ----------- -------- ---------
Balance, December 31, 1997 19,306,267 193 84,050 7,821 -- -- 92,064
Net income for the year -- -- -- 10,794 -- -- 10,794
Tax benefits on exercised -- -- 3,096 -- -- -- 3,096
warrants
Exercise of stock options
including tax benefit of
$140 on non-qualifying
exercises 44,000 1 234 -- -- -- 235
Purchase of treasury stock -- -- (1,845,200) (16,439) (16,439)
----------- ------- ----------- ------------ ----------- -------- ---------
Balance, December 31, 1998 19,350,267 $194 $87,380 $ 18,615 (1,845,200) $(16,439) $ 89,750
========== ==== ======= ========== ========== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
A-6
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Years Ended December 31,
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Fee and other revenue collected $ 98,649 $90,924 $72,452
Cash paid to employees, suppliers
of goods and others (39,748) (31,685) (22,455)
Interest received 1,417 739 459
Interest paid ( 7,261) ( 7,521) ( 5,104)
Taxes paid ( 7,506) ( 764) ( 1,015)
------- ------- -------
Net cash provided by
operating activities 45,551 51,693 44,337
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of lithotripter entities -- (20,217) (66,742)
Purchases of equipment and leasehold
improvements ( 5,213) ( 4,546) ( 2,526)
Deferred payments on
lithotripter entities -- -- ( 3,387)
Proceeds from sales of equipment 224 30 6
Investments 2,532 1,690 1,257
Other 315 94 ( 378)
--- -- -------
Net cash used by
investing activities ( 2,142) (22,949) (71,770)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable
exclusive of interest ( 80,484) (50,328) (15,351)
Borrowings on notes payable 100,025 51,201 74,000
Distributions to minority interest ( 25,799) (28,667) (13,440)
Debt issuance costs (4,417) -- ( 2,735)
Contributions by minority interest 72 2,381 --
Exercise of stock options 9 343 363
Purchase of treasury stock ( 16,439) -- --
------- ------- -------
Net cash provided by
(used in) financing
activities ( 27,033) (25,070) 42,837
-------- ------- ------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 16,376 3,674 15,404
Cash and cash equivalents,
beginning of period 23,770 20,096 4,692
------ ------ -----
Cash and cash equivalents,
end of period $ 40,146 $23,770 $20,096
======== ======= =======
See accompanying notes to consolidated financial statements.
A-7
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
($ in thousands)
Years Ended December 31,
1998 1997 1996
---- ---- ----
Reconciliation of net income to net
cash provided by operating activities
Net income $ 10,794 $14,856 $ 8,961
Adjustments to reconcile net
income to cash provided by
operating activities:
Minority interest in consolidated income 24,790 25,041 19,543
Depreciation and amortization 10,476 9,911 8,422
Provision for uncollectible accounts 252 427 319
Equity in earnings of affiliates (2,890) (2,339) (1,766)
Debt issuance costs 4,417 -- 2,735
Provision for deferred income taxes (442) 68 974
Writeoff of loan fees -- -- 696
Other (100) 1,159 (7)
Changes in operating assets and liabilities,
net of effect of purchase transactions:
Accounts receivable (3,186) (3,156) 1,284
Other receivables (910) 754 472
Other current assets (1,244) (602) 529
Accounts payable 822 934 452
Accrued expenses 2,772 4,640 1,723
----- ----- -----
Total adjustments 34,757 36,837 35,376
------ ------ ------
Net cash provided by
operating activities $45,551 $51,693 $44,337
======= ======= =======
See accompanying notes to consolidated financial statements.
A-8
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
($ in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended December 31,
1998 1997 1996
---- ---- ----
SUPPLEMENTAL INFORMATION OF
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
At December 31, 1998, the Company had accrued
distributions payable to minority interests. The
effect of this transaction was as follows:
Current liabilities increased by $8,951
Minority interest decreased by 8,951
In 1998, the Company recognized tax benefits associated
with warrants previously exercised. The effect of this
was as follows:
Current liabilities decreased by 1,512
Noncurrent liabilities decreased by 1,584
Stockholders' equity increased by 3,096
In 1997, the Company acquired (1) additional
ownership interests in 10 partnerships
(2) a 38.25% general partnership interest in a
lithotripter operation (3) 100% of the stock
of a lithotripter operator and (4) 75% equity
interest in a trailer manufacturer. These
transactions are discussed further in Notes C and D.
The acquired assets and liabilities were as follows:
Current assets decreased by $ 9,532
Noncurrent assets increased by 4,041
Goodwill increased by 15,836
Current liabilities increased by 1,343
Noncurrent liabilities increased by 10,000
Minority interest decreased by 998
At December 31, 1997, the Company had accrued
distributions payable to minority interests. The
effect of this transaction was as follows:
Current liabilities increased by 8,655
Minority interest decreased by 8,655
</TABLE>
See accompanying notes to consolidated financial statements.
A-9
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
($ in thousands)
<TABLE>
<S> <C> <C> <C>
Years Ended December 31,
1998 1997 1996
---- ---- ----
In 1996, the Company acquired (1) 100%
of the outstanding stock of a corporation
which operated 31 lithotripters and (2)
increased ownership in two partnerships, in
which the Company is the managing general
partner. These transactions are discussed
further in Note D. The acquired assets
and liabilities were as follows:
Current assets increased by $19,032
Noncurrent assets increased by 12,630
Goodwill increased by 82,297
Current liabilities increased by 13,110
Noncurrent liabilities increased by 69,712
Minority interest increased by 16,218
Stockholders' equity 14,919
In 1996, several holders of notes issued by the
Company elected to convert the outstanding
balances of the notes into 921,000 shares
of the Company stock. In addition, certain
holders of warrants exercised their warrants and
the Company issued 1,344,000 shares of the
Company's stock to the warrant holders. The
effect of these transactions were as follows:
Current assets increased by 1,749
Current liabilities decreased by 4,062
Noncurrent liabilities decreased by 3,493
Stockholders' equity increased by 9,304
At December 31, 1996, the Company had accrued
distributions payable to minority interests. The
effect of this transaction was as follows:
Current liabilities increased by 10,705
Minority interest decreased by 10,705
</TABLE>
See accompanying notes to consolidated financial statements.
A-10
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND OPERATION OF THE COMPANY
Prime Medical Services, Inc. ("Prime"), through its direct and indirect
wholly-owned subsidiaries, provides non-medical management services to
lithotripsy, prostatherapy, and cardiac rehabilitation centers. References to
the Company are to Prime and its controlled and affiliated entities. The Company
also manufactures trailers for major medical equipment manufacturers and mobile
medical service providers. The Company operates lithotripters in 34 states.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Prime, its
wholly-owned subsidiaries, entities more than 50% owned and partnerships where
Prime has control, even though its ownership is less than 50%. Investments in
entities in which the Company's investment is less than 50% ownership, and the
Company does not control, are accounted for by the equity method if ownership is
between 20% - 50%, or by the cost method if ownership is less than 20%. Through
December 31, 1998, the Company had recognized $435,000 in undistributed earnings
using the equity method. This amount represents undistributed earnings from
entities, in which the Company owns 50% or less, and does not exhibit control.
All significant intercompany accounts and transactions have been eliminated.
Cash Equivalents
The Company considers as cash equivalents demand deposits and all
short-term investments with an original maturity of three months or less.
Property and Equipment
Property and equipment are stated at cost. Major betterments are
capitalized while normal maintenance and repairs are charged to operations.
Depreciation is computed by the straight-line method using estimated useful
lives of five to ten years. Leasehold improvements are generally amortized over
ten years or the term of the lease, whichever is shorter. When assets are sold
or retired, the corresponding cost and accumulated depreciation or amortization
are removed from the related accounts and any gain or loss is credited or
charged to operations.
Intangible Assets
The Company records as goodwill the excess of the purchase price over the
fair value of the net assets associated with acquired businesses. Goodwill is
amortized over a period not to exceed forty years using the straight-line basis.
Accumulated amortization at December 31, 1998 and 1997 is $13,807,000 and
$9,745,000, respectively. Goodwill is reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of the goodwill, a loss is recognized for the
difference between the fair value and carrying value of the goodwill.
A-11
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenue Recognition
Revenues generated from management services and the manufacture of trailers
are recognized as they are earned.
The Company's lithotripsy fee revenues are based upon fees charged for
services to hospitals, commercial insurance carriers, state and federal health
care agencies, and individuals, net of contractual fee reductions.
At December 31, 1998, approximately 17% of accounts receivable relate to
units operating in Texas, 11% relate to units located in Louisiana, and 10%
relate to units located in California.
Income Tax
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized, for the difference between the fair
value and carrying value of the asset.
Accounts Receivable
Accounts receivable are recorded based on revenues, less allowance for
doubtful accounts and contractual adjustments.
Stock-Based Compensation
Upon adoption of Statement of Financial Accounting Standards No.123,
Accounting for Stock-Based Compensation ("Statement 123"), in 1996, the Company
continued to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB Opinion
No. 25, Accounting for Stock Issued to Employees. The Company provides proforma
disclosures of net income and earnings per share as if the fair value-based
method prescribed by Statement 123 had been applied in measuring compensation
expense. (See Note J).
A-12
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Debt Issuance Costs
The Company expenses debt issuance costs as incurred.
Estimates Used to Prepare Financial Statements
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were assumed in
preparing the financial statements.
Reclassification
Certain reclassifications have been made to amounts presented in previous
years to be consistent with the 1998 presentation.
Earnings Per Share
Basic earnings per share is based on the weighted average shares
outstanding without any dilutive effects considered. Diluted earnings per share
reflects dilution from all contingently issuable shares, including options and
convertible debt. A reconciliation of such earnings per share data is as
follows:
(In thousands, except per share data)
1998
Per Share
Income Shares Amount
------ ------ ------
Basic EPS
Net Income..................... $ 10,794 18,650 $ 0.58
========
Effect of dilutive securities:
Options . . .................. 133
---
Diluted EPS.................... $ 10,794 18,783 $ 0.57
======== ====== ========
A-13
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Earnings Per Share continued
1997
Per Share
Income Shares Amounts
------ ------ -------
Basic EPS
Net Income..................... $14,856 19,275 $ 0.77
========
Effect of dilutive securities:
Options . . .................. 186
---
Diluted EPS.................... $14,856 19,461 $ 0.76
======= ====== ========
1996
Per Share
Income Shares Amounts
------ ------ -------
Basic EPS
Net Income..................... $ 8,961 17,633 $ 0.51
========
Effect of dilutive securities:
Warrants . .................... 400
Convertible Debt............... 101 224
Options . . ................... 381
---
Diluted EPS.................... $ 9,062 18,638 $ 0.49
======= ====== ========
Unexercised employee stock options to purchase 1,708,000, 841,000 and
706,000 shares of Prime common stock as of December 31, 1998, 1997 and 1996,
respectively, were not included in the computations of diluted EPS because the
options exercise prices were greater than the average market price of Prime's
common stock during the respective periods.
C. INVESTMENTS
Tenn-Ga
In May 1997, the Company acquired a 38.25% general partner interest in a
partnership that provides mobile lithotripsy service in Tennessee and Georgia.
The purchase price was cash of $3,470,000. This investment is accounted for
using the equity method.
Southern California
Effective June 1, 1995, the Company acquired a 32.5% interest in a limited
liability company that operates a fixed site lithotripter near Los Angeles,
California. This investment is accounted for using the equity method.
Texas, Ohio & Louisiana Partnerships
In December 1994, the Company acquired all of the common stock of three
corporations. Each corporation is the general partner and holds an approximate
20% interest in a limited partnership which operates a mobile lithotripter.
Texas ESWL/Laser Lithotripter, Ltd. operates a mobile lithotripter in Texas,
Oklahoma and
A-14
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Arkansas. Ohio Mobile Lithotripter, Ltd. operates a mobile lithotripter in
Ohio. Arklatx Mobile Lithotripter, L.P. operates a mobile lithotripter in
Louisiana. This investment is accounted for using the equity method.
American Physicians Service Group, Inc.
At December 31, 1998 and 1997, the Company owned 1,000 and 50,000 shares of
common stock, representing less than 1%, of the outstanding common stock of
American Physicians Service Group, Inc. (APS). APS owned approximately 18% and
16% of the outstanding common stock of the Company at December 31, 1998 and
1997, respectively. Two of the Company's seven board members are also on the
board of APS.
The Company occupies approximately 5,600 square feet of office space owned
by APS. The Company also shares certain personnel with APS. The monthly rent and
personnel cost is approximately $8,000.
The Company purchased treasury stock shares through APS Financial Services,
Inc. The Company paid commissions of $100,000 to acquire 1,845,000 shares.
D. ACQUISITIONS
Effective September 1, 1997, the Company acquired a 75% equity interest in
AK Associates, LLC ("AK"), which provides installation, upgrade, manufacturing,
refurbishment and repair services for major medical equipment manufacturers and
mobile medical service providers. The purchase price was $4,761,000 in cash with
contingent consideration up to another $1,050,000 being payable based upon
certain performance criteria being met by AK during 1998. The contingent
consideration was accrued at December 31, 1998 and paid in the first quarter of
1999. This transaction was accounted for using the purchase method of
accounting.
Effective June 1, 1997, the Company acquired 100% of the stock of Executive
Medical Enterprises, Inc. ("EME"), which operated three lithotripters in
California, Oregon and Washington. The purchase price was $1,339,000 in cash and
potential contingent consideration based upon the performance of these
operations during 1998, 1999 and 2000. $400,000 of the contingent consideration
was paid in 1998 and $843,000 was accrued at December 31, 1998 and paid in the
first quarter of 1999. The transaction was accounted for using the purchase
method of accounting.
In January 1997, the Company purchased additional ownership interests in 10
partnerships, which the Company controls. The purchase price for the additional
ownership interests was $10,510,000 in cash. These transactions were accounted
for using the purchase method of accounting.
Unaudited proforma combined income data for the years ended December 31,
1997 and 1996 of the Company and the acquisitions discussed above assuming all
were effective January 1, 1996 is as follows:
($ in thousands, except per share data) 1997 1996
---- ----
Total revenues $100,228 $81,143
Total expenses 84,941 71,080
------ ------
Net income $ 15,287 $10,063
========= =======
Diluted earnings per share $ 0.79 $ 0.54
========= =======
A-15
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Effective May 1, 1996, the Company acquired 100% of the common stock of
Lithotripters, Inc. ("Litho"). Litho operated 31 lithotripters serving
approximately 200 locations in 19 states. The purchase price was $86,500,000
consisting of $71,600,000 cash and 1,636,000 shares of the Company's common
stock valued at $14,900,000. This transaction was accounted for using the
purchase method of accounting.
Effective November 1, 1996, the Company increased its ownership interest in
two partnerships that operate lithotripters in Arkansas and South Carolina. The
Company acquired an additional 12.0% interest in Fayetteville Lithotripters
Limited Partnership - Arkansas I and 2.7% interest in Fayetteville Lithotripters
Limited Partnership - South Carolina II, which the Company manages as General
Partner. The purchase price was $1,291,000 in cash. This transaction was
accounted for using the purchase method of accounting.
E. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments (Statement 107), requires that the Company
disclose estimated fair values for its financial instruments as of December 31,
1998 and 1997. The carrying amounts and fair values of the Company's significant
financial instruments are as follows:
<TABLE>
<S> <C> <C> <C> <C>
1998 1997
---- ----
Carrying Fair Carrying Fair
($ in Thousands) Amount Value Amount Value
---------------- ------ ----- ------ -----
Financial assets:
Cash $40,146 $40,146 $23,770 $23,770
Accounts receivable 22,321 22,321 19,387 19,387
Other receivables 2,228 2,228 1,103 1,103
Financial liabilities:
Debt 101,877 92,603 82,336 82,336
Accounts payable 6,208 6,208 5,386 5,386
</TABLE>
A-16
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
Cash
The carrying amounts for cash approximate fair value because they mature in
less than 90 days and do not present unanticipated credit concerns.
Accounts Receivable and Other Receivables
The carrying value of these receivables approximates the fair value due to
their short-term nature and historical collectibility.
Debt
The carrying value of debt in 1997 approximates fair value since the
majority was primarily floating rate debt based on current market rates. The
fair value at December 31, 1998 for the $100 million fixed rate senior
subordinated notes were present valued using the market rate of 10.456% as
quoted by Bloomberg Financial Services. The carrying value of the debt bearing
interest at prime rate approximates fair value.
Accounts Payable
The carrying value of the payables approximates fair value due to the
short-term nature of the obligation.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument. Fair
value estimates are based on existing on balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments.
Other significant assets and liabilities that are not considered financial
assets or liabilities include the deferred tax assets and liabilities, property
and equipment, equity investment in partnerships, goodwill, other noncurrent
assets and accrued expenses. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the aforementioned
estimates.
A-17
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31, December 31,
1998 1997
---- ----
($ in Thousands)
Legal fees $ 1,280 $ 634
Accrued group insurance costs 206 228
Compensation and payroll
related expense 2,958 1,787
Taxes, other than income taxes 1,301 439
Accrued interest 2,192 984
Income taxes payable 1,229 4,229
Deferred payments for acquisitions 1,950 1,339
Other 935 2,564
--- -----
$12,051 $12,204
======= =======
A-18
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
G. INDEBTEDNESS
Long-term debt is as follows:
($ in thousands)
Interest December 31,
Rates Maturities 1998 1997
----- ---------- ---- ----
8.75% 2008 $100,000 $ --
60-day LIBOR
plus 2 1/2% 1998 -- 79,000
Prime 1999-2001 1,715 2,969
Prime + 1% 1998 -- 200
None 2000-2006 162 161
11.50% 1998 -- 6
------- ------
101,877 82,336
Less current portion of
long-term debt 890 11,138
--- ------
$100,987 $71,198
======== =======
In March 1998, the Company completed an offering of an aggregate $100
million of unsecured senior subordinated notes (the "Notes") due 2008. The issue
price of the notes was 99.50 with an 8.75% coupon. Interest is payable
semiannually on April 1 and October 1, beginning October 1, 1998. The financing
costs associated with this offering totaling $4,418,000 were expensed on the
accompanying consolidated statements of income. A portion of the proceeds from
the offering were used to pay off the Company's $77 million of term loans under
its existing credit facility. (See Note P).
The Notes Indenture restricts, among other things, the ability of the
Company and its Restricted Subsidiaries to incur additional indebtedness and
issue preferred stock, enter into sale and leaseback transactions, incur liens,
pay dividends or make certain other restricted payments, apply net proceeds from
certain asset sales, enter into certain transactions with affiliates, merge or
consolidate with any other person, sell stock of subsidiaries and assign,
transfer, lease, convey or otherwise dispose of substantially all of the assets
of the Company.
During 1998, the Company amended its bank facility with Bank Boston from
$135 million to $100 million. The facility consists of a $100 million revolving
credit facility bearing interest of LIBOR +1 to 2%, maturing in April 2003. At
December 31, 1998, the entire $100 million revolving credit facility was
undrawn. At December 31, 1998, interest on the Company's bank facility was 8.6%.
The bank facility is collateralized by the assets of the Company, including the
stock of its subsidiaries.
The stated principal repayments for all indebtedness as of December 31,
1998 are payable as follows:
($ in thousands)
1999 $ 890
2000 449
2001 355
2002 51
2003 0
Thereafter 100,132
A-19
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
H. COSTS OF SERVICES AND GENERAL AND ADMINISTRATIVE EXPENSES
Costs of services and general and administrative expenses consist of the
following:
Years Ended December 31,
-------------------------
1998 1997 1996
---- ---- ----
($ in Thousands)
Salaries, wages and benefits $16,294 $15,779 $ 11,953
Other costs of services 7,136 7,569 6,878
General and administrative 3,225 3,595 1,941
Legal and professional 2,551 2,064 1,315
Manufacturing costs 8,294 1,394 --
Other 1,973 2,884 2,712
----- ----- -----
$39,473 $33,285 $24,799
======= ======= =======
I. COMMITMENTS AND CONTINGENCIES
At December 31, 1998, minimum annual rental commitments under
non-cancelable operating leases for equipment and office space are:
($ in thousands)
1999 $291
2000 260
2001 2
Rent expense for equipment and office space for the years ended December
31, 1998, 1997, and 1996 was $623,000, $568,000, and $360,000, respectively.
The Company sponsors a partially, self-insured group medical insurance
plan. The plan is designed to provide a specified level of coverage, with
stop-loss coverage provided by a commercial insurer. The Company's maximum claim
exposure is limited to $35,000 per person per policy year. At December 31, 1998,
the Company had 244 employees enrolled in the plan. The plan provides
non-contributory coverage for employees and contributory coverage for
dependents. The Company's contributions totaled $623,000, in 1998, $351,000 in
1997, and $224,000 in 1996.
A-20
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
J. COMMON STOCK OPTIONS
1993 Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options. The Company
provides proforma disclosures of net income and earnings per share as if the
fair-value based method prescribed by Statement 123 had been applied in
measuring compensation expense. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
On October 12, 1993, the Company adopted the 1993 Stock Option Plan which
authorizes the grant of up to 2,000,000 shares to certain key employees,
directors, and consultants and advisors to the Company. Options granted under
the 1993 Stock Option Plan shall terminate no later than ten years from the date
the option is granted, unless the option terminates sooner by reason of
termination of employment, disability or death.
In June 1997, the Company adopted an amendment to the 1993 Stock Option
Plan that authorized an additional 500,000 shares.
In June 1998, the Company adopted an amendment to the 1993 Stock Option
Plan that authorized an additional 750,000 shares.
A summary of the Company's stock option activity, and related information
for the years ended December 31, follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
Options Weighted-Average Options Weighted-Average Options Weighted-Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
----- -------------- ----- -------------- ----- --------------
Outstanding - beginning
of year 1,394 $11.04 1,228 $ 8.99 975 $ 1.31
Granted 825 8.63 428 11.94 730 13.87
Exercised (44) 3.73 (227) 1.51 (477) 0.52
Forfeited (283) 12.58 (35) 12.19 (--) --
---- --- -----
Outstanding-end of year 1,892 $10.10 1,394 $11.04 1,228 $ 8.99
======= ======== =====
Exercisable at end of year 806 $10.74 466 $ 8.21 422 $2.03
=== ====== === ====== === =====
Weighted-average fair
value of options granted
during the year $3.40 -- $5.21 -- $6.13 --
===== ===== =====
</TABLE>
A-21
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the Company's outstanding options at
December 31, 1998:
<TABLE>
<S> <C> <C> <C> <C> <C>
Outstanding Options Exercisable Options
Average Weighted Weighted
Remaining Average Average
Options Contractual Exercise Options Exercise
Range of Exercise Prices (000) Life Price (000) Price
------------------------ ----- ---- ----- ----- -----
$ 0.25 - $ 4.12 155 1.6 years $ 0.44 151 $ 0.37
$ 4.13 - $ 8.25 464 4.7 years $ 7.45 11 $ 5.99
$ 8.26 - $12.37 565 1.2 years $ 10.05 114 $ 10.36
$ 12.38 - $16.50 708 2.9 years $ 14.00 530 $ 13.87
----- ---
Total 1,892 806
===== ===
</TABLE>
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black- Scholes option pricing model with the following weighted-average
assumptions for 1996, 1997 and 1998, respectively: risk-free interest rates of
6.2%, 6.2%, and 5.2%; dividend yields of 0%, 0% and 0%; volatility factors of
the expected market price of the Company's common stock of .53, .46, and .42;
and a weighted- average expected life of the option of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
1998 1997 1996
---- ---- ----
Pro forma net income $7,817 $12,448 $8,109
====== ======= ======
Pro forma earnings
per share
Basic $0.42 $0.65 $0.46
===== ===== =====
Diluted $0.42 $0.64 $0.44
===== ===== =====
A-22
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Statement 123 calls for a prospective application of compensation relating
to the grant of stock options and, consequently pro-forma financial information
may not be indicative of future amounts until the new rules are applied to all
outstanding nonvested awards.
K. OTHER INCOME (EXPENSE)
Included in other, net in the consolidated statements of income are the
following components:
Years Ended December 31,
($ in thousands) 1998 1997 1996
- - ---------------- ---- ---- ----
Collections on amounts
previously written off $ -- $ -- $ 192
Gain on sale of investment in stock 144 -- --
Equipment rental -- -- 58
Other income 160 6 120
--- ----- ---
Other, net $304 $ 6 $ 370
==== ===== =====
L. INCOME TAXES
The Company files a consolidated tax return with its wholly owned
subsidiaries. A substantial portion of consolidated income is not taxed at the
corporate level as it represents income from partnerships. Accordingly, only the
portion of income from these partnerships attributable to the Company's
ownership interests is included in taxable income in the consolidated tax return
and financial statements. The minority interest portion of this income is the
responsibility of the individual partners.
Income tax expense consists of the following:
($ in thousands)
Years ended December 31,
1998 1997 1996
---- ---- ----
Federal
Current $6,404 $ 4,369 $ 97
Deferred (442) 68 974
State 1,415 1,358 925
----- ----- ---
$7,377 $5,795 $1,996
====== ====== ======
A reconciliation of expected income tax (computed by applying the United
States statutory income tax rate of 35% for 1998 and 1997 and 34% for 1996, to
earnings before income taxes) to total income tax expense in the accompanying
consolidated statements of income follows:
A-23
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ in thousands)
Years ended December 31,
1998 1997 1996
---- ---- ----
Expected federal income tax $6,360 $7,228 $3,725
Change in beginning of year
valuation allowance -- (2,399) (3,093)
State taxes 1,415 1,358 925
Other (398) ( 392) 439
---- ------- ---
$7,377 $5,795 $1,996
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are presented below:
($ in thousands)
1998 1997
---- ----
Deferred tax assets:
Capitalized costs $2,381 $932
Loan origination fees amortizable for
tax purposes 1,267 --
Accounts receivable, principally due
to allowance for doubtful accounts 248 266
Accrued expenses deductible for tax
purposes when paid 2,082 1,240
----- -----
Total gross deferred tax assets 5,978 2,438
Less valuation allowance -- --
----- -----
Net deferred tax assets 5,978 2,438
===== =====
Deferred tax liabilities:
Property and equipment, principally due
to differences in depreciation $( 166) $ (583)
Investments in affiliated entities,
principally due to undistributed income(2,703) (2,807)
Intangible assets, principally due to
differences in amortization periods for
tax purposes (5,568) (2,419)
------ ------
Total gross deferred tax liability (8,437) (5,809)
------ ------
Net deferred tax liability $2,459 $3,371
====== ======
There is no valuation allowance for deferred tax assets at December 31,
1998 and 1997. A decrease of $2,399,000 in 1997, primarily due to utilization of
net operating loss carryforwards was recorded in 1997. The valuation allowance
for deferred tax assets as of December 31, 1996 was $2,399,000. The valuation
A-24
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
allowance at December 31, 1996 was a result of uncertainties regarding the
Company's use of the net operating loss carryforwards and tax credit
carryforwards which could have become limited in the event that the Company
experienced a greater than 50% stock ownership change in a three-year period (as
defined in the Internal Revenue Service regulations).
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deductible temporary
differences reverse, management believes it is more likely than not the Company
will realize the benefits of these deductible differences at December 31, 1998.
M. RELATED PARTY TRANSACTIONS
See Note C for additional related party transactions involving investments
in affiliates.
O. SEGMENT REPORTING
The Company has two reportable segments: Medical, which includes
lithotripsy, prostatherapy and cardiac rehabilitation and Manufacturing.
Lithotripsy and prostatherapy provides services related to the operation of the
lithotripters and prostatherapy units, including scheduling, staffing, training,
quality assurance, maintenance, regulatory compliance and contracting with
payors, hospitals and surgery centers; and cardiac rehabilitation provides
non-medical management services for several cardiac rehabilitation centers
pursuant to agreements with physicians, clinics and hospitals. The manufacturing
segment provides manufacturing services and installation, upgrade, refurbishment
and repair of major medical equipment for mobile medical service providers.
The accounting policies of the segments are the same as those described in
Note B, the summary of significant accounting policies. The Company measures
performance based on the pretax income or loss from its operating segments,
which do not include unallocated corporate general and administrative expenses
and corporate interest revenue and expense.
The Company's segments are divisions that offer different services, and
require different technology and marketing approaches. The majority of the
lithotripsy segment is comprised of acquired entities, as is the manufacturing
segment. Prostatherapy and cardiac segments were developed internally.
A-25
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
All of the Company's revenues are earned in the United States and
long-lived assets are located in the United States. The Company does not have
any major customers who account for more than 10% of its revenues.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(Amounts in 1998 1998 1997 1997 1996 1996
thousands)
Medical Manufacturing Medical Manufacturing Medical Manufacturing
------- ------------- ------- ------------- ------- -------------
Revenue from
external
customers $93,570 $11,066 $93,621 $2,358 $72,404 $-0-
Intersegment
revenues 0 255 0 185 0 0
Interest
revenue 511 0 560 0 374 0
Interest
expense 235 38 314 0 539 0
Depreciation
and
amortization 10,359 72 9,868 18 8,274 0
Segment profit 33,189 1,753 31,666 403 23,209 0
Segment assets 235,248 4,892 219,166 1,152 196,731 0
Investment in
equity method
investees 10,605 0 11,453 0 7,377 0
Capital
Expenditures 3,557 1,580 4,473 23 2,507 0
</TABLE>
The following is a reconciliation of revenues per above to the consolidated
revenues per the consolidated statements of income:
(Amounts in thousands) 1998 1997 1996
- - ---------------------- ---- ---- ----
Total revenues for reportable segments $104,891 $96,164 $72,404
Elimination of intersegment revenues (255) (185) --
-------- ------- -------
Total consolidated revenues $104,636 $95,979 $72,404
======== ======= =======
The following is a reconciliation of the measure of segment profit per
above to consolidated income before income taxes per the consolidated
statements of income:
(Amounts in thousands) 1998 1997 1996
- - ---------------------- ---- ---- ----
Total segment profit for reportable segments $34,942 $32,069 $23,209
Unallocated corporate expenses:
General and administrative ( 3,035) ( 4,070) ( 3,413)
Net interest expense ( 7,292) ( 6,983) ( 5,354)
Loan fees and stock offering costs ( 4,978) ( 360) ( 3,535)
Nonrecurring development and other costs ( 1,617) -- --
Other, net 151 ( 5) 50
-------- -------- --------
Unallocated corporate expenses total (16,771) (11,418) (12,252)
------- ------- -------
Income before income taxes $18,171 $20,651 $10,957
======= ======= =======
The following is a reconciliation of segment assets per above to the
consolidated assets per the consolidated balance sheets:
(Amounts in thousands) 1998 1997 1996
- - ---------------------- ---- ---- ----
Total segment assets $240,140 $220,318 $196,731
Unallocated corporate assets 979 5,508 5,803
-------- -------- --------
Consolidated total $241,119 $225,826 $202,534
======== ======== ========
The reconciliation of the other significant items to the amounts reported
on the consolidated financial statements is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Amounts in 1998 1998 1998 1997 1997 1997 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
thousands)
Segment Corp- Consoli- Segment Corp- Consoli- Segment Corp- Consoli-
Totals orate dated Totals orate dated Totals orate dated
Totals Totals Totals
------ ------ ------
Interest revenue $511 $906 $1,417 $560 $180 $740 $374 $85 $ 459
Interest expense 273 8,196 8,469 314 7,163 7,477 539 5,438 5,977
Depreciation
and amortization 10,431 45 10,476 9,886 25 9,911 8,274 148 8,422
Capital
Expenditures 5,137 76 5,213 4,496 50 4,546 2,507 19 2,526
</TABLE>
The adjustments in 1998, 1997 and 1996 for interest revenue and expense,
depreciation and amortization and expenditures for segment assets represent
amounts recorded by the operations of the Company's corporate functions, which
have not been allocated to the segments.
P. CONDENSED FINANCIAL INFORMATION REGARDING GUARANTOR SUBSIDIARIES
Condensed consolidating financial information regarding the Company,
Guarantor Subsidiaries and non-guarantor subsidiaries as of December 31, 1998
and 1997 and for each of the years in the three-year period ended December 31,
1998 is presented below for purposes of complying with the reporting
requirements of the Guarantor Subsidiaries. Separate financial statements and
other disclosures concerning each Guarantor Subsidiary have not been presented
because management has determined that such information is not material to
investors. The Guarantor Subsidiaries are wholly- owned subsidiaries of the
Company who have fully and unconditionally guaranteed the Notes described in
Note G.
A-26
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Condensed Consolidating Statement of Income
Year Ended December 31, 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
($ in thousands)
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services Inc. Subsidiaries Subsidiaries Entries Total
------------- ------------ ------------- --------- -------
Fee revenue:
Lithotripsy:
Fee revenues $ -- $22,487 $ 61,392 $ -- $ 83,879
Management fees -- 3,126 2,158 -- 5,284
Equity income 30,952 20,077 -- (48,139) 2,890
Manufacturing -- -- 11,066 -- 11,066
Prostatherapy -- -- 1,207 -- 1,207
Cardiac -- 310 -- -- 310
---------- ------- --------- ------- ---------
30,952 46,000 75,823 (48,139) 104,636
Costs and expenses:
Cost of services and general and
administrative expenses:
Lithotripsy -- 3,977 18,697 -- 22,726
Manufacturing -- -- 9,204 -- 9,204
Prostatherapy -- -- 803 -- 803
Cardiac -- 249 -- -- 249
Corporate 203 4,723 -- -- 4,926
Nonrecurring development
and other costs 1,617 -- -- -- 1,617
---------- ------- --------- ------- ---------
1,820 8,949 28,704 -- 39,473
Depreciation and amortization 7 5,221 5,248 -- 10,476
---------- ------- --------- ------- ---------
Operating income 29,125 31,830 41,871 (48,139) 54,687
---------- ------- --------- ------- ---------
Other income (deductions):
Interest income 735 305 377 -- 1,417
Interest expense (8,234) (44) (191) -- (8,469)
Financing costs (4,978) -- -- -- (4,978)
Other, net (39) 331 12 -- 304
---------- ------- --------- ------- ---------
Total other income
(deductions) (12,516) 592 198 -- (11,726)
Income before provision for income
taxes and minority interest 16,609 32,422 42,069 (48,139) 42,961
Minority interest in consolidated
income -- -- -- 24,790 24,790
Provision for income taxes 5,815 1,470 92 -- 7,377
---------- ------- --------- ------- ---------
Net income $ 10,794 $30,952 $ 41,977 $(72,929) $ 10,794
========== ======= ========= ======== =========
</TABLE>
A-27
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Condensed Consolidating Statement of Income
Year Ended December 31, 1997
($ in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C>
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
Fee revenue:
Lithotripsy:
Fee revenues $ -- $ 20,863 $63,674 $ -- $ 84,537
Management fees -- 3,978 2,259 -- 6,237
Equity income 27,386 18,587 -- (43,634) 2,339
27,386 43,428 65,933 (43,634) 93,113
Manufacturing -- -- 2,358 -- 2,358
Cardiac -- 479 -- -- 479
Other -- 29 -- -- 29
---------- ------- -------- ------- ---------
Total fee revenue 27,386 43,936 68,291 (43,634) 95,979
Costs of services and general and
administrative expenses
Lithotripsy -- 4,646 20,735 -- 25,381
Manufacturing -- -- 1,743 -- 1,743
Cardiac -- 310 -- -- 310
Other -- 168 -- -- 168
Corporate 567 5,116 -- -- 5,683
---------- ------- -------- ------- ---------
567 10,240 22,478 -- 33,285
Depreciation and amortization 7 5,157 4,747 -- 9,911
---------- ------- -------- ------- ---------
Total operating expenses 574 15,397 27,225 -- 43,196
---------- ------- -------- ------- ---------
Operating income 26,812 28,539 41,066 (43,634) 52,783
---------- ------- -------- ------- ---------
Other income (deductions):
Interest and dividends -- 309 431 -- 740
Interest expense (7,160) (52) (265) -- (7,477)
Loan fees and stock offering costs (360) -- -- -- (360)
Other, net -- (128) 134 -- 6
---------- ------- -------- ------- ---------
(7,520) 129 300 -- (7,091)
Income before provision for income
taxes and minority interest 19,292 28,668 41,366 (43,634) 45,692
Minority interest in consolidated
income -- -- -- 25,041 25,041
Provision for income taxes 4,436 1,282 77 -- 5,795
------- ------- -------- ------- ---------
Net income $ 14,856 $ 27,386 $ 41,289 $ (68,675) $ 14,856
========= ========== ========= ========= ==========
</TABLE>
A-28
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Condensed Consolidating Statement of Income
Year Ended December 31, 1996
<TABLE>
<S> <C> <C> <C> <C> <C>
($ in thousands)
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- ------------- ------------ ------- -----
Fee revenue:
Lithotripsy:
Fee revenues $ -- $ 18,688 $ 46,450 $ -- $ 65,138
Management fees -- 3,180 1,518 -- 4,698
Equity income 19,382 10,701 -- (28,317) 1,766
------- ------- -------- ------- ---------
19,382 32,569 47,968 (28,317) 71,602
Cardiac -- 802 -- -- 802
------- ------- -------- ------- ---------
Total fee revenue 19,382 33,371 47,968 (28,317) 72,404
Costs of services and general and
administrative expenses
Lithotripsy -- 5,093 14,829 -- 19,922
Cardiac -- 632 -- -- 632
Corporate 257 3,988 -- -- 4,245
------- ------- -------- ------- ---------
257 9,713 14,829 -- 24,799
Depreciation and amortization 127 3,537 4,758 -- 8,422
------- ------- -------- ------- ---------
Total operating expenses 384 13,250 19,587 -- 33,221
------- ------- -------- ------- ---------
Operating income 18,998 20,121 28,381 (28,317) 39,183
------- ------- -------- ------- ---------
Other income (deductions):
Interest and dividends -- 202 257 -- 459
Interest expense (5,431) (299) (247) -- (5,977)
Loan fees and stock offering costs (3,535) -- -- -- (3,535)
Other, net -- 207 163 -- 370
------- ------- -------- ------- ---------
(8,966) 110 173 -- (8,683)
Income before provision for income
taxes and minority interest 10,032 20,231 28,554 (28,317) 30,500
Minority interest in consolidated
income -- -- -- 19,543 19,543
Provision for income taxes 1,071 849 76 -- 1,996
------- ------- -------- ------- ---------
Net income $ 8,961 $ 19,382 $ 28,478 $ (47,860) $ 8,961
========= ========== ========= ========== ==========
</TABLE>
A-29
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
($ in thousands) December 31, 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- ------------ ------------ ------- -----
ASSETS:
Current Assets:
Cash $ 15,798 $ 7,585 $ 16,763 $ -- $ 40,146
Accounts receivable, net -- 4,240 18,081 -- 22,321
Other receivables -- 2,228 -- -- 2,228
Deferred income taxes 1,603 727 -- -- 2,330
Prepaid expenses and
other current assets -- 456 2,318 -- 2,774
--------- ------- -------- -------- ---------
Total current assets 17,401 15,236 37,162 -- 69,799
--------- ------- -------- -------- ---------
Property and equipment:
Equipment, furniture and fixtures -- 5,301 29,184 -- 34,485
Building and leasehold improvements -- 491 1,582 -- 2,073
--------- ------- -------- -------- ---------
-- 5,792 30,766 -- 36,558
Less accumulated depreciation
and amortization -- (4,485) (13,986) -- (18,471)
--------- ------- -------- -------- ---------
Property and equipment, net -- 1,307 16,780 -- 18,087
--------- ------- -------- -------- ---------
Investment in subsidiaries and other 178,611 24,003 -- (191,123) 11,491
investments
Goodwill, at cost, net of amortization -- 140,863 -- -- 140,863
Other noncurrent assets 105 488 286 -- 879
--------- ------- -------- -------- ---------
Total Assets $ 196,117 $ 181,897 $ 54,228 $(191,123) $ 241,119
========== ========= ========= ========= ==========
LIABILITIES:
Current Liabilities:
Current portion of long-term debt $ -- $ -- $ 890 $ -- $ 890
Accounts payable 1,501 2,175 2,532 -- 6,208
Accrued expenses 3,563 1,929 15,510 -- 21,002
--------- ------- -------- -------- ---------
Total current liabilities 5,064 4,104 18,932 -- 28,100
Long-term debt, net of current portion 100,000 162 825 -- 100,987
Deferred income taxes 1,303 3,486 -- -- 4,789
--------- ------- -------- -------- ---------
Total liabilities 106,367 7,752 19,757 -- 133,876
Minority interest -- -- -- 17,493 17,493
STOCKHOLDERS' EQUITY:
Common stock 194 -- -- -- 194
Capital in excess of par value 87,380 -- -- -- 87,380
Accumulated earnings 18,615 -- -- -- 18,615
Treasury stock (16,439) -- -- -- (16,439)
Subsidiary net equity -- 178,645 34,471 (213,116) --
--------- ------- -------- -------- ---------
Total stockholders' equity 89,750 178,645 34,471 (213,116) 89,750
--------- ------- -------- -------- ---------
Total Liabilities and
stockholders' equity $ 196,117 $ 186,397 $ 54,228 $ (195,623) $ 241,119
========== ========= ========= ========== ==========
</TABLE>
A-31
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
($ in thousands) December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C>
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- ------------ ------------ ------- -----
ASSETS:
Current Assets:
Cash $ 18 $ 6,260 $ 17,492 $ -- $ 23,770
Accounts receivable, net -- 4,564 14,823 -- 19,387
Other receivables 291 578 234 -- 1,103
Deferred income taxes 779 727 -- -- 1,506
Prepaid expenses and
other current assets 24 1,098 654 -- 1,776
--------- ------- ------- -------- ---------
Total current assets 1,112 13,227 33,203 -- 47,542
--------- ------- ------- -------- ---------
Property and equipment:
Equipment, furniture and fixtures -- 5,970 26,703 -- 32,673
Leasehold improvements -- 515 16 -- 531
--------- ------- ------- -------- ---------
-- 6,485 26,719 -- 33,204
Less accumulated depreciation
and amortization -- (4,646) (8,851) -- (13,497)
--------- ------- ------- -------- ---------
Property and equipment, net -- 1,839 17,868 -- 19,707
--------- ------- ------- -------- ---------
Investment in subsidiaries and other 175,082 24,376 -- (187,153) 12,305
investments
Goodwill, at cost, net of amortization -- 143,790 33 -- 143,823
Other noncurrent assets 344 1,721 384 -- 2,449
--------- ------- ------- -------- ---------
Total Assets $ 176,538 $ 184,953 $ 51,488 $(187,153) $ 225,826
========== =========== ========= ========= ==========
LIABILITIES:
Current Liabilities:
Current portion of long-term debt $ 9,800 $ 6 $ 1,332 $ -- $ 11,138
Accounts payable -- 3,439 1,947 -- 5,386
Accrued expenses 3,367 2,563 14,929 -- 20,85
--------- ------- ------- -------- ---------
Total current liabilities 13,167 6,008 18,208 -- 37,383
--------- ------- ------- -------- ---------
Long-term debt, net of current portion 69,200 161 1,837 -- 71,198
Deferred income taxes 2,107 3,702 -- -- 5,809
--------- ------- ------- -------- ---------
Total liabilities 84,474 9,871 20,045 -- 114,390
--------- ------- ------- -------- ---------
Minority interest -- -- -- 19,372 19,372
STOCKHOLDERS' EQUITY:
Common stock 193 -- -- -- 193
Capital in excess of par value 84,050 -- -- -- 84,050
Accumulated earnings 7,821 -- -- -- 7,821
Subsidiary net equity -- 175,082 31,443 (206,525) --
--------- ------- ------- -------- ---------
Total stockholders' equity 92,064 175,082 31,443 (206,525) 92,064
--------- ------- ------- -------- ---------
Total Liabilities and
stockholders' equity $ 176,538 $ 184,953 $ 51,488 $ (187,153) $ 225,826
========== =========== ========= ========== ==========
</TABLE>
A-32
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
($ in thousands) Year Ended December 31, 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- ------------ ------------ ------- -----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in)
operating activities $ (10,215) $ 9,608 $ 46,158 $ -- $ 45,551
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of equipment and leasehold
improvements -- (2,000) (3,213) -- (5,213)
Proceeds from sales of equipment -- 179 45 -- 224
Distributions from subsidiaries 26,228 16,665 -- (42,893) --
Investments 408 2,940 -- -- 2,532
Other 22 166 127 -- 315
--------- ------- ------- -------- ---------
Net cash provided by (used in)
investing activities 25,842 17,950 (3,041) (42,893) (2,142)
--------- ------- ------- -------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on notes payable exclusive of
interest (79,000) (5) (1,479) -- (80,484)
Borrowings on notes payable 100,000 -- 25 -- 100,025
Distributions to minority interest -- -- -- (25,799) (25,799)
Debt issuance costs (4,417) -- -- -- (4,417)
Contributions by minority interest -- -- 72 -- 72
Exercise of stock options 9 -- -- -- 9
Distributions to equity owners -- (26,228) (42,464) 68,692 --
--------- ------- ------- -------- ---------
Net cash provided by (used in)
financing activities 153 (26,233) (43,846) 42,893 (27,033)
--------- ------- ------- -------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 15,780 1,325 (729) -- 16,376
Cash and cash equivalents, beginning
of period 18 6,260 17,492 -- 23,770
--------- ------- ------- -------- ---------
Cash and cash equivalents, end of
period $ 15,798 $ 7,585 $ 16,763 $ -- $ 40,146
========= ======== ========= ========== ==========
</TABLE>
A-33
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
($ in thousands) Year Ended December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C>
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
--------------------------- ------------ ------- -----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in)
operating activities $ (9,441) $ 14,879 $ 46,255 $ -- $ 51,693
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of lithotripter entities -- (20,217) -- -- (20,217)
Purchases of equipment and leasehold
improvements -- (1,516) (3,030) -- (4,546)
Proceeds from sales of equipment -- 30 -- -- 30
Distributions from subsidiaries 6,865 16,667 -- (23,532) --
Investments -- 1,690 -- -- 1,690
Other -- 94 -- -- 94
Net cash provided by (used in)
investing activities 6,885 (3,252) (3,030) (23,532) (22,949)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on notes payable exclusive of
interest (47,750) (1,100) (1,478) -- (50,328)
Borrowings on notes payable 50,000 -- 1,201 -- 51,201
Distributions to minority interest -- -- -- (28,667) (28,667)
Contributions by minority interest -- -- 2,381 -- 2,381
Exercise of stock options 343 -- -- -- 343
Distributions to equity owners -- (6,865) (45,334) 52,199 --
Net cash provided by (used in)
financing activities 2,593 (7,965) (43,230) 23,532 (25,070)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 17 3,662 (5) -- 3,674
Cash and cash equivalents, beginning
of period 1 2,598 17,497 -- 20,096
Cash and cash equivalents, end of
period $ 18 $ 6,260 $ 17,492 $ -- $ 23,770
=========== ========= ========= ========== ==========
</TABLE>
A-34
<PAGE>
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
($ in thousands)
Year Ended December 31, 1996
<TABLE>
<S> <C> <C> <C> <C> <C>
Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
Services, Inc. Subsidiaries Subsidiaries Entries Total
-------------- ------------ ------------ ------- -----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in)
operating activities $ (4,310) $ 7,912 $ 40,735 $ -- $ 44,337
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of lithotripter entities -- (66,742) -- -- (66,742)
Purchases of equipment and leasehold
improvements -- (1,131) (1,395) -- (2,526)
Deferred payments on lithotripter
entities -- (3,387) -- -- (3,387)
Proceeds from sales of equipment -- -- 6 -- 6
Contributions to subsidiaries (57,510) -- -- 57,510 --
Distributions from subsidiaries -- 7,180 -- (7,180) --
Investments -- 1,257 -- -- 1,257
Other -- (378) -- -- (378)
Net cash provided by (used in)
investing activities (57,510) (63,201) (1,389) 50,330 (71,770)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on notes payable exclusive
of interest (12,300) (1,515) (1,536) -- (15,351)
Borrowings on notes payable 74,000 -- -- -- 74,000
Distributions to minority interest -- -- -- (13,440) (13,440)
Contributions from parent -- 57,510 -- (57,510) --
Debt issuance costs (2,735) -- -- -- (2,735)
Exercise of stock options 363 -- -- -- 363
Distributions to equity owners -- -- (20,620) 20,620 --
Net cash provided by (used in)
financing activities 59,328 55,995 (22,156) (50,330) 42,837
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,492) 706 17,190 -- 15,404
Cash and cash equivalents, beginning
of period 2,493 1,892 307 -- 4,692
Cash and cash equivalents, end of
period $ 1 $ 2,598 $ 17,497 $ -- $ 20,096
========== ========= ========= ========= ==========
</TABLE>
A-35
<PAGE>
________________________
Name of Prospective Assignee
PACIFIC MEDICAL LIMITED PARTNERSHIP
A Limited Partnership Formed Under the Laws of Hawaii
CONFIDENTIAL ASSIGNMENT SUMMARY
Sale by Lithotripters, Inc.
of
6 Units of Limited Partnership Interest
THIS SUMMARY IS PROVIDED TO THE PROSPECTIVE ASSIGNEE 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 HIM OR IT TO PROVIDE ADVICE
WITH RESPECT TO THE MATTERS HEREIN ADDRESSED.
MEDTECH INVESTMENTS, INC.
Exclusive Sales Agent
2008 Litho Place
Fayetteville, North Carolina 28304
1-800-682-7971
<PAGE>
The Date of this Summary is July 13, 1998
SUMMARY OF ASSIGNMENT OF LIMITED PARTNERSHIP
INTERESTS OF PACIFIC MEDICAL LIMITED PARTNERSHIP
Lithotripters, Inc. ("Litho"), a North Carolina corporation, and the
general partner of Pacific Medical Limited Partnership, a Hawaii
limited partnership (the "Partnership"), hereby offers for sale and
assignment on the terms set forth herein, a maximum of 6 units of
limited partnership interest (collectively, the "Partnership
Interests") in the Partnership issued to and held by Litho. Each
Partnership Interest represents a 1% economic interest in the
Partnership, and the Partnership Interests are offered for assignment
at a price per Partnership Interest of $5,000 in cash payable to
Litho, plus a personal guaranty of 1% of the Partnership's obligations
under the loan of up to $1,652,014 from First Citizens Bank & Trust
Company (the "Loan") (up to a $16,520.14 principal guaranty obligation
per 1% Partnership Interest). Prospective assignees who meet certain
requirements may be able to fund all or a portion of their Partnership
Interest purchase price with the proceeds of certain third-party
financing. See "The Offering - Limited Partner Loans" below. The
Partnership owns and operates a Lithostar second generation
extracorporeal shock-wave lithotripter for the lithotripsy of kidney
stones housed in a self-propelled mobile coach servicing the island of
Oahu, Hawaii.
As the Partnership Interests being offered are owned by Litho, Litho
(not the Partnership) will receive any proceeds from the sale of such
Partnership Interests. Partnership Interests may only be purchased by
persons meeting certain suitability standards as provided herein. See
"Terms of the Offering - Suitability Standards." An investment in the
Partnership Interests is a long-term investment and should not be made
by persons who need liquidity in their investments.
THE PARTNERSHIP INTERESTS ARE BEING OFFERED PURSUANT TO AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND APPLICABLE STATE SECURITIES LAWS. A REGISTRATION
STATEMENT RELATING TO THESE SECURITIES HAS NOT BEEN FILED WITH ANY
STATE SECURITIES AGENCY OR WITH THE SECURITIES AND EXCHANGE
COMMISSION. ______________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
REGULATORY BODY HAS PASSED UPON THE VALUE OF THE PARTNERSHIP
INTERESTS, MADE ANY RECOMMENDATIONS AS TO THEIR PURCHASE, APPROVED OR
DISAPPROVED THE SALE, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS
SUMMARY. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
______________
2
<PAGE>
THE PARTNERSHIP INTERESTS 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 THE
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. NO PUBLIC OR OTHER MARKET EXISTS OR WILL DEVELOP
FOR THE PARTNERSHIP INTERESTS. PARTNERSHIP INTERESTS 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 VARIOUS STATE
SECURITIES LAWS. INVESTORS SHOULD PROCEED ONLY ON THE ASSUMPTION THAT
THEY MAY HAVE TO BEAR THE ECONOMIC RISK OF AN INVESTMENT IN THE
PARTNERSHIP INTERESTS FOR AN INDEFINITE PERIOD OF TIME.
_______________
OFFERING MEMORANDUM AND CERTAIN SUPPLEMENTAL INFORMATION
The sole purpose of this summary (the "Summary") is to set forth the
terms and conditions of the sale and assignment of the Partnership
Interests in the Partnership by Litho, and to provide information
concerning the Partnership's operations since the closing on April 1,
1996 of the Partnership's initial offering of limited partnership
interests (the "Offering"). The terms of the Partnership's Offering
and a description of its business and the risks associated with an
investment in the Partnership are set forth in the Partnership's
Confidential Private Placement Memorandum dated January 8, 1996, as
amended and as supplemented (the "Memorandum"), and are incorporated
herein by reference. A copy of the Memorandum accompanies this
Summary. Prospective assignees are also urged to review carefully the
Partnership's Agreement of Limited Partnership included as Appendix B
to the Memorandum (the "Partnership Agreement"). Capitalized terms
used herein and not otherwise defined shall have the meanings set
forth in the Memorandum.
IN MAKING AN INVESTMENT DECISION, PROSPECTIVE ASSIGNEES
MUST RELY ON THEIR OWN EXAMINATION OF THE PARTNERSHIP, ITS BUSINESS
AND OPERATIONS. PROSPECTIVE ASSIGNEES SHOULD NOTE THAT AN
INVESTMENT IN THE PARTNERSHIP INTERESTS IS SUBJECT TO CERTAIN RISKS.
SEE "RISK FACTORS" IN THE MEMORANDUM.
Between January 8, 1996 and the closing of the Offering, certain terms
of the Offering changed as reflected in supplements to the Memorandum,
copies of which are herewith provided and should be carefully
reviewed. In summary, the First Supplement dated February 23, 1996,
provided the following clarifications and amendments to the
Memorandum:
(i) Professional Liability Insurance -- Prior to beginning business
operations, the Partnership agreed to acquire professional liability
insurance covering
3
<PAGE>
itself and its employees in an amount of $3,000,000 per claim,
$5,000,000 in the aggregate. Such insurance is in effect as of the
date of this Summary.
(ii) Lithostar Service Contract -- The Siemens bid of $120,000 per
year for the Lithostar maintenance contract was accepted by the
Partnership. Under the Siemens contract, most maintenance during the
first year of operation is covered by a warranty. Service expenditures
in the initial year are expected to be limited to the estimated
$10,000 cost of shock tube replacements which are not covered by the
manufacturer's warranty.
(iii) Management Fee -- The Memorandum disclosed that Litho, in its
capacity as the management agent of the Partnership, would receive a
management fee from the Partnership equal to the greater of $8,000 per
month or 7.5% of Partnership net cash flow per month. Litho agreed to
accept a management fee of 7.5% of Partnership net cash flow per month
with no guaranteed minimum amount.
(iv) Partnership Books, Billings and Collection -- Except as otherwise
required by federal rules and regulations regarding government program
patients, the Partnership ordinarily would maintain clinic books and
records, and provide all billing and collection services.
(v) Noncompetition - Litho and its Affiliates agreed that, during the
life of the Partnership, they would not own, operate or manage a
competing lithotripsy business on the islands of Hawaii.
(vi) Service Area -- The Partnership's mobile service area will be
limited to the island of Oahu.
(vii) Extension of Offering Termination Date -- The First Supplement
extended the original offering termination date from February 23, 1996
to March 16, 1996.
The Second Supplement dated March 15, 1996 further extended the
offering termination date to April 1, 1996. The Third Supplement dated
April 1, 1996 closed the Offering effective at 5:00 p.m., Hawaii time,
April 1, 1996. Subsequent to the closing of the Offering, and pursuant
to the terms of the Memorandum, the Partnership continued to solicit
subscriptions for unsold Units until April 15, 1996. See "The
Partnership - Closing of the Partnership's Offering" below.
Effective April 26, 1996, the former shareholders of Litho listed in
the Memorandum sold all of their shares of Litho stock to Prime
Medical Services, Inc., a Delaware corporation ("Prime"). Since the
date of the sale, Litho's management has undergone certain changes as
discussed in more detail below. See "The Partnership - Management".
4
<PAGE>
Following the Closing, the Partnership also negotiated certain
modifications to the terms of the Loan. See "Sources and Applications
of Funds" below.
THE PARTNERSHIP
The Partnership was organized and created under the Hawaii Uniform
Limited Partnership Act, as amended, on December 14, 1995. Litho is
the general partner of the Partnership and is a wholly-owned
subsidiary of Prime. Litho currently holds a 20% economic interest in
the Partnership in its capacity as the general partner, and the
existing limited partners, including Litho, collectively, hold the
remaining 80% economic interest in the form of limited partner
interests in the Partnership. Litho holds an aggregate 21% limited
partner interest in the Partnership, and affiliates of Prime and Litho
hold an aggregate 4% limited partner interest in the Partnership. In
the event all the Partnership Interests hereby offered are assigned,
Litho will continue to own a 15% limited partnership interest in the
Partnership. The principal address of the Partnership and Litho is
2008 Litho Place, Fayetteville, North Carolina 28304. The telephone
number of the Partnership and Litho is (800) 682-7971.
Closing of the Partnership's Offering
The Offering initially closed on April 1, 1996, with continued
solicitation activity through April 15, 1998. In total, the
Partnership sold 80 units of limited partnership interest to 35
investors (including Litho and its Affiliates) for $190,750 in cash
and $1,321,611.20 in guarantees of Partnership principal obligations
under the Loan (up to $1,652,014). Because the Partnership had not
received its CON as of the closing, the subscription funds and
guarantees of the Limited Partners remained in escrow with the Escrow
Agent in accordance with the terms of the Offering pending receipt of
the CON. See "Regulation - State Issues" and "Terms of the Offering -
Extended Escrow" in the Memorandum.
Partnership Operations
Following the grant of a CON to the Partnership in March, 1997, the
Partnership notified the Escrow Agent and the subscription funds of
the Limited Partners and the Loan proceeds were released to the
Partnership. The Partnership's Lithostar was acquired from Siemens in
September, 1997 and is covered by a manufacturer's warranty until
September 4, 1998 for most repairs and maintenance. The Partnership's
Lithostar is housed in a mobile coach manufactured by AK Associates,
Inc., an Affiliate of Litho (the "AK Coach"). In Litho's opinion, the
AK Coach is better suited for the Partnership's mobile operations than
the Calumet Coach originally anticipated to be purchased for the
Lithostar. The AK Coach is 40' long, 8' wide and 13' 6" high. It is
equipped with complete HVAC and a humidifying system. The AK Coach is
fully wired and includes full lighting with emergency battery power
lighting. Four hydraulic stabilizing stands are provided, one at each
corner of the unit, to level the AK Coach at each treatment site. The
AK Coach includes a
5
<PAGE>
2,000 pound capacity patient lift platform and is warranted against
certain defects for a period of one year from the date of purchase.
The Partnership's lithotripsy operations commenced on September 5,
1997. The Partnership is now a party to contracts with several
hospitals for the provision of lithotripsy services in the Service
Area, including Castle Medical Center and Wahiwa General Hospital
pursuant to which the Partnership is responsible for billing and
collecting from private insurance payors and the hospitals bill and
collect from government program payors. The contract with Castle
Medical Center is presently being renegotiated to convert the
agreement from a services arrangement to a lease arrangement pursuant
to which the Partnership would lease the Lithostar Mobile System to
the hospital for a fixed monthly rental fee.
The Partnership also has entered into agreements with St. Francis
Medical Center and St. Francis-West pursuant to which the Partnership
receives a portion of the per procedure treatment fee and the
hospitals are responsible for billing and collecting from all
insurance program payors. The Partnership and Kaiser Permanente are
also presently negotiating a services agreement and the Partnership
has already began lithotripsy operations at Kaiser under the terms of
a letter of intent providing for per procedure payments to the
Partnership.
The contract terms are primarily for one year and renew automatically
for successive periods unless terminated by either party. Insurance
contracts with the major payors covering the Service Area have been
completed with a per case treatment fee payable to the Partnership.
The treatment fees vary from insurance company to insurance company,
and the General Partner has agreed on behalf of the Partnership to the
rates in each contract.
MANAGEMENT
Since the original date of the Memorandum, the former shareholders of
Litho listed in the Memorandum sold all of their shares of Litho stock
to Prime. Prime is the largest provider of lithotripsy services in the
United States and owns interests in and/or manages a total of 62
lithotripters, of which 55 are mobile and seven are fixed site.
Prime's lithotripters performed approximately 20% of the estimated
180,000 lithotripsy procedures in the United States in 1997. Prime is
a public company listed on NASDAQ and is the sole shareholder of
Litho. Certain changes have occurred in Litho's management from the
description in the Memorandum. See "The General Partner" in the
Memorandum. Dr. Jenkins remains a Director and is the President and
Chief Executive Officer of Litho. He also serves as Prime's President
and Chief Executive Officer and is a member of its Board of Directors.
Other senior management positions at Litho are currently held as
follows:
Name Offices Held
Kenneth S. Shifrin Director
Cheryl L. Williams Vice President and Director
Philip J. Gallina Secretary and Treasurer
6
<PAGE>
The Memorandum discusses the credentials of all current members of
Litho's senior management team except Mr. Shifrin and Ms. Williams.
Mr. Shifrin is a Director and Chairman of Prime's Board of Directors
and is the Chairman and Chief Executive Officer of American Physicians
Service Group, Inc. ("APS") with whom he has held several positions
since February 1985. Ms. Williams has held financial positions with
APS Systems, Inc. (a wholly-owned subsidiary of APS) and Fairchild
Aircraft Corporation and presently also serves as Prime's Chief
Financial Officer, Vice President-Finance and Secretary.
REGULATORY UPDATES
Federal Issues
Health facilities, such as the Partnership, which seek reimbursement for
services covered by Medicare or Medicaid (collectively, the "Government
Programs") are subject to federal regulation. As noted in the Memorandum
(See "Regulation - Federal Issues" in the Memorandum), Congress has passed
legislation prohibiting provider self-referral of patients for "designated
health services," which include inpatient and outpatient hospital services
(42 U.S.C. Section 1395nn (Supp. 1994)) ("Stark II"). Subject to certain
exceptions, Stark II provides that if a physician (or a family member of a
physician) has a financial relationship with an entity: (i) the physician
may not make a referral to the entity for the furnishing of designated
health services reimbursable under the Government Programs; and (ii) the
entity may not bill Government Programs, any individual or any third-party
payor for designated health services furnished pursuant to a prohibited
referral. The prohibitions of Stark II only apply to the treatment of
Government Program patients, and have no application to services performed
for non-government program patients. Entities and physicians committing an
act in violation of Stark II are required to refund amounts collected in
violation of the statute and also are subject to civil monetary penalties
and exclusion from the Government Programs.
As discussed in the Memorandum, on October 19, 1995, the House of
Representatives passed H.R. 2425, titled "An Act to amend Title XVIII
of the Social Security Act to preserve and reform the Medicare
program." Section 15202 of that act attempted to revise the definition
of "designated health services" subject to Stark II prohibitions to
exclude inpatient and outpatient hospital services. However, on
December 6, 1995 H.R. 2425 (which was ultimately incorporated into the
Seven Year Budget Reconciliation Act of 1995 (H.R. 2491)), was vetoed
by President Clinton resulting in no substantive changes to Stark II.
Currently, the Government Programs only reimburse for lithotripsy if
the service is provided through a hospital. Accordingly, in most
cases, lithotripsy services provided by the Partnership are provided
"under arrangements" with hospitals, whereby the treatment services
are billed by the contracting hospitals in their names and under their
Government Program provider numbers.
7
<PAGE>
Many key terms in Stark II are not adequately defined and the statute
is silent regarding its application to health care providers, such as
the Partnership, contracting "under arrangements" with hospitals for
the provision of outpatient services such as lithotripsy. In the past,
Litho has interpreted Stark II consistent with the informal view of
the General Counsel for the United States Department of Health and
Human Services, and concluded that the statute did not apply to the
Partnership's method of conducting business. Based upon a reasonable
interpretation of Stark II, by referring a patient to a hospital
furnishing the outpatient lithotripsy services "under arrangements"
with the Partnership, a physician investor in the Partnership is not
making a referral to an entity (the hospital) in which he or she has a
financial relationship.
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 Stark II (the "Proposed Stark II
Regulations"). The Proposed Stark II Regulations and HCFA's
accompanying commentary apply the physician referral prohibitions of
Stark II to the Partnership's present practice of contracting "under
arrangements" with hospitals for treatment and billing of Government
Program patients. Under this interpretation, physician Limited Partner
referrals of Government Program patients to contracting hospitals
would be prohibited.
At the present time the regulations are only proposed and HCFA has
solicited public comments on the regulations. Litho cannot predict
when final regulations will be issued or the substance of the final
regulations, but the interpretive provisions of the Proposed Stark II
Regulations may be viewed as HCFA's interim enforcement position until
final regulations are issued. Litho will continue to work through the
American Lithotripsy Association to encourage the adoption of
legislation supportive of urologists' ability to lawfully maintain
ownership interests in ventures that provide lithotripsy services to
all of their patients. Additionally, Litho will continue to carefully
review the Proposed Stark II Regulations and accompanying HCFA
commentary, and explore other alternative plans of operations that
would allow the Partnership to operate in compliance with Stark II and
its final regulations.
In the event Litho is unable to devise a plan pursuant to which the
Partnership may operate in compliance with Stark II and its final
regulations, Litho is obligated under the Partnership Agreement either
(i) to purchase (or cause the sale of ) the Partnership Interests of
all the Limited Partners at their Capital Account values, or (ii)
dissolve and liquidate the Partnership. See "Summary of the
Partnership Agreement - Optional Purchase of Limited Partner
Interests" in the Memorandum. Furthermore, as noted above, HCFA's
adoption of the current Proposed Stark II Regulations as final will
mean that the Partnership and its physician Limited Partners are in
violation of Stark II. In such instance, the Partnership and/or the
physician Limited Partners may be required to refund any amounts
collected from Government Program patients in violation of the
statute, and may be subject to potential civil monetary penalties and
possible exclusion from the Government Programs.
8
<PAGE>
In any event, prospective assignees should consider that whenever an
additional offering of ownership interests is made available to
persons with the potential to refer patients for services, there is a
possibility that HCFA may question whether the ownership interests are
being provided in exchange for potential referrals by the new owners
or for a legitimate business reason. Remuneration, which can include
the provision of an ownership interest in a facility to which a person
would refer patients for services, may constitute a violation of the
federal fraud and abuse statute (Section 1128B of the Social Security
Act). Whether the offering of ownership interests to additional
investors who may refer patients to the Partnership might constitute a
violation of this legislation 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 purchasers of the
Partnership Interests for any referrals of patients, and the existence
in Litho's view of valid business reasons to assign the Partnership
Interests unrelated to the prospective assignee's ability to refer
patients, form the basis of Litho's position that this offering is in
compliance with legal requirements; however, HCFA has not been
requested to review this offering (or offerings of this type to
additional investors) to determine whether it agrees with Litho's
position in this regard. Thus, federal and state regulatory
authorities may interpret this offering as a means to illegally
influence the referral patterns of the prospective assignees of the
Partnership Interests. Because there is no legal precedent
interpreting circumstances similar to these facts, it is not possible
to predict with certainty how this issue may be resolved if litigated.
SOURCES AND APPLICATIONS OF FUNDS
The following table sets forth the sources of the available funds
after the closing of the Offering in April 1, 1996 and their use by
the Partnership through the date of start-up of operations in
September 1997:
Sources of Funds
Limited Partners Contribution (1) 190,750 (11.29%)
General Partner Contribution (1) 47,688 ( 2.82%)
Loan (2) 1,451,816 (85.89%)
TOTAL SOURCES $1,690,254 (100.00%)
Application of Funds
Lithostar (2) 850,000 (50.29%)
Coach (2) 290,373 (17.18%)
Hawaii Use Tax (2) 46,224 ( 2.73%)
Shipping (2) 15,219 ( .90%)
Organizational and Start-up Costs(3) 40,000 ( 2.37%)
Syndication Costs (4) 31,610 ( 1.87%)
Working Capital and Reserve (5) 416,828 (24.66%)
TOTAL APPLICATIONS $1,690,254 (100.00%)
9
<PAGE>
Notes to Sources and Applications of Funds Table
(1) Represents the actual cash proceeds from the Partnership's initial
Offering.
(2) The Partnership used the Loan proceeds to acquire the Lithostar
($850,000), the AK Coach (including federal excise taxes)($290,373),
to pay the actual Hawaii use tax on the AK Coach and the Lithostar
($46,224) and to ship the AK Coach and the Lithostar to Hawaii
($15,219). The purchase prices listed for the Lithostar and AK Coach
differ from the prices listed for the equipment in the Memorandum. The
differences in the prices reflects discounts on the Lithostar and AK
Coach negotiated by Litho and made available to the Partnership. The
Partnership has since made a draw of $24,525 against the working
capital line provided by the Bank. See Note 5 below.
(3) This amount includes the (i) legal and accounting costs associated
with organizing the Partnership, preparing the Partnership Agreement,
the Management Agreement and other ancillary Partnership documents,
(ii) management fees paid to Litho prior to the commencement of the
Partnership's operations and (iii) all out-of-pocket expenses incurred
by the General Partner and its Affiliates associated with the initial
start-up of the Partnership's operations.
(4) Includes commissions paid to the Sales Agent, reimbursement to the
Sales Agent for out-of- pocket expenses incurred in selling the Units
in the Offering and legal and accounting costs associated with the
preparation of the Memorandum.
(5) The Partnership has extended the term of the credit line and
interest only payment period under the Loan until August 25, 1998, at
which time payments will be due in accordance with the 42 month
schedule outlined in the Memorandum. See "Proposed Activities -
Funding for Partnership Activities - General" in the Memorandum. The
Partnership to date has borrowed $24,525 of the $250,000 available
limit under the working capital credit line and has made a principal
prepayment of $100,000 on April 16, 1998. As of the date of this
Summary, the Loan balance is approximately $1,125,490.
[The remainder of this page is intentionally left blank.]
10
<PAGE>
FINANCIAL CONDITION OF THE PARTNERSHIP
Set forth below are the Partnership's internally prepared, accrual
based (i) Income Statement for the year ended December 31, 1997 and
for the five-month period ended May 31, 1998 and (ii) Balance Sheet as
of December 31, 1997 and as of May 31, 1998.
PACIFIC MEDICAL LIMITED PARTNERSHIP
STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C>
Year Ended Five-Month Period Ended
December 31, 1997 May 31, 1998
Percentage of Percentage of
Amount Total Revenue Amount Total Revenue
Operating Revenue $308,025 100 $546,795 100
Salaries and Benefits 51,672 16.8 57,305 10.5
Mobile Unit Expense 2,916 .9 45,087 8.2
Travel and Entertainment 44,770 14.5 14,434 2.6
Legal and Professional Fees 10,013 3.3 6,051 1.1
Management Overhead Allocation(1) 15,503 5.0 36,548 6.7
Depreciation and Amortization 135,944 44.1 105,494 19.3
Other Administrative Expenses 20,834 6.8 16,252 3.0
Total $281,652 91.4 $281,171 51.4
Net Operating Income $ 26,373 8.6 $265,624 48.7
Other Income 2,846 .9 12,558 2.3
Other Income, Net (29,956) 9.7 ($29,914) 5.5
Net Income ($ 3,583) 1.2 $235,710 43.1
</TABLE>
(1) The amount shown represents the management fees paid to Lithotripters,
Inc. as management agent for the Partnership.
11
<PAGE>
PACIFIC MEDICAL LIMITED PARTNERSHIP
BALANCE SHEET
As of 12/31/97 As of 5/31/98
Cash $25,938 $72,241
Accounts Receivable 308,025 518,380
Prepaid Items 3,745 3,437
Property/Equipment (Net) 1,077,320 975,159
Organizational Costs (Net) 36,666 33,332
Total Assets $1,451,694 $1,602,549
Accounts Payable 12,224 3,284
Accrued Liabilities 20,964 81,943
Long Term Debt* 1,201,341 1,125,490
Due to Affiliates 4,121 2,877
Retained Earnings (3,583) (3,583)
Net Income 0 235,710
Partnership Capital** 216,627 206,828
Partners' Distributions*** 0 (50,000)
Total Liabilities and Partner's Capital $1,451,694 $1,602,549
* See note 5 in Sources and Applications of Funds Above.
** The amount of Partnership Capital shown is the amount of initial
Partner Capital Contributions less the syndication costs for the
Offering, plus interest earned thereon.
*** Although the Partnership made a cash distribution to its Partners
at the end of the first quarter of 1998, no assurance can be given
that distributions in the same or any amount will be made in the
future. See "Summary of the Partnership Agreement - Profits, Losses
and Distributions" in the Memorandum.
12
<PAGE>
THE OFFERING
The Partnership Interests and Purchase Price
Litho is hereby offering for sale and assignment Partnership Interests
which in the aggregate represent a 6% economic interest in the
Partnership. Each Partnership Interest represents a 1% economic
interest in the Partnership. The price for each Partnership Interest
is $5,000 in cash payable at assignment, plus the assumption of
Litho's guaranty of the Partnership's principal obligations
attributable to the purchased Partnership Interests (up to a
$16,520.14 principal guaranty obligation per 1% Partnership Interest).
The Guaranty is included in the assignment materials accompanying this
Summary (the "Assignment Packet"). Litho has arranged for financing of
the Partnership Interests' purchase price with First Citizens Bank &
Trust Company, Fayetteville, North Carolina (the "Bank"). Therefore,
in lieu of paying the purchase price in cash, prospective assignees
may execute and deliver to the Sales Agent upon delivery of their
Assignment Packets, a Limited Partner Note, a Loan and Security
Agreement, Security Agreement and two Uniform Commercial Code
Financing Statements ("UCC-1's") (collectively, the "Loan Documents").
See "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 A, and the UCC-l's
attached as a part of the Assignment Packet. The cash portion of the
purchase price for the Partnership Interests has been arbitrarily
determined by Litho and is not necessarily indicative of their value.
No assurance can be given that the Partnership Interests, if and when
transferable, could be sold for the price set forth herein or for any
amount. For each 1% Partnership Interest it owns, Litho paid $2,230 in
cash and delivered a guaranty of 1% of the Loan obligations. Litho
purchased its Partnership Interests on the same terms as the other
Limited Partners except that the cash purchase price it paid was
reduced by $270 per 1% limited partnership unit because no sales
commission was payable on purchases by Litho or its Affiliates in the
Offering.
The cash purchase price, the Guaranties and, if applicable, the Loan
Documents of the prospective assignees will be held in an interest
bearing escrow account with the Bank, until either the application for
assignment is accepted by Litho and approved by the Bank, Litho (or
the Bank, in the case of a prospective assignee seeking to finance all
or a portion of his or its Partnership Interest purchase price)
rejects the application or this assignment offering is terminated.
A prospective assignee who pays his or its purchase price with a check
upon submission of his or its Assignment Packet, and whose assignment
materials are received and accepted by Litho, will become a Limited
Partner in the Partnership. Acceptance of the assignment by Litho is
conditioned on (i) the satisfaction of the suitability standards for
an investor in the Partnership as set forth below and (ii) the
prospective assignee's Guaranty being approved by the Bank. Upon
admission as a Limited Partner, the prospective assignee's cash funds
(plus interest) will be released from escrow to Litho and the
Guaranties will be released to the Bank. If a prospective assignee
finances his or its purchase price with the proceeds of a Limited
Partner Note, Litho's decision to sell and assign the Partnership
Interest to such prospective assignee will be further conditioned upon
13
<PAGE>
the Bank's approval of the prospective assignee's Loan Documents and
the funding of the loan contemplated thereby. If the prospective
assignee is acceptable to Litho, after receipt of the Bank's approval
of his or its Loan Documents, Litho will inform the Escrow Agent that
it will assign the Partnership Interest to the prospective assignee
and the Escrow Agent will release the Loan Documents to the Bank and
the Bank will pay the proceeds from the Limited Partner Loan to Litho.
The prospective assignee will then be assigned the Partnership
Interest and become a Limited Partner in the Partnership at the time
the Bank releases the proceeds of his or its Limited Partner Loan to
Litho. In the event an application is not accepted, all cash funds
(without interest), the Guaranty and Loan Documents, if any, held in
escrow will be returned to the rejected applicant. Notice of
acceptance of the assignment materials and admission of a prospective
assignee as a Limited Partner in the Partnership will be furnished
promptly after the Assignment Closing (as defined below).
Applications for the sale and assignment of Partnership Interests will
be taken by MedTech Investments, Inc., a North Carolina corporation
and an Affiliate of Litho and the Partnership (the "Sales Agent"). The
Sales Agent has entered into a Sales Agency Agreement with Litho
pursuant to which the Sales Agent has agreed to act as exclusive agent
for the assignment of the Partnership Interests. The assignment period
will commence on the date hereof and will terminate at 5:00 p.m.,
Honolulu, Hawaii time on August 24, 1998 (or earlier in the discretion
of Litho), unless extended at the discretion of Litho for an
additional period not to exceed 180 days (the "Assignment Closing").
Limited Partner Loans
The purchase price for the Partnership Interests is payable in cash
with the prospective assignee's cash funds or the proceeds of a
Limited Partner Note. Financing under the Limited Partner Note was
arranged by Litho with the Bank as provided in the Bank Commitment,
attached hereto as Appendix A. If the prospective assignee wishes to
finance the purchase price of his or its Partnership Interest as
provided herein, he or she must deliver to the Sales Agent upon
submission of his or its Assignment Packet an executed Limited Partner
Note and Note Addendum, the form of which are attached as Exhibit A to
the Bank Commitment, a Loan and Security Agreement, the form of which
is attached as Exhibit B to the Bank Commitment, a Security Agreement,
the form of which is attached as Exhibit C to the Bank Commitment and
two UCC-1's, the form of which are attached to the Assignment Packet.
The Limited Partner Note is repayable in 12 installments in the
respective amounts set forth in the Bank Commitment. The installments
are payable on each January 15th, April 15th, June 15th and September
15th commencing on September 15, 1998, with a 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 September 15, 2001. Interest accrues at the Bank's
"Prime Rate." 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 assignee shall 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 Bank Commitment.
14
<PAGE>
The Limited Partner Note will be secured by the cash flow
distributions of the prospective assignee'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 assignee requests the Bank to extend the
Bank Commitment to him or it if he or it 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 Litho
and Litho to acknowledge receipt thereof and (ii) the Partnership to
remit funds directly to the Bank out of the prospective assignee's
share of any distributions represented by the prospective assignee's
percentage Partnership Interest to fund installment payments due on
the prospective assignee's Limited Partner Note. See the form of the
Loan and Security Agreement attached as Exhibit B to the Bank
Commitment which is attached hereto as Appendix A.
If the prospective assignee is approved by the Bank and is acceptable
to Litho, the Escrow Agent will release the Loan Documents to the Bank
and the Bank will pay the proceeds of the Limited Partner Note to
Litho. The prospective assignee will have substantial exposure under
the Limited Partner Note. Regardless of the success of the
Partnership, the prospective assignee will remain liable to the Bank
under his or its 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 assignee is impaired or the
Bank otherwise in good faith deems 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.
THE PROSPECTIVE ASSIGNEE SHOULD REVIEW CAREFULLY ALL THE PROVISIONS
CONTAINED IN THE BANK COMMITMENT AND THE TERMS OF THE LIMITED PARTNER
NOTE AND LOAN AND SECURITY AGREEMENT WITH HIS OR ITS COUNSEL AND
FINANCIAL ADVISORS. LITHO DOES NOT ENDORSE OR RECOMMEND TO THE
PROSPECTIVE ASSIGNEES 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. 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 or Litho. In addition to the
suitability requirements discussed below and in the Memorandum, the
prospective assignee must be approved by the Bank for purposes of its
delivery of the Limited Partner Note. The Bank has established its own
criteria for approving the creditworthiness of the prospective
assignee and has not established objective minimum suitability
standards. Instead, the Bank is empowered to accept or reject the
prospective assignee. To enable the Bank and Litho to make credit and
investor decisions, respectively, the prospective assignee must
complete and deliver to Litho (i) in the case of individuals, a
Purchaser Financial Statement in the form included in the Assignment
Packet accompanying this Summary, or a substitute financial statement
containing the same information as provided therein, and pages one and
two of the prospective assignee's most recently filed Form 1040 U.S.
Individual Income Tax Return, and (ii) in the case of entities, one
copy of the prospective
15
<PAGE>
assignee s unaudited balance sheet and income statement for the past
two years, and the prospective assignee's federal income tax return.
Offering Exemption
The Partnership Interests are being offered and will be sold and
assigned in reliance on (i) the exemption from the registration
requirements of the Securities Act of 1933 provided by Section 4(1)
thereof, and (ii) the exemption from registration provided by Section
485-6(9) of the Hawaii Revised Statutes, 1968, as amended. The
suitability standards set forth below have been established in order
to comply with the terms of these offering 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, and who can bear the loss of, the
entire Partnership Interest investment. See "Risk Factors" in the
Memorandum. Each assignee must also be at least 21 years old and
otherwise duly qualified to acquire and hold limited partnership
interests. Litho reserves the right to refuse to sell and assign
Partnership Interests to any prospective assignee, subject to federal,
Hawaii and other applicable state securities laws.
Each prospective assignee must make an independent judgment, in
consultation with his or its own counsel, accountant, investment
advisor or business advisor, as to whether an investment in the
Partnership Interests is advisable. The fact that such person meets
Litho's or the Bank's suitability standards should in no way be taken
as an indication that an investment in the Partnership Interests is
advisable.
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 Partnership Interests. Transferability of
Partnership Interests is severely restricted by the Partnership
Agreement and the Assignment Agreement. See "Summary of the
Partnership Agreement" in the Memorandum.
Special Transferee Agreement
Because the Partnership Agreement does not contemplate the ownership
of limited partnership interests by a closely-held entity, the
assignment of a Partnership Interest to a prospective entity assignee
is further conditioned upon the execution of a Special Transferee
Agreement. The Special Transferee Agreement provides for certain
options and calls upon the occurrence of the dissolution of the
entity, a change in control or ownership and other events as provided
therein with respect to the Partnership Interest to be held by such
entity.
16
<PAGE>
How to Apply
Prospective assignees who meet the qualifications for investment in
the Partnership as set forth in this Summary, may apply for the
purchase and assignment of a Partnership Interest by doing the
following:
a. Executing the Assignment Agreement and Power of Attorney and the
Counterpart Signature Page to the Partnership Agreement (the forms of
which are included in the Assignment Packet accompanying this
Summary);
b. Completing, dating and signing the Guaranty (the form of which is
included in the Assignment Packet accompanying this Summary);
c. Completing, dating and signing the Questionnaire and Statement of
Assignee (the form of which is included in the Assignment Packet
accompanying this Summary);
d. Having any Purchaser Representative who has acted on behalf of the
prospective assignee in connection with the purchase and assignment
complete, date and sign the Purchaser Representative Questionnaire (a
copy of which is available upon request to Litho);
e. Either (i) in the case of individuals, completing, dating and
signing the Purchaser Financial Statement (in the form included in the
Assignment Packet), or in lieu thereof, substituting the prospective
assignee's own personal executed financial statement, as long as such
substitute statement contains the same information as in the form
provided, and attaching to the Purchaser Financial Statement or
substitute statement, as the case may be, pages one and two of the
assignee's most recently filed Form 1040 U.S. Individual Income Tax
Return, or (ii) in the case of entities, attaching one copy each of
the prospective assignee's unaudited balance sheet and income
statement for the past two years, and the prospective assignee's
income tax return;
f. If the prospective assignee is financing his or its purchase
pursuant to the 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
Assignment Packet and is attached as Exhibit A to the Bank
Commitment);
g. If the prospective assignee is financing his or its purchase
pursuant to the Limited Partner Loan, by completing and signing (but
not dating) the Loan and Security Agreement (the form of which is
included in the Assignment Packet and is attached as Exhibit B to the
Bank Commitment);
h. If the prospective assignee is financing his or its purchase
pursuant to the Limited Partner Loan, by completing and signing (but
not dating) the Security Agreement (the form
17
<PAGE>
of which is included in the Assignment Packet and is attached as
Exhibit C to the Bank Commitment);
i. If the prospective assignee is financing his or its purchase
pursuant to the Limited Partner Loan, by completing and signing two
copies of the UCC-1 (the form of which is included in the Assignment
Packet);
j. In the case of an entity assignee, dating and executing the Special
Transferee Assignee Agreement included in the Assignment Packet; and
k. Delivering or mailing all of the foregoing to the Sales Agent at
2008 Litho Place, Fayetteville, North Carolina 28304. If a prospective
assignee wishes to pay for his or its Partnership Interest in cash, he
or she should delete steps (f), (g), (h) and (i) above and instead
enclose a check in the amount of $5,000 per 1% Partnership Interest
payable to "First-Citizens as Escrow Agent for Lithotripters, Inc. -
Pacific Medical".
All information provided by prospective assignees, including
information in the Questionnaire and Statement of Assignee and any
purchaser financial information, will be kept confidential and not
disclosed except to Litho, the Partnership, the Bank and their
respective counsel and Affiliates and, if required, to governmental
and regulatory authorities. If a prospective assignee would like to
request additional information concerning the Partnership prior to
making a decision to acquire a Partnership Interest, please contact
either the Sales Agent (Jim Brady, (800) 423-1055) or Litho (Joseph
Jenkins, M.D., (800) 682-7971).
18
AGREEMENT OF LIMITED PARTNERSHIP
OF
TEXAS LITHOTRIPSY LIMITED PARTNERSHIP VII, L.P.
<PAGE>
AGREEMENT
OF LIMITED PARTNERSHIP
OF
TEXAS LITHOTRIPSY LIMITED PARTNERSHIP VII, L.P.
TABLE OF CONTENTS
Page
1. FORMATION..................................................-1-
2. NAME.......................................................-1-
3. OFFICES....................................................-1-
4. PURPOSE....................................................-2-
5. TERM.......................................................-2-
6. CERTAIN DEFINED TERMS......................................-2-
7. CAPITAL CONTRIBUTIONS AND DILUTION OFFERINGS...............-6-
8. CONDITIONS TO THE CAPITAL CONTRIBUTIONS OF CERTAIN
LIMITED PARTNERS...........................................-7-
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
GENERAL PARTNER............................................-7-
10. ADMISSION OF LIMITED PARTNERS..............................-8-
11. CAPITAL ACCOUNTS...........................................-9-
12. ALLOCATIONS...............................................-10-
13. DISTRIBUTIONS.............................................-11-
14. RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS................-11-
15. LIMITED LIABILITY.........................................-13-
16. TRANSFER OF INTERESTS AND ADMISSION OF PARTNERS...........-13-
17. OPTIONAL PURCHASE OF LIMITED PARTNERSHIP INTERESTS ON
CERTAIN EVENTS............................................-18-
i
<PAGE>
18. SALE, ASSIGNMENT OR OTHER TRANSFER OF THE GENERAL
PARTNER'S INTEREST........................................-23-
19. TERMINATION OF THE SERVICES OF THE GENERAL PARTNER........-23-
20. MANAGEMENT AND OPERATION OF BUSINESS......................-24-
21. RESERVES..................................................-27-
22. INDEMNIFICATION AND EXCULPATION OF THE GENERAL
PARTNER...................................................-27-
23. DISSOLUTION OF THE PARTNERSHIP............................-27-
24. DISTRIBUTION UPON DISSOLUTION.............................-29-
25. BOOKS OF ACCOUNT, RECORDS AND REPORTS.....................-29-
26. NOTICES...................................................-30-
27. AMENDMENTS................................................-31-
28. LIMITATIONS ON AMENDMENTS.................................-31-
29. MEETINGS, CONSENTS AND VOTING.............................-31-
30. SUBMISSIONS TO THE LIMITED PARTNERS.......................-32-
31. ADDITIONAL DOCUMENTS......................................-32-
32. SURVIVAL OF RIGHTS........................................-32-
33. INTERPRETATION AND GOVERNING LAW..........................-32-
34. SEVERABILITY..............................................-33-
35. AGREEMENT IN COUNTERPARTS.................................-33-
36. THIRD PARTIES.............................................-33-
37. POWER OF ATTORNEY.........................................-33-
38. ARBITRATION...............................................-34-
ii
<PAGE>
39. CREDITORS.................................................-34-
SCHEDULES
Schedule A - Schedule of Partnership Interests
iii
<PAGE>
THE LIMITED PARTNERSHIP INTERESTS REPRESENTED BY THIS LIMITED PARTNERSHIP
AGREEMENT HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, UNDER THE TEXAS SECURITIES ACT, AS
AMENDED, OR UNDER SIMILAR LAWS OR ACTS OF OTHER STATES IN RELIANCE UPON
EXEMPTIONS UNDER SUCH LAWS. IN ADDITION, NO TRANSFERS OF LIMITED PARTNERSHIP
INTERESTS MAY BE MADE WITHOUT COMPLIANCE WITH THE RESTRICTIONS SET FORTH IN
ARTICLE 16 BELOW.
AGREEMENT
OF LIMITED PARTNERSHIP
OF
TEXAS LITHOTRIPSY
LIMITED PARTNERSHIP VII, L.P.
THIS AGREEMENT OF LIMITED PARTNERSHIP (the "Agreement") is made as of September
4, 1998, by and among LITHOTRIPTERS, INC., a North Carolina corporation (the
"General Partner"), and MICHAEL MADLER, a resident of the State of Texas, as the
Initial Limited Partner.
1. FORMATION.
The Partnership was formed pursuant to the filing in the Office
of the Secretary of State of Texas on or about January 5, 1998 of a
Certificate of Limited Partnership in accordance with the provisions
of the Act.
2. NAME.
2.1 The name of the Partnership is "Texas Lithotripsy Limited
Partnership VII, L.P."
2.2 The Partnership business shall be conducted under such names
as the General Partner may from time to time deem necessary or
advisable, provided that appropriate amendments to this Agreement and
all necessary filings under applicable assumed or fictitious name
statutes or the Act are first obtained.
3. OFFICES.
3.1 The principal office of the Partnership shall be at 1301
Capital of Texas Highway, Suite C-300, Austin, Texas 78746, or at such
other place as the General Partner may, from time to time, designate
by notice to the Limited Partners (the "Records Office").
-1-
<PAGE>
3.2 The Partnership may have such additional offices as the
General Partner may, from time to time, deem necessary or advisable.
4. PURPOSE.
The purpose and business of the Partnership shall be: (i) to
become a party to and the survivor of a merger whereby Texas
Lithotripsy Limited Partnership II L.P., a Texas limited partnership
("Texas II"), Texas Lithotripsy Limited Partnership IV L.P., a Texas
limited partnership ("Texas IV") and Texas ESWL/Laser Lithotripter,
Ltd., a Texas limited partnership ("ESWL") will be merged with and
into the Partnership; (ii) to continue the business of Texas II, Texas
IV and ESWL and to acquire and operate one or more additional fixed
base or mobile lithotripters (or any other renal stone treatment
equipment) for the treatment of renal stones in such location(s) as
the General Partner may determine, in its sole discretion, to be in
the best interests of the Partnership; (iii) to acquire an interest in
any business entity, including, without limitation, a limited
partnership, limited liability company or corporation, that engages in
any business activity described in this Article 4; and (iv) 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
this Agreement.
5. TERM.
The Partnership shall terminate on December 31, 2040, unless
sooner terminated as herein provided.
6. CERTAIN DEFINED TERMS.
Certain terms used in this Agreement shall have the following
meanings:
Act. The Act means the Texas Revised Limited Partnership Act, as
then in effect.
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 interest 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.
Agreement. This Agreement of Limited Partnership, as the same may
be amended from time to time.
Capital Account. The Partnership capital account of a Partner as
computed pursuant to Article 11 of this Agreement.
-2-
<PAGE>
Capital Contributions. All capital contributions made by a
Partner or his predecessor in interest which shall include, without
limitation, contributions made pursuant to Article 7 of this
Agreement.
Capital Transaction. Any transaction which, were it to generate
proceeds, would produce Partnership Sales Proceeds or Partnership
Refinancing Proceeds.
Code. The Internal Revenue Code of 1986, as amended, or
corresponding provisions of subsequent, superseding revenue laws.
Dilution Offering. As provided in Article 7.4 of this Agreement,
the future offering of additional limited partnership interests in the
Partnership as determined by the General Partner. Any successful
Dilution Offering will proportionately reduce the Percentage Interests
of the then current Partners in the Partnership.
Domestic Proceeding. Any divorce, annulment, separation or
similar domestic proceeding between a married couple.
Effective Time. The time at which the Merger becomes effective as
provided in the Merger Agreement.
Equipment. The equipment used in the operation of the
Lithotripter Systems, including the mobile transport vehicles, the
lithotripters and miscellaneous medical equipment and supplies.
ESWL. Texas ESWL/Laser Lithotripter, Ltd., a Texas limited
partnership organized and operated by its general partner, Texas
Litho, Inc., a Delaware corporation and an Affiliate of the General
Partner. Immediately prior to the Effective Time, Texas Litho, Inc.
will distribute its general partner interest in ESWL to the General
Partner.
FDA. The United States Food and Drug Administration.
General Partner. The General Partner of the Partnership,
Lithotripters, Inc., a North Carolina corporation.
Initial Limited Partner. Michael Madler, a resident of Texas and
an Affiliate of the General Partner. The Initial Limited Partner is to
be the only limited partner of the Partnership until such time as the
first new Limited Partners are admitted to the Partnership, at which
time the Initial Limited Partner shall withdraw from the Partnership.
Limited Partners. The Limited Partners will be the former limited
partners of Texas II, Texas IV and ESWL acquiring limited partner
interests in the Partnership pursuant to the Merger,
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those investors in the Units admitted to the Partnership as
limited partners and any person admitted as a limited partner in
accordance with the provisions of this Agreement.
Lithotripters. The extracorporeal shock-wave lithotripters of
Texas II, Texas IV and ESWL acquired by the Partnership in connection
with the Merger and any replacements therefor or additional
lithotripters to be purchased by the Partnership.
Lithotripter Systems. The mobile transport systems with the
installed and operational Lithotripters.
Losses. The net loss (including Net Losses from Capital
Transactions) of the Partnership for each Year of the Partnership as
determined for federal income tax purposes.
Majority in Interest of the Limited Partners. The Limited
Partners who hold more than 50% of the Percentage Interests in the
Partnership held by the Limited Partners.
Memorandum. The Confidential Private Placement Memorandum of the
Partnership dated September 4, 1998, as amended or as supplemented.
Merger. The transaction whereby Texas II, Texas IV and ESWL will
merge with and into the Partnership at the Effective Time on the terms
and conditions provided in the Merger Agreement.
Merger Agreement. The Agreement and Plan of Merger among the
Partnership, Texas II, Texas IV, ESWL and the other persons named
therein providing for the Merger.
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.
Net Losses from Capital Transactions. The losses 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
shall include Code Section 1231 assets) or as a result of or upon the
damage or destruction of such capital assets.
Offering. The offer to potential investors of up to 40 Units
pursuant to the Memorandum.
Partners. The General Partner and the Limited Partners,
collectively, where no distinction is required by the context in which
the term is used herein.
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Partnership. Texas Lithotripsy Limited Partnership VII, L.P., a
Texas limited partnership.
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 this Agreement.
Partnership Refinancing Proceeds. The cash realized from the
refinancing of Partnership assets after retirement of any secured
loans and less (i) payment of all expenses relating to the transaction
and (ii) establishment of such reasonable reserves as the General
Partner shall deem necessary or prudent to set aside for future
repairs, improvements, or equipment replacement or additions, or to
meet working capital requirements or foreseen or unforeseen future
liabilities or contingencies of the Partnership.
Partnership Sales Proceeds. The cash realized from the sale,
exchange, casualty or other disposition of all or a portion of
Partnership assets after the retirement of all secured loans and less
(i) the payment of all expenses related to the transaction and
(ii) establishment of such reasonable reserves as the General Partner
shall deem necessary or prudent to set aside for future repairs,
improvements, or equipment replacement or additions, or to meet
working capital requirements or foreseen or unforeseen future
liabilities or contingencies of the Partnership.
Percentage Interest. The interest of each Partner in the
Partnership as set forth on Schedule A hereto, which will be amended
upon the admission of the Limited Partners acquiring their Partnership
Interests in the Merger and the Offering as provided in the Merger
Agreement and the Memorandum, respectively. A Partner's Percentage
Interest may be reduced by a future Dilution Offering. Any future
adjustments in the Partners' Percentage Interests, due to future
Dilution Offerings or otherwise, will also be reflected by amendments
to Schedule A.
Profit. The net income of the Partnership (including Net Gains
from Capital Transactions) for each Year of the Partnership as
determined for federal income tax purposes.
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Pro Rata Basis. In connection with an allocation or distribution,
an allocation or distribution in proportion to the respective
Percentage Interests of the class of Partners to which reference is
made.
Sales Agency Agreement. The sales agency agreement through which
MedTech Investments, Inc., an Affiliate of the General Partner and a
broker-dealer company registered with the Securities and Exchange
commission and a member of the National Association of Securities
Dealers, Inc. shall offer and sell up to 40 Units pursuant to the
Memorandum.
Sales Commission. The $250 sales commission paid to MedTech
Investments, Inc. for each Unit sold.
Service. The Internal Revenue Service.
Texas II. Texas Lithotripsy Limited Partnership II L.P., a Texas
limited partnership organized and operated by its general partner,
Lithotripters, Inc., a North Carolina corporation
Texas IV. Texas Lithotripsy Limited Partnership IV L.P., a Texas
limited partnership organized and operated by its general partner,
Lithotripters, Inc., a North Carolina corporation.
Units. The 40 equal limited partner interests in the Partnership
offered pursuant to the Memorandum for a price per Unit of $5,688 in
cash.
Year. An annual accounting period ending on December 31 of each
year during the term of the Partnership.
7. CAPITAL CONTRIBUTIONS AND DILUTION OFFERINGS.
7.1 General Partner Contribution. The General Partner initially
will hold a 99% Percentage Interest, which interest shall be canceled
in the Merger and redetermined following the Effective Time based upon
the conversion of its general partner interests in Texas II, Texas IV
and ESWL in the Merger on the terms and conditions set forth in the
Merger Agreement.
7.2 Limited Partner Contribution. Each Limited Partner acquiring
his Partnership Interest upon the conversion of a limited partner
interest in either Texas II, Texas IV or ESWL in the Merger shall do
so upon the terms and conditions set forth in the Merger Agreement and
shall become a Limited Partner at the Effective Time. Each Limited
Partner acquiring his Units in connection with the Offering shall
contribute to the capital of the Partnership on the date of his
admission to the Partnership the cash amount set forth opposite his
name on the amendment to Schedule A to be attached hereto upon the
closing of such Offering.
7.3 No Interest. Except as otherwise provided herein, no interest
shall be paid on any contribution to the capital of the Partnership.
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7.4 Dilution Offerings. If the General Partner, in its sole
discretion, determines that it is in the best interest of the
Partnership, the General Partner may, from time to time, offer, sell
and issue, for and on behalf of the Partnership, additional limited
partnership interests in the Partnership (a "Dilution Offering") to
investors who are not already Limited Partners ("Qualified
Investors"). The primary purpose of any Dilution Offering would be to
raise additional capital for any legitimate Partnership purpose as set
forth in Article 4. Any limited partnership interests offered by the
Partnership in a Dilution Offering shall be sold in the manner and
according to the terms prescribed in the sole discretion of the
General Partner; provided, however, that 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 (excluding for this purpose the conversion of
partnership interests in the Merger) unless otherwise determined by a
vote of the General Partner and a Majority in Interest of the Limited
Partners. Any sale of additional limited partnership interests will
result in the proportionate dilution of the Percentage Interests of
the existing Partners. Any investor acquiring a limited partnership
interest in a Dilution Offering shall agree to be bound by the terms
of this Agreement, and shall be automatically admitted as a Limited
Partner of the Partnership. Any adjustment in the Partners' Percentage
Interests resulting from a Dilution Offering shall be set forth on an
amended Schedule A to be attached hereto.
8. CONDITIONS TO THE CAPITAL CONTRIBUTIONS OF CERTAIN LIMITED
PARTNERS.
The obligations of any Limited Partners acquiring their
Partnership Interests in the Offering or a Dilution Offering to make
cash Capital Contributions hereunder are subject to the condition that
the representations, warranties, agreements and covenants of the
General Partner set forth in Article 9 of this Agreement are and shall
be true and correct or have been and will have been complied with in
all material respects on the date such Capital Contributions are
required to be made, except to the extent that any such representation
or warranty expressly pertains to an earlier date.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE GENERAL
PARTNER.
9.1 The General Partner hereby represents and warrants to the
Limited Partners that:
(a) The Partnership is a limited partnership formed in accordance
with and validly existing under the Act and the other applicable laws
of the State of Texas;
(b) The interests in the Partnership of the Limited Partners will
have been duly authorized or created and validly issued and the
Limited Partners shall have no personal liability to contribute money
to the Partnership other than the amounts
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agreed to be contributed by them in the manner and on the terms
set forth in this Agreement, subject, however, to such limitations as
may be imposed under the Act;
(c) Except as disclosed in the Memorandum or documentation
prepared in connection with a Dilution Offering, no material breach or
default adverse to the Partnership exists under the terms of any other
material agreement affecting the Partnership; and
(d) The General Partner is a North Carolina corporation formed
and existing under the laws of the State of North Carolina.
9.2 The General Partner hereby covenants to the Limited Partners
that:
(a) It will at all times act in a fiduciary manner with respect
to the Partnership and the Limited Partners;
(b) Except as provided in Article 18, it will serve as the
General Partner of the Partnership until the Partnership is terminated
without reconstitution; and
(c) It will cause the Partnership to carry adequate public
liability, property damage and other insurance as is customary in the
business to be engaged in by the Partnership.
10. ADMISSION OF LIMITED PARTNERS.
The General Partner may permit the offer and sale of limited
partnership interests on the terms and conditions provided in the
Merger Agreement and the Memorandum or future Dilution Offering and
may admit persons subscribing for interests as Limited Partners in the
Partnership on the terms and conditions set forth in this Article 10.
(a) The General Partner shall have approved of the admission of
said person in writing on such terms and conditions as the General
Partner shall determine;
(b) Said person shall have executed such documents or instruments
as the General Partner may deem necessary or desirable to effect his
admission as a Limited Partner;
(c) Said person shall have accepted and adopted all of the terms
and provisions of this Agreement, as then amended;
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(d) Said person (if a corporation) shall deliver to the General
Partner a certified copy of a resolution of its Board of Directors
authorizing it to become a Limited Partner under the terms and
conditions of this Agreement; and
(e) Said person, upon request by the General Partner, shall pay
such reasonable expenses as may be incurred in connection with its
admission as a Limited Partner.
11. CAPITAL ACCOUNTS.
A Capital Account shall be established for each Partner and shall
at all times be determined and maintained in accordance with the Final
Treasury Regulations under Section 704(b) of the Code, as the same may
be amended. A Partner shall not be entitled to withdraw any part of
his Capital Account or to receive any distribution from the
Partnership, except as provided in Articles 13 and 24.
(a) Each Partners' Capital Account shall be increased by:
(i) The amount of his Capital Contribution pursuant to
Article 7 (or in the case of a Partner acquiring his Partnership
Interest in the Merger, the balance of his capital account in
Texas II, Texas IV or ESWL, as the case may be, at the Effective
Time); and
(ii) The amount of Profits allocated to him pursuant to
Article 12; and
(iii) The Partner's pro rata share (determined in the same
manner as such Partner's share of Profits and Losses allocated
pursuant to Article 12 hereof) of any income or gain exempt from
tax.
(b) Each Partner's Capital Account shall be decreased by:
(i) The amount of Losses allocated to him pursuant to
Article 12; and
(ii) The amount of Partnership Cash Flow, Partnership Sales
Proceeds and Partnership Refinancing Proceeds distributed to him
pursuant to Article 13; and
(iii) The Partner's pro rata share of any other expenditures
of the Partnership which are not deductible in computing
Partnership Profits or Losses and which are not added to the tax
basis of any Partnership property, including, without limitation,
expenditures
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described in Section 705(a)(2)(B) of the Code. The Partner's
pro rata share of such expenditures shall be determined in the
same manner as such Partner's share of Profits and Losses
allocated pursuant to Article 12.
12. ALLOCATIONS
(a) Profits and Losses. The Profits and Losses of the
Partnership shall be allocated among the Partners in accordance
with their respective Percentage Interests. In allocating Profits
and Losses, Net Gains and Losses from Capital Transactions (a
part of Profits and Losses), if any, shall be allocated first.
(b) Qualified Income Offset. If any Partner unexpectedly
receives any adjustment, allocation or distribution described in
Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4) through (6)
which causes or increases a deficit balance in such Partner's
Capital Account (adjusted for this purpose in the manner provided
in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)), items of
Partnership income and gain shall 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 Article 12(b) shall be made if and
only to the extent that such Partner would have a deficit Capital
Account after all other allocations provided for in this Article
12 have been tentatively made as if this Article 12(b) were not
in the Agreement. This provision is intended to be a "qualified
income offset," as defined in Treasury Regulations Section
1.704-1(b)(2)(ii)(d), such Regulation being specifically
incorporated herein by reference.
(c) Sales Commission. The Sales Commission shall be
allocated to the Units acquired in the Offering in proportion to
their respective capital contributions represented by such Units
(i.e., $250 in Sales Commissions per each such Unit). The purpose
of this Article 12(c) is to allocate the Sales Commission to
those Partners who actually bore the burden of paying the Sales
Commission.
(d) Allocations Between Transferor and Transferee. In the
event of the transfer (other than the pledges of the General
Partner s interest permitted by Article 18 or Permitted Pledges
described in Article 16.2(b)) of all or any part of a Partner's
interest (in accordance with the provisions of this 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 terms of
this Agreement), the transferring Partner 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, shall 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
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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 the General Partner may
elect, in its sole discretion, to treat the periods before and
after the date of the transfer or admission as separate Years and
allocate the Partnership's net income, gain, net loss, deductions
and credits for each of such deemed separate Years.
Notwithstanding the foregoing, the Partnership's "allocable cash
basis items," as that term is used in Section 706(d)(2)(B) of the
Code, shall be allocated as required by Section 706(d)(2) of the
Code and the regulations thereunder.
(e) Tax Withholding. The Partnership shall be 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 other 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 shall be
treated as a cash Distribution to such Partner and shall reduce
the amount otherwise distributable to such Partner.
13. DISTRIBUTIONS.
(a) Distribution of Partnership Cash Flow. Partnership Cash
Flow shall be distributed to the Partners within 60 days after
the end of each Year, or earlier in the discretion of the General
Partner, in proportion to their respective Percentage Interests
at the time of distribution.
(b) Distribution of Partnership Refinancing Proceeds and
Partnership Sales Proceeds. Partnership Refinancing Proceeds and
Partnership Sales Proceeds shall be distributed to the Partners
within 60 days of the Capital Transaction giving rise to such
proceeds, or earlier in the discretion of the General Partner, in
proportion to their respective Percentage Interests at the time
of distribution.
(c) Distribution in Liquidation. Upon liquidation of the
Partnership, all of the Partnership's property shall be sold and
Profits and Losses allocated accordingly. Proceeds from the
liquidation of the Partnership shall be distributed in accordance
with Article 24.
14. RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS.
14.1 Management. The Limited Partners shall not take part in
the management of the business, nor transact any business for the
Partnership, nor shall they have power to sign for or to bind the
Partnership. The Partnership may, however, contract with one or
more Limited Partners to act as the local medical directors of
any Lithotripter System. No Limited Partner may withdraw from the
Partnership except as expressly permitted herein.
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14.2 Operation of Lithotripter Systems. The Limited Partners
shall not operate or utilize any Partnership Lithotripter System
or other Partnership equipment except pursuant to (i) an
agreement with the Partnership; or (ii) any other arrangement
specifically approved by the General Partner.
14.3 Outside Activities. The Limited Partners agree that
they owe fiduciary duties to the Partnership and, as a
consequence, each Limited Partner (that is not the General
Partner or an Affiliate of the General Partner) agrees that he
shall not engage in "Outside Activities" (as defined below) in
the "Market Area" (as defined below) while he is a Limited
Partner in the Partnership and shall otherwise be subject to the
provisions of this Article 14.3. The phrase "Outside Activities"
means directly or indirectly owning, leasing or subleasing a
lithotripter (or any similar equipment or competing devices used
for treating renal or biliary stone disease) or any other
therapeutic equipment acquired by the Partnership. Prohibited
indirect ownership shall include without limitation the direct or
indirect ownership of any interest in a business venture (through
stock ownership, partnership interest ownership, ownership by or
through a close family member, or as otherwise determined in good
faith by the General Partner) involving the ownership, purchase,
lease, sublease, promotion, management or operation of a
lithotripter (or similar equipment or competing devices used for
treating renal or biliary stone disease) or other competing
device or equipment, unless the General Partner determines that
such activity by the Limited Partners is not detrimental to the
best interests of the Partnership. The ownership of less than 1%
of the capital stock (calculated on a fully diluted basis) of a
corporation whose stock is publicly owned or regularly traded on
any public exchange shall not constitute an Outside Activity.
Upon the termination or transfer of a Limited Partner's
interest in the Partnership for any reason, including a transfer
pursuant to Article 17.3 hereof, the withdrawing Limited Partner
shall not, for a period of two (2) years following the date of
withdrawal, engage in any Outside Activities in any "Market Area"
in which the Partnership is transacting business or within the
prior twelve months has transacted business (the "Restricted
Facilities"). For the purposes of this Article 14.3, the term
"Market Area" shall mean (i) the area within a fifty (50) mile
radius of any Restricted Facility, but if such area is determined
by a court of competent jurisdiction to be too broad, then it
shall mean (ii) the area within a thirty (30) mile radius of any
Restricted Facility, but if such area is determined by a court of
competent jurisdiction to be too broad then it shall mean (iii)
the area within a fifteen (15) mile radius of any Restricted
Facility.
In the event a Limited Partner wishes and intends to engage
in an Outside Activity in a Market Area, he or she must provide
written notice of such intent to the General Partner prior to
engaging in the Outside Activity. The written notice shall be
deemed an election by the Limited Partner to withdraw from the
Partnership (the "Notice of Withdrawal"), and shall give the
General Partner the purchase rights as provided in Article 17.3
hereof. After the Notice of Withdrawal, the former Limited
Partner may engage in an Outside Activity in the Market Area only
after waiting the period of two years specified in this Article
14.3. In the event of breach of the waiting period, the
Partnership shall be entitled to any remedy at law or equity with
respect to such breach, including without limitation an
injunction or suit for damages.
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If a Limited Partner during his participation in the
Partnership engages in an Outside Activity in a Market Area
without first notifying the General Partner in violation of this
Article 14.3, the Limited Partner shall be deemed to have given a
Notice of Withdrawal on the date the General Partner first
becomes aware of the Limited Partner's Outside Activity in the
Market Area. Upon receiving a Limited Partner's Notice of
Withdrawal or equivalent thereof, the Partnership may invoke the
purchase rights provided in Article 17.3 and shall be entitled to
any other remedy at law or equity including without limitation an
injunction or suit for damages. Notwithstanding anything in this
Section 14.3 to the contrary, "Outside Activity" shall not
include conduct by any former ESWL limited partner which he had
engaged in immediately prior to the Effective Time and which did
not constitute a violation of Section 16.16(a) of ESWL's First
Amended and Restated Agreement of Limited Partnership as in
effect immediately prior to the Merger; provided, that such
partner does not increase or enhance such interest or activities
during the term of the Partnership.
14.4 Disclosure of Confidential Information. Each Limited
Partner acknowledges and agrees that his participation in the
Partnership under this Agreement necessarily involves his
understanding of and access to certain trade secrets and other
confidential information pertaining to the business of the
Partnership. Accordingly, each Limited Partner (other than the
General Partner and its Affiliates that may also hold Limited
Partner Partnership Interests) agrees that at all times during
his participation in the Partnership as a Limited Partner and
thereafter, he will not, directly or indirectly, without the
express written authority of the Partnership, unless required by
law or directed by a applicable legal authority having
jurisdiction over the Limited Partner, disclose or use for the
benefit of any person, corporation or other entity (other than
the Partnership), or himself, (i) any trade, technical,
operational, management or other secrets, any patient or customer
lists or other confidential or secret data, or any other
proprietary, confidential or secret information of the
Partnership or (ii) any confidential information concerning any
of the financial arrangements, financial condition, hospital or
physician contracts, third party payor arrangements, quality
assurance and outcome analysis programs, competitive status,
customer or supplier matters, internal organizational matters,
technical abilities, or other business affairs of or relating to
the Partnership. The Limited Partners (other than the General
Partner and its Affiliates that may also hold Limited Partner
Partnership Interests) acknowledge that all of the foregoing
constitutes proprietary information, which is the exclusive
property of the Partnership. In the event of breach of this
Article 14.4 as determined by the General Partner, the
Partnership shall be entitled to any remedy at law or equity with
respect to such breach, including without limitation, an
injunction or suit for damages.
15. LIMITED LIABILITY.
No Limited Partner shall be required to make any
contribution to the capital of the Partnership except as set
forth in Article 7, nor shall any Limited Partner in his capacity
as such, be bound by, or personally liable for, any expense,
liability or obligation of the Partnership except to the extent
of his (i) interest in the Partnership; and (ii) obligation to
return distributions made to him under certain circumstances as
required by the Act.
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16. TRANSFER OF INTERESTS AND ADMISSION OF PARTNERS.
16.1 Transferability.
(a) The term "transfer" when used in this Agreement with
respect to a Partnership Interest includes a sale, assignment,
gift, pledge, exchange or any other disposition (but does not
include the issuance of new Partnership Interests pursuant to the
Merger, the Offering or a Dilution Offering);
(b) Except as otherwise provided herein, the General Partner
shall not at any time transfer or assign its interest or
obligation as General Partner;
(c) The Partnership Interest of any Limited Partner shall
not be transferred, in whole or in part, except in accordance
with the conditions and limitations set forth in Articles 16.2 or
17;
(d) The transferee of a Partnership Interest by assignment,
operation of law or otherwise, shall have only the rights, powers
and privileges enumerated in Article 16.3 or otherwise provided
by law and may not be admitted to the Partnership as a Limited
Partner except as provided in Article 16.4 or as a General
Partner except as provided in Article 16.5;
(e) Notwithstanding any provision herein to the contrary,
the Partnership Agreement shall in no way restrict the issuance
or transfers of stock of the General Partner; and
(f) Notwithstanding any provision herein to the contrary,
the issuance of Partnership Interests pursuant to a Dilution
Offering and the admission of new Limited Partners pursuant to a
Dilution Offering shall be governed by the provisions of Article
7.4 of this Agreement.
16.2 Restrictions on Transfers by Limited Partners.
(a) All or part of a Partnership Interest may be transferred
by a Limited Partner only with the prior written approval of the
General Partner, which approval may be granted or denied in the
sole discretion of the General Partner.
(b) The General Partner shall not approve any transfer of a
Partnership Interest, except a pledge of any Partnership Interest
by the General Partner to any bank, insurance company or other
financial institution to secure payment of indebtedness (a
"Permitted Pledge"), or otherwise unless the proposed transferee
shall have furnished the General Partner with a sworn statement
that:
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(i) The proposed transferee proposes to acquire his
Partnership Interest as a principal, for investment and not
with a view to resale or distribution;
(ii) The proposed transferee meets such requirements
regarding sophistication, income and net worth as required
by applicable state and federal securities laws;
(iii) The proposed transferee has met such net worth
and income suitability standards as have been established by
the General Partner;
(iv) The proposed transferee recognizes that investment
in the Partnership involves certain risks and has taken full
cognizance of and understands all of the risk factors
related to the purchase of a Partnership Interest; and
(v) The proposed transferee has met all other
requirements of the General Partner for the proposed
transfer.
(c) Other than in the case of a Permitted Pledge, a transfer
of a Partnership Interest may be made only if, prior to the date
thereof, the Partnership upon request receives an opinion of
counsel, satisfactory in form and substance to the General
Partner, that neither the offering nor the proposed transfer will
require registration under federal or applicable state securities
laws or regulations.
16.3 Rights of Transferee. Unless admitted to the Partnership in accordance
with Article 16.4, the transferee of a Partnership Interest or a part thereof or
any right, title or interest therein shall not be entitled to any of the rights,
powers, or privileges of his predecessor in interest, except that he shall be
entitled to receive and be credited or debited with his proportionate share of
Partnership income, gains, Profits, Losses, deductions, credits or
distributions. 16.4 Admission of Limited Partners. Except as otherwise provided
in Article 17, the General Partner, or the transferee of all or part of the
Partnership Interest of either a General Partner or a Limited Partner, may be
admitted to the Partnership as a Limited Partner upon furnishing to the General
Partner all of the following:
(a) The written approval of a Majority in Interest of all of the Limited
Partners (except the assignor Partner), or the assignor Partner alone, which
approval may be granted or denied in the sole discretion of such Partners or
Partner (as the case may be);
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(b) The written approval of the General Partner, which approval may be
granted or denied in the sole discretion of the General Partner;
(c) Acceptance, in a form satisfactory to the General Partner, of all the
terms and conditions of this Agreement and any other documents required in
connection with the operation of the Partnership pursuant to the terms of this
Agreement;
(d) A properly executed power of attorney substantially identical to that
contained in Article 37;
(e) Such other documents or instruments as may be required in order to
effect his or her admission as a Limited Partner; and
(f) Payment of such reasonable expenses as may be incurred in connection
with his admission as a Limited Partner.
16.5 Admission of General Partners. A Limited Partner, or the transferee of
all or part of the Partnership Interest of the General Partner, may be admitted
to the Partnership as a general partner upon furnishing to the General Partner
all of the following:
(a) The written consent of both the General Partner and a Majority in
Interest of the Limited Partners, which consent may be granted or denied in the
sole discretion of the Partners;
(b) Such financial statements, guarantees or other assurances as the
General Partner may require with regard to the ability of the proposed general
partner to fulfill the financial obligations of a general partner hereunder;
(c) Acceptance, in form satisfactory to the General Partner, of all the
terms and provisions of this Agreement and any other documents required in
connection with the operation of the Partnership pursuant to the terms of this
Agreement;
(d) A certified copy of a resolution of its Board of Directors (if it is a
corporation) authorizing it to become a general partner under the terms and
conditions of this Agreement;
(e) A power of attorney substantially identical to that contained in
Article 37;
(f) Such other documents or instruments as may be required in order to
effect its admission as a general partner; and
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(g) Payment of such reasonable expenses as may be incurred in connection
with its admission as a general partner.
Notwithstanding the above, a transferee that controls or is controlled by
the General Partner or one or more of its Affiliates that receives all or part
of the Partnership Interest of the General Partner may be admitted to the
Partnership as a general partner upon complying with all the provisions of
Article 16.5 except for subparagraph 16.5(a). As long as the transferee either
controls or is controlled by the General Partner or one or more of its
Affiliates, no Limited Partner consents will be required to admit such
transferee as a general partner to the Partnership.
16.6 Amendment of Certificate of Limited Partnership and Qualification. The
General Partner shall take all steps necessary and appropriate to prepare and
record any amendments to the Certificate of Limited Partnership, as may be
necessary or appropriate from time to time to comply with the requirements of
the Act, including, without limitation, upon the admission to the Partnership of
any general partner pursuant to the provisions of Article 16.5, and may for this
purpose exercise the power of attorney delivered to the General Partner pursuant
to Article 16.5 or 37. In addition, the General Partner shall take all steps
necessary and appropriate to prepare and record any and all documents necessary
to qualify the Partnership to do business in jurisdictions where the Partnership
is doing business, and may for this purpose exercise the power of attorney
delivered to the General Partner pursuant to Articles 16.4, 16.5 or 37.
16.7 Fundamental Changes. In the event a plan is approved by the General
Partner providing for the merger or consolidation of the Partnership with
another person or entity, or the sale of all or substantially all of the
Partnership Interests, including without limitation the exchange of Partnership
Interests for equity interests in another person or entity or for cash or other
consideration or combination thereof, then and in such event, the Limited
Partners shall be obligated 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 shall
reasonably request. Any plan described in this Article 16.7 may also effect an
amendment to the Partnership Agreement or the adoption of a new partnership
agreement in connection with the merger of the Partnership with another person
or entity as provided in Section 2.11 of the Act. The plan may also provide that
the General Partner and its Affiliates shall 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 Partners shall have any right by virtue of this
Agreement in the income derived therefrom. Any securities or other consideration
to be distributed to the Partners pursuant to the plan shall be distributed in
the manner set forth in Article 24(c) as though the Partnership were being
liquidated. For this purpose only, the fair market value of the securities or
other consideration to be received pursuant to the plan shall be treated as
"Profits" and the capital accounts of the Partners shall be increased in the
manner provided in Article 11(a)(ii). No Partner shall be entitled to any
dissent, appraisal or similar rights in connection with a plan contemplated by
this Article 16.7.
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16.8 Cancellation of Partnership Interest of Initial Limited Partner. The
Partnership Interest of the Initial Limited Partner will be canceled at the
Effective Time.
17. OPTIONAL PURCHASE OF LIMITED PARTNERSHIP INTERESTS ON CERTAIN EVENTS.
17.1 Death. Upon the death of a Limited Partner, the deceased Limited
Partner's executor, administrator, or other legal or personal representative
shall give written notice of that fact to the General Partner. The General
Partner shall have the option to purchase at the Closing (as defined below) the
Partnership Interest of the deceased Limited Partner (whose executor,
administrator or other legal or personal representative shall then become
obligated to sell such Partnership Interest) at the price determined in the
manner provided in Article 17.6 of this Agreement and on the terms and
conditions provided in Article 17.7 of this Agreement. The General Partner shall
have a period of thirty (30) days following the date of notice of the death of
the Limited Partner (the "Option Period") within which to notify in writing the
deceased Limited Partner's executor, administrator or other legal or personal
representative, whether the General Partner wishes to purchase all or a portion
of the Partnership Interest of the deceased Limited Partner. If the General
Partner does not elect to purchase the entire Partnership Interest of the
deceased Limited Partner before the expiration of the Option Period and in the
manner provided herein, the portion of the Partnership Interest not purchased
shall be held by the deceased Limited Partner's executor, administrator or other
legal representative pursuant to the terms of this Agreement. The General
Partner, in its sole discretion, may elect to assign its rights to purchase the
Partnership Interest of a deceased Limited Partner under this Article 17.1 to
the Partnership and, in such case, the Partnership shall have the same rights as
provided for the General Partner under this Article 17.1.
17.2 Bankruptcy, Insolvency or Assignment for Benefit of Creditors of a
Limited Partner. In the event that an involuntary or voluntary proceeding under
the Federal Bankruptcy Code, as amended, is filed for or against any Limited
Partner, or if any Limited Partner shall make an assignment for the benefit of
his creditors, or if any Limited Partner has a receiver or custodian appointed
for his assets, or any Limited Partner generally fails to pay his debts when
due, the insolvent Limited Partner shall give written notice (the "Notice of
Insolvency") to the General Partner of the commencement of any such proceeding
or the occurrence of such event within five days of the first notice to him of
such commencement or occurrence of such event. The General Partner shall have
the option to purchase at the Closing (as defined below) the Partnership
Interest of the insolvent Limited Partner (which the insolvent Limited Partner
or his trustee, custodian, receiver or other personal or legal representative,
as the case may be, shall then become obligated to sell) at the price determined
in the manner provided in Article 17.6 of this Agreement and on the terms and
conditions provided in Article 17.7 of this Agreement. The General Partner shall
have a period of thirty (30) days following the date of the Notice of Insolvency
(the "Option Period") within which to notify in writing the insolvent Limited
Partner or his trustee, custodian, receiver, or other legal or personal
representative, whether the General Partner wishes to purchase all or a portion
of the Partnership Interest of the insolvent Limited Partner. If the General
Partner does not elect to purchase the entire Partnership Interest of the
insolvent Limited Partner before the expiration of the
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Option Period and in the manner provided herein, the portion of the Partnership
Interest not purchased shall be held by the insolvent Partner, his trustee,
custodian, receiver or other legal or personal representative pursuant to the
terms of this Agreement. The General Partner, in its sole discretion, may elect
to assign its rights to purchase the Partnership Interest of an insolvent
Limited Partner under this Article 17.2 to the Partnership and, in such case,
the Partnership shall have the same rights as provided for the General Partner
under this Article 17.2.
17.3 Breach of Article 14.3. In the event the General Partner either
receives a Notice of Withdrawal as provided in Article 14.3 or receives notice
of a breach of Article 14.3 by or with respect to a Limited Partner (the
"Defaulting Limited Partner"), the General Partner may elect, in its sole
discretion, to treat such event as a default under this Agreement and enforce
the provisions of this Article 17.3. If the General Partner elects to enforce
the provisions of this Article 17.3, the General Partner shall give written
notice of such election (the "Notice of Default") to the Defaulting Limited
Partner within 180 days of the date the General Partner first received the
Notice of Withdrawal or notice of the defaulting event. The General Partner
shall have the option to purchase at the Closing (as defined below) the
Partnership Interest of the Defaulting Limited Partner (which the Defaulting
Limited Partner shall then become obligated to sell) at the price determined in
the manner provided in Article 17.6 of this Agreement and on the terms and
conditions provided in Article 17.7 of this Agreement. The General Partner shall
have a period of thirty (30) days following the date it sends the Notice of
Default (the "Option Period") within which to notify in writing the Defaulting
Limited Partner, whether the General Partner wishes to purchase all or a portion
of the Partnership Interest of the Defaulting Limited Partner. If the General
Partner does not elect to purchase the entire Partnership Interest of the
Defaulting Limited Partner before the expiration of the Option Period and in the
manner provided herein, the portion of the Partnership Interest not purchased
shall be held by the Defaulting Limited Partner pursuant to the terms of this
Agreement. The General Partner, in its sole discretion, may elect to assign its
rights to purchase the Partnership Interest of a Defaulting Limited Partner
under this Article 17.3 to the Partnership and, in such case, the Partnership
shall have the same rights as provided for the General Partner under this
Article 17.3.
17.4 Domestic Proceeding. In the event that a spouse of a Limited Partner
commences against a Limited Partner, or a Limited Partner is named in, a
Domestic Proceeding, the Limited Partner shall give written notice (the "Notice
of Domestic Proceeding") to the General Partner of the commencement of any such
proceeding within five days of the first notice to him of such commencement. The
General Partner shall have the option to purchase at the Closing (as defined
below) the Partnership Interest of the Limited Partner involved in the Domestic
Proceeding (which the Limited Partner shall then become obligated to sell), at
the price determined in the manner provided in Article 17.6 of this Agreement
and on the terms and conditions provided in Article 17.7 of this Agreement. The
General Partner shall have a period of thirty (30) days following the date of
the Notice of Domestic Proceeding (the "Option Period") within which to notify
in writing the Limited Partner involved in the Domestic Proceeding, whether the
General Partner wishes to purchase all or a portion of the Partnership Interest
of such Limited Partner. If the General Partner does not elect to purchase the
Partnership Interest of the Limited Partner involved
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in the Domestic Proceeding before the expiration of the Option Period and in the
manner provided herein, the portion of the Partnership Interest not purchased
shall be held by such Limited Partner pursuant to the terms of this Agreement.
The General Partner, in its sole discretion, may elect to assign its rights to
purchase the Partnership Interest of the Limited Partner involved in the
Domestic Proceeding under this Article 17.4 to the Partnership and, in such
case, the Partnership shall have the same rights as provided for the General
Partner under this Article 17.4.
17.5 Divestiture Option. 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 (e.g., the enactment or application of
prohibitory physician self-referral legislation against the Partnership or its
Partners), the General Partner shall promptly either, in its sole discretion,
(i) take the steps outlined in this Article 17.5 to divest the Limited Partners
of their Partnership Interests, or (ii) dissolve the Partnership as provided in
Article 23.1(f). If the General Partner chooses option (i), it shall deliver a
written notice to all of the Limited Partners (the "Notice of Election") and
purchase such Partnership Interests for its own account. The purchase price to
be paid for each Partnership Interest shall be determined in the manner as
provided in Article 17.6 and shall be on the terms and conditions as provided in
Article 17.7. The transfer of the Partnership Interests and the payment of the
purchase price (as provided in Article 17.6) shall be made at such time as
determined by the General Partner to be in the best interests of the Partnership
and its Limited Partners. Each Limited Partner hereby makes, constitutes and
appoints the General Partner, with full power of substitution, his true and
lawful attorney-in-fact, to take such actions and execute such documents on his
behalf to effect the transfer of his Partnership Interest as provided in this
Article 17.5. The foregoing power of attorney shall not be affected by the
subsequent incapacity or mental incompetence of any Limited Partner.
17.6 Purchase Price. The purchase price to be paid for the Partnership
Interest of any Limited Partner whose interest is being purchased pursuant to
the provisions of Article 17.1, 17.2, 17.3, 17.4 or 17.5 (the "Selling Limited
Partner") shall be determined in the manner provided in this Article 17.6. The
purchase price for a Partnership Interest purchased pursuant to the provisions
of Article 17.1, 17.2, 17.3 or 17.4 shall be an amount equal to the lesser of
(i) the fair market value of the Selling Limited Partner's Partnership Interest
on the Valuation Date (prorated in the event that only a portion of his
Partnership Interest is being purchased) as determined by an Appraiser (as
defined below) selected by the General Partner, or (ii) the Selling Limited
Partner's share of the Partnership's book value, if any (prorated in the event
that only a portion of his Partnership Interest is being purchased) as reflected
by the Capital Account of the Selling Limited Partner (unadjusted for any
appreciation in Partnership assets and as reduced by depreciation deductions
claimed by the Partnership for tax purposes) as of the Valuation Date (as
defined below). The General Partner, in its sole discretion, may pursue both of
the above valuation methods and choose the lesser value of the two as indicated
above, or may designate and follow only one of the methods in calculating the
purchase price. In the case of a purchase of a Partnership Interest pursuant to
the provisions of Article 17.5, the purchase price shall be an amount equal to
the greater of (i) two (2) times the aggregate distributions made with respect
to such Partnership Interest
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pursuant to Article 13(a) during the twelve-month period ending on the
Valuation Date or (ii) the Selling Limited Partner's share of the Partnership's
book value determined in the manner described above. For purposes of this
Article 17.6, the term "Appraiser" shall mean an independent appraiser who is
qualified in appraising limited partnership interests and who has at least five
years experience. In determining fair market value, the Appraiser shall take
into consideration any outstanding indebtedness, liabilities, liens and
obligations of the Partnership and the relative Partnership Interests and
capital accounts of all Partners, as well as applying any customary discounts
for lack of liquidity and control. Such appraisal shall be conducted in
accordance with professional appraisal standards. The valuation of the Appraiser
shall be conclusive and binding upon the Partnership, the purchaser and the
Selling Limited Partner and his representatives. The determination of the
Selling Limited Partner's Capital Account or aggregate distributable amount on
the Valuation Date (as defined below) shall be made by the Partnership's
internal accountant (the "Partnership Accountant") upon a review of the
Partnership books of account, and a formal audit is expressly waived. The
statement of the Partnership Accountant with respect to the Capital Account or
aggregate distributable amount of the Selling Limited Partner on the Valuation
Date shall be binding and conclusive upon the Partnership, the purchaser and the
Selling Limited Partner and his representative. The Valuation Date shall be the
last day of the month immediately preceding the month in which occurs: (i) the
death of a Selling Limited Partner, in the case of a purchase by reason of
death; (ii) the bankruptcy or insolvency of a Selling Limited Partner, in the
case of a purchase by reason of such bankruptcy or insolvency; (iii) the Notice
of Withdrawal or breach of Article 14.3 as provided in Article 17.3 in the case
of a purchase by reason thereof; (iv) the commencement of the Domestic
Proceeding, in the case of a purchase by reason thereof; or (v) the Notice of
Election as provided in Article 17.5, in the case of a purchase by reason
thereof. Any Limited Partner whose Partnership Interest is purchased pursuant to
the provisions of Article 17.1, 17.2, 17.3, 17.4 or 17.5 shall be entitled only
to the purchase price which shall be paid at the Closing in cash (or by
certified or cashier's check) and shall not be entitled to any Partnership
distributions made after the Valuation Date. The transfer of a Partnership
Interest of a Selling Limited Partner shall be deemed to occur as of the
Valuation Date and the Selling Limited Partner shall have no voting or other
rights as a Limited Partner after such date. The purchaser shall be entitled to
any distributions attributable to the transferred interest after the Valuation
Date and the Partnership shall have the right to deduct the amount of any such
distributions made to the Selling Limited Partner after the Valuation Date from
the purchase price.
17.7 Closing.
17.7.1 Closing of Purchase and Sale. The Closing of any purchase and sale
of a Partnership Interest pursuant to Article 17.1, 17.2, 17.3, 17.4 or 17.5 of
this Agreement shall take place at the principal office of the Partnership, or
such other place designated by the General Partner, on the date determined as
follows (the "Closing"):
(a) In the case of a purchase and sale occurring by reason of the death of
a Limited Partner as provided in Article 17.1 of this Agreement, the Closing
shall be
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held on the thirtieth day (or if such thirtieth day is not a business day, the
next business day following the thirtieth day) next following the last to occur
of:
(i) Qualification of the executor or personal administrator of the deceased
Limited Partner's estate;
(ii) The date on which any necessary determination of the purchase price of
the Partnership Interest to be purchased has been made; or
(iii) The date that coincides with the close of the Option Period.
(b) In the case of a purchase and sale occurring by reason of the
occurrence of one of the events described in Article 17.2, 17.3, 17.4 or 17.5 of
this Agreement, the Closing shall be held on the thirtieth day (or if such
thirtieth day is not a business day, the next business day following the
thirtieth day) next following the later to occur of:
(i) The date on which any necessary determination of the purchase price of
the Partnership Interest to be purchased has been made; or
(ii) The date that coincides with the close of the Option Period.
At the Closing, although not necessary to effect the transfer, the Selling
Limited Partner shall concurrently with tender and receipt of the applicable
purchase price, deliver to the purchaser duly executed instruments of transfer
and assignment, assigning good and marketable title to the portion or portions
of the Selling Limited Partner's entire Partnership Interest thus purchased,
free and clear from any liens or encumbrances or rights of others therein. The
parties acknowledge that occurrence of any of the triggering events described in
Article 17.1, 17.2, 17.3, 17.4 or 17.5 and compliance with all the Articles of
this Agreement, except the execution of the transfer documents by the Selling
Limited Partner as provided above in this Article 17.7.1, are sufficient to
effect the complete transfer of the Selling Limited Partner's Partnership
Interest and the Selling Limited Partner shall be deemed to consent to admission
of the transferee as a substitute Limited Partner. Notwithstanding the date of
the Closing or whether a Closing is successfully held, the transfer of a
Partnership Interest of a Selling Limited Partner shall be deemed to occur as of
the Valuation Date as defined in Article 17.6. The deemed transfer is effective
regardless of whether the Selling Limited Partner performs the duties set forth
in this Article 17.7.1.
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17.7.2 Terms and Conditions of Purchase. The Partnership Interest of a
Limited Partner shall not be transferred to any Partner unless the requirements
of Articles 16.2 and 16.4 (b) through (f) are satisfied with respect to it. The
purchaser shall be liable for all obligations and liabilities connected with
that portion of the Partnership Interest transferred to it unless otherwise
agreed in writing.
18. SALE, ASSIGNMENT OR OTHER TRANSFER OF THE GENERAL PARTNER'S INTEREST.
18.1 The General Partner may not mortgage, pledge, hypothecate, transfer,
sell, assign or otherwise dispose of all or any part of its interest in the
Partnership, whether voluntarily, by operation of law or otherwise (the
foregoing actions being hereafter collectively referred to as "Transfers" or
singularly as a "Transfer") except as permitted by this Article.
18.2 If the General Partner makes a Transfer (other than a mortgage, pledge
or hypothecation) of its general partner interest in the Partnership pursuant to
this Article, it shall be liable for all obligations and liabilities incurred by
it as the general partner of the Partnership on or before the effective date of
such Transfer, but shall not be liable for any obligations or liabilities of the
Partnership arising after the effective date of the Transfer.
18.3 No Transfer by the General Partner shall be permitted unless:
(a) Counsel for the Partnership shall have rendered an opinion that none of
the actions taken in connection with such Transfer will cause the Partnership to
be classified other than as a partnership for federal income tax purposes or
will cause the termination or dissolution of the Partnership under state law;
and
(b) Such documents or instruments, in form and substance satisfactory to
counsel for the Partnership, shall have been executed and delivered as may be
required in the opinion of counsel for the Partnership to effect fully any such
Transfer.
Notwithstanding the foregoing provisions of this Article 18.3, the General
Partner may pledge its interest in the Partnership to any bank, insurance
company or other financial institution to secure payment of indebtedness.
19. TERMINATION OF THE SERVICES OF THE GENERAL PARTNER.
If the General Partner shall be finally adjudged by a court of competent
jurisdiction to be liable to the Limited Partners or the Partnership for any act
of gross negligence or willful misconduct in the performance of its duties under
the terms of this Agreement, the General Partner may be removed and another
substituted with the consent of all of the Limited Partners. Such consent shall
be evidenced by a certificate of removal signed by all of the Limited Partners.
In the
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event of removal, the new general partner shall succeed to all of the powers,
privileges and obligations of the General Partner, and the General Partner's
interest in the Partnership shall become that of a Limited Partner, and the
General Partner shall maintain its same Percentage Interest in the Partnership
notwithstanding anything contained in the Act to the contrary. In addition, in
the event of removal, the new general partner shall take all steps necessary and
appropriate to prepare and record an amendment to the Certificate of Limited
Partnership to reflect the removal of the General Partner and the admission of
such new general partner.
20. MANAGEMENT AND OPERATION OF BUSINESS.
20.1 All decisions with respect to the management of the business and
affairs of the Partnership shall be made by the General Partner.
20.2 The General Partner shall be under no duty to devote all of its time
to the business of the Partnership, but shall devote only such time as it deems
necessary to conduct the Partnership business and to operate and manage the
Partnership in an efficient manner.
20.3 The General Partner may charge to the Partnership all ordinary and
necessary costs and expenses, direct and indirect, attributable to the
activities, conduct and management of the business of the Partnership. The costs
and expenses to be borne by the Partnership shall include, but are not limited
to, all expenditures incurred in acquiring and financing the Equipment or other
Partnership property, legal and accounting fees and expenses, salaries of
employees of the Partnership, consulting and quality assurance fees paid to
independent contractors, insurance premiums and interest.
20.4 In addition to, and not in limitation of, any rights and powers
covenanted by law or other provisions of this Agreement, and except as limited,
restricted or prohibited by the express provisions of this Agreement, the
General Partner shall have and may exercise on behalf of the Partnership all
powers and rights necessary, proper, convenient or advisable to effectuate and
carry out the purposes, business and objectives of the Partnership. Such powers
shall include, without limitation, the following:
(a) To execute and deliver the Merger Agreement and conduct the Offering
and any Dilution Offering on behalf of the Partnership;
(b) To acquire on behalf of the Partnership (i) one or more fixed-base or
mobile lithotripsy systems, (ii) any other assets related to the provision of
lithotripsy services, or (iii) any other assets or equipment or an interest in
another entity consistent with the purposes of the Partnership as provided in
Article 4 (collectively, the "Additional Assets"), at such times and at such
price and upon such terms, as the General Partner deems to be in the best
interest of the Partnership;
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(c) To purchase, hold, manage, lease, license and dispose of Partnership
assets, including the purchase, exchange, trade or sale of the Partnership's
assets at such price, or amount, for cash, securities or other property and upon
such terms, as the General Partner deems to be in the best interest of the
Partnership; provided, that should the Partnership assets be exchanged or traded
for securities or other property (the "Replacement Property") the General
Partner shall have the same powers with regard to the Replacement Property as it
does towards the traded property;
(d) To exercise the option of the General Partner or the Partnership to
purchase a Limited Partner's Partnership Interest pursuant to Article 17;
(e) To determine the travel itinerary and site locations for the
Lithotripter Systems or other Partnership technology;
(f) To borrow money for any Partnership purpose (including the acquisition
of the Additional Assets) and, if security is required therefor, to subject to
any security device any portion of the property for the Partnership, to obtain
replacements of any other security device, to prepay, in whole or in part,
refinance, increase, modify, consolidate or extend any encumbrance or other
security device;
(g) To deposit, withdraw, invest, pay, retain (including the establishment
of reserves in order to acquire the Additional Assets) and distribute the
Partnership's funds in any manner consistent with the provisions of this
Agreement;
(h) To institute and defend actions at law or in equity;
(i) To enter into and carry out contracts and agreements and any or all
documents and instruments and to do any and all such other things as may be in
furtherance of Partnership purposes or necessary or appropriate to the conduct
of the Partnership activities;
(j) To execute, acknowledge and deliver any and all instruments which may
be deemed necessary or convenient to effect the foregoing;
(k) To form a new limited partnership made up of qualified investors to
treat gallstone patients (if the FDA approves a lithotripter for such purpose),
and to contract on behalf of the Partnership with the new limited partnership
for the use for a fee of a Partnership lithotripter for the treatment of the new
limited partnership's gallstone patients; and
(l) To engage or retain one or more persons to perform acts or provide
materials as may be required by the Partnership, at the Partnership's expense,
and to compensate such person or persons at a rate to be set by the General
Partner,
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provided that the compensation is at the then prevailing rate for the type of
services and materials provided, or both. Any person, whether a Partner, an
Affiliate of a Partner or otherwise, including without limitation the General
Partner, may be employed or engaged by the Partnership to render services and
provide materials, including, but not limited to, management services,
professional services, accounting services, quality assessment services, legal
services, marketing services, maintenance services or provide materials; and if
such person is a Partner or an Affiliate of a Partner, he shall be entitled to,
and shall be paid compensation for said services or materials, anything in this
Agreement to the contrary notwithstanding, provided that the compensation to be
received for such services or materials is competitive in price and terms with
then prevailing rate for the type of services and/or materials provided. The
Partnership, pursuant to the terms of a Management Agreement, will contract with
the General Partner with respect to the supervision and coordination of the
management and administration of the day-to-day operations of the Partnership's
business for a monthly fee equal to 7.5% of Partnership Cash Flow per month. All
costs incurred by the General Partner under the Management Agreement shall be
paid or reimbursed by the Partnership directly. The Partnership may also
contract with healthcare facilities and/or qualified physicians desiring to use
its Lithotripter Systems for the treatment of patients. Owning an interest in
the Partnership shall not be a condition to using any Lithotripter System. The
General Partner and its Affiliates may engage in or possess an interest in other
business ventures of any nature and description independently or with others,
including, but not limited to, the operation of a fixed-base or mobile
lithotripsy unit, whether or not such business ventures are in direct or
indirect competition with the Partnership, and neither the Partnership nor the
Partners shall have any right by virtue of this Agreement in and to said
independent ventures or to the income or profits derived therefrom.
20.5 In addition to other acts expressly prohibited or restricted by this
Agreement or by law, the General Partner shall have no authority to act on
behalf of the Partnership in:
(a) Doing any act in contravention of this Agreement or the Partnership's
Certificate of Limited Partnership;
(b) Doing any act which would make it impossible to carry on the ordinary
business of the Partnership;
(c) Possessing or in any manner dealing with the Partnership's property or
assigning the rights of the Partnership in the Partnership's property for other
than Partnership purposes;
(d) Admitting a person as a Limited Partner or a General Partner except as
provided in this Agreement; or
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(e) Performing any act (other than an act required by this 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.
21. RESERVES.
The General Partner may cause the Partnership to create a reserve account
to be used exclusively for repairs and acquisition of Additional Assets and for
any other valid Partnership purpose. The General Partner shall, in its sole
discretion, determine the amount of payments to such reserve.
22. INDEMNIFICATION AND EXCULPATION OF THE GENERAL PARTNER.
22.1 The General Partner is accountable to the Partnership as a fiduciary
and consequently must exercise good faith and integrity in handling Partnership
affairs. The General Partner and its Affiliates shall have no liability to the
Partnership which arises out of any action or inaction of the General Partner or
its Affiliates if the General Partner or its Affiliates, in good faith,
determined that such course of conduct was in the best interest of the
Partnership and such course of conduct did not constitute gross negligence or
willful misconduct of the General Partner or its Affiliates. The General Partner
and its Affiliates shall 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.
22.2 The General Partner shall not be liable for the return of the Capital
Contributions of the Limited Partners, and upon dissolution, Limited Partners
shall look solely to the assets of the Partnership.
23. DISSOLUTION OF THE PARTNERSHIP.
23.1 The Partnership shall be dissolved and terminated and its business
wound up upon the occurrence of any one of the following events:
(a) December 31, 1998 if the Merger has not yet become effective by such
date;
(b) The expiration of its term on December 31, 2040;
(c) The filing by, on behalf of, or against the General Partner of any
petition or pleading, voluntary or involuntary, to declare the General Partner
bankrupt under any bankruptcy law or act, or the commencement in any court of
any
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<PAGE>
proceeding, voluntary or involuntary, to declare the General Partner insolvent
or unable to pay its debts, or the appointment by any court or supervisory
authority of a receiver, trustee or other custodian of the property, assets or
business of the General Partner or the assignment by it of all or any part of
its property or assets for the benefit of creditors, if said action, proceeding
or appointment is not dismissed, vacated or otherwise terminated within ninety
(90) days of its commencement;
(d) The determination of the General Partner that the Partnership should be
dissolved;
(e) The occurrence of an event described in a plan approved by the General
Partner pursuant to Article 16.7 resulting in the dissolution of the
Partnership;
(f) The election of the General Partner to dissolve the Partnership
following the occurrence of an event described in Article 17.5;
(g) Except as otherwise provided in any plan approved by the General
Partner pursuant to Article 16.7, the sale, exchange or other disposition of all
or substantially all of the property of the Partnership without making provision
for the replacement thereof; and
(h) The dissolution, retirement, resignation, death, disability or legal
incapacity of a general partner, and any other event resulting in the
dissolution or termination of the Partnership under the laws of the State of
Texas; provided, that the events described in Sections 4.02(a)(4) and (5) of the
Act or any similar provisions of any successor statute, shall not work a
dissolution of the Partnership except as provided in (c) above.
23.2 Notwithstanding the provisions of Article 23.1, the Partnership shall
not be dissolved and terminated upon the retirement, resignation, bankruptcy,
assignment for the benefit of creditors, dissolution, death, disability or legal
incapacity of a general partner, and its business shall continue pursuant to the
terms and conditions of this Agreement, if any general partner or general
partners remain following such event; provided that such remaining general
partner or general partners are hereby obligated to continue the business of the
Partnership. If no general partner remains after the occurrence of such event,
the business of the Partnership shall continue pursuant to the terms and
conditions of this Agreement, if, within ninety (90) days after the occurrence
of such event, a Majority in Interest of the Limited Partners agree in writing
to continue the business of the Partnership, and, if necessary, to the
appointment of one or more persons or entities to be substituted as the general
partner. In the event the Limited Partners agree as provided above to continue
the business of the Partnership, the new general partner or general partners
shall succeed to all of the powers, privileges and obligations of the General
Partner, and the General Partner's interest in the Partnership shall become a
Limited Partner's interest hereunder.
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Furthermore, in the event a remaining general partner or the Limited Partners,
as the case may be, agree to continue the business of the Partnership as
provided herein, the remaining general partner or the newly appointed general
partner or general partners, as the case may be, shall take all steps necessary
and appropriate to prepare and record an amendment to the Certificate of Limited
Partnership to reflect the continuation of the business of the Partnership and
the admission of a new general partner or general partners, if any.
24. 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, shall
cause the cancellation of the Partnership's Certificate of Limited Partnership,
shall liquidate the assets of the Partnership, and shall apply and distribute
the proceeds of such liquidation in the following order of priority:
(a) First, to the payment of the debts and liabilities of the Partnership,
and the expenses of liquidation;
(b) Second, to the creation of any reserves which the General Partner (or
such 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
(c) Third, the balance, if any, shall be distributed to the Partners in
accordance with the Partners' positive Capital Account balances after such
Capital Accounts are adjusted as provided by Article 12, and any other
adjustments required by the Final Treasury Regulations under Section 704(b) of
the Code. Any general partner with a negative Capital Account following the
distribution of liquidation proceeds or the liquidation of its interest must
contribute to the Partnership an amount equal to such negative Capital Account
on or before the end of the Partnership's taxable year (or, if later, within
ninety days after the date of liquidation). Any capital so contributed shall be
(i) distributed to those Partners with positive Capital Accounts until such
Capital Accounts are reduced to zero, and/or (ii) used to discharge recourse
liabilities.
25. BOOKS OF ACCOUNT, RECORDS AND REPORTS.
25.1 Proper and complete records and books of account shall be kept by the
General Partner in which shall be entered fully and accurately all transactions
and such other matters relating to the Partnership's business as are usually
entered into records and books of account maintained by persons engaged in
businesses of a like character. The books and records of the Partnership shall
be prepared according to the accounting method determined by the General
Partner. The Partnership's fiscal year shall be the calendar year. The books and
records shall at all times be
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<PAGE>
maintained at the Partnership's Records Office and shall be open to the
reasonable inspection and examination of the Partners or their duly authorized
representatives during reasonable business hours.
25.2 Within ninety (90) days after the end of each Year, the General
Partner shall 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 shall be reasonably necessary for the preparation by such
person of his federal income tax return. The General Partner will also make
available to the Limited Partners any other information required by the Act.
25.3 The General Partner shall maintain at the Partnership's Records Office
copies of the Partnership's original Certificate of Limited Partnership and any
certificate of amendment, restated certificate or certificate of cancellation
with respect thereto and such other documents as the Act shall require. The
General Partner will furnish to any Limited Partner upon request or as otherwise
required by law a copy of the Partnership's original Certificate of Limited
Partnership and any certificate of amendment, restated certificate, or
certificate of cancellation, if any.
25.4 The General Partner shall, 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.
25.5 The General Partner is designated as the Tax Matters Partner (as
defined in Section 6231 of the Code) and to act in any similar capacity under
state or local law, and 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. The General Partner is authorized and required to notify
the federal, state or local tax authorities of the appointment of a Tax Matters
Partner in the manner provided in Treasury Regulations Section 301.6231(a)(7)-1,
as modified from time to time. In its capacity as Tax Matters Partner, the
General Partner shall oversee the Partnership's tax affairs in the manner which,
in its best judgment, is in the interests of the Partners.
26. NOTICES.
All notices under this Agreement shall be in writing and shall be deemed to
have been given when delivered personally, or mailed by certified or registered
mail, postage prepaid, return receipt requested. Notices to the General Partner
shall be delivered at, or mailed to, its principal
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<PAGE>
office. Notices to the Partnership shall be delivered at, or mailed to, its
principal office with a copy to each of its business offices. Notice to a
Limited Partner shall be delivered to such Limited Partner, or mailed to the
last address furnished by him for such purposes to the General Partner. Limited
Partners shall give notice of a change of address to the General Partner in the
manner provided in this Article.
27. AMENDMENTS.
Subject to the provisions of Article 28, this Agreement is subject to
amendment only by written consent of the General Partner and a Majority in
Interest of the Limited Partners; provided, however, the consent of the Limited
Partners shall not be required if such amendments are ministerial in nature and
do not contravene the provisions of Article 28. Further, no Limited Partner
consent shall be required to amend Schedule A to reflect the admission of
Partners as contemplated by the Merger, the Offering, any Dilution Offering or
as otherwise herein permitted.
28. LIMITATIONS ON AMENDMENTS.
Notwithstanding the provisions of Article 27, no amendment to this
Agreement shall:
(a) Enlarge the obligations of any Partner under this Agreement or convert
the interest in the Partnership of any Limited Partner into the interest of a
general partner or modify the limited liability of any Limited Partner, without
the consent of such Partner;
(b) Amend the provisions of Article 12, 13, 15 or 24 without the approval
of the General Partner and a Majority in Interest of the Limited Partners;
provided, however, that the General Partner may at any time amend such Articles
without the consent of the Limited Partners 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, in which case such amendments may only be made as provided in
this Article 28(b); or
(c) Amend this Article 28 without the consent of all Partners.
29. MEETINGS, CONSENTS AND VOTING.
29.1 A meeting of the Partnership to consider any matter with respect to
which the Partners may vote as set forth in this Agreement may be called by the
General Partner or by Limited Partners who hold more than twenty-five percent
(25%) of the aggregate interests in the Partnership held by all the Limited
Partners. Upon receipt of a notice requesting a meeting by such Partner or
Partners and stating the purpose of the meeting, the General Partner shall,
within ten (10) days thereafter, give notice to the Partners of a meeting of the
Partnership to be held at a time and place generally convenient to the Limited
Partners on a date not earlier than fifteen (15) days after receipt
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<PAGE>
by the General Partner of the notice requesting a meeting. The notice of the
meeting shall set forth the time, date, location and purpose of the meeting.
29.2 Any consent of a Partner required by this Agreement may be given as
follows:
(a) By a written consent given by the consenting Partner and received by
the General Partner at or prior to the doing of the act or thing for which the
consent is solicited, or
(b) By the affirmative vote by the consenting Partner to the doing of the
act or thing for which the consent is solicited at any meeting called pursuant
to this Article to consider the doing of such act or thing.
29.3 When exercising voting rights expressly granted under the Articles of
this Agreement, each Partner shall have that number of votes as is equal to the
Percentage Interest of such Partner at the time of the vote, multiplied by 100.
30. SUBMISSIONS TO THE LIMITED PARTNERS.
The General Partner shall give the Limited Partners notice of any proposal
or other matter required by any provision of this Agreement or by law to be
submitted for consideration and approval of the Limited Partners. Such notice
shall include any information required by the relevant provision or by law.
31. ADDITIONAL DOCUMENTS.
Each party hereto agrees to execute and acknowledge all documents and
writings which the General Partner may deem necessary or expedient in the
creation of this Partnership and the achievement of its purpose.
32. SURVIVAL OF RIGHTS.
Except as herein otherwise provided to the contrary, this Agreement shall
be binding upon and inure to the benefit of the parties hereto, their successor
and assigns.
33. INTERPRETATION AND GOVERNING LAW.
When the context in which words are used in this Agreement indicates that
such is the intent, words in the singular number shall include the plural and
vise versa; in addition, the masculine gender shall include the feminine and
neuter counterparts. The Article headings or titles and the table of contents
shall not define, limit, extend or interpret the scope of this Agreement or any
particular Article. This Agreement shall be governed and construed in accordance
with the laws of the State of Texas without giving effect to the conflicts of
laws provisions thereof.
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<PAGE>
34. SEVERABILITY.
If any provision, sentence, phrase or word of this Agreement or the
application thereof to any person or circumstance shall be held invalid, the
remainder of this Agreement, or the application of such provision, sentence,
phrase, or word to persons or circumstances, other than those as to which it is
held invalid, shall not be affected thereby.
35. AGREEMENT IN COUNTERPARTS.
This Agreement may be executed in several counterparts, each of which shall
be deemed an original, but all of which shall constitute one and the same
instrument. In addition, this Agreement may contain more than one counterpart of
the signature page and this Agreement may be executed by the affixing of the
signatures of each of the Partners to one of such counterpart signature pages;
all of such signature pages shall be read as though one, and they shall have the
same force and effect as though all of the signers had signed a single signature
page.
36. THIRD PARTIES.
The agreements, covenants and representations contained herein are for the
benefit of the parties hereto inter se and are not for the benefit of any third
parties including, without limitation, any creditors of the Partnership.
37. POWER OF ATTORNEY.
Each Limited Partner hereby makes, constitutes and appoints Dr. Joseph
Jenkins and Michael Madler, severally, with full power of substitution, his true
and lawful attorneys-in-fact, for him and in his name, place and stead and for
his use and benefit to sign and acknowledge, file and record, any amendments
hereto among the Partners for the further purpose of executing and filing on
behalf of each Limited Partner, any and all certificates of limited partnership
or other documents necessary to constitute the Partnership or to effect the
continuation of the Partnership, the admission or withdrawal of a general
partner or a limited partner, the qualification of the Partnership in a foreign
jurisdiction (or amendment to such qualification), the admission of substitute
Limited Partners or the dissolution or termination of the Partnership, provided
such continuation, admission, withdrawal, qualification, or dissolution and
termination are in accordance with the terms of this Agreement.
The foregoing power of attorney is a special power of attorney coupled with
an interest, is irrevocable and shall survive the death or legal incapacity of
each Limited Partner. It may be exercised by any one of said attorneys by
listing all of the Limited Partners executing any instrument over the signature
of the attorney-in-fact acting for all of them. The power of attorney shall
survive the delivery of an assignment by a Limited Partner of the whole or any
portion of his Unit. In those cases in which the assignee of, or the successor
to, a Limited Partner owning a Unit has been approved by the Partners for
admission to the Partnership as a substitute Limited Partner,
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<PAGE>
the power of attorney shall survive for the sole purpose of enabling the General
Partner to execute, acknowledge and file any instrument necessary to effect such
substitution.
This power of attorney shall not be affected by the subsequent incapacity
or mental incompetence of any Limited Partner.
38. ARBITRATION.
Any dispute arising out of or in connection with this Agreement or the
breach thereof shall be decided by arbitration in Austin, Texas in accordance
with the then effective commercial arbitration rules of the American Arbitration
Association, and judgment thereof may be entered in any court having
jurisdiction thereof.
39. CREDITORS.
None of the provisions of this Agreement shall be for the benefit of or
enforceable by any creditors of the Partnership.
[The remainder of this page is intentionally left blank]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement of Limited
Partnership as of the day and year first above written.
GENERAL PARTNER:
LITHOTRIPTERS, INC.,
a North Carolina corporation
By: __________________________________
Joseph Jenkins, M.D., President
ATTEST:
_________________________ [CORPORATE SEAL]
Secretary
[CORPORATE SEAL]
INITIAL LIMITED PARTNER:
__________________________________
Michael Madler
STATE OF NORTH CAROLINA )
)
COUNTY OF CUMBERLAND )
On this _______ day of ___________, 1998, before me, the undersigned Notary
Public in and for the County of Cumberland in the State of North Carolina,
personally came Joseph Jenkins, M.D., who, being by me duly sworn, said that he
is President of Lithotripters, Inc., the sole general partner of Texas
Lithotripsy Limited Partnership VII, L.P., that the seal affixed to the
foregoing instrument in writing is the corporate seal of the corporation, and
that said writing was signed, sworn to, and sealed by him in behalf of said
corporation by its authority duly given. And the said Joseph Jenkins, M.D.,
further certified that the facts set forth in said writing are true and correct,
and acknowledged said instrument to be the act and deed of said corporation.
WITNESS my hand and notarial seal.
-----------------------------------------
Notary Public
My commission expires:
___________________________
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<PAGE>
STATE OF TEXAS )
)
COUNTY OF ______________ )
I, _______________________________, a notary public in and for the State
and County set forth above, do hereby certify that Michael Madler personally
appeared before me this _____ day of _________, 1998 and acknowledged and swore
to the due execution of the foregoing Limited Partnership Agreement in his
capacity as the initial limited partner.
------------------------------------------
Notary Public
My commission expires:
___________________________
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<PAGE>
COUNTERPART SIGNATURE PAGE
By signing this Counterpart Signature Page, the undersigned acknowledges
his or her acceptance of that certain Agreement of Limited Partnership of Texas
Lithotripsy Limited Partnership VII, L.P., and his or her intention to be
legally bound thereby.
Dated this _________ day of ___________________, 1998.
-----------------------------------------
Signature
------------------------------------------
Printed Name
STATE OF _______________ )
)
COUNTY OF _____________ )
BEFORE ME, the undersigned Notary Public in and for the State and County
set forth above, on the _______ day of __________________, 1998, personally
appeared ___________________, and, being by me first duly sworn, stated that
(s)he signed this Counterpart Signature Page for the purpose set forth above and
that the statements contained therein are true.
------------------------------------------
Signature of Notary Public
------------------------------------------
Printed Name of Notary
My Commission Expires:
___________________________
[SEAL]
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<PAGE>
SCHEDULE A
Schedule of Partnership Interests
TEXAS LITHOTRIPSY LIMITED PARTNERSHIP VII, L.P.
CONTRIBUTIONS OF CAPITAL TO THE PARTNERSHIP AND PERCENTAGE
INTERESTS
Cash Percentage
General Partner Contribution Interest
Lithotripters, Inc. $0 99%
2008 Litho Place
Fayetteville, NC 28304
Initial Limited Partners
Michael Madler $0 1%
c/o Prime Medical Services, Inc.
1301 Capital of Texas Highway
Suite C-300
Austin, TX 78746
TOTAL: $0 100%
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AGREEMENT AND PLAN OF MERGER
among
TEXAS LITHOTRIPSY LIMITED PARTNERSHIP II L.P.,
TEXAS LITHOTRIPSY LIMITED PARTNERSHIP IV L.P.,
TEXAS ESWL/LASER LITHOTRIPTER, LTD.
and
TEXAS LITHOTRIPSY LIMITED PARTNERSHIP VII, L.P.
September 4, 1998
<PAGE>
Page
TABLE OF CONTENTS
Page
ARTICLE I
PLAN OF MERGER
Section 1.01. Merger.......................................................1
Section 1.02. Filing.......................................................3
Section 1.03. Effective Date...............................................3
Section 1.04. Effect of Merger.............................................3
Section 1.05. Further Assurances...........................................3
Section 1.06. Closing......................................................3
ARTICLE II
REPRESENTATIONS AND WARRANTIES CONCERNING MERGING PARTNERSHIPS
Section 2.01. Effect of Agreement..........................................4
Section 2.02. Organization.................................................4
Section 2.03. Capitalization...............................................5
Section 2.04. Financial Statements.........................................5
Section 2.05. Absence of Certain Changes...................................5
Section 2.06. Litigation...................................................5
Section 2.07. Property; Title..............................................5
Section 2.08. Records and Permits. .......................................6
Section 2.09. Contracts and Leases.........................................6
Section 2.10 Receivables..................................................6
Section 2.11 Insurance....................................................6
Section 2.12 Employees; Benefits..........................................6
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Page
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TEXAS VII
Section 3.01. Organization; Good Standing; Power...........................7
Section 3.02. Authority Relative to Agreement..............................7
Section 3.03. Effect of Agreement..........................................7
Section 3.04. No Other Representations.....................................7
ARTICLE IV
CERTAIN COVENANTS
Section 4.01. Conduct of Business..........................................8
Section 4.02. Access to Books, Records, and Properties.....................8
Section 4.03. Confidentiality..............................................8
Section 4.04. Maintenance of Insurance.....................................8
ARTICLE V
NATURE AND SURVIVAL OF COVENANTS, REPRESENTATIONS
AND WARRANTIES; INDEMNIFICATION
Section 5.01. Survival of Representations..................................9
Section 5.02. Indemnification by Merging Partnerships......................9
Section 5.03. Indemnification by Texas VII.................................9
Section 5.04. Notice of Claim..............................................9
Section 5.05. Limits of Indemnification...................................10
ARTICLE VI
CONDITIONS PRECEDENT TO THE CONSUMMATION OF THE MERGER
Section 6.01. Accuracy of Representations and Warranties..................10
Section 6.02. Performance of Agreements...................................10
-ii-
<PAGE>
Page
Section 6.03. Partnership Approval............................................10
ARTICLE VII
TERMINATION OF AGREEMENT
Section 7.01. Conditions for Termination.....................................10
ARTICLE VIII
MISCELLANEOUS PROVISIONS
Section 8.01. Expenses......................................................11
Section 8.02. Governing Law.................................................11
Section 8.03. Entire Agreement..............................................11
Section 8.04. Amendments and Modifications..................................11
Section 8.05. Assignment....................................................11
Section 8.06. Captions......................................................11
Section 8.07. Execution in Counterparts.....................................11
Section 8.08. Number and Gender.............................................11
Section 8.09. Notices.......................................................12
Section 8.10. Successors and Assigns........................................12
SCHEDULES
Schedule 2.01 - Defaults & Consents
Schedule 2.02 - Qualifications and Licenses
Schedule 2.03 - Capitalization
Schedule 2.05 - Absence of Certain Changes
Schedule 2.06 - Litigation
Schedule 2.07 - Property; Title
Schedule 2.09 - Contracts and Leases
Schedule 2.11 - Insurance
Schedule 2.12 - Employees; Benefits
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<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (together with all Schedules and
Exhibits hereto, the "Agreement"), made and entered into as of the 4th day
of September, 1998, by and among Texas Lithotripsy Limited Partnership VII,
L.P., a recently organized Texas limited partnership ("Texas VII" or the
"Surviving Partnership"), Texas Lithotripsy Limited Partnership II L.P., a
Texas limited partnership ("Texas II"), Texas Lithotripsy Limited
Partnership IV L.P., a Texas limited partnership ("Texas IV"), Texas
ESWL/Laser Lithotripter, Ltd., a Texas limited partnership ("ESWL"),
Lithotripters, Inc., a North Carolina corporation and the sole general
partner of Texas II and Texas IV ("Litho") and Texas Litho, Inc., a
Delaware corporation and the sole general partner of ESWL ("Texas Litho").
ESWL, Texas II and Texas IV are sometimes referred to herein individually
as a "Merging Partnership" and collectively as the "Merging Partnerships."
The Surviving Partnership and the Merging Partnerships are also sometimes
referred to herein collectively as the "Constituent Partnerships."
RECITAL:
Each of the Constituent Partnerships deems it advisable that the
Merging Partnerships merge with and into the Surviving Partnership on the
terms and conditions set forth herein (the "Merger"), subject to the
approval of this Agreement by the partners of each of the Merging
Partnerships in the manner set forth in their respective limited
partnership agreements.
THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties hereto do hereby agree as follows:
ARTICLE I
PLAN OF MERGER
Section 1.01. Merger. This Section 1.01 shall constitute the "plan of
merger" within the meaning of the Texas Revised Limited Partnership Act
(the "Act").
(A) The names of the limited partnerships proposing to merge are Texas
Lithotripsy Limited Partnership II L.P., a Texas limited partnership
("Texas II"), Texas Lithotripsy Limited Partnership IV L.P., a Texas
limited partnership ("Texas IV") and Texas ESWL/Laser Lithotripter, Ltd., a
Texas limited partnership ("ESWL") (each, a "Merging Partnership" and
collectively the "Merging Partnerships"). The name of the limited
partnership into which the Merging Partnerships propose to merge (the
"Merger") is Texas Lithotripsy Limited Partnership VII, L.P., a Texas
limited partnership (the "Surviving Partnership" or "Texas VII"). The
Merging Partnerships and the Surviving Partnership are hereinafter referred
to collectively as the "Constituent Partnerships."
(B) Until the effective time of the Merger (the "Effective Time"),
each of the Constituent Partnerships shall continue to conduct its business
without material change and shall not make any distribution or other
disposition of any material assets, capital or surplus, except in the
ordinary course of business or with the consent of the other Constituent
Partnerships.
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<PAGE>
(C) As of the Effective Time, the Merging Partnerships' liabilities
and assets of every nature shall become those of the Surviving Partnership
by operation of law, without reversion or impairment, without further act
or deed, and without any transfer or assignment having occurred.
(D)(1) At the Effective Time, by virtue of the Merger and without any
action on the part of the general partner or the limited partner of the
Surviving Partnership, the sole general partner partnership interest in the
Surviving Partnership shall be cancelled and the entire limited partner
partnership interest of the sole initial limited partner of the Surviving
Partnership shall be canceled.
(2) At the Effective Time, by virtue of the Merger and without any
action on the part of the general partner or the limited partners of Texas
II, the sole general partner partnership interest in Texas II shall be
converted into and shall represent the right to receive an 11.507% general
partner partnership interest in the Surviving Partnership and each
outstanding 1% limited partner partnership interest in Texas II shall be
converted into and represent the right to receive a 0.514% limited partner
partnership interest in the Surviving Partnership (proportionately adjusted
for fractional percentage interests).
(3) At the Effective Time, by virtue of the Merger and without any
action on the part of the general partner or the limited partners of Texas
IV, the sole general partner partnership interest in Texas IV shall be
converted into and shall represent the right to receive a 4.120% general
partner partnership interest in the Surviving Partnership and each
outstanding 1% limited partner partnership interest in Texas IV shall be
converted into and represent the right to receive a 0.206% limited partner
partnership interest in the Surviving Partnership (proportionately adjusted
for fractional percentage interests).
(4) At the Effective Time, by virtue of the Merger and without any
action on the part of the general partner or the limited partners of ESWL,
the sole general partner partnership interest in ESWL shall be converted
into and shall represent the right to receive a 5.181% general partner
partnership interest in the Surviving Partnership and each outstanding 1%
limited partner partnership interest in ESWL shall be converted into and
represent the right to receive a 0.279% limited partner partnership
interest in the Surviving Partnership (proportionately adjusted for
fractional percentage interests).
(5) Promptly after the Effective Time, the general partner of the
Surviving Partnership shall prepare and execute an amendment to the
Surviving Partnership's Agreement of Limited Partnership providing for the
general and limited partner partnership interests herein contemplated and
deliver a copy of such amendment to each person who was a general or
limited partner of any of the Merging Partnerships.
(6) After the Effective Time, no transfer of partnership interests
shall be made on the transfer books of the Merging Partnerships.
(E) The Texas VII limited partnership agreement shall, as amended in
the manner contemplated in Section 1.01(D)(5) above, continue as the
Surviving Partnership's agreement of limited partnership.
2
<PAGE>
(G) The Effective Time shall be 11:59:59 p.m. on the day the
Certificate of Merger is filed with the Texas Secretary of State.
Section 1.02. Filing. Upon fulfillment or waiver of the conditions
specified in ARTICLE VI and provided that this Agreement has not been
terminated pursuant to ARTICLE VII, the Constituent Partnerships will cause
a Certificate of Merger reflecting the terms of the Merger in the form
prescribed by law to be executed and filed with the Secretary of State of
the State of Texas.
Section 1.03. Effective Date. The Merger shall be effective at the
Effective Time.
Section 1.04. Effect of Merger. From and after the Effective Time, the
separate existence of the Merging Partnerships shall cease, and the
Surviving Partnership shall thereupon and thereafter, to the extent
consistent with its Certificate of Limited Partnership, possess all the
rights, privileges, immunities and franchises, of a public as well as of a
private nature, of each of the Constituent Partnerships; and all property,
real, personal and mixed, and all debts due on whatever account, and all
other choses in action, and all and every other interest, of or belonging
to or due to each of the Constituent Partnerships shall vest in the
Surviving Partnership without further act or deed and without any transfer
or assignment having occurred; and the title to any property or interest
therein, vested in any of the Constituent Partnerships shall not revert or
be in any way impaired by reason of the Merger. The Surviving Partnership
shall thenceforth be responsible and liable for all the liabilities,
obligations and penalties of each of the Constituent Partnerships; and any
claim existing or action or proceeding, civil or criminal, pending by or
against any of the Constituent Partnerships may be prosecuted as if the
Merger had not taken place, or the Surviving Partnership may be substituted
in its place; and any judgment rendered against any of the Constituent
Partnerships may be enforced against the Surviving Partnership. Neither the
rights of creditors nor any liens upon the property of any of the
Constituent Partnerships shall be impaired by reason of the Merger.
Section 1.05. Further Assurances. If, at any time after the Effective
Time, the Surviving Partnership shall consider or be advised that any
further deeds, assignments or assurances in law or any other actions are
necessary, desirable or proper to vest, perfect or confirm of record or
otherwise, in it, the title to any property or rights of the Constituent
Partnerships acquired or to be acquired by reason of, or as a result of,
the Merger, the Constituent Partnerships agree that such Constituent
Partnerships, acting through their respective general partners by their
proper officers and directors, shall and will execute and deliver all such
proper deeds, assignments and assurances in law and do all things
necessary, desirable or proper to vest, perfect or confirm title to such
property or rights in the Surviving Partnership and otherwise to carry out
the purpose of this Agreement, and that the Surviving Partnership's general
partner is fully authorized and directed in the name of the Constituent
Partnerships or otherwise to take any and all such actions.
Section 1.06. Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Texas
VII, 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746 at
9:00 A.M., Central time on the business day following the satisfaction of
the conditions to Closing set forth in ARTICLE VI (the "Closing Date")
unless the parties hereto agree upon a different time, date or place. The
Closing shall not be deemed to have occurred until all actions necessary to
complete the Closing have occurred.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES CONCERNING MERGING PARTNERSHIPS
Subject to the limitations and qualifications set forth in this
Agreement, including the Disclosure Schedule attached hereto and
incorporated herein by reference, each Merging Partnership severally (and
only to the extent any representation or warranty pertains to itself) and
not jointly, represents and warrants, to each other Constituent Partnership
as follows:
Section 2.01. Effect of Agreement. This Agreement is a legal, valid
and binding obligation of the Merging Partnership and is enforceable
against it in accordance with the terms hereof, except that such
enforceability may be limited by bankruptcy, insolvency, reorganization or
other similar laws affecting creditors' rights generally and by principles
of equity regarding the availability of remedies. The Merging Partnership
has the requisite limited partnership power and authority to enter into
this Agreement and to carry out the transactions contemplated hereby and,
assuming receipt of the approvals described in Section 6.03 below, the
execution, delivery and performance of this Agreement will have been duly
and validly authorized by all necessary limited partnership action on the
part of such Merging Partnership. Except as set forth on Schedule 2.01 of
the Disclosure Schedule or to the extent the following would not reasonably
be expected to have a material adverse effect on the business of the
Merging Partnership ("Material Adverse Effect"), the execution, delivery
and performance of this Agreement by the Merging Partnership and the
consummation of the transactions contemplated hereby will not (i) require
the consent, approval or authorization of any person (other than its
partners), corporation, partnership, joint venture or other business
association or public authority; (ii) violate, with or without the giving
of notice or the passage of time, or both, any provisions of law applicable
to the Merging Partnership; (iii) with or without the giving of notice or
the passage of time, or both, conflict with or result in a breach or
termination of any provision of, or constitute a default under, or result
in the creation of any lien, charge or encumbrance upon any of the
properties or assets of the Merging Partnership pursuant to any agreement
of limited partnership or limited partnership certificate or material
indenture, note, bond, pledge, mortgage, deed of trust, lease, license,
contract, agreement, commitment or other instrument, or obligation, or any
order, judgment, award, decree, statute, ordinance, regulation or any other
restriction of any kind or character, to which such Merging Partnership is
a party or by which it or any of its assets or properties may be bound; or
(iv) result in the acceleration of any indebtedness or increase the rate of
interest payable by the Merging Partnership with respect to any
indebtedness. Except to the extent disclosed in the Texas VII Confidential
Private Placement Memorandum dated as of even date herewith, as hereafter
amended and supplemented (the "Offering Memorandum"), the Merging
Partnership is in material compliance with all applicable laws, rules and
regulations.
Section 2.02. Organization. The Merging Partnership is a limited
partnership formed in accordance with, validly existing and in good
standing under the laws of the State of Texas, with all requisite limited
partnership power and authority to own, operate and lease its properties
and to carry on its business as now being conducted. The Merging
Partnership neither owns nor has the right to acquire an equity interest in
any corporation, partnership or other organization. As of the date of this
Agreement, the Merging Partnership is qualified to conduct business and
holds licenses as provided on Schedule 2.02 of the Disclosure Schedule.
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Section 2.03. Capitalization. Schedule 2.03 of the Disclosure Schedule
sets forth the names and respective partnership interests of each general
and limited partner of record in the Merging Partnership. Except as
provided on such Schedule 2.03 or pursuant to the terms of its Agreement of
Limited Partnership, to the knowledge of the Merging Partnership there are
no outstanding or authorized subscriptions, options, warrants, calls,
rights, commitments or any other agreements of any character obligating the
Merging Partnership to issue any additional capital partner interests or
any securities convertible into or evidencing the right to subscribe for,
purchase or acquire any capital partner interests, nor are there any voting
trusts or any other agreements or understandings with respect to the voting
of its general and limited partner interests.
Section 2.04. Financial Statements. Complete copies of the internally
prepared or audited financial statements, as the case may be, of the
Merging Partnership for the three-year period ended December 31, 1997 and
the six-month period ended June 30, 1998 have previously been provided to
Litho or Texas Litho, as the case may be. Such financial statements present
fairly in all material respects the financial position and results of
operation of the Merging Partnership as of such dates and for the periods
then ended, subject to year end adjustments in the case of interim
financial statements; provided, that any unaudited statements (including
interim statements) may not contain footnotes. The balance sheet of the
Merging Partnership at June 30, 1998 is referred to herein as the "Balance
Sheet" and June 30, 1998 is referred to herein as the "Balance Sheet Date."
Section 2.05. Absence of Certain Changes. Except as set forth on
Schedule 2.05 of the Disclosure Schedule or otherwise contemplated by the
terms of this Agreement, since the Balance Sheet Date, no material adverse
change has occurred to the Merging Partnership or its business, properties,
financial condition or prospects.
Section 2.06. Litigation. Except as set forth on Schedule 2.06 of the
Disclosure Schedule or the Section of the Offering Memorandum entitled
"Regulation", there is no claim, action, suit, proceeding (legal,
administrative or otherwise), investigation or inquiry (by an
administrative agency, governmental body or otherwise) pending or, to the
knowledge of the Merging Partnership threatened by or against, or otherwise
affecting, the Merging Partnership, its properties or assets or the
transactions contemplated hereby, at law or in equity, or before or by any
federal, state, municipal or other governmental department, commission,
board, agency, instrumentality or authority, domestic or foreign.
Section 2.07. Property; Title. Schedule 2.07 of the Disclosure
Schedule describes each material item of machinery, equipment, furniture,
supplies, materials, vehicles and other items of tangible personal property
of every kind owned by the Merging Partnership (the "Partnership Assets").
The Merging Partnership has good and marketable title to its Partnership
Assets, free and clear of all liens except as disclosed on Schedule 2.07.
The Merging Partnership does not own an interest in any real property. The
Partnership Assets constitute all of the assets of the Merging Partnership
required to operate its business in the manner presently conducted (except
to the extent a necessary asset may be leased as disclosed on Schedule 2.09
of the Disclosure Schedule) and are in good operating order and condition,
ordinary wear and tear excepted and are suitable for their intended use
subject to periodic maintenance.
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Section 2.08. Records and Permits. The books and records of the
Merging Partnership are true, accurate and complete in all material
respects. The Merging Partnership has obtained all permits, certificates
and licenses required for the conduct of its business and the ownership of
its Partnership Assets the failure of which to obtain or maintain could
reasonably be expected to have a Material Adverse Effect (the "Necessary
Permits"). The Merging Partnership is not in violation of any Necessary
Permit and no proceedings are pending, or to the knowledge of the Merging
Partnership, threatened, to revoke or limit any Necessary Permit.
Section 2.09. Contracts and Leases. Schedule 2.09 of the Disclosure
Schedule lists all contracts, commitments, agreements (including agreements
for the borrowing of money or the extension of credit), leases, licenses,
understandings and obligations, whether written or oral, to which the
Merging Partnership is party or by which it or any of its Partnership
Assets is bound or affected, that are material to the operation of its
business or which impose a material obligation on the Merging Partnership
(the "Contracts"). Each of the Contracts is valid, binding and enforceable
in accordance with its terms except that such enforceability may be limited
by bankruptcy, insolvency, reorganization or other similar laws affecting
creditors' rights generally and by principles of equity regarding the
availability of remedies. Each Contract is in full force and effect. Except
as set forth on Schedule 2.01 of the Disclosure Schedule, there are no
existing defaults, and no events or circumstances have occurred which, with
or without notice or lapse of time or both, would constitute defaults,
under any of the Contracts by the Merging Partnership or, to its knowledge,
any other party thereto.
Section 2.10 Receivables. All accounts receivable due to the Merging
Partnership are, and will be at the Effective Time, legal, valid and
binding obligations, created in the ordinary course of business of the
Merging Partnership.
Section 2.11 Insurance. Schedule 2.11 of the Disclosure Schedule
describes all insurance policies maintained by the Merging Partnership with
respect to its business and Partnership Assets. Such policies are valid,
binding and enforceable in accordance with their terms except that such
enforceability may be limited by bankruptcy, insolvency, reorganization or
other similar laws affecting creditors' rights generally and by principles
of equity regarding the availability of remedies, are in full force and
effect, and all premiums due thereon have been paid and will be paid
through the Effective Time.
Section 2.12 Employees; Benefits. Schedule 2.12 of the Disclosure
Schedule sets forth a list of the name and position of each person who is
employed by the Merging Partnership or associated with its business in any
capacity, as well as each other person to whom the Merging Partnership has
a policy, practice or obligation to pay or provide retirement, health,
welfare or other benefits of any kind, together with a description of such
benefits (other than salary information). Except as set forth on Schedule
2.12, there are no Plans, as defined below, contributed to, maintained or
sponsored by the Merging Partnership, to which the Merging Partnership is
obligated to contribute or with respect to which the Merging Partnership
has any liability or potential liability, whether direct or indirect,
including all Plans contributed to, maintained or sponsored by each member
of the controlled group of companies, within the meaning of Sections
414(b), 414(c), and 414(m) of the Internal Revenue Code of 1986, as
amended, of which the Merging Partnership is a member to the extent the
Merging Partnership has any potential liability with respect to such Plans.
For purposes of this Agreement, the term "Plans" shall mean: (a) employee
benefit plans as defined in Section 3(3) of the Employee
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Retirement Income Security Act of 1974, as amended ("ERISA"), whether
or not funded and whether or not terminated, (b) employment agreements and
(c) personnel policies or fringe benefit plans, policies, programs and
arrangements, whether or not subject to ERISA, whether or not funded, and
whether or not terminated, including without limitation, stock bonus,
deferred compensation, pension, severance, bonus, vacation, travel,
incentive, and health, disability and welfare plans. There is no unfair
labor practice complaint, labor organizational effort, strike, slowdown or
similar labor matter pending or, to the knowledge of the Merging
Partnership, threatened against it or affecting its business.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TEXAS VII
Subject to the limitations and qualifications set forth in this
Agreement, Texas VII represents and warrants to each Merging Partnership as
follows:
Section 3.01. Organization; Good Standing; Power. Texas VII is a
limited partnership formed in accordance with, validly existing and in good
standing under the laws of the State of Texas and has all requisite limited
partnership power and authority to own, lease and operate its prop erties,
to carry on its business as now being conducted and to enter into this
Agreement and perform its obligations hereunder.
Section 3.02. Authority Relative to Agreement. The execution,
delivery and per formance of this Agreement have been duly and effectively
authorized by all necessary limited partnership action on the part of Texas
VII, and this Agreement is a valid, legally binding and en forceable
obligation of Texas VII, except that enforceability hereof may be limited
by bankruptcy, insolvency, reorganization or other similar laws affecting
creditors' rights generally and by principles of equity regarding the
availability of remedies.
Section 3.03. Effect of Agreement. The execution, delivery and
performance of this Agreement by Texas VII and the consummation of the
transactions contemplated hereby will not (i) require the consent, approval
or authorization of any person, corporation, partnership, joint venture or
other business association or public authority; (ii) violate, with or
without the giving of notice or the passage of time, or both, any provision
of law now applicable to Texas VII; (iii) with or without the giving of
notice or the passage of time, or both, conflict with or result in a breach
or termination of any provision of, or constitute a default under, or
result in the creation of any lien, charge or encumbrance upon any of the
property or assets of Texas VII pursuant to any agreement of limited
partnership or limited partnership certificate, indenture, note, bond,
pledge, mortgage, deed of trust, lease, license, contract, agreement,
commitment or other instrument or obligation or any order, judgment, award,
decree, statute, ordinance, regulation, or any other restriction of any
kind or character, to which Texas VII is a party, or by which Texas VII or
any of its assets or properties are bound; or (iv) result in the
acceleration of any indebtedness of Texas VII or increase the rate of
interest payable by Texas VII with respect to any indebtedness.
Section 3.04. No Other Representations. The proposed business of Texas
VII is accurately described in the Offering Memorandum (subject to the
limitations, assumptions and conditions therein provided and the accuracy
and completeness of the representations and warranties
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made herein by the Merging Partnerships) and Texas VII has no material
assets or liabilities except as described therein. No representation is
made as to the projected financial or other results of its proposed
operations.
ARTICLE IV
CERTAIN COVENANTS
Section 4.01. Conduct of Business. Between the date hereof and the
Effective Time, each Merging Partnership and the Surviving Partnership
(solely with respect to themselves) covenants and agrees that except as set
forth herein or in the Offering Memorandum, (i) the business of such person
will be conducted in a manner not materially different from its past
practice and only in the ordinary course, and (ii) it will refrain from
incurring any material debt, liability or obligation, contingent or
otherwise absent the consent of the other Constituent Partnerships.
Section 4.02. Access to Books, Records, and Properties. Subject to
Section 4.03 below, each Party has previously and shall continue to afford
to each other party and its representatives reasonable access to their
respective properties, books and records at reasonable times.
Section 4.03. Confidentiality. In recognition of the confidential
nature of certain of the information which has been or will be provided to
each party and its affiliates by the other parties hereto, each party
agrees to retain in confidence (except that it may disclose the information
herein described to its agents, advisors and lenders after making them
aware of the limitations on disclosure herein set forth and obtaining their
agreement to abide by them), information transmitted or disclosed to it by
any other party and further agrees that it will not use for its own benefit
or for the benefit of any of its affiliates and will not use or disclose to
any other third party, or permit the use or disclosure to any other third
party of, any information so obtained or revealed. Notwithstanding anything
to the contrary in the foregoing provisions, such information may be
disclosed (a) where it is required by court order or decree or applicable
law (including to the extent reasonably necessary to prepare the Offering
Memorandum and provide adequate disclosure in connection with the votes
described in Section 6.03 below), (b) if it is ascertainable or obtained
from public or published information, (c) if the recipient can demonstrate
that such information was properly in its possession prior to disclosure
thereof and (d) following successful consummation of the Closing to the
extent required in connection with the operation of Texas VII's business.
If any recipient of information shall be required to make disclosure of any
such information by court order or decree or applicable law, such person
shall give the affected party or parties prior notice of the making of such
disclosure and shall use all efforts to afford them an opportunity to
contest the making of such disclosure. The restrictions under this Section
shall survive Closing; provided further, that in the event this Agreement
is terminated prior to Closing, the restrictions under this Section shall
survive such termination notwithstanding anything contained herein to the
contrary.
Section 4.04. Maintenance of Insurance. Texas VII covenants that for a
period of not less than the longer of (i) three years or (ii) the
expiration of any applicable statute of limitations or repose, to maintain
in full force and effect one or more policies of insurance issued by
reputable carriers providing coverage against services furnished by the
Merging Partnerships prior to the Effective Time, in amounts and with
deductibles consistent with good and standard industry practices.
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ARTICLE V
NATURE AND SURVIVAL OF COVENANTS, REPRESENTATIONS
AND WARRANTIES; INDEMNIFICATION
Section 5.01. Survival of Representations. Except as otherwise
expressly provided herein, all representations, warranties, indemnities,
covenants and agreements made in this Agreement and the remedies of the
parties with respect thereto, shall, except to the extent notice is given
prior to the expiration of the applicable period, survive the Effective
Time hereunder for a period of one year. Any claim for indemnification
hereunder which shall have been asserted during the survival period shall
continue in effect with respect to such particular claims until such claim
shall have been finally resolved or settled. It is expressly understood and
agreed that each covenant and agreement which by its nature survives
Closing shall survive for an indefinite period except to the extent limited
by the express terms thereof.
Section 5.02. Indemnification by Merging Partnerships. Subject to the
period of survival set forth in Section 5.01 and the limitations contained
in Section 5.05 below, Litho and Texas Litho, severally and not jointly,
shall indemnify, defend and hold harmless Texas VII and its affiliates,
partners, agents and employees (collectively, the "Surviving Indemnitees")
from, against and with respect to any and all losses, damages, claims,
obligations, liabilities, costs and expenses of any kind or character (a
"Loss") arising out of or in connection with any of the following:
(a) any breach of any of the representations or warranties of any
Merging Partnership of which such person is the general partner contained
in or made pursuant to this Agreement; and
(b) any failure by any Merging Partnership of which such person is the
general partner to perform or observe, in full, any covenant, agreement or
condition to be performed or observed by it pursuant to this Agreement.
Section 5.03. Indemnification by Texas VII. Subject to the period of
survival set forth in Section 5.01 and the limitations contained in
Section 5.05 below, Texas VII shall indemnify, defend and hold harmless
each partner in the Merging Partnerships from, against and with respect to
any Loss arising out of or in connection with any of the following:
(a) any breach of any of the representations and warranties of Texas
VII contained in or made pursuant to this Agreement; and
(b) any failure by Texas VII to perform or observe, in full, any
covenant, agreement or condition to be performed or observed by it pursuant
to this Agreement.
Section 5.04. Notice of Claim. Any party seeking to be indemnified
hereunder (the "Indemnified Party") shall, within 15 days following
discovery of the matters giving rise to a Loss, notify the party from whom
indemnity is sought (the "Indemnity Obligor") in writing of any claim for
recovery, specifying in reasonable detail the nature of the Loss and the
amount of the liability estimated to arise therefrom. Failure to give such
notice shall constitute a waiver of the Loss attributable to such
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matters only to the extent the indemnitor is actually damaged thereby
or such delay causes an additional expense.
Section 5.05. Limits of Indemnification. The amount payable with respect to any
Loss by any Indemnified Party (i) shall be reduced by the amount of any
insurance proceeds received with respect to the Loss, and each of the parties
hereby agrees to use its reasonable best efforts to collect any and all
insurance proceeds to which it may be entitled in respect of any Loss;
(ii) shall be net of any federal, state or local tax benefit derived by the
Indemnified Party by reason of the Loss and (iii) shall not include any amounts
related to special, incidental, indirect, cover, exemplary or consequential
damages.
ARTICLE VI
CONDITIONS PRECEDENT TO THE CONSUMMATION OF THE MERGER
The obligations of each party under this Agreement are subject to the
satisfaction at or prior to the Closing Date (including satisfaction
thereof simultaneously with the Closing, it being agreed that no action to
be taken at the Closing shall be deemed consummated until all actions to be
taken at the Closing shall be deemed consummated) of each of the following
conditions:
Section 6.01. Accuracy of Representations and Warranties. The
representations and warranties of each other party herein contained shall
be true and correct in all material respects on and as of the Closing Date
with the same force and effect as though made on and as of the Closing
Date, except as affected by transactions contemplated hereby.
Section 6.02. Performance of Agreements. Each other party shall have
complied with the covenants set forth in Sections 4.01 and 4.02.
Section 6.03. Partnership Approval. The partners of each Merging
Partnership shall have approved the Merger in the manner required in their
respective Agreements of Limited Partnership.
ARTICLE VII
TERMINATION OF AGREEMENT
Section 7.01. Conditions for Termination. Notwithstanding anything to
the contrary herein, this Agreement may be terminated and the transactions
hereby may be abandoned:
(A) by the mutual consent of Litho and Texas Litho at any time prior
to the Effective Time;
(B) by action of any Merging Partnership if the Merger has not been
consummated or any other party shall have failed to satisfy the conditions
to Closing to be satisfied by such party on or before December 31, 1998;
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(C) by action of any Merging Partnership if there exists a material
breach of any representation, warranty or covenant made by any other
Merging Partnership or by Texas VII following notice thereof and failure by
such party to cure such breach with 15 days thereafter.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
Section 8.01. Expenses. Except as otherwise expressly provided herein
or as provided in the section of the Offering Memorandum entitled "Sources
and Applications of Funds," each party will bear its own expenses in
connection with the accounting, legal, investment banking and professional
services required in the negotiation and preparation of this Agreement and
the consummation of the transactions provided for in this Agreement.
Section 8.02. Governing Law. This Agreement and the transactions
contemplated herein shall be governed by, interpreted, construed and
enforced in accordance with the laws of the State of Texas applicable to
contracts made and to be performed entirely within the State of Texas.
Section 8.03. Entire Agreement. This Agreement (including the
Schedules and any subsidiary agreements incorporated herein as Exhibits)
contains the entire agreement of the parties with respect to the subject
matter hereof and supersedes any prior agreement between or among the
parties hereto.
Section 8.04. Amendments and Modifications. This Agreement shall not
be modified, amended or changed in any respect except in writing duly
signed by the parties hereto and each party hereby waives any right to
amend this Agreement in any other way.
Section 8.05. Assignment. This Agreement may not be assigned by any
of the parties hereto. Notwithstanding the foregoing, it is expressly
agreed that prior to or concurrent with the Effective Time, Texas Litho may
merge with Litho or otherwise convey its interests in ESWL to Litho and
Litho shall succeed to the rights and obligations of Texas Litho hereunder.
Section 8.06. Captions. Captions in this Agreement are solely for
purposes of identification and shall not in any manner alter or vary the
interpretation or construction of this Agreement.
Section 8.07. Execution in Counterparts. This Agreement may be
executed in more than one counterpart, each of which shall be deemed to be
an original, but all of which shall be deemed to constitute one instrument.
It shall not be necessary for all parties to have signed the same
counterpart provided that all parties have signed at least one counterpart.
Section 8.08. Number and Gender. Throughout this Agreement, wherever
the context so requires, the singular shall include the plural, and the
masculine gender shall include the feminine and neuter genders, and vice
versa.
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Section 8.09. Notices. All notices or other communications that are
required or permitted hereunder shall be given in writing and shall be
given either by personal delivery, by Federal Express or other overnight
courier or by telecopy, shall be deemed to have been given when personally
delivered, when deposited with charges prepaid with Federal Express or
other nationally recognized overnight courier service, or when transmitted
to telecopy machine, addressed to the respective parties as follows:
Texas Lithotripsy Limited Partnership II L.P.
c/o Lithotripters, Inc
2008 Litho Place
Fayetteville, NC 28304
Facsimile: (910) 323-9857
Attn: Joseph Jenkins, M.D.
Texas Lithotripsy Limited Partnership IV L.P.
c/o Lithotripters, Inc
2008 Litho Place
Fayetteville, NC 28304
Facsimile: (910) 323-9857
Attn: Joseph Jenkins, M.D.
Texas ESWL/Laser Lithotripter, Ltd.
c/o Texas Litho, Inc.
1301 Capital of Texas Highway
Suite C-300
Austin, Texas 78746
Facsimile: (512) 328-8510
Attn: Michael Madler
Texas Lithotripsy Limited Partnership VII, L.P.
c/o Lithotripters, Inc
1301 Capital of Texas Highway
Suite C-300
Austin, Texas 78746
Facsimile: (512) 328-8510
Attn: Michael Madler
Any party may by notice change the address to which notice or other
communications to such party are to be delivered or mailed.
Section 8.10. Successors and Assigns. All of the terms and provisions
of this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and to the extent
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permitted herein, their successors and assigns. No third parties are
intended to benefit, however, from the terms and provisions hereof or from
any representation, warranty, covenant or obligation set forth herein or in
any schedule, exhibit or other writing delivered pursuant hereto.
[The remainder of this page has been left blank intentionally.]
13
IN WITNESS WHEREOF, the parties hereto have executed or caused to be executed
this Agreement on the day and year first above written.
TEXAS LITHOTRIPSY LIMITED PARTNERSHIP
II L.P.
By: Lithotripters, Inc., sole general partner
By: ________________________________________
________________________________________
(Type Name and Title)
TEXAS LITHOTRIPSY LIMITED PARTNERSHIP
IV L.P.
By: Lithotripters, Inc., sole general partner
By: ________________________________________
________________________________________
(Type Name and Title)
TEXAS ESWL/LASER LITHOTRIPTER, LTD
By: Texas Litho, Inc., sole general partner
By: ________________________________________
________________________________________
(Type Name and Title)
TEXAS LITHOTRIPSY LIMITED PARTNERSHIP
VII, L.P.
By: Lithotripters, Inc. sole general partner
By: ________________________________________
________________________________________
(Type Name and Title)
[SIGNATURES CONTINUED ON FOLLOWING PAGE.]
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LITHOTRIPTERS, INC.
By: ________________________________________
________________________________________
(Type Name and Title)
TEXAS LITHO, INC.
By: ________________________________________
________________________________________
(Type Name and Title)
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SCHEDULES
Relating to the
AGREEMENT AND PLAN OF MERGER
among
TEXAS LITHOTRIPSY LIMITED PARTNERSHIP II L.P.,
TEXAS LITHOTRIPSY LIMITED PARTNERSHIP IV L.P.,
TEXAS ESWL/LASER LITHOTRIPTER, LTD.
and
TEXAS LITHOTRIPSY LIMITED PARTNERSHIP VII, L.P.
September 4, 1998
ANY FACT OR MATTER DISCLOSED IN ONE OR MORE SCHEDULES SHALL BE DEEMED DISCLOSED
FOR PURPOSES OF ALL SCHEDULES, WHETHER OR NOT SPECIFICALLY CROSS-REFERENCED.
CAPITALIZED TERMS USED HEREIN AND NOT OTHERWISE DEFINED HAVE THE SAME MEANING AS
IN THE AGREEMENT TO WHICH THESE SCHEDULES ARE ATTACHED AND INCORPORATED BY
REFERENCE.
<PAGE>
TABLE OF CONTENTS
Page
SCHEDULE 2.01 - Defaults and Consents..........................................1
SCHEDULE 2.02 - Qualifications and Licenses....................................3
SCHEDULE 2.03 - Capitalization.................................................4
SCHEDULE 2.05 - Absence of Certain Changes....................................10
SCHEDULE 2.06 - Litigation....................................................11
SCHEDULE 2.07 - Property; Title...............................................12
SCHEDULE 2.09 - Contracts and Leases..........................................16
SCHEDULE 2.11 - Insurance.....................................................22
SCHEDULE 2.12 - Employees; Benefits...........................................26
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SCHEDULE 2.01
Defaults and Consents
1. The vote of a prescribed portion of the outstanding limited partner interests
in each Merging Partnership is necessary to authorize the Merger. Litho and
Texas Litho interpret the agreement of limited partnership for ESWL to require
the vote of two-thirds in interest of the ESWL limited partners. Such
interpretation is reasonable in the opinion of Litho and Texas Litho, but an
argument can be made that a greater voting requirement applies. As of the date
of this Agreement, no such claims are pending or, to the knowledge of Litho and
Texas Litho, threatened.
2. Consents must be obtained under the following lithotripsy services agreements
in connection with the Merger:
a. Texas II
i. Services Agreement by and among Texas II and Harris Methodist
Fort Worth, Harris Methodist Southwest and Harris Methodist H-E-B
dated May 1, 1997.
ii. Services Agreement by and between Texas II and Hillcrest
Baptist Medical Center dates April 1, 1992.
iii. Services Agreement by and between Texas II and Irving
Hospital Authority d/b/a Irving Healthcare System dated August 9,
1991.
iv. Services Agreement by and between Texas II and Health Trust,
Inc.-The Hospital Company with respect to Northeast Community Hospital
dated April 25, 1991.
v. Services Agreement by and between Texas II and Providence
Health Center dated July 9, 1991.
b. Texas IV
i. None
c. ESWL
i. Lithotripsy Services Agreement between ESWL and Angelo
Community Hospital dated July 8, 1992, as amended by that certain
Amendment No. 1
1
<PAGE>
to the Lithotripsy Services Agreement regarding billing and user
fees between ESWL and Angelo Community Hospital dated January 1, 1995.
3. Consent must be obtained under the following lease in connection with
the Merger:
a. Vehicle Lease Service Agreement between PACCAR Leasing
Corporation and ESWL for 1996 Peterbilt 379 truck dated October 9,
1995.
2
<PAGE>
SCHEDULE 2.02
Qualifications and Licenses
1. Texas II
a. Texas II was organized and conducts business in Texas.
b. Texas II operates its lithotripter equipment in Texas under a
Certificate of Registration for Industrial Services issued to its
general partner, Lithotripters, Inc., by the Texas Department of
Health Bureau of Radiation Control which will expire on May 31, 2000.
2. Texas IV
a. Texas IV was organized and conducts business in Texas.
b. Texas IV operates its lithotripter equipment in Texas under a
Certificate of Registration for Industrial Services issued to its
general partner, Lithotripters, Inc., by the Texas Department of
Health Bureau of Radiation Control which will expire on May 31, 2000.
Texas IV currently conducts no active operations in Oklahoma and
therefore has allowed its license for the use of its lithotripter
equipment to lapse.
3. ESWL
a. ESWL was organized and conducts business in Texas. ESWL is
qualified to conduct business in Oklahoma and Arkansas.
b. ESWL operates its lithotripter equipment in Texas under a
Certificate of Registration for Industrial Services issued to it by
the Texas Department of Health Bureau of Radiation Control which will
expire on May 31, 2001. ESWL operates its lithotripter equipment in
Oklahoma under a permit issued to it by the Oklahoma State Department
of Health which will expire on January 27, 1999. ESWL currently
conducts no active operations in Arkansas and therefore has allowed
its license for the use of its lithotripter equipment to lapse.
3
<PAGE>
SCHEDULE 2.03
Capitalization
1. Please see attachments.
4
<PAGE>
SCHEDULE 2.03
Texas II
PARTNERS AND PERCENTAGE INTERESTS
Percentage
General Partner Interest
Lithotripters, Inc. 22.38810000%
Limited Partners
Thomas Arnold 2.23880000
Charles Bamberger 2.98550000
Marc Barrett 4.47760000
Philip Damstra .74660000
Jules Delaune 1.11940000
Ruth Anne Winterringer Delaune 1.11940000
Robert A. Dowling .74660000
Wayne A. Hey 1.49220000
Ira N. Hollander 3.35820000
Dan Johnson 2.79850000
John Johnson 1.11940000
Sid Jones 2.23880000
Hugh Lamensdorf 2.23880000
Edward Lee 2.23880000
Lithotripters, Inc. 29.10460000
Wade Lowry or Assignee 2.98550000
Dennis Ortiz .74660000
Gary Price or Assignee 1.11940000
Lillian Jordan Rawleigh 1.11940000
Donald M. Ross 1.11940000
James Saalfield 1.49220000
Martha Storrie 2.98550000
Mark Story 3.91790000
Robert Stroud .74660000
Addison Thurman 2.23880000
Michael Walter 1.11940000
5
<PAGE>
SCHEDULE 2.03
Texas IV
PARTNERS AND PERCENTAGE INTERESTS
Percentage
General Partner Interest
Lithotripters, Inc 20%
Limited Partners
Robert Admire 2%
Mark Allen 1%
Charles Bamberger 1%
James Brady 1%
Franklin Clark 1%
J. Stephen Dryden 1%
Richard Dulany 1%
Christopher Fetner 4%
Larry Frank 1%
Gerald Frankel 4%
William Freeborn 4%
Philip Gallina 1%
William Grine 1%
J. Scott Hassell 2%
Joseph Jenkins 1%
Thomas Jordan 1%
William Jordan 1%
Farid Khoury 1%
Mario Labardini 1%
Stephen Lieman 3%
Lithotripters, Inc. 32%
Donald McKay 3%
Thomas Mobley 1%
Yondell Moore 1%
Dan Myers 1%
Estate of Roberto Olivares 1%
Anthony Rand 1%
Estate of H. Edward Rietze 1%
James Saalfield 1%
6
<PAGE>
Martha Storrie 3%
Roger Stuart 1%
W. Alan Terry 1%
7
<PAGE>
SCHEDULE 2.03
ESWL
PARTNERS AND PERCENTAGE INTERESTS
Percentage
Interest
General Partner
Texas Litho, Inc. 18.50533808%
Limited Partners
Joyce Allen 1.06761566
John S. Ballard, III 1.06761566
James Cochran 4.62633452
Donald W. Cook 1.06761566
Stephen Corwin 1.06761566
Glenn Dunnington 1.06761566
Fifth Street Corp. 6.40569395
Alan Freeman 1.06761566
Glen R. Goldsmith 1.06761566
A. Mason Holden 1.06761566
T.S. Kent 1.06761566
J. L. LaManna, III 1.06761566
Barney Maddox 1.06761566
William Mitchell 1.06761566
William L. Mulchin 1.06761566
Jerry A. Newton 1.06761566
Paris Urology Associates Pension Plan 2.13523132
Allen Plotkin 1.06761566
Richard Reese 2.13523132
Jack S. Rice 1.06761566
William Risk 5.33807829
Southwest Lithotripter Partners, Ltd. 28.82562278
John Barry Staub 1.06761566
Agif Syed 1.06761566
Texas Litho Inc. 1.06761566
Arthur Tijernia 6.40569395
Eugene Todd 2.13523132
R.D. West 0.71174377
8
<PAGE>
Jeannie B. Westerburg 0.71174377
Robert H. Westerburg 0.71174377
Roger Wolfert 1.06761566
9
<PAGE>
SCHEDULE 2.05
Absence of Certain Changes
1. Since July 1998, the Lithotripsy Services Agreement between
Hendrick Medical Center in Abilene, Texas and ESWL has continued
in effect on a month-to-month basis. While no assurance can be
given that such efforts will be successful, Hendrick Medical
Center and ESWL are currently in negotiations to enter into a new
lithotripsy services agreement for a new two-year term effective
September 1, 1998.
10
<PAGE>
SCHEDULE 2.06
Litigation
1. None
11
<PAGE>
SCHEDULE 2.07
Property; Title
1. Please see the attached lists of the Partnership Assets for
each Merging Partnership.
2. Liens against each Merging Partnership.
a. Texas II
i. The Certificate of Title for the 1991 Calumet Coach
still shows a lien held by Siemens Credit Corporation
against the vehicle dated August 8, 1991. However, the
obligation underlying the lien has been satisfied and the
lien has been released. Proper documentation has not yet
been obtained and Texas II is endeavoring to clear the lien
from the Certificate of Title.
b. Texas IV
i. None
c. ESWL
i. A UCC Financing Statement was filed with the County
Clerk of Oklahoma County, Oklahoma on December 31, 1991.
This financing statement covers both a Pulsolith Laser
Lithotripter and 1991 Ford E150 Custom Lift Van and
Accessories and any proceeds of those items. A continuation
was filed at this location on October 17, 1996 which remains
in effect. However, ESWL no longer owns the underlying
property upon which the security interest is attached. ESWL
is endeavoring to have the financing statement terminated by
Heller Financial, Inc., the secured party.
12
<PAGE>
SCHEDULE 2.07
Texas II
PARTNERSHIP ASSETS
1. 1991 Calumet Coach
2. Siemens LithostarTM
3. Sensimeter/380 Densitometer
4. 'C' Shock Tube
5. Miscellaneous Equipment related to the provision of lithotripsy
services
<PAGE>
SCHEDULE 2.07
Texas IV
PARTNERSHIP ASSETS
1. 1981 Calumet Coach
2. Siemens LithostarTM
3. Dinamap Plus E CSA
4. 'C' Shock Tube
5. Ohmeda Excel 110 Anesthesia System
14
<PAGE>
SCHEDULE 2.07
ESWL
PARTNERSHIP ASSETS
1. 1993 Calumet Trailer
2. 1998 Mercury Mystique
3. 1996 Ford Taurus
4. Dornier MFL 5000 Lithotripter
5. Ohmeda Excel Anesthesia System
6. X-Ray Processor.
7. Sogevac Vacuum Pump
8. Critikon 1846 Dinamap NIBP (automated blood pressure cuff) monitor
9. M310 ECG Simulator
10. Miscellaneous computer and office equipment
15
<PAGE>
SCHEDULE 2.09
Contracts and Leases
I. Contracts
a. Texas II
1. Services Agreement by and between Texas II and Arlington Memorial
Hospital dated November 21, 1993. Letter Agreement amending original
agreement by and between Texas II and Arlington Memorial Hospital
dated January 9, 1998.
2. Services Agreement by and among Texas II and Harris Methodist Fort
Worth, Harris Methodist Southwest and Harris Methodist H-E-B dated May
1, 1997.
3. Services Agreement by and between Texas II and HCA South Arlington
Hospital dated August 14, 1991.
4. Services Agreement by and between Texas II and Hillcrest Baptist
Medical Center dates April 1, 1992.
5. Services Agreement by and between Texas II and Irving Hospital
Authority d/b/a Irving Healthcare System dated August 9, 1991.
6. Services Agreement by and between Texas II and Metroplex Surgicare
dated June 6, 1995.
7. Services Agreement by and between Texas II and Health Trust ,
Inc.-The Hospital Company with respect to Northeast Community Hospital
dated April 25, 1991.
8. Services Agreement by and between Texas II and Providence Health
Center dated July 9, 1991.
b. Texas IV
1. Services Agreement by and between Texas IV and Titus County
Memorial Hospital dated January 1, 1993 .
16
<PAGE>
2. Services Agreement by and between Texas IV and Texas Surgery
Center, Ltd. dated May 20, 1998.
3. Services Agreement by and between Texas IV and Baylor University
Medical Center dated May 20, 1998.
4. Services Agreement by and between Texas IV and Bethania Regional
Hospital Care Center dated November 9, 1992.
5. Services Agreement by and between Texas IV and Columbia Medical
Center of Plano dated July 19, 1996.
6. Services Agreement by and between Texas IV and Harrison County
Hospital Association d/b/a Marshall Memorial Hospital dated January
26, 1996.
7. Services Agreement by and between Texas IV and HCA Denton Community
Hospital dated June 23, 1992 .
8. Services Agreement by and between Texas IV and HMA Durant d/b/a
Medical Center of Southeastern Oklahoma dated March 16, 1994. Addendum
to the Services Agreement by and between Texas IV and HMA Durant d/b/a
Medical Center of Southeastern Oklahoma amending termination
provisions of the Services Agreement (not dated).
9. Services Agreement by and between Texas IV and Medical Plaza
Hospital dated July 17, 1992.
10. Services Agreement by and between Texas IV and Methodist Hospital
of Dallas d/b/a Methodist Medical Center dated December 3, 1992.
11. Services Agreement by and between Texas IV and North Texas Medical
Center dated July 1, 1992.
12. Services Agreement by and between Texas IV and Presbyterian
Hospital of Plano dated [September] 1, 1993. Addendum I to the
Services Agreement by and between Texas IV and Presbyterian Hospital
of Plano regarding personnel records of employees dated April 8, 1994.
Addendum II to the Services Agreement by and between Texas IV and
Presbyterian Hospital of Plano regarding contract services dated April
8, 1994.
17
<PAGE>
13. Services Agreement by and between Texas IV and Richardson Hospital
Authority d/b/a Richardson Medical Center dated July 1, 1992. Addendum
to the Services Agreement by and between Texas IV and Richardson
Hospital Authority d/b/a Richardson Medical Center regarding
inspection, maintenance and proper licensure of the lithotripter coach
by Texas IV (not dated).
14. Services Agreement by and between Texas IV and St. Paul Medical
Center dated October 15, 1992. First Amendment to the Services
Agreement by and between Texas IV and St. Paul Medical Center
regarding payments to Texas IV dated July 1, 1993.
c. ESWL
1. Lithotripsy Services Agreement between Columbia Medical Center of
Plano and ESWL dated December 27, 1996.
2. Lithotripsy Services Agreement between Walls Regional Hospital and
ESWL dated September 18, 1995. Addendum to the Lithotripsy Services
Agreement between Walls Regional Hospital and ESWL regarding
maintenance and monitoring of quality improvement programs dated
September 19, 1995.
3. Lithotripsy Services Agreement between Columbia Medical Center at
Lewisville and ESWL dated December 16, 1996.
4. Lithotripsy Services Agreement between Tenet Health System
Hospitals Dallas, Inc. d/b/a RHD Memorial Medical Center and Trinity
Medical Center and ESWL dated October 1, 1996. Addendum to the
Lithotripsy Services Agreement between Tenet Health System Hospitals
Dallas, Inc. d/b/a RHD Memorial Medical Center and Trinity Medical
Center and ESWL providing for a new effective date of February 1, 1998
and a new one-year term dated March 6, 1998.
5. Agreement for Mobile Laser Lithotripsy Services between ESWL and
Wilson N. Jones Hospital dated June 1, 1993.
6. Agreement for Mobile Lithotripsy Services between Maxum Health
Corp. And Wichita General Hospital dated June 15, 1990. Pricing
Addendum for Mobile Lithotripsy Services between Maxum Health Corp.
and Wichita General Hospital dated May 11, 1994. Assignment Agreement
between Maxum Health Corp. and Wichita General Hospital assigning all
rights,
18
<PAGE>
duties and obligations of Maxum Health Corp. to ESWL dated
September 1, 1991.
7. Agreement for Mobile Laser Lithotripsy Services between ESWL and
Waco Surgical Center, Ltd. dated January 14, 1993.
8. Lithotripsy Services Agreement between Valley View Surgery Center
and ESWL dated May 10, 1996.
9. Agreement for Mobile Lithotripsy Services between ESWL and NME
Hospitals, Inc. d/b/a Trinity Medical Center dated June 7, 1994.
10. Agreement for Mobile Lithotripsy Services (Revision #2) between
ESWL and Texoma Medical Center dated June 1, 1993. Letter Agreement
between ESWL and Texoma Medical Center amending Schedule A regarding
user fees dated June 6, 1997.
11. Lithotripsy Services Agreement between Terrell Community Hospital,
Inc. d/b/a Columbia Medical Center at Terrell and ESWL dated March 18,
1997.
12. Agreement for Mobile Lithotripsy Services between ESWL and St.
Joseph's Hospital and Health Center dated January 14, 1993. Pricing
Addendum for Mobile Lithotripsy Services between ESWL and St. Joseph's
Hospital and Health Center dated May 11, 1994.
13. Lithotripsy Services Agreement between Presbyterian Hospital of
Kaufman and ESWL dated February 22, 1996.
14. Lithotripsy Services Agreement between Jane Phillips Episcopal
Memorial Medical Center and ESWL dated July 1, 1996.
15. Agreement for Mobile Lithotripsy Equipment between VHA Southwest
Litho I, Ltd. and Memorial Hospital and Medical Center f/k/a Midland
Memorial Hospital dated March 1, 1988. Assignment Agreement between
Memorial Hospital and ESWL assigning VHA Southwest Litho I, Ltd.'s
rights under the original agreement to ESWL dated September 1, 1991.
Addendum to Agreement for Mobile Lithotripsy Services between Memorial
Hospital and ESWL dated April 16, 1998. Notice of termination of this
agreement was received by ESWL on April 16, 1998 to be effective
December 9, 1998. While no assurance can be given that such efforts
will be successful, ESWL
19
<PAGE>
is presently attempting to renegotiate a renewal or new agreement with
Memorial Hospital and Medical Center.
16. Lithotripsy Use Agreement between Memorial Hospital (Palestine,
Texas) and ESWL dated November 30, 1995.
17. Lithotripsy Services Agreement between McCuistion Regional Medical
Center and ESWL dated August 13, 1996.
18. Lithotripsy Services Agreement between Hendrick Medical Center and
ESWL dated June13, 1996.
19. Lithotripsy Services Agreement between Columbia North Hills and
ESWL dated April 8, 1996. First Amendment to Lithotripsy Services
Agreement regarding user fees and a new term between HCA Health
Services of Texas, Inc. d/b/a North Hill Hospital and ESWL dated
February 1, 1997. Amendment between Columbia North Hills and ESWL
regarding Medicare access, independent contractor status, insurance
coverage, quality standards and confidentiality dated December 1,
1997.
20. Agreement for Mobile Lithotripsy Services between ESWL and
Columbia HCA Navarro Regional Hospital dated April 1, 1995. Letter
amending original agreement between ESWL and Columbia HCA Navarro
Regional Hospital extending contract on a month-to-month basis dated
June 21, 1996. While no assurance can be given that such efforts will
be successful, ESWL is presently attempting to negotiate a new
agreement for an initial term of at least one year with Navarro
Regional.
21. Lithotripsy Services Agreement between Tenet Health System
Hospitals Dallas, Inc. d/b/a Doctors Hospital, Dallas and ESWL dated
April 1, 1997. Letter Agreement renewing the existing Lithotripsy
Services Agreement between Tenet Health System Hospitals Dallas, Inc.
d/b/a Doctors Hospital, Dallas and ESWL dated March 20, 1998.
22. Revised Agreement for Mobile Lithotripsy Services between ESWL and
Dallas-Fort Worth Medical Center dated June 1, 1993.
23. Lithotripsy Services Agreement between Columbia Medical
Center/Dallas Southwest and ESWL dated March 15, 1996. Amendment to
the Lithotripsy Services Agreement regarding Medicare access,
independent contractor
20
<PAGE>
status, indemnification and assignment between Columbia Medical
Center/Dallas Southwest and ESWL dated March 15, 1996.
24. Agreement for Mobile Lithotripsy Services between ESWL and DeQueen
Health Services, Inc. d/b/a Community Hospital of DeQueen dated July
8, 1992. Pricing Addendum for Mobile Lithotripsy Services between ESWL
and DeQueen Health Services, Inc. d/b/a Community Hospital of DeQueen
dated May 11, 1994.
25. Lithotripsy Services Agreement between ESWL and Angelo Community
Hospital dated July 8, 1992. Amendment No. 1 to the Lithotripsy
Services Agreement regarding billing and user fees between ESWL and
Angelo Community Hospital dated January 1, 1995.
d. Each of the Merging Partnerships participates in reimbursement
arrangements pursuant to agreements the General Partner has with national
and local payors. See the section of the Offering Memorandum entitled
"Proposed Activities - Operations of Merging Partnerships - Service
Agreements - Reimbursement Agreements.
II. Leases
a. Texas II
1. None
b. Texas IV
1. None
c. ESWL
1. Vehicle Lease Service Agreement between PACCAR Leasing
Corporation and ESWL for 1996 Peterbilt 379 truck dated
October 9, 1995.
21
<PAGE>
SCHEDULE 2.11
Insurance
1. Insurance policies for each Merging Partnership are maintained
through blanket insurance policies with Prime Medical Services, Inc. Prime
Medical Services, Inc. is the corporate parent of Litho, the sole general
partner of both Texas II and Texas IV, and Texas Litho, the sole general
partner of ESWL. See the attached list of insurance policies maintained by
Prime Medical Services, Inc. which insure the Merging Partnerships.
22
<PAGE>
SCHEDULE 2.11
INSURANCE POLICIES
<TABLE>
<S> <C> <C> <C> <C> <C>
TYPE CARRIER POLICY TERM DEDUCTIBLE LIMITS PREMIUM
---- ------- ------ ---- ---------- ------ -------
NUMBER
------
Commercial Crime National Union Fire 484-29-38 10/30/96 $10,000 $1,000,000 [Unspecified]
Insurance Company of to
Pittsburgh, PA 10/30/97
Workers American Protection 3BR 011735-00 10/31/97 None Per Accident Limit - $1,000,000 $42,585 (est.)
Compensation and Insurance Company to Disease Each Employee Limit -
Employer's 10/31/98 $1,000,000
Liability Disease Per Policy Limit - $1,000,00
Business American Motorists F3R 028308-00 10/31/97 $1000 per Comprehensive - $30,000 $17,004 (est.)
Automobile Insurance Company to vehicle Collision - $30,000
10/31/98 Combined Liability - $1,000,000
Auto Medical Payments - $5,000
Uninsured/Underinsured Motorists -
$1,000,000
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
TYPE CARRIER POLICY TERM DEDUCTIBLE LIMITS PREMIUM
---- ------- ------ ---- ----------------- -------
NUMBER
------
Commercial Inland General Accident CIM 0448425-00 10/31/96 None Mobile Coaches, Vans & Trailers - $97,209
Marine Insurance Company to $59,011,500(est.)
of America 10/31/97 Fixed Site Litho Units & Medical
Equipment - $6,040,100
Business Interruption for all
Litho units - $12,322,000
Service Trucks & Tractors - $1,347,904
Off-Premises Utility Failure - $1,000,000
Personal Property of others - $500,000
EDP Media & Hardware - $310,000
Extra Expense - $250,000
Other Transit - $100,000
Real & Personal Property - $4,840,100
Commercial American Manufacturers 3AE 663 383-00 10/31/97 $25,000 per Mobile Equipment - $59,511,500 $96,637
Output Program Mutual Insurance to earthquake Buildings & Business Personal (est.)
Company 10/31/98 or flood Property - $10,880,200
occurrence Income - $12,572,000
$5,000 per Pollutant Clean-up and Removal -
vehicle $250,000
24 hrs. for Accounts Receivable - $250,000
utility Property in Transit - $100,000
interruption Valuable Papers & Records - $250,000
$25,000 for Utility interruption/property damage -
all other $1,000,000
covered perils Earthquake - $2,500,000
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
TYPE CARRIER POLICY TERM DEDUCTIBLE LIMITS PREMIUM
---- ------- ------ ---- ---------- ------ -------
NUMBER
------
Health Care Columbia Casualty HMH 1028627495-1 10/30/97 None Shown Professional Liability - $1,000,000 per $25,348
[Professional Company to person; $3,000,000 total limit (est.)
and General 10/30/98 General Liability - $1,000,000 per
Liability]Policy occurrence; $2,000,000 general aggregate
limit; $2,000,000 products/completed
operations aggregate; $50,000 damage
limit per fire; $1,000,000
personal/advertising injury limit
</TABLE>
25
<PAGE>
SCHEDULE 2.12
Employees; Benefits
1. Employee List
a. Texas II
Name Title
i. Carylane B. Bogan Radiologic Technician
ii. Dale F. Cuthbertson Licensed Registered Nurse
iii. Donna I. Hardt Registered Nurse
iv. Christopher I. Laskey Radiologic Technician
b. Texas IV
Name Title
i. Susan F. Adkisson Registered Nurse
ii. Carla C. Dooley Radiologic Technician
iii. Mary Ann Elder Radiologic Technician
iv. Susan Ann Hatfield Registered Nurse
c. ESWL
Name Title
i. Terry B. Guthrie Radiologic Technician
ii. William C. Mason, II Driver
iii. Gregory P. Starr Project Manager
iv. Jack C. Ward Driver
2. See the attached summary of employee benefits.
26
<PAGE>
SCHEDULE 2.12
Summary of Employee Benefits
All active full-time employees of the Merging Partnerships are eligible to
participate in the benefit plans of Prime Medical Services, Inc. ("Prime"), the
parent company of the general partner of all of the Merging Partnerships. The
following is a brief summary of these benefit plans:
1. Insurance - Prime provides medical and dental insurance, long term
disability, accidental death and dismemberment, and life insurance. There is an
employee contribution for this benefit which varies depending upon the marital
status and number of dependents of the employee.
2. 125-Cafeteria Plan - Prime offers a 125-Cafeteria Plan to employees after six
months of employment, which includes dependent care, medical reimbursement and
insurance premiums.
3. 401(k) Retirement Plan - Prime offers employees an opportunity to contribute
to a 401(k) retirement plan after the completion of six months of employment.
Prime, in its sole discretion, makes a decision to contribute a matching portion
in Prime common stock at the end of each year.
4. Holidays - There are nine paid holidays per year.
5. Sick leave, vacation - The sick leave and vacation benefits vary depending
upon the work schedule of the employee. Certain employees have flexible
schedules which do not require them to work a consistent 5 day week and
therefore do not accumulate vacation and sick leave.
6. Bonus Plan - see attached memo.
In addition to the above, there are miscellaneous benefits such as bereavement,
military reserves, jury duty and an educational assistance plan.
27
<PAGE>
AGREEMENT OF LIMITED PARTNERSHIP
OF
BIG SKY UROLOGICAL SERVICES LIMITED PARTNERSHIP
<PAGE>
AGREEMENT
OF LIMITED PARTNERSHIP
OF
BIG SKY UROLOGICAL SERVICES LIMITED PARTNERSHIP
TABLE OF CONTENTS
Page
1. FORMATION...........................................1
2. NAME................................................1
3. OFFICES.............................................1
4. PURPOSE.............................................2
5. TERM................................................2
6. CERTAIN DEFINED TERMS...............................2
7. CAPITAL CONTRIBUTIONS AND DILUTION OFFERINGS........6
8. GUARANTIES..........................................7
9. CONDITIONS TO THE CAPITAL CONTRIBUTIONS OF CERTAIN LIMITED
PARTNERS............................................7
10. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE GENERAL
PARTNER.............................................7
11. ADMISSION OF LIMITED PARTNERS.......................8
12. CAPITAL ACCOUNTS....................................9
13. ALLOCATIONS........................................10
14. DISTRIBUTIONS......................................11
l5. RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS.........11
16. LIMITED LIABILITY..................................13
17. TRANSFER OF INTERESTS AND ADMISSION OF PARTNERS....14
i
<PAGE>
18. OPTIONAL PURCHASE OF LIMITED PARTNERSHIP INTERESTS ON CERTAIN
EVENTS....................................................18
19. SALE, ASSIGNMENT OR OTHER TRANSFER OF THE GENERAL PARTNER'S
INTEREST..................................................22
20. TERMINATION OF THE SERVICES OF THE GENERAL PARTNER........23
21. MANAGEMENT AND OPERATION OF BUSINESS......................23
22. RESERVES..................................................26
23. INDEMNIFICATION AND EXCULPATION OF THE GENERAL PARTNER....27
24. DISSOLUTION OF THE PARTNERSHIP............................27
25. DISTRIBUTION UPON DISSOLUTION.............................28
26. BOOKS OF ACCOUNT, RECORDS AND REPORTS.....................29
27. NOTICES...................................................30
28. AMENDMENTS................................................30
29. LIMITATIONS ON AMENDMENTS.................................31
30. MEETINGS, CONSENTS AND VOTING.............................31
31. SUBMISSIONS TO THE LIMITED PARTNERS.......................32
32. ADDITIONAL DOCUMENTS......................................32
33. SURVIVAL OF RIGHTS........................................32
34. INTERPRETATION AND GOVERNING LAW..........................32
35. SEVERABILITY..............................................32
36. AGREEMENT IN COUNTERPARTS.................................32
37. THIRD PARTIES.............................................33
38. POWER OF ATTORNEY.........................................33
ii
<PAGE>
39. ARBITRATION...............................................33
40. CREDITORS.................................................34
SCHEDULES
Schedule A - Schedule of Partnership Interests
iii
<PAGE>
THE LIMITED PARTNERSHIP INTERESTS REPRESENTED BY THIS LIMITED
PARTNERSHIP AGREEMENT HAVE NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF
1933, AS AMENDED, UNDER THE SECURITIES ACT OF MONTANA, AS AMENDED,
OR UNDER SIMILAR LAWS OR ACTS OF OTHER STATES IN RELIANCE UPON
EXEMPTIONS UNDER SUCH LAWS. IN ADDITION, NO TRANSFERS OF LIMITED
PARTNERSHIP INTERESTS MAY BE MADE WITHOUT COMPLIANCE WITH THE
RESTRICTIONS SET FORTH IN ARTICLE 17 BELOW.
AGREEMENT
OF LIMITED PARTNERSHIP
OF
BIG SKY UROLOGICAL SERVICES
LIMITED PARTNERSHIP
THIS AGREEMENT OF LIMITED PARTNERSHIP (the "Agreement") is made as of
December 2, 1998, by and among SUN MEDICAL TECHNOLOGIES, INC., a California
corporation and a wholly-owned subsidiary of Prime Medical Services, Inc., a
Delaware corporation (the "General Partner"), and persons listed on Schedule A
attached hereto as the Limited Partners.
1. FORMATION.
The Partnership was formed pursuant to the filing in the Office of the
Secretary of State of Montana on or about August 31, 1998 of a Certificate of
Limited Partnership in accordance with the provisions of the Act.
2. NAME.
2.1 The name of the Partnership is "Big Sky Urological Services Limited
Partnership."
2.2 The Partnership business shall be conducted under such names as the
General Partner may from time to time deem necessary or advisable, provided that
appropriate amendments to this Agreement and all necessary filings under
applicable assumed or fictitious name statutes or the Act are first obtained.
3. OFFICES.
3.1 The principal office of the Partnership shall be at 1301 Capital of
Texas Highway, Suite C-300, Austin, Texas 78746, or at such other place as the
General Partner may, from time to time, designate by notice to the Limited
Partners (the "Records Office").
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3.2 The Partnership may have such additional offices as the General Partner
may, from time to time, deem necessary or advisable.
4. PURPOSE.
The purpose and business of the Partnership shall be: (i) to acquire and
operate one or more transportable lithotripters (or any other renal stone
treatment equipment) for the treatment of renal stones primarily in the areas of
Great Falls, Helena, Butte, Bozeman, Missoula and Kalispell, Montana, or in such
other location(s) as the General Partner may determine, in its sole discretion,
to be in the best interests of the Partnership; (ii) to acquire and operate in
the future any other urological device or equipment; provided, that such
equipment as of the date of acquisition by the Partnership has received FDA
premarket approval; (iii) to acquire an interest in any business entity,
including, without limitation, a limited partnership, limited liability company
or corporation, that engages in any business activity described in this Article
4; and (iv) to engage in any and all activities incidental or related to the
foregoing, upon and subject to the terms and conditions of this Agreement.
5. TERM.
The Partnership shall terminate on December 31, 2048, unless sooner
terminated as herein provided.
6. CERTAIN DEFINED TERMS.
Certain terms used in this Agreement shall have the following meanings:
Act. The Act means the Montana Uniform Limited Partnership Act, as then in
effect.
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 interest 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.
Agreement. This Agreement of Limited Partnership, as the same may be
amended from time to time.
Bank. First Citizens Bank & Trust Company.
Capital Account. The Partnership capital account of a Partner as computed
pursuant to Article 12 of this Agreement.
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Capital Contributions. All capital contributions made by a Partner or his
or her predecessor in interest which shall include, without limitation,
contributions made pursuant to Article 7 of this Agreement.
Capital Transaction. Any transaction which, were it to generate proceeds,
would produce Partnership Sales Proceeds or Partnership Refinancing Proceeds.
Code. The Internal Revenue Code of 1986, as amended, or corresponding
provisions of subsequent, superseding revenue laws.
Dilution Offering. As provided in Article 7.4 of this Agreement, the future
offering of additional limited partnership interests in the Partnership as
determined by the General Partner. Except as otherwise provided in Article 7.4,
any successful Dilution Offering will proportionately reduce the Percentage
Interests of the then current Partners in the Partnership.
Domestic Proceeding. Any divorce, annulment, separation or similar domestic
proceeding between a married couple.
Equipment. The equipment used in the operation of the Lithotripter System,
including the mobile transport vehicle, the transportable lithotripter and
miscellaneous medical equipment and supplies, and any similar additional
equipment acquired by the Partnership in the future.
FDA. The United States Food and Drug Administration.
General Partner. The general partner of the Partnership, Sun Medical
Technologies, Inc., a California corporation and a wholly-owned subsidiary of
Prime Medical Services, Inc., a Delaware corporation.
Guaranty. The Guaranty Agreement pursuant to which each Limited Partner
will guarantee a portion of the Partnership's obligations to the Bank under the
Loan. The form of the Guaranty Agreement is included in the Subscription Packet
accompanying the Memorandum.
Initial Limited Partner. Stan Johnson, a resident of Arizona and an
Affiliate of the General Partner. The Initial Limited Partner is to be the only
limited partner of the Partnership until such time as the new Limited Partners
are admitted to the Partnership, at which time the Initial Limited Partner shall
withdraw from the Partnership.
Limited Partners. The Limited Partners are those investors in the Units
admitted to the Partnership and any person admitted as a Limited Partner in
accordance with the provisions of this Agreement.
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Lithotripter. The extracorporeal shock-wave lithotripter to be acquired by
the Partnership and any replacements therefor or additional lithotripters to be
purchased by the Partnership.
Lithotripter System. The mobile transport vehicle and operational
Lithotripter.
Loan. The loan of up to $450,000 from the Bank to the Partnership. Loan
proceeds will be used by the Partnership to (i) acquire an extracorporeal
shockwave lithotripter with options (up to $400,000), and (ii) acquire and upfit
a mobile van to transport the lithotripter (up to $50,000).
Losses. The net loss (including Net Losses from Capital Transactions) of
the Partnership for each Year of the Partnership as determined for federal
income tax purposes.
Majority in Interest of the Limited Partners. The Limited Partners who hold
more than 50% of the Percentage Interests in the Partnership held by the Limited
Partners.
Memorandum. The Confidential Private Placement Memorandum of the
Partnership dated October 5, 1998, as amended or as supplemented.
Mobile Kidney Stone. Mobile Kidney Stone Centers of California, Ltd., a
California limited partnership and an Affiliate of the General Partner.
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.
Net Losses from Capital Transactions. The losses 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 shall include Code
Section 1231 assets) or as a result of or upon the damage or destruction of such
capital assets.
Offering. The offer to potential investors of 99 Units pursuant to the
Memorandum.
Partners. The General Partner and the Limited Partners, collectively, where
no distinction is required by the context in which the term is used herein.
Partnership. Big Sky Urological Services Limited Partnership, a Montana
limited partnership.
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
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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 this Agreement.
Partnership Refinancing Proceeds. The cash realized from the refinancing of
Partnership assets after retirement of any secured loans and less (i) payment of
all expenses relating to the transaction and (ii) establishment of such
reasonable reserves as the General Partner shall deem necessary or prudent to
set aside for future repairs, improvements, or equipment replacement or
additions, or to meet working capital requirements or foreseen or unforeseen
future liabilities or contingencies of the Partnership.
Partnership Sales Proceeds. The cash realized from the sale, exchange,
casualty or other disposition of all or a portion of Partnership assets after
the retirement of all secured loans and less (i) the payment of all expenses
related to the transaction and (ii) establishment of such reasonable reserves as
the General Partner shall deem necessary or prudent to set aside for future
repairs, improvements, or equipment replacement or additions, or to meet working
capital requirements or foreseen or unforeseen future liabilities or
contingencies of the Partnership.
Percentage Interest. The interest of each Partner in the Partnership, to be
determined initially in the case of a Limited Partner by reference to his or her
Unit ownership based upon the Limited Partners holding an aggregate 99%
Percentage Interest in the Partnership, with each initial Unit sold representing
an initial 1% interest. The General Partner will initially own a 1% Percentage
Interest in the Partnership. A Partner's Percentage Interest may be reduced by a
future Dilution Offering. The Partners' Percentage Interests in the Partnership
as of the date hereof are as set forth in Schedule A attached hereto. Any future
adjustments in the Partners' Percentage Interests, due to future Dilution
Offerings or otherwise, will also be reflected by amendments to Schedule A.
Profit. The net income of the Partnership (including Net Gains from Capital
Transactions) for each Year of the Partnership as determined 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 Interests
of the class of Partners to which reference is made.
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Sales Agency Agreement. The sales agency agreement through which MedTech
Investments, Inc., an Affiliate of the General Partner and a broker-dealer
company registered with the Securities and Exchange commission and a member of
the National Association of Securities Dealers, Inc. shall offer and sell the
limited partnership interest of the Partnership pursuant to the Memorandum.
Sales Commission. The $100 sales commission paid to MedTech Investments,
Inc. for each Unit sold.
Service. The Internal Revenue Service.
Units. The 99 equal limited partner interests in the Partnership offered
pursuant to the Memorandum for a price per Unit of $1,500 in cash, plus a
personal guaranty of 1% of the Partnership's obligations under the Loan (up to
$4,500 principal guaranty obligation).
Year. An annual accounting period ending on December 31 of each year during
the term of the Partnership.
7. CAPITAL CONTRIBUTIONS AND DILUTION OFFERINGS.
7.1 General Partner Contribution. On or before the date of this Agreement,
the General Partner will contribute to the capital of the Partnership cash in
the amount equal to 1% (up to $1,500) of the total cash contributed to the
Partnership by the Partners in the offering made pursuant to the Memorandum.
7.2 Limited Partner Contribution. Each Limited Partner hereby agrees to
contribute and shall contribute to the capital of the Partnership on the date of
his or her admission to the Partnership the cash amount set forth opposite his
or her name on Schedule A attached hereto.
7.3 No Interest. Except as otherwise provided herein, no interest shall be
paid on any contribution to the capital of the Partnership.
7.4 Dilution Offerings. If the General Partner, in its sole discretion,
determines that it is in the best interest of the Partnership, the General
Partner may, from time to time, offer, sell and issue, for and on behalf of the
Partnership, additional limited partnership interests in the Partnership (a
"Dilution Offering") to investors who are not already Limited Partners
("Qualified Investors"). The primary purpose of any Dilution Offering would be
to raise additional capital for any legitimate Partnership purpose as set forth
in Article 4. Any limited partnership interests offered by the Partnership in a
Dilution Offering shall be sold in the manner and according to the terms
prescribed in the sole discretion of the General Partner; provided, however,
that 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 unless otherwise determined by a vote of the General Partner and
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a Majority in Interest of the Limited Partners. Any sale of additional limited
partnership interests will result in the proportionate dilution of the
Percentage Interests of the existing Partners. Notwithstanding the above, in the
event of a Dilution Offering, the General Partner may elect, in its sole
discretion, to prevent dilution of its Percentage Interest by either
contributing additional capital to the Partnership or purchasing additional
limited partnership interest in any Dilution Offering. Limited Partners shall
have no right to purchase additional limited partner interests in any Dilution
Offering. Any investor acquiring a limited partnership interest in a Dilution
Offering shall agree to be bound by the terms of this Agreement, and shall be
automatically admitted as a Limited Partner of the Partnership. Any adjustment
in the Partners' Percentage Interests resulting from a Dilution Offering shall
be set forth on an amended Schedule A to be attached hereto.
8. GUARANTIES.
Each Partner agrees to execute and deliver to the Partnership on the date
of his or her admission to the Partnership a Guaranty in the amount set forth
opposite his or her name on Schedule A attached hereto.
9. CONDITIONS TO THE CAPITAL CONTRIBUTIONS OF CERTAIN LIMITED PARTNERS.
The obligations of any Limited Partners acquiring their Partnership
Interests in the Offering or a Dilution Offering to make cash Capital
Contributions hereunder are subject to the condition that the representations,
warranties, agreements and covenants of the General Partner set forth in
Article 10 of this Agreement are and shall be true and correct or have been and
will have been complied with in all material respects on the date such Capital
Contributions are required to be made, except to the extent that any such
representation or warranty expressly pertains to an earlier date.
10. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE GENERAL PARTNER.
10.1 The General Partner hereby represents and warrants to the Limited
Partners that:
(a) The Partnership is a limited partnership formed in accordance with and
validly existing under the Act and the other applicable laws of the State of
Montana;
(b) The General Partner is duly qualified to transact business in the State
of Montana;
(c) The interests in the Partnership of the Limited Partners will have been
duly authorized or created and validly issued and the Limited Partners shall
have no
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personal liability to contribute money to the Partnership other than the amounts
agreed to be contributed by them in the manner and on the terms set forth in
this Agreement, subject, however, to such limitations as may be imposed under
the Act;
(d) Except as disclosed in the Memorandum or documentation prepared in
connection with a Dilution Offering, no material breach or default adverse to
the Partnership exists under the terms of any other material agreement affecting
the Partnership; and
(e) The General Partner is a California corporation formed and existing
under the laws of the State of California.
10.2 The General Partner hereby covenants to the Limited Partners that:
(a) It will at all times act in a fiduciary manner with respect to the
Partnership and the Limited Partners;
(b) Except as provided in Article 19, it will serve as the General Partner
of the Partnership until the Partnership is terminated without reconstitution;
and
(c) It will cause the Partnership to carry adequate public liability,
property damage and other insurance as is customary in the business to be
engaged in by the Partnership.
11. ADMISSION OF LIMITED PARTNERS.
The General Partner may permit the offer and sale of limited partnership
interests on the terms and conditions provided in the Memorandum or future
Dilution Offerings and may admit persons subscribing for interests as Limited
Partners in the Partnership on the terms and conditions set forth in this
Article 11.
(a) The General Partner shall have approved of the admission of said person
in writing on such terms and conditions as the General Partner shall determine;
(b) Said person shall have executed such documents or instruments as the
General Partner may deem necessary or desirable to effect his or her admission
as a Limited Partner;
(c) Said person shall have accepted and adopted all of the terms and
provisions of this Agreement, as then amended;
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(d) Said person (if a corporation) shall deliver to the General Partner a
certified copy of a resolution of its Board of Directors authorizing it to
become a Limited Partner under the terms and conditions of this Agreement; and
(e) Said person, upon request by the General Partner, shall pay such
reasonable expenses as may be incurred in connection with its admission as a
Limited Partner.
12. CAPITAL ACCOUNTS.
A Capital Account shall be established for each Partner and shall at all
times be determined and maintained in accordance with the Final Treasury
Regulations under Section 704(b) of the Code, as the same may be amended. A
Partner shall not be entitled to withdraw any part of his or her Capital Account
or to receive any distribution from the Partnership, except as provided in
Articles 14 and 25.
(a) Each Partners' Capital Account shall be increased by:
(i) The amount of his or her Capital Contribution pursuant to Article 7;
and
(ii) The amount of Profits allocated to him or her pursuant to Article 13;
and
(iii) The Partner's pro rata share (determined in the same manner as such
Partner's share of Profits and Losses allocated pursuant to Article 13 hereof)
of any income or gain exempt from tax.
(b) Each Partner's Capital Account shall be decreased by:
(i) The amount of Losses allocated to him or her pursuant to Article 13;
and
(ii) The amount of Partnership Cash Flow, Partnership Sales Proceeds and
Partnership Refinancing Proceeds distributed to him or her pursuant to Article
14; and
(iii) The Partner's pro rata share of any other expenditures of the
Partnership which are not deductible in computing Partnership Profits or Losses
and which are not added to the tax basis of any Partnership property, including,
without limitation, expenditures described in Section 705(a)(2)(B) of the Code.
The Partner's pro rata share of such expenditures shall be determined in the
same manner as
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such Partner's share of Profits and Losses allocated pursuant to Article 13.
13. ALLOCATIONS
(a) Profits and Losses. The Profits and Losses of the Partnership shall be
allocated among the Partners in accordance with their respective Percentage
Interests. In allocating Profits and Losses, Net Gains and Losses from Capital
Transactions (a part of Profits and Losses), if any, shall be allocated first.
(b) Qualified Income Offset. If any Partner unexpectedly receives any
adjustment, allocation or distribution described in Treasury Regulations Section
1.704-1(b)(2)(ii)(d)(4) through (6) which causes or increases a deficit balance
in such Partner's Capital Account (adjusted for this purpose in the manner
provided in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)), items of
Partnership income and gain shall 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 Article 13(b) shall be made if and
only to the extent that such Partner would have a deficit Capital Account after
all other allocations provided for in this Article 13 have been tentatively made
as if this Article 13(b) were not in the Agreement. This provision is intended
to be a "qualified income offset," as defined in Treasury Regulations Section
1.704-1(b)(2)(ii)(d), such Regulation being specifically incorporated herein by
reference.
(c) Sales Commission. The Sales Commission shall be allocated to the Units
which are not held by the General Partner and its Affiliates and are acquired in
the Offering in proportion to the respective capital contributions represented
by such Units (i.e., $100 in Sales Commissions per each such Unit). The purpose
of this Article 13(c) is to allocate the Sales Commission to those Partners who
actually bore the burden of paying the Sales Commission.
(d) Allocations Between Transferor and Transferee. In the event of the
transfer (other than the pledges of the General Partner's interest permitted by
Article 19 or Permitted Pledges described in Article 17.2(b)) of all or any part
of a Partner's interest (in accordance with the provisions of this 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 terms of this Agreement), the transferring
Partner 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, shall 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;
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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 the
General Partner may elect, in its sole discretion, to treat the periods before
and after the date of the transfer or admission as separate Years and allocate
the Partnership's net income, gain, net loss, deductions and credits for each of
such deemed separate Years. Notwithstanding the foregoing, the Partnership's
"allocable cash basis items," as that term is used in Section 706(d)(2)(B) of
the Code, shall be allocated as required by Section 706(d)(2) of the Code and
the regulations thereunder.
(e) Tax Withholding. The Partnership shall be 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 other 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 shall be treated as a cash distribution to
such Partner and shall reduce the amount otherwise distributable to such
Partner.
14. DISTRIBUTIONS.
(a) Distribution of Partnership Cash Flow. Partnership Cash Flow shall be
distributed to the Partners within 60 days after the end of each Year, or
earlier in the discretion of the General Partner, in proportion to their
respective Percentage Interests at the time of distribution.
(b) Distribution of Partnership Refinancing Proceeds and Partnership Sales
Proceeds. Partnership Refinancing Proceeds and Partnership Sales Proceeds shall
be distributed to the Partners within 60 days of the Capital Transaction giving
rise to such proceeds, or earlier in the discretion of the General Partner, in
proportion to their respective Percentage Interests at the time of distribution.
(c) Distribution in Liquidation. Upon liquidation of the Partnership, all
of the Partnership's property shall be sold and Profits and Losses allocated
accordingly. Proceeds from the liquidation of the Partnership shall be
distributed in accordance with Article 25.
l5. RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS.
15.1 Management. The Limited Partners shall not take part in the management
of the business, nor transact any business for the Partnership, nor shall they
have power to sign for or to bind the Partnership. The Partnership may, however,
contract with one or more Limited Partners to act as the local medical
director(s) of the Lithotripter System. No Limited Partner may withdraw from the
Partnership except as expressly permitted herein.
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15.2 Operation of Lithotripter System. The Limited Partners shall not
operate or utilize the Partnership Lithotripter System or other Partnership
equipment except pursuant to (i) an agreement with the Partnership; or (ii) any
other arrangement specifically approved by the General Partner.
15.3 Outside Activities. The Limited Partners agree that they owe fiduciary
duties to the Partnership and, as a consequence, each Limited Partner (that is
not the General Partner or an Affiliate of the General Partner) agrees that
(s)he shall not engage in "Outside Activities" (as defined below) in the "Market
Area" (as defined below) while(s)he is a Limited Partner in the Partnership and
shall otherwise be subject to the provisions of this Article 15.3. The phrase
"Outside Activities" means directly or indirectly owning, leasing or subleasing
a lithotripter (or any similar equipment or competing devices used for treating
renal or biliary stone disease) or any other therapeutic equipment acquired by
the Partnership. Prohibited indirect ownership shall include without limitation
the direct or indirect ownership of any interest in a business venture (through
stock ownership, partnership interest ownership, ownership by or through a close
family member, or as otherwise determined in good faith by the General Partner)
involving the ownership, purchase, lease, sublease, promotion, management or
operation of a lithotripter (or similar equipment or competing devices used for
treating renal or biliary stone disease) or other competing device or equipment,
unless the General Partner determines that such activity by the Limited Partners
is not detrimental to the best interests of the Partnership. The ownership of
less than 1% of the capital stock (calculated on a fully diluted basis) of a
corporation whose stock is publicly owned or regularly traded on any public
exchange shall not constitute an Outside Activity.
Upon the termination or transfer of a Limited Partner's interest in the
Partnership for any reason, including a transfer pursuant to Article 18.3
hereof, the withdrawing Limited Partner shall not, for a period of two (2) years
following the date of withdrawal, engage in any Outside Activities in any
"Market Area" in which the Partnership is transacting business or within the
prior twelve months has transacted business (the "Restricted Facilities"). For
the purposes of this Article 15.3, the term "Market Area" shall mean (i) the
area within a fifty (50) mile radius of any Restricted Facility, but if such
area is determined by a court of competent jurisdiction to be too broad, then it
shall mean (ii) the area within a thirty (30) mile radius of any Restricted
Facility, but if such area is determined by a court of competent jurisdiction to
be too broad then it shall mean (iii) the area within a fifteen (15) mile radius
of any Restricted Facility.
In the event a Limited Partner wishes and intends to engage in an Outside
Activity in a Market Area, he or she must provide written notice of such intent
to the General Partner prior to engaging in the Outside Activity. The written
notice shall be deemed an election by the Limited Partner to withdraw from the
Partnership (the "Notice of Withdrawal"), and shall give the General Partner the
purchase rights as provided in Article 18.3 hereof. After the Notice of
Withdrawal, the former Limited Partner may engage in an Outside Activity in the
Market Area only after waiting the period of two years specified in this Article
15.3. In the event of breach of the waiting period, the Partnership shall be
entitled to any remedy at law or equity with respect to such breach, including
without limitation an injunction or suit for damages.
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If a Limited Partner during his or her participation in the Partnership
engages in an Outside Activity in a Market Area without first notifying the
General Partner in violation of this Article 15.3, the Limited Partner shall be
deemed to have given a Notice of Withdrawal on the date the General Partner
first becomes aware of the Limited Partner's Outside Activity in the Market
Area. Upon receiving a Limited Partner's Notice of Withdrawal or equivalent
thereof, the Partnership may invoke the purchase rights provided in Article 18.3
and shall be entitled to any other remedy at law or equity including without
limitation an injunction or suit for damages.
15.4 Disclosure of Confidential Information. Each Limited Partner
acknowledges and agrees that his or her participation in the Partnership under
this Agreement necessarily involves his or her understanding of and access to
certain trade secrets and other confidential information pertaining to the
business of the Partnership. Accordingly, each Limited Partner (other than the
General Partner and its Affiliates that may also hold Limited Partner
Partnership Interests) agrees that at all times during his or her participation
in the Partnership as a Limited Partner and thereafter, (s)he will not, directly
or indirectly, without the express written authority of the Partnership, unless
required by law or directed by a applicable legal authority having jurisdiction
over the Limited Partner, disclose or use for the benefit of any person,
corporation or other entity (other than the Partnership), or the Limited
Partner, (i) any trade, technical, operational, management or other secrets, any
patient or customer lists or other confidential or secret data, or any other
proprietary, confidential or secret information of the Partnership or (ii) any
confidential information concerning any of the financial arrangements, financial
condition, hospital or physician contracts, third party payor arrangements,
quality assurance and outcome analysis programs, competitive status, customer or
supplier matters, internal organizational matters, technical abilities, or other
business affairs of or relating to the Partnership. The Limited Partners (other
than the General Partner and its Affiliates that may also hold Limited Partner
Partnership Interests) acknowledge that all of the foregoing constitutes
proprietary information, which is the exclusive property of the Partnership. In
the event of breach of this Article 15.4 as determined by the General Partner,
the Partnership shall be entitled to any remedy at law or equity with respect to
such breach, including without limitation, an injunction or suit for damages.
16. LIMITED LIABILITY.
No Limited Partner shall be required to make any contribution to the
capital of the Partnership except as set forth in Article 7, nor shall any
Limited Partner in his or her capacity as such, be bound by, or personally
liable for, any expense, liability or obligation of the Partnership except to
the extent of his or her (i) interest in the Partnership; (ii) Guaranties of
Partnership obligations; and (iii) obligation to return distributions made to
him or her under certain circumstances as required by the Act.
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17. TRANSFER OF INTERESTS AND ADMISSION OF PARTNERS.
17.1 Transferability.
(a) The term "transfer" when used in this Agreement with respect to a
Partnership Interest includes a sale, assignment, gift, pledge, exchange or any
other disposition (but does not include the issuance of new Partnership
Interests pursuant to a Dilution Offering);
(b) Except as otherwise provided herein, the General Partner shall not at
any time transfer or assign its interest or obligation as General Partner;
(c) The Partnership Interest of any Limited Partner shall not be
transferred, in whole or in part, except in accordance with the conditions and
limitations set forth in Articles 17.2 or 18;
(d) The transferee of a Partnership Interest by assignment, operation of
law or otherwise, shall have only the rights, powers and privileges enumerated
in Article 17.3 or otherwise provided by law and may not be admitted to the
Partnership as a Limited Partner except as provided in Article 17.4 or as a
General Partner except as provided in Article 17.5;
(e) Notwithstanding any provision herein to the contrary, the Partnership
Agreement shall in no way restrict the issuance or transfers of stock of the
General Partner; and
(f) Notwithstanding any provision herein to the contrary, the issuance of
Partnership Interests pursuant to a Dilution Offering and the admission of new
Limited Partners pursuant to a Dilution Offering shall be governed by the
provisions of Article 7.4 of this Agreement.
17.2 Restrictions on Transfers by Limited Partners.
(a) All or part of a Partnership Interest may be transferred by a Limited
Partner only with the prior written approval of the General Partner, which
approval may be granted or denied in the sole discretion of the General Partner.
(b) The General Partner shall not approve any transfer of a Partnership
Interest, except a pledge of any Partnership Interest by the General Partner to
any bank, insurance company or other financial institution to secure payment of
indebtedness (a "Permitted Pledge"), or otherwise unless the proposed transferee
shall have furnished the General Partner with a sworn statement that:
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(i) The proposed transferee proposes to acquire his or her Partnership
Interest as a principal, for investment and not with a view to resale or
distribution;
(ii) The proposed transferee meets such requirements regarding
sophistication, income and net worth as required by applicable state and federal
securities laws;
(iii) The proposed transferee has met such net worth and income suitability
standards as have been established by the General Partner;
(iv) The proposed transferee recognizes that investment in the Partnership
involves certain risks and has taken full cognizance of and understands all of
the risk factors related to the purchase of a Partnership Interest; and
(v) The proposed transferee has met all other requirements of the General
Partner for the proposed transfer.
(c) Other than in the case of a Permitted Pledge, a transfer of a
Partnership Interest may be made only if, prior to the date thereof, the
Partnership upon request receives an opinion of counsel, satisfactory in form
and substance to the General Partner, that neither the offering nor the proposed
transfer will require registration under federal or applicable state securities
laws or regulations.
17.3 Rights of Transferee. Unless admitted to the Partnership in accordance
with Article 17.4, the transferee of a Partnership Interest or a part thereof or
any right, title or interest therein shall not be entitled to any of the rights,
powers, or privileges of his or her predecessor in interest, except that (s)he
shall be entitled to receive and be credited or debited with his or her
proportionate share of Partnership income, gains, Profits, Losses, deductions,
credits or distributions.
17.4 Admission of Limited Partners. Except as otherwise provided in Article
18, the General Partner, or the transferee of all or part of the Partnership
Interest of either a General Partner or a Limited Partner, may be admitted to
the Partnership as a Limited Partner upon furnishing to the General Partner all
of the following:
(a) The written approval of a Majority in Interest of all of the Limited
Partners (except the assignor Partner), or the assignor Partner alone, which
approval may be granted or denied in the sole discretion of such Partners or
Partner (as the case may be);
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(b) The written approval of the General Partner, which approval may be
granted or denied in the sole discretion of the General Partner;
(c) Acceptance, in a form satisfactory to the General Partner, of all the
terms and conditions of this Agreement and any other documents required in
connection with the operation of the Partnership pursuant to the terms of this
Agreement;
(d) A properly executed power of attorney substantially identical to that
contained in Article 38;
(e) Such other documents or instruments as may be required in order to
effect his or her admission as a Limited Partner; and
(f) Payment of such reasonable expenses as may be incurred in connection
with his or her admission as a Limited Partner.
17.5 Admission of General Partners. A Limited Partner, or the transferee of
all or part of the Partnership Interest of the General Partner, may be admitted
to the Partnership as a general partner upon furnishing to the General Partner
all of the following:
(a) The written consent of both the General Partner and a Majority in
Interest of the Limited Partners, which consent may be granted or denied in the
sole discretion of the Partners;
(b) Such financial statements, guarantees or other assurances as the
General Partner may require with regard to the ability of the proposed general
partner to fulfill the financial obligations of a general partner hereunder;
(c) Acceptance, in form satisfactory to the General Partner, of all the
terms and provisions of this Agreement and any other documents required in
connection with the operation of the Partnership pursuant to the terms of this
Agreement;
(d) A certified copy of a resolution of its Board of Directors (if it is a
corporation) authorizing it to become a general partner under the terms and
conditions of this Agreement;
(e) A power of attorney substantially identical to that contained in
Article 38;
(f) Such other documents or instruments as may be required in order to
effect its admission as a general partner; and
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(g) Payment of such reasonable expenses as may be incurred in connection
with its admission as a general partner.
Notwithstanding the above, a transferee that controls or is controlled by
the General Partner or one or more of its Affiliates that receives all or part
of the Partnership Interest of the General Partner may be admitted to the
Partnership as a general partner upon complying with all the provisions of
Article 17.5 except for subparagraph 17.5(a). As long as the transferee either
controls or is controlled by the General Partner or one or more of its
Affiliates, no Limited Partner consents will be required to admit such
transferee as a general partner to the Partnership.
17.6 Amendment of Certificate of Limited Partnership and Qualification. The
General Partner shall take all steps necessary and appropriate to prepare and
record any amendments to the Certificate of Limited Partnership, as may be
necessary or appropriate from time to time to comply with the requirements of
the Act, including, without limitation, upon the admission to the Partnership of
any general partner pursuant to the provisions of Article 17.5, and may for this
purpose exercise the power of attorney delivered to the General Partner pursuant
to Article 17.5 or 38. In addition, the General Partner shall take all steps
necessary and appropriate to prepare and record any and all documents necessary
to qualify the Partnership to do business in jurisdictions where the Partnership
is doing business, and may for this purpose exercise the power of attorney
delivered to the General Partner pursuant to Articles 17.4, 17.5 or 38.
17.7 Fundamental Changes. In the event a plan is approved by the General
Partner providing for the merger or consolidation of the Partnership with
another person or entity, or the sale of all or substantially all of the
Partnership Interests, including without limitation the exchange of Partnership
Interests for equity interests in another person or entity or for cash or other
consideration or combination thereof, then and in such event, the Limited
Partners shall be obligated 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 shall
reasonably request. Any plan described in this Article 17.7 may also effect an
amendment to the Partnership Agreement or the adoption of a new partnership
agreement in connection with the merger of the Partnership with another person
or entity. The plan may also provide that the General Partner and its Affiliates
shall 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 Partners
shall have any right by virtue of this Agreement in the income derived
therefrom. Any securities or other consideration to be distributed to the
Partners pursuant to the plan shall be distributed in the manner set forth in
Article 25(c) as though the Partnership were being liquidated. For this purpose
only, the fair market value of the securities or other consideration to be
received pursuant to the plan shall be treated as "Profits" and the capital
accounts of the Partners shall be increased in the manner provided in Article
12(a)(ii). No Partner shall be entitled to any dissent, appraisal or similar
rights in connection with a plan contemplated by this Article 17.7.
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17.8 Withdrawal of Initial Limited Partner. Upon the date the first Limited
Partner is admitted to the Partnership in accordance with Article 11 of this
Agreement, the Initial Limited Partner shall withdraw from the Partnership, and
thereupon his Capital Contribution shall be returned and his Partnership
Interest canceled and reallocated to the Limited Partners.
18. OPTIONAL PURCHASE OF LIMITED PARTNERSHIP INTERESTS ON CERTAIN EVENTS.
18.1 Death. Upon the death of a Limited Partner, the deceased Limited
Partner's executor, administrator, or other legal or personal representative
shall give written notice of that fact to the General Partner. The Partnership
shall have the option to purchase at the Closing (as defined below) the
Partnership Interest of the deceased Limited Partner (whose executor,
administrator or other legal or personal representative shall then become
obligated to sell such Partnership Interest) at the price determined in the
manner provided in Article 18.6 of this Agreement and on the terms and
conditions provided in Article 18.7 of this Agreement. The Partnership shall
have a period of thirty (30) days following the date of notice of the death of
the Limited Partner (the "Option Period") within which to notify in writing the
deceased Limited Partner's executor, administrator or other legal or personal
representative, whether the Partnership wishes to purchase all or a portion of
the Partnership Interest of the deceased Limited Partner. If the Partnership
does not elect to purchase the entire Partnership Interest of the deceased
Limited Partner before the expiration of the Option Period and in the manner
provided herein, the portion of the Partnership Interest not purchased by the
Partnership shall be held by the deceased Limited Partner's executor,
administrator or other legal representative pursuant to the terms of this
Agreement.
18.2 Bankruptcy, Insolvency or Assignment for Benefit of Creditors of a
Limited Partner. In the event that an involuntary or voluntary proceeding under
the Federal Bankruptcy Code, as amended, is filed for or against any Limited
Partner, or if any Limited Partner shall make an assignment for the benefit of
his creditors, or if any Limited Partner has a receiver or custodian appointed
for his assets, or any Limited Partner generally fails to pay his debts when
due, the insolvent Limited Partner shall give written notice (the "Notice of
Insolvency") to the General Partner of the commencement of any such proceeding
or the occurrence of such event within five days of the first notice to him of
such commencement or occurrence of such event. The Partnership shall have the
option to purchase at the Closing (as defined below) the Partnership Interest of
the insolvent Limited Partner (which the insolvent Limited Partner or his
trustee, custodian, receiver or other personal or legal representative, as the
case may be, shall then become obligated to sell) at the price determined in the
manner provided in Article 18.6 of this Agreement and on the terms and
conditions provided in Article 18.7 of this Agreement. The Partnership shall
have a period of thirty (30) days following the date of the Notice of Insolvency
(the "Option Period") within which to notify in writing the insolvent Limited
Partner or his trustee, custodian, receiver, or other legal or personal
representative, whether the Partnership wishes to purchase all or a portion of
the Partnership Interest of the insolvent Limited Partner. If the Partnership
does not elect to purchase the entire Partnership Interest of the insolvent
Limited Partner before the expiration of the Option Period and in the manner
provided herein, the portion of the Partnership Interest not purchased by the
Partnership shall be held
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by the insolvent Partner, his trustee, custodian, receiver or other legal or
personal representative pursuant to the terms of this Agreement.
18.3 Breach of Article 15.3. In the event the General Partner either
receives a Notice of Withdrawal as provided in Article 15.3 or receives notice
of a breach of Article 15.3 by or with respect to a Limited Partner (the
"Defaulting Limited Partner"), the General Partner may elect, in its sole
discretion, to treat such event as a default under this Agreement and enforce
the provisions of this Article 18.3. If the General Partner elects to enforce
the provisions of this Article 18.3, the General Partner shall give written
notice of such election (the "Notice of Default") to the Defaulting Limited
Partner within 180 days of the date the General Partner first received the
Notice of Withdrawal or notice of the defaulting event. The Partnership shall
have the option to purchase at the Closing (as defined below) the Partnership
Interest of the Defaulting Limited Partner (which the Defaulting Limited Partner
shall then become obligated to sell) at the price determined in the manner
provided in Article 18.6 of this Agreement and on the terms and conditions
provided in Article 18.7 of this Agreement. The Partnership shall have a period
of thirty (30) days following the date it sends the Notice of Default (the
"Option Period") within which to notify in writing the Defaulting Limited
Partner, whether the Partnership wishes to purchase all or a portion of the
Partnership Interest of the Defaulting Limited Partner. If the Partnership does
not elect to purchase the entire Partnership Interest of the Defaulting Limited
Partner before the expiration of the Option Period and in the manner provided
herein, the portion of the Partnership Interest not purchased by the Partnership
shall be held by the Defaulting Limited Partner pursuant to the terms of this
Agreement.
18.4 Domestic Proceeding. In the event that a spouse of a Limited Partner
commences against a Limited Partner, or a Limited Partner is named in, a
Domestic Proceeding, the Limited Partner shall give written notice (the "Notice
of Domestic Proceeding") to the General Partner of the commencement of any such
proceeding within five days of the first notice to him of such commencement. The
Partnership shall have the option to purchase at the Closing (as defined below)
the Partnership Interest of the Limited Partner involved in the Domestic
Proceeding (which the Limited Partner shall then become obligated to sell), at
the price determined in the manner provided in Article 18.6 of this Agreement
and on the terms and conditions provided in Article 18.7 of this Agreement. The
Partnership shall have a period of thirty (30) days following the date of the
Notice of Domestic Proceeding (the "Option Period") within which to notify in
writing the Limited Partner involved in the Domestic Proceeding, whether the
Partnership wishes to purchase all or a portion of the Partnership Interest of
such Limited Partner. If the Partnership does not elect to purchase the
Partnership Interest of the Limited Partner involved in the Domestic Proceeding
before the expiration of the Option Period and in the manner provided herein,
the portion of the Partnership Interest not purchased by the Partnership shall
be held by such Limited Partner pursuant to the terms of this Agreement.
18.5 Divestiture Option. 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 (e.g., the enactment
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or application of prohibitory physician self-referral legislation against the
Partnership or its Partners), the General Partner shall promptly either, in its
sole discretion, (i) take the steps outlined in this Article 18.5 to divest the
Limited Partners of their Partnership Interests, or (ii) dissolve the
Partnership as provided in Article 24.1(f). If the General Partner chooses
option (i), it shall deliver a written notice to all of the Limited Partners
(the "Notice of Election") and purchase such Partnership Interests for its own
account. The purchase price to be paid for each Partnership Interest shall be
determined in the manner as provided in Article 18.6 and shall be on the terms
and conditions as provided in Article 18.7. The transfer of the Partnership
Interests and the payment of the purchase price (as provided in Article 18.6)
shall be made at such time as determined by the General Partner to be in the
best interests of the Partnership and its Limited Partners. Each Limited Partner
hereby makes, constitutes and appoints the General Partner, with full power of
substitution, his true and lawful attorney-in-fact, to take such actions and
execute such documents on his behalf to effect the transfer of his Partnership
Interest as provided in this Article 18.5. The foregoing power of attorney shall
not be affected by the subsequent incapacity or mental incompetence of any
Limited Partner.
18.6 Purchase Price. The purchase price to be paid for the Partnership
Interest of any Limited Partner whose interest is being purchased pursuant to
the provisions of Article 18.1, 18.2, 18.3, 18.4 or 18.5 (the "Selling Limited
Partner") shall be determined in the manner provided in this Article 18.6. The
purchase price for a Partnership Interest purchased pursuant to the provisions
of Article 18.1, 18.2, 18.3, 18.4 or 18.5 shall be an amount equal to the lesser
of (i) the fair market value of the Selling Limited Partner's Partnership
Interest on the Valuation Date (prorated in the event that only a portion of his
or her Partnership Interest is being purchased) as determined by an Appraiser
(as defined below) selected by the General Partner, or (ii) the Selling Limited
Partner's share of the Partnership's book value, if any (prorated in the event
that only a portion of his or her Partnership Interest is being purchased) as
reflected by the Capital Account of the Selling Limited Partner (unadjusted for
any appreciation in Partnership assets and as reduced by depreciation deductions
claimed by the Partnership for tax purposes) as of the Valuation Date (as
defined below). The General Partner, in its sole discretion, may pursue both of
the above valuation methods and choose the lesser value of the two as indicated
above, or may designate and follow only one of the methods in calculating the
purchase price. For purposes of this Article 18.6, the term "Appraiser" shall
mean an independent appraiser who is qualified in appraising limited partnership
interests and who has at least five years experience. In determining fair market
value, the Appraiser shall take into consideration any outstanding indebtedness,
liabilities, liens and obligations of the Partnership and the relative
Partnership Interests and capital accounts of all Partners, as well as applying
any customary discounts for lack of liquidity and control. Such appraisal shall
be conducted in accordance with professional appraisal standards. The valuation
of the Appraiser shall be conclusive and binding upon the Partnership, the
purchaser and the Selling Limited Partner and his or her representatives. The
determination of the Selling Limited Partner's Capital Account or aggregate
distributable amount on the Valuation Date (as defined below) shall be made by
the Partnership's internal accountant (the "Partnership Accountant") upon a
review of the Partnership books of account, and a formal audit is expressly
waived. The statement of the Partnership Accountant with respect to the Capital
Account or aggregate distributable amount of the Selling
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Limited Partner on the Valuation Date shall be binding and conclusive upon the
Partnership, the purchaser and the Selling Limited Partner and his
representative. The Valuation Date shall be the last day of the month
immediately preceding the month in which occurs: (i) the death of a Selling
Limited Partner, in the case of a purchase by reason of death; (ii) the
bankruptcy or insolvency of a Selling Limited Partner, in the case of a purchase
by reason of such bankruptcy or insolvency; (iii) the Notice of Withdrawal or
breach of Article 15.3 as provided in Article 18.3 in the case of a purchase by
reason thereof; (iv) the commencement of the Domestic Proceeding, in the case of
a purchase by reason thereof; or (v) the Notice of Election as provided in
Article 18.5, in the case of a purchase by reason thereof. Any Limited Partner
whose Partnership Interest is purchased pursuant to the provisions of
Article 18.1, 18.2, 18.3, 18.4 or 18.5 shall be entitled only to the purchase
price which shall be paid at the Closing in cash (or by certified or cashier's
check) and shall not be entitled to any Partnership distributions made after the
Valuation Date. The transfer of a Partnership Interest of a Selling Limited
Partner shall be deemed to occur as of the Valuation Date and the Selling
Limited Partner shall have no voting or other rights as a Limited Partner after
such date. The purchaser shall be entitled to any distributions attributable to
the transferred interest after the Valuation Date and the Partnership shall have
the right to deduct the amount of any such distributions made to the Selling
Limited Partner after the Valuation Date from the purchase price.
18.7 Closing.
18.7.1 Closing of Purchase and Sale. The Closing of any purchase and sale
of a Partnership Interest pursuant to Article 18.1, 18.2, 18.3, 18.4 or 18.5 of
this Agreement shall take place at the principal office of the Partnership, or
such other place designated by the General Partner, on the date determined as
follows (the "Closing"):
(a) In the case of a purchase and sale occurring by reason of the death of
a Limited Partner as provided in Article 18.1 of this Agreement, the Closing
shall be held on the thirtieth day (or if such thirtieth day is not a business
day, the next business day following the thirtieth day) next following the last
to occur of:
(i) Qualification of the executor or personal administrator of the deceased
Limited Partner's estate;
(ii) The date on which any necessary determination of the purchase price of
the Partnership Interest to be purchased has been made; or
(iii) The date that coincides with the close of the Option Period.
(b) In the case of a purchase and sale occurring by reason of the
occurrence of one of the events described in Article 18.2, 18.3, 18.4 or 18.5 of
this
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Agreement, the Closing shall be held on the thirtieth day (or if such thirtieth
day is not a business day, the next business day following the thirtieth day)
next following the later to occur of:
(i) The date on which any necessary determination of the purchase price of
the Partnership Interest to be purchased has been made; or
(ii) The date that coincides with the close of the Option Period.
At the Closing, although not necessary to effect the transfer, the Selling
Limited Partner shall concurrently with tender and receipt of the applicable
purchase price, deliver to the purchaser duly executed instruments of transfer
and assignment, assigning good and marketable title to the portion or portions
of the Selling Limited Partner's entire Partnership Interest thus purchased,
free and clear from any liens or encumbrances or rights of others therein. The
parties acknowledge that occurrence of any of the triggering events described in
Article 18.1, 18.2, 18.3, 18.4 or 18.5 and compliance with all the Articles of
this Agreement, except the execution of the transfer documents by the Selling
Limited Partner as provided above in this Article 18.7.1, are sufficient to
effect the complete transfer of the Selling Limited Partner's Partnership
Interest and the Selling Limited Partner shall be deemed to consent to admission
of the transferee as a substitute Limited Partner. Notwithstanding the date of
the Closing or whether a Closing is successfully held, the transfer of a
Partnership Interest of a Selling Limited Partner shall be deemed to occur as of
the Valuation Date as defined in Article 18.6. The deemed transfer is effective
regardless of whether the Selling Limited Partner performs the duties set forth
in this Article 18.7.1.
18.7.2 Terms and Conditions of Purchase. The Partnership Interest of a
Limited Partner shall not be transferred to any Partner unless the requirements
of Articles 17.2 and 17.4 (b) through (f) are satisfied with respect to it. The
purchaser shall be liable for all obligations and liabilities connected with
that portion of the Partnership Interest transferred to it unless otherwise
agreed in writing.
19. SALE, ASSIGNMENT OR OTHER TRANSFER OF THE GENERAL PARTNER'S INTEREST.
19.1 The General Partner may not mortgage, pledge, hypothecate, transfer,
sell, assign or otherwise dispose of all or any part of its interest in the
Partnership, whether voluntarily, by operation of law or otherwise (the
foregoing actions being hereafter collectively referred to as "Transfers" or
singularly as a "Transfer") except as permitted by this Article.
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19.2 If the General Partner makes a Transfer (other than a mortgage, pledge
or hypothecation) of its general partner interest in the Partnership pursuant to
this Article, it shall be liable for all obligations and liabilities incurred by
it as the general partner of the Partnership on or before the effective date of
such Transfer, but shall not be liable for any obligations or liabilities of the
Partnership arising after the effective date of the Transfer.
19.3 No Transfer by the General Partner shall be permitted unless:
(a) Counsel for the Partnership shall have rendered an opinion that none of
the actions taken in connection with such Transfer will cause the Partnership to
be classified other than as a partnership for federal income tax purposes or
will cause the termination or dissolution of the Partnership under state law;
and
(b) Such documents or instruments, in form and substance satisfactory to
counsel for the Partnership, shall have been executed and delivered as may be
required in the opinion of counsel for the Partnership to effect fully any such
Transfer.
Notwithstanding the foregoing provisions of this Article 19.3, the General
Partner may pledge its interest in the Partnership to any bank, insurance
company or other financial institution to secure payment of indebtedness.
20. TERMINATION OF THE SERVICES OF THE GENERAL PARTNER.
If the General Partner shall be finally adjudged by a court of competent
jurisdiction to be liable to the Limited Partners or the Partnership for any act
of gross negligence or willful misconduct in the performance of its duties under
the terms of this Agreement, the General Partner may be removed and another
substituted with the consent of all of the Limited Partners. Such consent shall
be evidenced by a certificate of removal signed by all of the Limited Partners.
In the event of removal, the new general partner shall succeed to all of the
powers, privileges and obligations of the General Partner, and the General
Partner's interest in the Partnership shall become that of a Limited Partner,
and the General Partner shall maintain its same Percentage Interest in the
Partnership notwithstanding anything contained in the Act to the contrary. In
addition, in the event of removal, the new general partner shall take all steps
necessary and appropriate to prepare and record an amendment to the Certificate
of Limited Partnership to reflect the removal of the General Partner and the
admission of such new general partner.
21. MANAGEMENT AND OPERATION OF BUSINESS.
21.1 All decisions with respect to the management of the business and
affairs of the Partnership shall be made by the General Partner.
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21.2 The General Partner shall be under no duty to devote all of its time
to the business of the Partnership, but shall devote only such time as it deems
necessary to conduct the Partnership business and to operate and manage the
Partnership in an efficient manner.
21.3 The General Partner may charge to the Partnership all ordinary and
necessary costs and expenses, direct and indirect, attributable to the
activities, conduct and management of the business of the Partnership. The costs
and expenses to be borne by the Partnership shall include, but are not limited
to, all expenditures incurred in acquiring and financing the Equipment or other
Partnership property, legal and accounting fees and expenses, salaries of
employees of the Partnership, consulting and quality assurance fees paid to
independent contractors, insurance premiums and interest.
21.4 In addition to, and not in limitation of, any rights and powers
covenanted by law or other provisions of this Agreement, and except as limited,
restricted or prohibited by the express provisions of this Agreement, the
General Partner shall have and may exercise on behalf of the Partnership all
powers and rights necessary, proper, convenient or advisable to effectuate and
carry out the purposes, business and objectives of the Partnership. Such powers
shall include, without limitation, the following:
(a) To conduct the Offering and any Dilution Offering on behalf of the
Partnership;
(b) To acquire on behalf of the Partnership (i) one or more fixed base of
transportable lithotripsy systems, including the Lithotripter System, (ii) any
other assets related to the provision of lithotripsy services, or (iii) any
other assets or equipment or an interest in another entity consistent with the
purposes of the Partnership as provided in Article 4 (collectively, the
"Additional Assets"), at such times and at such price and upon such terms, as
the General Partner deems to be in the best interest of the Partnership;
(c) To purchase, hold, manage, lease, license and dispose of Partnership
assets, including the purchase, exchange, trade or sale of the Partnership's
assets at such price, or amount, for cash, securities or other property and upon
such terms, as the General Partner deems to be in the best interest of the
Partnership; provided, that should the Partnership assets be exchanged or traded
for securities or other property (the "Replacement Property") the General
Partner shall have the same powers with regard to the Replacement Property as it
does towards the traded property;
(d) To exercise the option of the Partnership to purchase a Limited
Partner's Partnership Interest pursuant to Article 18;
(e) To determine the travel itinerary and site locations for the
Lithotripter System or other Partnership technology;
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(f) To borrow money for any Partnership purpose (including the acquisition
of the Additional Assets) and, if security is required therefor, to subject to
any security device any portion of the property for the Partnership, to obtain
replacements of any other security device, to prepay, in whole or in part,
refinance, increase, modify, consolidate or extend any encumbrance or other
security device;
(g) To deposit, withdraw, invest, pay, retain (including the establishment
of reserves in order to acquire the Additional Assets) and distribute the
Partnership's funds in any manner consistent with the provisions of this
Agreement;
(h) To institute and defend actions at law or in equity;
(i) To enter into and carry out contracts and agreements and any or all
documents and instruments and to do any and all such other things as may be in
furtherance of Partnership purposes or necessary or appropriate to the conduct
of the Partnership activities;
(j) To execute, acknowledge and deliver any and all instruments which may
be deemed necessary or convenient to effect the foregoing;
(k) To form a new limited partnership made up of qualified investors to
treat gallstone patients (if the FDA approves a lithotripter for such purpose),
and to contract on behalf of the Partnership with the new limited partnership
for the use for a fee of a Partnership lithotripter for the treatment of the new
limited partnership's gallstone patients; and
(l) To engage or retain one or more persons to perform acts or provide
materials as may be required by the Partnership, at the Partnership's expense,
and to compensate such person or persons at a rate to be set by the General
Partner, provided that the compensation is at the then prevailing rate for the
type of services and materials provided, or both. Any person, whether a Partner,
an Affiliate of a Partner or otherwise, including without limitation the General
Partner, may be employed or engaged by the Partnership to render services and
provide materials, including, but not limited to, management services,
professional services, accounting services, quality assessment services, legal
services, marketing services, maintenance services or provide materials; and if
such person is a Partner or an Affiliate of a Partner, (s)he shall be entitled
to, and shall be paid compensation for said services or materials, anything in
this Agreement to the contrary notwithstanding, provided that the compensation
to be received for such services or materials is competitive in price and terms
with then prevailing rate for the type of services and/or materials provided.
The Partnership, pursuant to the terms of a Management Agreement, will contract
with the General Partner with respect to the supervision and coordination of the
management and administration of the day-to-day operations of the Partnership's
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business for a monthly fee equal to 7.5% of net Partnership Cash Flow per month.
All costs incurred by the General Partner under the Management Agreement shall
be paid or reimbursed by the Partnership directly. The Partnership may also
contract with healthcare facilities and/or qualified physicians desiring to use
its Lithotripter System for the treatment of patients. Owning an interest in the
Partnership shall not be a condition to using the Lithotripter System. The
General Partner and its Affiliates may engage in or possess an interest in other
business ventures of any nature and description independently or with others,
including, but not limited to, the operation of a fixed-base or mobile
lithotripsy unit, whether or not such business ventures are in direct or
indirect competition with the Partnership, and neither the Partnership nor the
Partners shall have any right by virtue of this Agreement in and to said
independent ventures or to the income or profits derived therefrom.
21.5 In addition to other acts expressly prohibited or restricted by this
Agreement or by law, the General Partner shall have no authority to act on
behalf of the Partnership in:
(a) Doing any act in contravention of this Agreement or the Partnership's
Certificate of Limited Partnership;
(b) Doing any act which would make it impossible to carry on the ordinary
business of the Partnership;
(c) Possessing or in any manner dealing with the Partnership's property or
assigning the rights of the Partnership in the Partnership's property for other
than Partnership purposes;
(d) Admitting a person as a Limited Partner or a General Partner except as
provided in this Agreement; or
(e) Performing any act (other than an act required by this 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.
22. RESERVES.
The General Partner may cause the Partnership to create a reserve account
to be used exclusively for repairs and acquisition of Additional Assets and for
any other valid Partnership purpose. The General Partner shall, in its sole
discretion, determine the amount of payments to such reserve.
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23. INDEMNIFICATION AND EXCULPATION OF THE GENERAL PARTNER.
23.1 The General Partner is accountable to the Partnership as a fiduciary
and consequently must exercise good faith and integrity in handling Partnership
affairs. The General Partner and its Affiliates shall have no liability to the
Partnership which arises out of any action or inaction of the General Partner or
its Affiliates if the General Partner or its Affiliates, in good faith,
determined that such course of conduct was in the best interest of the
Partnership and such course of conduct did not constitute gross negligence or
willful misconduct of the General Partner or its Affiliates. The General Partner
and its Affiliates shall 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.
23.2 The General Partner shall not be liable for the return of the Capital
Contributions of the Limited Partners, and upon dissolution, Limited Partners
shall look solely to the assets of the Partnership.
24. DISSOLUTION OF THE PARTNERSHIP.
24.1 The Partnership shall be dissolved and terminated and its business
wound up upon the occurrence of any one of the following events:
(a) The expiration of its term on December 31, 2048;
(b) The filing by, on behalf of, or against the General Partner of any
petition or pleading, voluntary or involuntary, to declare the General Partner
bankrupt under any bankruptcy law or act, or the commencement in any court of
any proceeding, voluntary or involuntary, to declare the General Partner
insolvent or unable to pay its debts, or the appointment by any court or
supervisory authority of a receiver, trustee or other custodian of the property,
assets or business of the General Partner or the assignment by it of all or any
part of its property or assets for the benefit of creditors, if said action,
proceeding or appointment is not dismissed, vacated or otherwise terminated
within ninety (90) days of its commencement;
(c) The determination of the General Partner that the Partnership should be
dissolved;
(d) The occurrence of an event described in a plan approved by the General
Partner pursuant to Article 17.7 resulting in the dissolution of the
Partnership;
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<PAGE>
(e) The election of the General Partner to dissolve the Partnership
following the occurrence of an event described in Article 18.5;
(f) Except as otherwise provided in any plan approved by the General
Partner pursuant to Article 17.7, the sale, exchange or other disposition of all
or substantially all of the property of the Partnership without making provision
for the replacement thereof; and
(g) The dissolution, retirement, resignation, death, disability or legal
incapacity of a general partner, and any other event resulting in the
dissolution or termination of the Partnership under the laws of the State of
Montana.
24.2 Notwithstanding the provisions of Article 24.1, the Partnership shall
not be dissolved and terminated upon the retirement, resignation, bankruptcy,
assignment for the benefit of creditors, dissolution, death, disability or legal
incapacity of a general partner, and its business shall continue pursuant to the
terms and conditions of this Agreement, if any general partner or general
partners remain following such event; provided that such remaining general
partner or general partners are hereby obligated to continue the business of the
Partnership. If no general partner remains after the occurrence of such event,
the business of the Partnership shall continue pursuant to the terms and
conditions of this Agreement, if, within ninety (90) days after the occurrence
of such event, a Majority in Interest of the Limited Partners agree in writing
to continue the business of the Partnership, and, if necessary, to the
appointment of one or more persons or entities to be substituted as the general
partner. In the event the Limited Partners agree as provided above to continue
the business of the Partnership, the new general partner or general partners
shall succeed to all of the powers, privileges and obligations of the General
Partner, and the General Partner's interest in the Partnership shall become a
Limited Partner's interest hereunder. Furthermore, in the event a remaining
general partner or the Limited Partners, as the case may be, agree to continue
the business of the Partnership as provided herein, the remaining general
partner or the newly appointed general partner or general partners, as the case
may be, shall take all steps necessary and appropriate to prepare and record an
amendment to the Certificate of Limited Partnership to reflect the continuation
of the business of the Partnership and the admission of a new general partner or
general partners, if any.
25. 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, shall
cause the cancellation of the Partnership's Certificate of Limited Partnership,
shall liquidate the assets of the Partnership, and shall apply and distribute
the proceeds of such liquidation in the following order of priority:
(a) First, to the payment of the debts and liabilities of the Partnership,
and the expenses of liquidation;
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<PAGE>
(b) Second, to the creation of any reserves which the General Partner (or
such 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
(c) Third, the balance, if any, shall be distributed to the Partners in
accordance with the Partners' positive Capital Account balances after such
Capital Accounts are adjusted as provided by Article 13, and any other
adjustments required by the Final Treasury Regulations under Section 704(b) of
the Code. Any general partner with a negative Capital Account following the
distribution of liquidation proceeds or the liquidation of its interest must
contribute to the Partnership an amount equal to such negative Capital Account
on or before the end of the Partnership's taxable year (or, if later, within
ninety days after the date of liquidation). Any capital so contributed shall be
(i) distributed to those Partners with positive Capital Accounts until such
Capital Accounts are reduced to zero, and/or (ii) used to discharge recourse
liabilities.
26. BOOKS OF ACCOUNT, RECORDS AND REPORTS.
26.1 Proper and complete records and books of account shall be kept by the
General Partner in which shall be entered fully and accurately all transactions
and such other matters relating to the Partnership's business as are usually
entered into records and books of account maintained by persons engaged in
businesses of a like character. The books and records of the Partnership shall
be prepared according to the accounting method determined by the General
Partner. The Partnership's fiscal year shall be the calendar year. The books and
records shall at all times be maintained at the Partnership's Records Office and
shall be open to the reasonable inspection and examination of the Partners or
their duly authorized representatives during reasonable business hours.
26.2 Within ninety (90) days after the end of each Year, the General
Partner shall 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 shall be reasonably necessary for the preparation by such
person of his federal income tax return. The General Partner will also make
available to the Limited Partners any other information required by the Act.
26.3 The General Partner shall maintain at the Partnership's Records Office
copies of the Partnership's original Certificate of Limited Partnership and any
certificate of amendment, restated certificate or certificate of cancellation
with respect thereto and such other documents as the Act shall require. The
General Partner will furnish to any Limited Partner upon request or as otherwise
required by law a copy of the Partnership's original Certificate of Limited
Partnership and any certificate of amendment, restated certificate, or
certificate of cancellation, if any.
<PAGE>
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26.4 The General Partner shall, 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.
26.5 The General Partner is designated as the Tax Matters Partner (as
defined in Section 6231 of the Code) and to act in any similar capacity under
state or local law, and 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. The General Partner is authorized and required to notify
the federal, state or local tax authorities of the appointment of a Tax Matters
Partner in the manner provided in Treasury Regulations Section 301.6231(a)(7)-1,
as modified from time to time. In its capacity as Tax Matters Partner, the
General Partner shall oversee the Partnership's tax affairs in the manner which,
in its best judgment, is in the interests of the Partners.
27. NOTICES.
All notices under this Agreement shall be in writing and shall be deemed to
have been given when delivered personally, or mailed by certified or registered
mail, postage prepaid, return receipt requested. Notices to the General Partner
shall be delivered at, or mailed to, its principal office. Notices to the
Partnership shall be delivered at, or mailed to, its principal office with a
copy to each of its business offices. Notice to a Limited Partner shall be
delivered to such Limited Partner, or mailed to the last address furnished by
him for such purposes to the General Partner. Limited Partners shall give notice
of a change of address to the General Partner in the manner provided in this
Article.
28. AMENDMENTS.
Subject to the provisions of Article 28, this Agreement is subject to
amendment only by written consent of the General Partner and a Majority in
Interest of the Limited Partners; provided, however, the consent of the Limited
Partners shall not be required if such amendments are ministerial in nature and
do not contravene the provisions of Article 29. Further, no Limited Partner
consent shall be required to amend Schedule A to reflect the admission of
Partners as contemplated by the Offering, any Dilution Offering or as otherwise
herein permitted.
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<PAGE>
29. LIMITATIONS ON AMENDMENTS.
Notwithstanding the provisions of Article 28, no amendment to this
Agreement shall:
(a) Enlarge the obligations of any Partner under this Agreement or convert
the interest in the Partnership of any Limited Partner into the interest of a
general partner or modify the limited liability of any Limited Partner, without
the consent of such Partner;
(b) Amend the provisions of Article 13, 14, 16 or 25 without the approval
of the General Partner and a Majority in Interest of the Limited Partners;
provided, however, that the General Partner may at any time amend such Articles
without the consent of the Limited Partners 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, in which case such amendments may only be made as provided in
this Article 29(b); or
(c) Amend this Article 29 without the consent of all Partners.
30. MEETINGS, CONSENTS AND VOTING.
30.1 A meeting of the Partnership to consider any matter with respect to
which the Partners may vote as set forth in this Agreement may be called by the
General Partner or by Limited Partners who hold more than twenty-five percent
(25%) of the aggregate interests in the Partnership held by all the Limited
Partners. Upon receipt of a notice requesting a meeting by such Partner or
Partners and stating the purpose of the meeting, the General Partner shall,
within ten (10) days thereafter, give notice to the Partners of a meeting of the
Partnership to be held at a time and place generally convenient to the Limited
Partners on a date not earlier than fifteen (15) days after receipt by the
General Partner of the notice requesting a meeting. The notice of the meeting
shall set forth the time, date, location and purpose of the meeting.
30.2 Any consent of a Partner required by this Agreement may be given as
follows:
(a) By a written consent given by the consenting Partner and received by
the General Partner at or prior to the doing of the act or thing for which the
consent is solicited, or
(b) By the affirmative vote by the consenting Partner to the doing of the
act or thing for which the consent is solicited at any meeting called pursuant
to this Article to consider the doing of such act or thing.
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<PAGE>
30.3 When exercising voting rights expressly granted under the Articles of
this Agreement, each Partner shall have that number of votes as is equal to the
Percentage Interest of such Partner at the time of the vote, multiplied by 100.
31. SUBMISSIONS TO THE LIMITED PARTNERS.
The General Partner shall give the Limited Partners notice of any proposal
or other matter required by any provision of this Agreement or by law to be
submitted for consideration and approval of the Limited Partners. Such notice
shall include any information required by the relevant provision or by law.
32. ADDITIONAL DOCUMENTS.
Each party hereto agrees to execute and acknowledge all documents and
writings which the General Partner may deem necessary or expedient in the
creation of this Partnership and the achievement of its purpose.
33. SURVIVAL OF RIGHTS.
Except as herein otherwise provided to the contrary, this Agreement shall
be binding upon and inure to the benefit of the parties hereto, their successor
and assigns.
34. INTERPRETATION AND GOVERNING LAW.
When the context in which words are used in this Agreement indicates that
such is the intent, words in the singular number shall include the plural and
vise versa; in addition, the masculine gender shall include the feminine and
neuter counterparts. The Article headings or titles and the table of contents
shall not define, limit, extend or interpret the scope of this Agreement or any
particular Article. This Agreement shall be governed and construed in accordance
with the laws of the State of Montana without giving effect to the conflicts of
laws provisions thereof.
35. SEVERABILITY.
If any provision, sentence, phrase or word of this Agreement or the
application thereof to any person or circumstance shall be held invalid, the
remainder of this Agreement, or the application of such provision, sentence,
phrase, or word to persons or circumstances, other than those as to which it is
held invalid, shall not be affected thereby.
36. AGREEMENT IN COUNTERPARTS.
This Agreement may be executed in several counterparts, each of which shall
be deemed an original, but all of which shall constitute one and the same
instrument. In addition, this Agreement may contain more than one counterpart of
the signature page and this Agreement may
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<PAGE>
be executed by the affixing of the signatures of each of the Partners to one of
such counterpart signature pages; all of such signature pages shall be read as
though one, and they shall have the same force and effect as though all of the
signers had signed a single signature page.
37. THIRD PARTIES.
The agreements, covenants and representations contained herein are for the
benefit of the parties hereto inter se and are not for the benefit of any third
parties including, without limitation, any creditors of the Partnership.
38. POWER OF ATTORNEY.
Each Limited Partner hereby makes, constitutes and appoints Stan Johnson
and Cheryl Williams, severally, with full power of substitution, his true and
lawful attorneys-in-fact, for him and in his name, place and stead and for his
use and benefit to sign and acknowledge, file and record, any amendments hereto
among the Partners for the further purpose of executing and filing on behalf of
each Limited Partner, any and all certificates of limited partnership or other
documents necessary to constitute the Partnership or to effect the continuation
of the Partnership, the admission or withdrawal of a general partner or a
limited partner, the qualification of the Partnership in a foreign jurisdiction
(or amendment to such qualification), the admission of substitute Limited
Partners or the dissolution or termination of the Partnership, provided such
continuation, admission, withdrawal, qualification, or dissolution and
termination are in accordance with the terms of this Agreement.
The foregoing power of attorney is a special power of attorney coupled with
an interest, is irrevocable and shall survive the death or legal incapacity of
each Limited Partner. It may be exercised by any one of said attorneys by
listing all of the Limited Partners executing any instrument over the signature
of the attorney-in-fact acting for all of them. The power of attorney shall
survive the delivery of an assignment by a Limited Partner of the whole or any
portion of his Unit. In those cases in which the assignee of, or the successor
to, a Limited Partner owning a Unit has been approved by the Partners for
admission to the Partnership as a substitute Limited Partner, the power of
attorney shall survive for the sole purpose of enabling the General Partner to
execute, acknowledge and file any instrument necessary to effect such
substitution.
This power of attorney shall not be affected by the subsequent bankruptcy,
dissolution, incapacity or mental incompetence of any Limited Partner.
39. ARBITRATION.
Any dispute arising out of or in connection with this Agreement or the
breach thereof shall be decided by arbitration in Austin, Texas in accordance
with the then effective commercial arbitration rules of the American Arbitration
Association, and judgment thereof may be entered in any court having
jurisdiction thereof.
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<PAGE>
40. CREDITORS.
None of the provisions of this Agreement shall be for the benefit of or
enforceable by any creditors of the Partnership.
IN WITNESS WHEREOF, the parties have executed this Agreement of Limited
Partnership as of the day and year first above written.
GENERAL PARTNER:
SUN MEDICAL TECHNOLOGIES, INC.,
a California corporation
By: ______________________________
Stan Johnson, President
ATTEST:
_________________________ [CORPORATE SEAL]
Secretary
INITIAL LIMITED PARTNER:
__________________________________
Stan Johnson
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STATE OF ____________________)
)
COUNTY OF __________________ )
On this _______ day of ___________, 1998, before me, the undersigned Notary
Public in and for the County of _______________ in the State of ___________,
personally came Stan Johnson, who, being by me duly sworn, said that he is
President of Sun Medical Technologies, Inc., the sole general partner of Big Sky
Urological Services Limited Partnership, that the seal affixed to the foregoing
instrument in writing is the corporate seal of the corporation, and that said
writing was signed, sworn to, and sealed by him in behalf of said corporation by
its authority duly given. And the said Stan Johnson, further certified that the
facts set forth in said writing are true and correct, and acknowledged said
instrument to be the act and deed of said corporation.
WITNESS my hand and notarial seal.
-------------------------------------------
Notary Public
My commission expires:
___________________________
STATE OF ________________ )
)
COUNTY OF ______________ )
I, _______________________________, a notary public in and for the State
and County set forth above, do hereby certify that Stan Johnson personally
appeared before me this _____ day of _________, 1998 and acknowledged and swore
to the due execution of the foregoing Limited Partnership Agreement in his
capacity as the initial limited partner.
------------------------------------------
Notary Public
My commission expires:
___________________________
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<PAGE>
COUNTERPART SIGNATURE PAGE
By signing this Counterpart Signature Page, the undersigned acknowledges
his or her acceptance of that certain Agreement of Limited Partnership of Big
Sky Urological Services Limited Partnership, and his or her intention to be
legally bound thereby.
Dated this _________ day of ___________________, 199__.
-------------------------------------------
Signature
-------------------------------------------
Printed Name
STATE OF _______________ )
)
COUNTY OF _____________ )
BEFORE ME, the undersigned Notary Public in and for the State and County
set forth above, on the _______ day of __________________, 199__, personally
appeared ___________________, and, being by me first duly sworn, stated that
(s)he signed this Counterpart Signature Page for the purpose set forth above and
that the statements contained therein are true.
-------------------------------------------
Signature of Notary Public
-------------------------------------------
Printed Name of Notary
My Commission Expires:
___________________________
[SEAL]
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<PAGE>
SCHEDULE A
Schedule of Partnership Interests
BIG SKY UROLOGICAL SERVICES LIMITED PARTNERSHIP
CONTRIBUTIONS OF CAPITAL TO THE PARTNERSHIP AND PERCENTAGE
INTERESTS
Cash Percentage
General Partner Contribution Guaranty(1) Interest
Sun Medical Technologies, Inc. $1,448.48 $ 4,500.00 1%
1301 Capital of Texas Highway
Suite C-300
Austin, Texas 78746
Limited Partners as a whole $143,400.00 $445,500.00 99%
TOTAL: $144,848.48 $450,000.00 100%
(1) Represents the principal portion of each Partner's guaranty obligation, as
each Partner's obligation under the Guaranty includes not only principal,
but also (as provided in the Guaranty) accrued and unpaid interest, late
payment penalties and all costs incurred by the Bank in collecting any
defaulted obligations.
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OPERATING AGREEMENT
OF
KENTUCKY I LITHOTRIPSY, LLC
(A Kentucky Limited Liability Company)
Dated: January 26, 1999
THE LLC MEMBERSHIP INTERESTS REPRESENTED BY THIS OPERATING AGREEMENT HAVE NOT
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES ACTS OR LAWS OF ANY STATE IN
RELIANCE UPON EXEMPTIONS UNDER THOSE ACTS OR LAWS. THE SALE OR OTHER DISPOSITION
OF THE MEMBERSHIP INTERESTS IS RESTRICTED AS STATED IN THIS OPERATING AGREEMENT,
AND IN ANY EVENT IS PROHIBITED UNLESS THE LLC RECEIVES AN OPINION OF COUNSEL
SATISFACTORY TO IT AND ITS COUNSEL THAT SUCH SALE OR OTHER DISPOSITION CAN BE
MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY
APPLICABLE STATE SECURITIES ACTS AND LAWS. BY ACQUIRING THE MEMBERSHIP INTEREST
REPRESENTED BY THIS OPERATING AGREEMENT, EACH MEMBER REPRESENTS THAT IT WILL NOT
SELL OR OTHERWISE DISPOSE OF ITS MEMBERSHIP INTEREST WITHOUT REGISTRATION OR
OTHER COMPLIANCE WITH THE AFORESAID ACTS AND THE RULES AND REGULATIONS ISSUED
THEREUNDER.
<PAGE>
TABLE OF CONTENTS
ARTICLE I - FORMATION OF THE COMPANY...........................................1
1.1 Formation....................................................1
1.2 Name.........................................................1
1.3 Registered Office and Registered Agent.......................1
1.4 Principal Place of Business..................................1
1.5 Purposes and Powers..........................................1
1.6 Term.........................................................2
1.7 Nature of Members' Interests.................................2
ARTICLE II - DEFINITIONS.......................................................2
2.1 Definitions..................................................2
ARTICLE III - MANAGEMENT OF THE COMPANY.......................................11
3.1 The Manager.................................................11
3.2 Specific Authority of the Manager...........................12
3.3 Specific Authority of Manager...............................15
3.4 Authority as to Third Persons...............................15
3.5 Compensation and Expenses...................................15
3.6 Indemnification and Exculpation of the Manager..............15
3.7 Liability for Return of Capital Contribution................15
ARTICLE IV - EXECUTIVE COMMITTEE..............................................16
4.1 General Powers. ...........................................16
4.2 Number, Term and Qualification..............................16
4.3 Removal and Replacement. ..................................16
4.4 Compensation and Expenses. ................................17
4.5 Action by the Executive Committee. ........................17
4.6 Action Without Meeting. ...................................17
4.7 Meeting by Communications Device. .........................17
4.8 Indemnification of Executive Committee Members. ...........17
4.9 Liability for Return of Capital Contribution. .............18
ARTICLE V - RIGHTS AND OBLIGATIONS OF MEMBERS.................................18
5.1 Names and Addresses of Members..............................18
5.2 No Management by Members....................................18
5.3 Election of Manager.........................................18
5.4 Action by Members...........................................18
5.5 Operation of Mobile System..................................18
5.6 Outside Activities..........................................19
5.7 Disclosure of Con...........................................19
5.8 Limited Liability...........................................20
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<PAGE>
ARTICLE VI - CAPITAL CONTRIBUTIONS,
GUARANTIES AND DILUTION OFFERINGS....................................20
6.1 Manager Contribution........................................20
6.2 Physician Members Contribution..............................20
6.3 No Interest.................................................20
6.4 Dilution Offerings..........................................20
6.5 Conditions to the Capital Contributions
of the Physician Members...............21
6.6 Capital Accounts............................................21
ARTICLE VII - REPRESENTATIONS, WARRANTIES AND
COVENANTS OF THE MANAGER.............................................22
7.1 Manager's Representations and Warranties....................22
7.2 Manager's Covenants.........................................23
ARTICLE VIII - ALLOCATIONS, ELECTIONS AND REPORTS.............................23
8.1 Profits and Losses..........................................23
8.2 Sales Commission............................................23
8.3 Nonrecourse Deductions......................................23
8.4 Member Nonrecourse Deductions...............................24
8.5 Allocations Between Transferor and Transferee...............24
8.6 Gains from Capital Transactions.............................24
8.7 Contributed Property........................................24
8.8 Minimum Gain Chargeback.....................................25
8.9 Member Minimum Gain Chargeback..............................25
8.10 Qualified Income Offset.....................................25
8.11 Gross Income Allocation.....................................26
8.12 Section 754 Adjustment......................................26
8.13 Curative Allocations........................................26
8.14 Compliance with Treasury Regulations........................26
8.15 Tax Withholding.............................................26
ARTICLE IX - DISTRIBUTIONS....................................................27
9.1 Company Cash Flow...........................................27
9.2 Company Refinancing Proceeds................................27
9.3 Company Sales Proceeds......................................27
9.4 Distributions in Liquidation................................27
9.5 Limitation Upon Distributions...............................27
ARTICLE X - TRANSFER OF INTERESTS AND ADMISSION OF MEMBERS....................27
10.1 Transferability of Membership Interests.....................27
10.2 Restrictions on Transfers by Physician Members..............28
10.3 Rights of Transferee........................................29
10.4 Admission of Members........................................29
10.5 Amendment of Articles of Organization
and Certificate of Qualification................30
10.6 Fundamental Changes.........................................30
-ii-
<PAGE>
ARTICLE XI - OPTIONAL PURCHASE OF MEMBERSHIP INTERESTS
ON CERTAIN EVENTS....................................................30
11.1 Death.......................................................30
11.2 Bankruptcy, Insolvency or Assignment for Benefit
of Creditors of a Physician Member..................31
11.3 Breach of Section 5.6.......................................31
11.4 Domestic Proceeding.........................................32
11.5 Divestiture Option..........................................32
11.6 Purchase Price..............................................33
11.7 Closing of Purchase and Sale................................34
11.8 Terms and Conditions of Purchase............................35
ARTICLE XII - DISSOLUTION AND LIQUIDATION OF THE COMPANY......................35
12.1 Dissolution Events..........................................35
12.2 Continuation................................................36
12.3 Liquidation.................................................36
12.4 Articles of Dissolution.....................................36
ARTICLE XIII - MISCELLANEOUS..................................................37
13.1 Fiscal Year.................................................37
13.2 Records.....................................................37
13.3 Reports.....................................................37
13.4 Reserves....................................................37
13.5 Notices.....................................................37
13.6 Amendments..................................................37
13.7 Additional Documents........................................37
13.8 Representations of Members..................................38
13.9 Survival of Rights..........................................38
13.10 Interpretation and Governing Law............................38
13.11 Severability................................................38
13.12 Agreement in Counterparts...................................38
13.13 Tax Matters Partner.........................................38
13.14 Third Parties...............................................38
13.15 Power of Attorney...........................................39
13.16 Arbitration.................................................39
Attachments:
Schedule I - Names, Initial Capital Contributions and Percentage Interests of
the Members
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<PAGE>
OPERATING AGREEMENT
OF
KENTUCKY I LITHOTRIPSY, LLC
THIS OPERATING AGREEMENT of KENTUCKY I LITHOTRIPSY LLC (the "Company"), a
limited liability company organized pursuant to the Delaware Limited Liability
Company Act, is executed effective as of the ____ day of ______________, 199__,
by and among the Company and the persons executing this Agreement as the initial
Members (as defined below).
ARTICLE I - FORMATION OF THE COMPANY
1.1 Formation. The Company was formed on September 23, 1997 upon the filing with
the Secretary of State of the Articles of Organization of the Company. In
consideration of the mutual premises and covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree that the rights and obligations of the
parties and the administration and termination of the Company shall be governed
by this Agreement, the Articles of Organization and the Act.
1.2 Name. The name of the Company is as set forth on the cover page of this
Agreement. The Manager may change the name of the Company from time to time as
it deems advisable, provided that appropriate amendments to this Agreement and
the Articles of Organization and necessary filings under the Act are first
obtained.
1.3 Registered Office and Registered Agent. The Company's registered office
shall be at Kentucky Home Life Building, Louisville, Kentucky, 40202, and the
name of its initial registered agent at such address shall be The Corporation
Trust Company.
1.4 Principal Place of Business. The principal place of business of the Company
shall be located at 1301 Capital of Texas Highway, Suite C-300, Austin, Texas
78746, or at any other place or places as the Manager may from time to time deem
necessary or advisable.
1.5 Purposes and Powers.
(a) The purpose and business of the Company shall be: (i) to operate one or
more extracorporeal shock-wave lithotripters (or any other renal stone treatment
equipment) for the lithotripsy of renal stones primarily in central Kentucky, or
in such other location(s) as the Manager, with the consent of the Executive
Committee, may determine to be in the best interests of the Company; (ii) to
acquire and operate in the future any other therapeutic urological device or
equipment provided that such device have FDA premarket approval at the time it
is acquired by the Company; (iii) to acquire an interest in any business entity,
including, without limitation, a limited partnership, limited liability company
or corporation, that engages in any business activity described in this Section
1.5; and (iv) to
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<PAGE>
engage in any and all activities incidental or related to the foregoing, upon
and subject to the terms and conditions of this Agreement.
(b) The Company shall have any and all powers which are necessary or desirable
to carry out the purposes and business of the Company, to the extent the same
may be legally exercised by limited liability companies under the Act. The
Company shall carry out the foregoing activities pursuant to the arrangements
set forth in the Articles of Organization and this Agreement.
1.6 Term. The Company shall continue in existence until the close of the
Company's business on December 31, 2047 as specified in the Company's
Certificate of Formation, unless the Company is earlier dissolved and its
affairs wound up in accordance with the provisions of this Agreement or the Act.
1.7 Nature of Members' Interests. The Membership Interests of the Members in the
Company shall be personal property for all purposes. Legal title to all Company
assets shall be held in the name of the Company. Neither any Member nor a
successor, representative or assign of such Member, shall have any right, title
or interest in or to any Property owned by the Company or the right to partition
any Property owned by the Company. Membership Interests are evidenced by the
execution of this Agreement by the Members.
ARTICLE II - DEFINITIONS
2.1 Definitions. The following terms used in this Agreement shall have the
following meanings (unless otherwise expressly provided herein):
2.1.1 "Act" means the Kentucky Limited Liability Company Act, as the same may be
amended from time to time.
2.1.2 "Adjusted Capital Account Deficit" means, with respect to any Member, the
deficit balance, if any, in such Member's Capital Account as of the end of the
relevant Fiscal Year, after giving effect to the following adjustments:
(i) Credit to such Capital Account any amounts to which such Member is obligated
to restore or is deemed to be obligated to restore pursuant to the penultimate
sentences of Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and
(ii) Debit to such Capital Account the items described in Sections 1.704-
1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6) of the
Treasury Regulations.
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Treasury
Regulations and shall be interpreted consistently therewith.
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2.1.3 "Adjusted Capital Contributions" means, as of any day, a Member's Capital
Contributions adjusted as follows:
(i) Increased by the amount of any Company liabilities which, in connection with
Distributions, are assumed by such Member or are secured by any Company Property
distributed to such Member; and
(ii) Reduced by the amount of cash and the value of any Company property
distributed to such Member and the amount of any liabilities of such Member
assumed by the Company or which are secured by any property contributed by such
Member to the Company.
In the event any Member transfers all or any portion of his or her Membership
Interest in accordance with the terms of this Agreement, his transferee shall
succeed to the Adjusted Capital Contribution of the transferor to the extent it
relates to the transferred Membership Interest or portion thereof.
2.1.4 "Affiliate" of a specified Person means (i) any Person directly or
indirectly controlling, controlled by or under common control with the specified
Person; (ii) any Person owning or controlling 10% or more of the outstanding
voting interest of such specified Person; (iii) any officer, director or partner
of such specified Person; and (iv) if the specified Person is an officer,
director or partner, any entity for which the specified Person acts in such
capacity.
2.1.5 "Agreement" means this Operating Agreement, as amended from time to time.
2.1.6 "Appraiser" means an independent appraiser, investment banker, financial
analyst or other valuation expert with at least 5 years experience valuing
closely held businesses.
2.1.7 "Bank" means First Citizens Bank & Trust Company.
2.1.8 "Articles of Organization" means the Articles of Organization of the
Company filed with the Secretary of State, as amended or restated from time to
time.
2.1.9 "Bankruptcy" means with respect to a Member, when such Member (i) makes an
assignment for the benefit of creditors; (ii) files a voluntary petition in
bankruptcy; (iii) is adjudged a bankrupt or insolvent, or has entered against
him an order for relief, in any bankruptcy or insolvency proceeding; (iv) files
a petition or answer seeking for himself any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
statute, law or regulation; (v) files an answer or other pleading admitting or
failing to contest the material allegations of a petition filed against him in
any proceeding of the type described in clauses (i)-(iv) above; or (vi) seeks,
consents to or acquiesces in the appointment of a trustee, receiver or
liquidator of the Member or of all or any substantial part of his properties.
"Bankruptcy" shall also be deemed to have occurred to a Member 120 days after
the commencement of any proceeding against such Member seeking reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any statute, law or regulation, if the proceeding has not been
dismissed, or if within 90 days after the appointment without his consent or
acquiescence of a trustee, receiver or liquidator of the Member or of all or any
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substantial part of his properties, the appointment is not vacated or stayed, or
within 90 days after the expiration of any such stay, the appointment is not
vacated.
2.1.10 "Buy-Sell Event" has the meaning assigned to it in Section 11.1.
2.1.11 "Buy-Sell Notice" has the meaning assigned to it in Section 11.2.
2.1.12 "Capital Account" means, with respect to any Member, the capital account
maintained for such Member in accordance with Section 6.12 of this Agreement.
2.1.13 "Capital Contribution" means all contributions to the Company of cash or
property (valued for this purpose at initial gross fair market value as
determined by the contributing Member and the Manager) made by a Member or his
or her predecessor in interest which shall include, without limitation, those
contributions made pursuant to Article VI of this Agreement.
2.1.14 "Capital Transaction" means any transactions undertaken by the Company or
by any company or partnership in which the Company owns an interest, which, were
it to generate proceeds, would produce Company Sales Proceeds or Company
Refinancing Proceeds.
2.1.15 "Code" means the Internal Revenue Code of 1986, as amended from time to
time (and any corresponding provisions of succeeding law).
2.1.16 "Company Cash Flow" for any period means the excess, if any, of (A) the
sum of (i) all gross receipts from any source for such period, other than from
Company loans, Capital Transactions and Capital Contributions, and (ii) any
funds released by the Company from previously established reserves, over (B) the
sum of (i) all cash expenses paid by the Company for such period (including any
compensation to the Managers and their Affiliates); (ii) all amounts paid by the
Company in such period on account of the amortization of the principal of any
debts or liabilities of the Company (including loans from any Member);
(iii) capital expenditures of the Company; and (iv) a reasonable reserve for
future expenditures as provided by Section 13.4; 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 Company Cash Flow by the
Managers.
2.1.17 "Company Minimum Gain" means gain as defined in Treasury Regulations
Section 1.704-2(d).
2.1.18 "Company Refinancing Proceeds" means (i) the cash realized from the
financing or refinancing of all or any portion of any Company assets, less the
retirement of any related secured loans, the payment of all expenses relating to
the transaction and the establishment of such reasonable reserves as the
Managers shall deem prudent or necessary and (ii) the Company's allocable
portion of cash realized by an entity in which the Company owns an interest from
such entity financing or refinancing all or any portion of such entity's assets,
less the retirement of any related secured loans and the payment of all expenses
relating to such transaction.
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2.1.19 "Company Sales Proceeds" means (i) the cash realized from the sale,
exchange, condemnation, casualty or other disposition of all or any portion of
any Company assets not in the ordinary course of business, less the retirement
of any related secured loans, the payment of all expenses relating to the
transaction and the establishment of such reasonable reserves as the Managers
shall deem prudent or necessary and (ii) the Company's allocable portion of cash
realized by an entity in which the Company owns an interest from the sale,
exchange, condemnation, casualty or other disposition of all or any portion of
such entity's assets not in the ordinary course of business, less the retirement
of any related secured loans and the payment of all expenses relating to such
transaction.
2.1.20 "Depreciation" means, for each Fiscal Year, an amount equal to the
depreciation, amortization, or other cost recovery deduction allowable with
respect to an asset for such Fiscal Year, except that if the Gross Asset Value
of an Asset differs from its adjusted basis for federal income tax purposes at
the beginning of such Fiscal Year, Depreciation shall be an amount which bears
the same ratio to such beginning Gross Asset Value as the federal income tax
depreciation, amortization, or other cost recovery deduction for such Fiscal
Year bears to such beginning adjusted tax basis; provided, however, that if the
adjusted basis for federal income tax purposes of an asset at the beginning of
such Fiscal Year is zero, Depreciation shall be determined with reference to
such beginning Gross Asset Value using any reasonable method selected by the
Managers.
2.1.21 "Dilution Offering" means, as provided in Article VI of this Agreement,
the future offering of additional Membership Interests in the Company by the
Manager. Except as otherwise provided in Article VI, any successful Dilution
Offering will proportionately reduce the Percentage Interests of the then
current Members in the Company.
2.1.22 "Distribution" means any money or other property distributed to a Member
with respect to the Member's Membership Interest, but shall not include any
payment to a Member for materials or services rendered nor any reimbursement to
a Member for expenses permitted in accordance with this Agreement.
2.1.23 "Domestic Proceeding" means any divorce, annulment, separation or similar
domestic proceeding between a married couple.
2.1.24 "Encumbrance" means any lien, pledge, encumbrance, collateral assignment
or hypothecation.
2.1.25 "Equipment" means the initial equipment to be acquired by the Company for
the operation of the Mobile Lithotripsy System. The initial equipment to be used
in the operation of the Mobile Lithotripsy System will include the Trailer, a
tractor truck, the Dornier HM3 lithotripter and miscellaneous medical equipment
and supplies.
2.1.26 "Executive Committee" means the committee made up of four Physician
Members and a representative of the Manager, each appointed by the Manager,
which has certain management authority as set forth in Article IV.
2.1.27 "FDA" means the United States Food and Drug Administration.
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2.1.28 "Fiscal Year" means an annual accounting period ending December 31 of
each year during the term of the Company, unless otherwise specified by the
Managers.
2.1.29 "Gains from Capital Transactions" means the gains realized by the Company
as a result of or upon any sale, exchange, condemnation or other disposition of
capital assets of the Company or any entity in which the Company shall own an
interest (which assets shall include Code Section 1231 assets and all real and
personal property) or as a result of or upon the damage to or destruction of
such capital assets.
2.1.30 "Gross Asset Value" means, with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(i) The initial Gross Asset Value of any asset contributed by a Member to the
Company shall be the gross fair market value of such asset, as determined by the
contributing Member and the Managers, provided that, if the contributing Member
is a Manager, the determination of the fair market value of a contributed asset
shall be determined by appraisal;
(ii) The Gross Asset Values of all Company assets shall be adjusted to equal
their respective gross fair market values, as determined by the Managers, as of
the following times: (a) the acquisition of an additional interest in the
Company (other than upon the initial formation of the Company) by any new or
existing Member in exchange for more than a de minimis Capital Contribution;
(b) the distribution by the Company to a Member of more than a de minimis amount
of Company property as consideration for an interest in the Company; and (c) the
liquidation of the Company within the meaning of Treasury Regulations Section
1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to
clauses (a) and (b) above shall be made only if the Managers reasonably
determine that such adjustments are necessary or appropriate to reflect the
relative economic interests of the Members in the Company;
(iii) The Gross Asset Value of any Company asset distributed to any Member shall
be adjusted to equal the gross fair market value of such asset on the date of
distribution as determined by the distributee and the Managers, provided that,
if the distributee is a Manager, the determination of the fair market value of
the distributed asset shall be determined by appraisal; and
(iv) The Gross Asset Values of Company assets shall be increased (or decreased)
to reflect any adjustments to the adjusted basis of such assets pursuant to Code
Section 734(b) or Code Section 743(b), but only to the extent that such
adjustments are taken into account in determining Capital Accounts pursuant to
Treasury Regulations Section 1.704-1(b)(2)(iv)(m) and Sections 2.1.48(vi) and
7.11 hereof; provided, however, that Gross Asset Values shall not be adjusted
pursuant to this Section 2.1.29(iv) to the extent the Managers determine that an
adjustment pursuant to Section 2.1.29(ii) hereof is necessary or appropriate in
connection with a transaction that would otherwise result in an adjustment
pursuant to this Section 2.1.29(iv).
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If the Gross Asset Value of an asset has been determined or adjusted pursuant to
Section 2.1.29(i), Section 2.1.29(ii), or Section 2.1.29(iv) hereof, such Gross
Asset Value shall thereafter be adjusted by the Depreciation taken into account
with respect to such asset for purposes of computing Profits, Gains from Capital
Transactions or Losses.
2.1.31 "Guaranty" means the Guaranty Agreement pursuant to which each
Member will guarantee a portion of the Company's obligation to the Bank under
the Loan. The form of Guaranty Agreement is included in the Subscription Packet
accompanying the Memorandum.
2.1.32 "Loan" means the loan of $550,000 from the Bank to the Company. Loan
proceeds will be used by the Company to (i) acquire a used Dornier HM3
lithotripter (up to $100,000), (ii) acquire and upfit a mobile Trailer to house
the lithotripter (up to $325,000), (iii) acquire a used tractor truck for
hauling the Trailer housing the lithotripter (up to $50,000), and (iv) purchase
additional miscellaneous equipment (up to $30,000), (v) pay the applicable state
sales and use taxes on the lithotripter Trailer, tractor truck and additional
miscellaneous equipment (estimated to be $30,300), and (vi) serve as working
capital (estimated at $14,700).
2.1.33 "Losses from Capital Transactions" means the losses realized by the
Company as a result of or upon any sales exchange, condemnation or other
disposition of the capital assets of the Company (which include Code Section
1231 assets) or as a result of or upon the damage or destruction of such capital
assets.
2.1.34 "Management Agent" means Lithotripters, Inc., a wholly owned
subsidiary of Prime and an Affiliate of the Manager.
2.1.35 "Management Agreement" means the agreement pursuant to which the
Management Agent will provide the daily management services to the Company.
2.1.36 "Majority in Interest" means, with respect to any referenced group
of Members, a combination of any of such Members who, in the aggregate, own more
than fifty percent (50%) of the Percentage Interests owned by all of such
referenced group of Members.
2.1.37 "Manager" means Prime Kidney Stone Treatment, Inc. ("PKST"), a New
Jersey Corporation, the initial Manager of the Company, and any other Person or
Persons that succeeds such Manager in its capacity as Manager, and any other
Person elected to act as Manager of the Company as provided herein. PKST is also
a member of the Company.
2.1.38 "Member" means each Person designated as a member of the Company on
Schedule I hereto, or any additional member admitted as a member of the Company
in accordance with Article IX. "Members" refers to such Persons as a group, and
shall include the Manager, PKST, where no distinction is required by the context
in which the term is used herein.
2.1.39 "Member Minimum Gain" means an amount, with respect to each Member
Nonrecourse Debt, equal to the Company Minimum Gain that would result if such
Member Nonrecourse
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Debt were treated as a Nonrecourse Liability, determined in accordance with
Treasury Regulations Section 1.704-2(i).
2.1.40 "Member Nonrecourse Debt" means any nonrecourse debt (for the
purposes of Treasury Regulations Section 1.1001-2) of the Company for which any
Member bears the "economic risk of loss," within the meaning of Treasury
Regulations Section 1.752-2.
2.1.41 "Member Nonrecourse Deductions" means deductions as described in
Treasury Regulations Section 1.704-2(i). The amount of Member Nonrecourse
Deductions with respect to a Member Nonrecourse Debt for any Fiscal Year equals
the excess, if any, of (A) the net increase, if any, in the amount of Member
Minimum Gain attributable to such Member Nonrecourse Debt during such Fiscal
Year, over (B) the aggregate amount of any Distributions during that Fiscal Year
to the Member that bears the economic risk of loss for such Member Nonrecourse
Debt to the extent such Distributions are from the proceeds of such Member
Nonrecourse Debt and are allocable to an increase in Member Minimum Gain
attributable to such Member Nonrecourse Debt, determined in accordance with
Treasury Regulations Section 1.704-2(i).
2.1.42 "Membership Interest" means all of a Member's rights in the Company,
including without limitation, the Member's share of the Profits and Losses of
the Company, the right to receive Distributions, any right to vote and any right
to participate in the management of the Company as provided in the Act and this
Agreement.
2.1.43 "Memorandum" means the Confidential Private Placement Memorandum of
the Company dated October 14, 1998, as amended or as supplemented.
2.1.44 "Mobile Lithotripsy System" means the Trailer and tractor truck with
the installed and operational Dornier HM3 lithotripter.
2.1.45 "Nonrecourse Deductions" means deductions as set forth in Treasury
Regulations Section 1.704-2(b)(1). The amount of Nonrecourse Deductions for a
given Fiscal Year equals the excess, if any, of (A) the net increase, if any, in
the amount of Company Minimum Gain during such Fiscal Year, over (B) the
aggregate amount of any Distributions during such Fiscal Year of proceeds of a
Nonrecourse Liability that are allocable to an increase in Company Minimum Gain,
determined according to the provisions of Treasury Regulations Section
1.704-2(h).
2.1.46 "Nonrecourse Liability" means any Company liability (or portion
thereof) for which no Member bears the "economic risk of loss," within the
meaning of Treasury Regulations Section 1.752-2.
2.1.47 "Offering" means the initial offering of Units in the Company
pursuant to the Memorandum.
2.1.48 "Percentage Interest" means the interest of each Member in the
Company, to be determined in the case of a Physician Member by reference to his
or her Unit ownership based upon the Physician Members holding an aggregate 80%
Percentage Interest in the Company, with each Unit sold
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representing an initial 1% interest. The Manager will own a 20% Percentage
Interest in the Company. As provided in Article VI, a Physician Member's
Percentage Interest may be reduced by a future Dilution Offering. The Members'
Percentage Interests in the Company as of the date hereof are as set forth in
Schedule I attached hereto. Any future adjustments in the Member's Percentage
Interests, due to future Dilution Offerings or otherwise, will be reflected by
revisions to Schedule A.
2.1.49 "Person" means an individual, a foreign or domestic corporation, a
professional corporation, a partnership, a limited partnership, a limited
liability company, a foreign limited liability company, an unincorporated
association, or other legal entity.
2.1.50 "Physician Members" means those investors in the Units admitted to
the Company, and any Person admitted as a substitute Physician Member in
accordance with the provisions herein, provided that the Manager and its
Affiliates shall not be considered Physician Members.
2.1.51 "PKST" means Prime Kidney Stone Treatment, Inc., a New Jersey
corporation. PKST is the sole Manager of the Company.
2.1.52 "Prime" means Prime Medical Services, Inc., a publicly held
corporation and parent of both the Manager and the Management Agent.
2.1.53 "Profits and Losses" means, for each Fiscal Year, an amount equal to
the Company's taxable income or loss for such Fiscal Year (excluding Gains from
Capital Transactions), determined in accordance with Code Section 703(a) (for
this purpose, all items of income, gain, loss, or deduction required to be
stated separately pursuant to Code Section 703(a)(1) shall be included in
taxable income or loss), with the following adjustments:
(i) Any income of the Company that is exempt from federal income tax and
not otherwise taken into account in computing Profits and Losses pursuant to
this definition (excluding Gains from Capital Transactions) shall be added to
such taxable income or loss;
(ii) Any expenditures of the Company described in Code Section 705(a)(2)(B)
or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treasury
Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account
in computing Profits or Losses pursuant to this Section 2.1.48 shall be
subtracted from such taxable income or loss;
(iii) In the event the Gross Asset Value of any Company asset is adjusted
pursuant to Section 2.1.27, the amount of such adjustment shall be taken into
account as gain or loss from the disposition of such asset for purposes of
computing Profits or Losses;
(iv) Gain or loss resulting from any disposition of Company property with
respect to which gain or loss is recognized for federal income tax purposes
shall be computed by reference to the Gross Asset Value of the property disposed
of,
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notwithstanding that the adjusted tax basis of such property differs from its
Gross Asset Value;
(v) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or loss, there
shall be taken into account Depreciation for such fiscal year or other period,
computed in accordance with the definition of Depreciation set out hereof;
(vi) To the extent an adjustment to the adjusted tax basis of any Company
asset pursuant to Code Section 734(b) or Code Section 743(b) is required
pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be taken
into account in determining Capital Accounts as a result of a distribution other
than in liquidation of a Member's interest in the Company, the amount of such
adjustment shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases the basis of the asset)
from the disposition of the asset and shall be taken into account for purposes
of computing Profits or Losses;
(vii) Notwithstanding any other provision of this Section 2.1.48, any items
which are specially allocated pursuant to Sections 7.2, 7.3, 7.7, 7.8, 7.9,
7.10, 7.11 or 7.12 hereof shall not be taken into account in computing Profits
or Losses.
The amounts of the items of Company income, gain, loss or deduction
available to be specially allocated pursuant to Sections 7.2, 7.3, 7.7, 7.8,
7.9, 7.10, 7.11 or 7.12 hereof shall be determined by applying rules analogous
to those set forth in Sections (i) through (vi) above.
2.1.54 "Property" means any and all property acquired by the Company, real
and/or personal (including, without limitation, intangible property).
2.1.55 "Pro Rata Basis" means in connection with an allocation or
distribution in proportion to the respective Percentage Interests or the class
of Members to which reference is made.
2.1.56 "Sales Agency Agreement" means the sales agency agreement through
which MedTech Investments, Inc., an Affiliate of the Manager and a broker-dealer
company registered with the Securities and Exchange commission and a member of
the National Association of Securities Dealers, Inc. shall offer and sell the
membership interest of the Company pursuant to the Memorandum.
2.1.57 "Sales Commission" means the $250.00 sales commission paid to
MedTech Investments, Inc. for each Unit sold to parties other than the Manager
and its Affiliates.
2.1.58 "Secretary of State" means the Secretary of State of Kentucky.
2.1.59 "Service" means the Internal Revenue Service.
2.1.60 "Service Area" means the geographic region in which the Company
operations are expected to be conducted and which is anticipated to consist
primarily of central Kentucky.
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2.1.61 "Tax Matters Partner" means the Person designated by the Managers as
the "tax matters partner," as that term is defined in the Code.
2.1.62 "Trailer" means the new mobile trailer manufactured and upfitted by
AK Associates, Inc. to house the lithotripter.
2.1.63 "Transfer" means sell, assign, transfer, lease or otherwise dispose
of property, including without limitation an interest in the Company.
2.1.64 "Treasury Regulations" means the Income Tax Regulations and
Temporary Regulations promulgated under the Code, as such regulations may be
amended from time to time (including corresponding provisions of succeeding
regulations).
2.1.65 "Units" means the 80 equal membership interests in the Company
offered to the Memorandum for a price per Unit of $2,500 in cash and personal
guaranty of 1% of the Company's obligations under the Loan.
2.1.66 "Withdrawing Member" has the meaning assigned to it in Article 11.
ARTICLE III - MANAGEMENT OF THE COMPANY
3.1 The Manager.
(a) Except as otherwise may be expressly provided in this Agreement, the
Articles of Organization or the Act, all decisions with respect to the
management of the business and affairs of the Company shall be made by action of
the Manager. The Manager shall have full and complete authority, power and
discretion to manage and control the business of the Company, to make all
decisions regarding those matters and to perform any and all other acts or
activities customary or incident to the management of the Company's business,
except only as to those acts and things as to which approval by the Executive
Committee and/or the Members is expressly required by this Agreement. The
Manager may delegate responsibility for the day-to- day management of the
Company to any Person retained by the Manager including Affiliates of Members or
the Managers who shall have and exercise on behalf of the Company all powers and
rights necessary or convenient to carry out such management responsibilities.
(b) The Manager shall be under no duty to devote all of its time to the
business of the Company, but shall devote only such time as it deems necessary
to conduct the Company business and to operate and manage the Company in an
efficient manner.
(c) The Manager may charge to the Company all ordinary and necessary costs
and expenses, direct and indirect, attributable to the activities, conduct and
management of the business of the Company. The costs and expenses to be borne by
the Company shall include, but are not limited to, all expenditures incurred in
acquiring and financing the Equipment or other Company property, legal and
accounting fees and expenses, salaries of employees of the
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Company, consulting and quality assurance fees paid to independent contractors,
insurance premiums and interest.
(d) The Manager shall serve as Manager until the earlier to occur of its
resignation or removal. If the Manager shall be finally adjudged by a court of
competent jurisdiction to be liable to the Members or the Company for any act of
gross negligence or willful misconduct in the performance of its duties under
the terms of this Agreement, the Manager may be removed and another substituted
with the consent of all of the Physician Members. With the unanimous consent of
the Members, the Manager may also be removed for cause for the following
reasons:
(i) The failure to establish and maintain a quality assurance and outcome
analysis program aimed at improving the quality of care of all Company patients;
(ii) The failure to make adequate and customary arrangements for the
maintenance of the Mobile Lithotripsy System, or to provide for the disposables
and other supplies necessary for Company operations;
(iii) The failure to make reasonable arrangements for the timely billing
for the Company's services and to timely collect for such services;
(iv) The failure to engage drivers and lithotripsy technicians and to
arrange for the engagement of all other nonphysician personnel reasonably
necessary to staff and operate the Mobile Lithotripsy System, including, without
limitation, nurses, secretaries and receptionists;
(v) The failure to establish an Executive Committee;
(vi) The failure to timely make reasonable repairs, replacements,
alterations, additions and improvements to the equipment used in the Mobile
Lithotripsy System; and
(vii) The failure to make reasonable arrangements for the travel and
location itinerary of the Mobile Lithotripsy System in the Service Area.
Consent to the removal of the Manager shall be evidenced by a certificate
of removal signed by all of the Members. In the event of removal, the new
Manager shall succeed to all of the powers, privileges and obligations of the
Manager. The removed Manager shall become a Member and shall maintain its same
Percentage Interest in the Company notwithstanding anything contained in the Act
to the contrary. In addition, in the event of removal, the new Manager shall
take all steps necessary and appropriate to prepare and record an amendment to
the Articles of Organization to reflect the removal of the Manager and the
admission of such new Manager.
3.2 Specific Authority of the Managers. Without limiting the generality of
Section 3.1 above, and except as otherwise prohibited by this Agreement or the
Act, the Manager or Managers shall
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have and exercise on behalf of the Company all powers and rights necessary or
convenient to carry out the purposes of the Company. Such powers shall include,
without limitation, the following:
(a) To acquire a Mobile Lithotripsy System;
(b) To purchase, hold, manage and dispose of Company assets, including the
purchase, exchange, trade, or sale of Company assets at such price, or amount,
for cash, securities or other property and upon such terms, as the Manager deems
to be in the best interests of the Company; provided, that should the Company
assets be exchanged or traded for securities or other property the Manager shall
have the same powers with regard to such property as it does towards the
property traded;
(c) To exercise the option of the Manager or the Company to purchase a
Member's Membership Interest pursuant to Article XI;
(d) To determine the travel itinerary and site locations for the Mobile
Lithotripsy System or other Company technology;
(e) Subject to the limitations set forth in Section 4.1, to acquire (i)
additional Mobile Lithotripter Systems, (ii) any other assets related to the
provision of lithotripsy treatment services, or (iii) any other assets or
equipment or an interest in another entity consistent with the purposes of the
Company as provided in Section 1.5 (collectively, the "Additional Assets"), at
such times and at such price and upon such terms, as the Manager deems to be in
the best interest of the Company;
(f) Subject to the limitations set forth in Section 4.1, to borrow money
for any Company purpose and, if security is required therefor, to subject to any
security device any portion of the Property of the Company, to obtain
replacements of any other security device, to repay, in whole or in part,
refinance, increase, modify, consolidate or extend any Encumbrance or other
security device;
(g) To deposit, withdraw, invest, pay, retain (including the establishment
of reserves) and distribute the Company funds in accordance with the provisions
of this Agreement;
(h) To consent to the modifications, renewal or extension of any
obligations to the Company of any Person or of any agreement to which the
Company is a party or of which it is a beneficiary;
(i) To enter into and carry out contracts and agreements and any or all
other documents and instruments, and to do any and all such other things as may
be in furtherance of Company purposes or necessary or appropriate to the conduct
of the Company activities;
(j) To adjust, compromise, settle or refer to arbitration any claim against
or in favor of the Company, and to institute, prosecute and defend any actions
or proceedings relating to the Company, its business and property;
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(k) To make all decisions related to principles and methods of accounting
and federal income tax elections;
(l) Generally to possess and exercise any and all rights, powers and
privileges of Managers under the Act and the laws of the State of Kentucky;
(m) To do and perform all such other acts and things and to execute,
acknowledge and deliver any and all other documents or instruments in connection
with any or all of the foregoing; and
(n) Subject to the limitations set forth in Section 4.1(j), to engage or
retain one or more persons to perform acts or provide materials as may be
required by the Company, at the Company's expense, and to compensate such person
or persons at a rate to be set by the Manager, provided that the compensation is
at the then prevailing rate for the type of services and materials provided, or
both. Any person, whether a Member, an Affiliate of a Member or otherwise,
including without limitation the Manager, may be employed or engaged by the
Company to render services and provide materials, including, but not limited to,
management services, professional services, accounting services, quality
assessment services, legal services, marketing services, maintenance services or
provide materials; and if such person is a Member or an Affiliate of a Member,
he shall be entitled to, and shall be paid compensation for said services or
materials, anything in this Agreement to the contrary notwithstanding, provided
that the compensation to be received for such services or materials is
competitive in price and terms with then prevailing rate for the type of
services and/or materials provided. The Company, pursuant to the terms of a
Management Agreement, will contract with the Management Agent with respect to
the supervision and coordination of the management and administration of the
day-to-day operations of the Mobile Lithotripsy System for a monthly fee equal
to 7.5% of Company Cash Flow per month. All costs incurred by the Management
Agent in performing its duties as management agent shall be paid by the Company
directly. The Company may also contract with qualified physicians desiring to
use the Mobile Lithotripsy System for treatment of patients. Owning an interest
in the Company shall not be a condition to using the Mobile Lithotripsy System.
The Manager and its Affiliates may engage in or possess an interest in other
business ventures of any nature and description independently or with others,
including, but not limited to, the operation of a mobile lithotripsy treatment
unit similar to the Mobile Lithotripsy System, whether or not such business
ventures are in direct or indirect competition with the Company, and neither the
Company nor the Physician Members shall have any right by virtue of this
Agreement in and to said independent ventures or to the income or profits
derived therefrom.
(o) To cause the Company to engage in a Dilution Offering as provided in
Section 6.4.
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3.3 Specific Authority of Manager. Notwithstanding Sections 3.1 and 3.2,
the Manager shall have and may exercise on behalf of the Company the following
powers:
(a) To prepare or cause to be prepared reports, statements and other
relevant information for distribution to Members; and
(b) To open accounts and deposit and maintain funds in the name of the
Company in banks or savings and loan associations.
3.4 Authority as to Third Persons. Notwithstanding Sections 3.2, 3.3 and
4.5 the signed statement of the Manager reciting that he has the authority or
the necessary approvals of either the Executive Committee or the Members for any
action, as to any third Person, shall be conclusive evidence of the authority of
the Manager to take that action and of compliance with Section 3.2, if
applicable. Each Physician Member will promptly execute instruments determined
by the Manager to be appropriate to evidence the authority of the Manager to
consummate any transaction permitted by this Agreement.
3.5 Compensation and Expenses. The Manager shall not receive any
compensation from the Company for serving as Manager, but all expenses incurred
by the Manager in connection with its service as Manager will be paid or
promptly reimbursed by the Company. Nothing contained in this Section 3.5 is
intended to affect the Percentage Interest of the Manager as a Member or the
amounts that may be payable to the Manager by reason of its respective
Percentage Interests.
3.6 Indemnification and Exculpation of the Manager. The Manager, as the
managing member of the Company, is accountable to the Company as a fiduciary and
consequently must exercise good faith and integrity in handling Company affairs.
The Manager and its Affiliates shall have no liability to the Company which
arises out of any action or inaction of the Manager or its Affiliates if the
Manager or its Affiliates, in good faith, determined that such course of conduct
was in the best interest of the Company and such course of conduct did not
constitute gross negligence or willful misconduct of the Manager or its
Affiliates. The Company shall indemnify the Manager, each officer, director,
employee, agent or Affiliate of the Manager or of any of their officers or
directors (the "Indemnified Persons") against any direct and actual losses,
liabilities, damages or expenses (including court costs and reasonable
attorney's fees but excluding consequential damages) that any of the Indemnified
Persons incur in connection with the Company, but only to the extent that such
Indemnified Person acted in good faith, without gross negligence, or willful
misconduct, and in a manner reasonably believed to be in the best interests of
the Company. Any attorney's fees or other litigation expenses incurred by an
Indemnified Person shall be advanced to such Indemnified Person within 30 days
of receipt of a written demand therefor, together with an undertaking by or on
behalf of the Indemnified Person to repay to the Company such amount if it is
ultimately determined that the Indemnified Person is not entitled to be
indemnified by the Company pursuant to this Section 3.6.
3.7 Liability for Return of Capital Contribution. The Manager shall not be
liable for the return of the Capital Contributions of the Physician Members, and
upon dissolution, the Physician Members shall look solely to the assets of the
Company.
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ARTICLE IV - EXECUTIVE COMMITTEE
4.1 General Powers. The business and affairs of the Company shall be
managed under the direction of the Manager; provided, however, that without the
prior written consent of the Executive Committee, the Manager shall have no
authority to do any of the following:
(a) The refinancing of any Company indebtedness, or the incurrence of
additional Company indebtedness, in excess of $100,000;
(b) A capital expenditure by the Company, other than out of the initial
Offering proceeds, in excess of $100,000, including the acquisition by the
Company of one or more additional Mobile Lithotripsy Systems or other urological
equipment;
(c) The institution and carrying out any plan of merger, consolidation or
sale of all the Membership Interests or the Company as set forth in Section
10.6;
(d) The voluntary dissolution of the Company;
(e) The disposition of all or substantially all of the Company's assets;
(f) Doing any act in contravention of this Agreement;
(g) Possessing or in any manner dealing with the Company's Property or
assigning the rights of the Company in the Company's Property for other than
Company purposes;
(h) Amending this Agreement;
(i) Expanding the Service Area beyond the boundaries of the State of
Kentucky;
(j) With the exception of the Management Agreement (including renewals
thereof) and the Sales Agency Agreement, authorize or make payment of any salary
or other compensation to, or enter into any contract, agreement or other
arrangement with, any Affiliate of the Manager; and
(k) Confessing a judgment against the Company in connection with any
threatened or pending legal action.
4.2 Number, Term and Qualification. The Executive Committee shall be
appointed by the Manager and shall consist of four Physician Members and a
representative of the Manager who need not be a Member. Each member of the
Executive Committee shall continue to hold office until his or her death,
resignation or removal and replacement by the Manager.
4.3 Removal and Replacement. The Manager may remove and replace one or more
of the Executive Committee members at any time, with or without cause, provided,
however, that written
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notice of such removal and replacement must be given to the Executive Committee
and all Physician Members at least five (5) days before the effective date of
removal and replacement.
4.4 Compensation and Expenses. The members of the Executive Committee shall
not receive compensation for their services as such, but all expenses incurred
by the members of the Executive Committee in connection with their service as
such will be paid or promptly reimbursed by the Company. Any member of the
Executive Committee may serve the Company in any other capacity and receive
compensation therefore.
4.5 Action by the Executive Committee. Any action to be taken by the
Executive Committee under this Agreement may be taken at a meeting of the
Executive Committee held on such terms, and after such notice as the Manager may
establish; provided, however, that notice of a meeting of the Executive
Committee must be given to all Members entitled to vote at the meeting at least
five (5) days before the date of the meeting. All of the members of the
Executive Committee in office shall constitute a quorum for the transaction of
business at a meeting of the Executive Committee, and the affirmative vote of a
majority of such members shall constitute the act of the Executive Committee,
unless a different affirmative vote is otherwise specifically provided for
herein. An Executive Committee member who is present at a meeting of the
Executive Committee at which action on any Company matter is taken is deemed to
have assented to the action taken unless he or she objects at the beginning of
the meeting (or promptly upon arrival) to the holding, or transacting of
business at, the meeting, or unless his or her dissent or abstention is entered
in the minutes of the meeting or unless he or she shall file written notice of
his or her dissent or abstention to such action with the presiding officer of
the meeting before its adjournment or with the Manager immediately after
adjournment of the meeting. The right of dissent or abstention shall not apply
to a member of the Executive Committee who voted in favor of such action.
4.6 Action Without Meeting. Unless otherwise provided in this Agreement,
any action required or permitted to be taken at a meeting of the Executive
Committee may be taken without a meeting if the action is taken by all members
of the Executive Committee. Such action must be evidenced by one or more written
consents signed by each member before or after such action, describing the
action taken, and included in the records of the Company. Action taken without a
meeting is effective when the last director signs the consent, unless the
consent specifies a different effective date.
4.7 Meeting by Communications Device. Unless otherwise provided in this
Agreement, the Executive Committee may permit any or all members to participate
in a meeting by, or conduct the meeting through the use of, any means of
communication by which all members participating may simultaneously hear each
other during the meeting. A member participating in a meeting by this means is
deemed to be present in person at the meeting.
4.8 Indemnification of Executive Committee Members. The Executive Committee
and its members shall have no liability to the Company which arises out of any
action or inaction of the Executive Committee if the Executive Committee and its
members in good faith determined that such course of conduct was in the best
interest of the Company and such course of conduct did not constituted gross
negligence or willful misconduct of the Executive Committee and its members. The
Company
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shall indemnify the members of the Executive Committee against any direct and
actual losses, liabilities, damages or expenses (including court cost and
reasonable attorney's fees but excluding consequential damages) that any of the
members incur in connection with the Company but only to the extent that such
member acted in good faith, without gross negligence, and in a manner reasonably
believed to be in the best interests of the Company. Any attorney's fees or
other litigation expenses incurred by a member of the Executive Committee member
shall be advanced to such member within thirty (30) days of receipt of a written
demand therefor, together with an undertaking by or on behalf of the member to
repay to the Company such amount if it is ultimately determined that such member
is not entitled to be indemnified by the Company pursuant to this Section 4.8.
4.9 Liability for Return of Capital Contribution. The Executive Committee
and its members shall not be liable for the return of the Capital Contributions
of the Members, and upon dissolution, the Members shall look solely to the
assets of the Company.
ARTICLE V - RIGHTS AND OBLIGATIONS OF MEMBERS
5.1 Names and Addresses of Members. The names, addresses and Percentage
Interests of the Members are as reflected in Schedule I attached hereto and made
a part hereof, which Schedule shall be amended by the Company upon the effective
date of any Transfer or subsequent issuance of any Membership Interest.
5.2 No Management by Members. The Members in their capacity as Members
shall not take part in the management or control of the business, nor transact
any business for the Company, nor shall they have power to sign for or to bind
the Company. The Company may, however, contract with one or more Members to act
as the local Medical Director for the Mobile Lithotripsy System. No Member may
withdraw from the Company except as expressly permitted herein.
5.3 Election of Manager. PKST shall serve as the initial Manager of the
Company. The Members shall have the power to remove and replace the Manager as
set forth in Section 3.1(d).
5.4 Action by Members. Any action to be taken by the Members under the Act
or this Agreement may be taken (i) at a meeting of the Members held on such
terms, and after such notice as the Manager may establish; provided, however,
that notice of a meeting of Members must be given to all Members entitled to
vote at the meeting at least five (5) days before the date of the meeting, or
(ii) by written action of a Majority in Interest of the Members; provided,
however, that any action requiring the consent of all Members under the Act or
this Agreement taken by written action must be signed by all Members. No notice
need be given of action proposed to be taken by written action, or an approval
given by written action, unless specifically required by this Agreement or the
Act. Such written actions must be kept with the records of the Company.
5.5 Operation of Mobile System. The Members shall not operate or utilize
the Mobile Lithotripsy System or other Company equipment except pursuant to (i)
an agreement with the Company; or (ii) any other arrangement specifically
approved by the Manager.
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5.6 Outside Activities. The Physician Members agree that they owe fiduciary
duties to the Company and, as a consequence, each Physician Member agrees that
he or she shall not engage in "Outside Activities" (as defined below) in the
"Market Area" (as defined below) while he or she is a Member of the Company. The
phrase "Outside Activities" means directly or indirectly owning, leasing or
subleasing Mobile Lithotripsy System (or any similar equipment or competing
devices used for lithotripsy of renal stones) or any other therapeutic equipment
acquired by the Company. Prohibited indirect ownership shall include the direct
or indirect ownership of any interest in a business venture (through stock
ownership, partnership interest ownership, ownership by or through a close
family member, or as otherwise determined in good faith by the Manger) involving
the ownership, purchase, lease, sublease, promotion, management or operation of
a Mobile Lithotripsy System (or similar equipment or competing devices used for
lithotripsy of renal stones), or other competing device or equipment, unless the
Manager determines that such activity by the Physician Members is not
detrimental to the best interests of the Company.
Upon the termination or transfer of a Physician Member interest in the
Company for any reason, including a transfer pursuant to Section 11.3 hereof,
the withdrawing Physician Member shall not, for a period of two (2) years
following the date of his or her withdrawal, engage in any Outside Activities in
any "Market Area" in which the Company is transacting business or within the
prior twelve months has transacted business (the "Restricted Facilities"). For
the purposes of this Section 5.6, the term "Market Area" shall mean (i) the area
within a fifty mile radius of any Restricted Facility, but if such area is
determined by a court of competent jurisdiction to be too broad, then it shall
mean (ii) the area within a twenty-five mile radius of any Restricted Facility,
but if such area is determined by a court of competent jurisdiction to be too
broad then it shall mean (iii) the area within a ten mile radius of any
Restricted Facility.
In the event a Physician Member wishes and intends to engage in an Outside
Activity in a Market Area, he or she must provide written notice of such intent
to the Manager prior to engaging in the Outside Activity. The written notice
shall be deemed an election by the Physician Member to withdraw from the Company
(the "Notice of Withdrawal"), and shall give the Manager the purchase rights as
provided in Section 11.3 hereof. After the Notice of Withdrawal, the former
Physician Member may engage in an Outside Activity in the Market Area only after
waiting the period of two years specified in this Section 5.6. In the event of
breach of the waiting period, the Company shall be entitled to any remedy at law
or equity with respect to such breach, including without limitation an
injunction or suit for damages.
If a Physician Member during his or her participating in the Company
engages in an Outside Activity in a Market Area without first notifying the
Manager in violation of this Section 5.6, the Physician Member shall be deemed
to have given a Notice of Withdrawal on the date the Manager first becomes aware
of the Physician Member's Outside Activity in the Market Area. Upon receiving a
Physician Member's Notice of Withdrawal or equivalent thereof, the Company may
invoke the purchase rights provided in Section 11.3 and shall be entitled to any
other remedy at law or equity including without limitation and injunction or
suit for damages.
5.7 Disclosure of Confidential Information. Each Physician Member
acknowledges and agrees that his or her participation in the Company under this
Agreement necessarily involves his or her
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understanding of and access to certain trade secrets and other confidential
information pertaining to the business of the Company. Accordingly, each
Physician Member agrees that at all times during his or her participation in the
Company as a Member and thereafter, he or she will not, directly or indirectly,
without the express written authority of the Company, unless required by law or
directed by a applicable legal authority having jurisdiction over the Physician
Member, disclose or use for the benefit of any person, corporation or other
entity (other than the Company), or himself or herself, (i) any trade,
technical, operational, management or other secrets, any patient or customer
lists or other confidential or secret data, or any other proprietary,
confidential or secret information of the Company or (ii) any confidential
information concerning any of the financial arrangements, financial positions,
hospital or physician contracts, third party payor arrangements, quality
assurance and outcome analysis programs, competitive status, customer or
supplier matters, internal organizational matters, technical abilities, or other
business affairs of or relating to the Company. The Physician Members
acknowledge that all of the foregoing constitutes proprietary information, which
is the exclusive property of the Company. In the event of breach of this Section
5.7 as determined by the Manager, the Company shall be entitled to any remedy at
law or equity with respect to such breach, including without limitation, an
injunction or suit for damages.
5.8 Limited Liability. No Members shall be required to make any
contribution to the capital of the Company except as set forth in Article VI,
nor shall any Member in his or her capacity as such be bound by, or personally
liable for, any expense, liability or obligation of the Company except to the
extent of his or her (i) interest in the Company, (ii) Guaranties of Company
obligations, and (iii) obligation to return Distributions made to him or her
under certain circumstances as required by the Act.
ARTICLE VI - CAPITAL CONTRIBUTIONS,
GUARANTIES AND DILUTION OFFERINGS
6.1 Manager Contribution. On or before the date of this Agreement, the
Manager will contribute to the capital of the Company cash in an amount equal to
20% (up to $50,000) of the total cash contributed to the Company by the Members
in the Offering made pursuant to the Memorandum.
6.2 Physician Members Contribution. Each Physician Member hereby agrees to
contribute and shall contribute to the capital of the Company on the date of his
or her admission to the Company the cash amount set forth opposite his or her
name on Schedule I attached hereto.
6.3 No Interest. Except as otherwise provided herein, no interest shall be
paid on any contribution to the capital of the Company.
6.4 Dilution Offerings. As provided in Section 4.1(a), Manager may, from
time to time, cause the Company to issue, offer and sell additional Membership
Interests in the Company (a "Dilution Offering") to local urologists who are not
already Members ("Qualified Investors"). The primary purpose of any Dilution
Offering would be (i) to raise additional capital for any legitimate Company
purpose as set forth in Section 1.5 and (ii) to assure the highest quality of
patient care by admitting Qualified Investors to the Company who would be
dedicated and motivated as owners to follow the Company's treatment protocol,
and comply with its quality assurance and outcome analysis programs.
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Any Membership Interests offered by the Company in a Dilution Offering shall be
sold in the manner and according to the terms prescribed in the sole discretion
of the Manager; provided, however, that any additional Membership Interests
offered in a Dilution Offering will be sold for a price no lower than the
highest price for which proportionate Membership Interests in the Company have
been previously sold by the Manager. Any sale of additional Membership Interests
will result in the proportionate dilution of the Company Percentage Interests of
the existing Members. Any investor acquiring a Membership Interest in a Dilution
Offering shall agree to be bound by the terms of this Agreement, and shall be
automatically admitted as a Member of the Company notwithstanding any other
provisions in this Agreement to the contrary. Any adjustment in the Members'
Percentage Interests resulting from a Dilution Offering shall be set forth on
Schedule I attached hereto.
6.5 Conditions to the Capital Contributions of the Physician Members. The
obligation of the Physician Members to make cash Capital Contributions hereunder
are subject to the condition that the representations, warranties, agreements
and covenants of the Manager set forth in Article VII of this Agreement are and
shall be true and correct or have been and will have been complied with in all
material respects on the date such Capital Contributions are required to be
made, except to the extent that any such representation or warranty expressly
pertains to an earlier date.
6.6 Capital Accounts. A Capital Account shall be established for each Member and
shall be credited with each Member's Capital Contributions pursuant to Sections
6.1 and 6.2. All contributions of property to the Company by a Member shall be
valued and credited to the Member's Capital Account at such property's gross
fair market value on the date of contribution as determined by the contributing
Member and the Manager. All distributions of Property to the Member by the
Company shall be valued and debited against the Member's Capital Account at such
Property's gross fair market value on the date of distribution as determined by
the Manager. Each Member's Capital Account shall at all times be determined and
maintained pursuant to the principles of this Section 6.6 and Treasury
Regulations Section 1.704-1(b)(2)(iv). A Member shall not be entitled to
withdraw any part of his or her Capital Account except as otherwise specifically
provided herein. Each Member's Capital Account shall be increased in accordance
with such Regulations by:
(i) The amount of Profits allocated to the Member pursuant to this Agreement;
(ii) The amount of all Gains From Capital Transactions allocated to the Member
pursuant to this Agreement; and
(iii) The amount of any Company liabilities assumed by the Member or which are
secured by any Company property distributed to such Member.
Each Member's Capital Account shall be decreased in accordance with such
Regulations by:
(i) The amount of Losses allocated to the Member pursuant to this
Agreement;
(ii) The amount of Company Cash Flow distributed to the Member pursuant to
this Agreement;
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(iii) The amount of Company Sales Proceeds and Company Refinancing Proceeds
distributed to the Member pursuant to this Agreement; and
(iv) The amount of any liabilities of the Member assumed by the Company or
which are secured by any property contributed by such Member to the Company.
In addition, each Member's Capital Account shall be subject to such other
adjustments as may be required in order to comply with the capital account
maintenance requirements of Section 704(b) of the Code.
In the event that the Manager shall determine that it is prudent to modify
the manner in which the Capital Accounts, or any debits or credits thereto
(including, without limitation, debits or credits relating to liabilities that
are secured by contributed or distributed property or that are assumed by the
Company or the Members), are computed in order to comply with such Treasury
Regulations, the Manager may make such modification, provided that it is not
likely to have a material effect on the amounts distributable to any Member upon
dissolution of the Company. The Manager also shall (i) make any adjustments that
are necessary or appropriate to maintain equality between the Capital Accounts
of the Members and the amount of Company capital reflected on the Company's
balance sheet, as computed for book purposes, in accordance with Treasury
Regulations Section 1.704-1(b)(2)(iv)(g), and (ii) make any appropriate
modifications in the event unanticipated events might otherwise cause this
Agreement not to comply with Treasury Regulations Section 1.704-1(b).
ARTICLE VII - REPRESENTATIONS, WARRANTIES AND
COVENANTS OF THE MANAGER
7.1 Manager's Representations and Warranties. The Manager hereby represents
and warrants to the Physician Members that:
(a) The Company is a limited liability company formed in accordance with
and validly existing under the Act and the other applicable laws of the State of
Kentucky;
(b) The interest in the Company of the Physician Members will have been
duly authorized or created and validly issued and the Physician Members shall
have no personal liability to contribute money to the Company other than the
amounts agreed to be contributed by them in the manner and on the terms set
forth in this Agreement, subject, however, to such limitations as may be imposed
under the Act;
(c) No material breach or default adverse to the Company exists under the
terms of any other material agreement affecting the Company; and
(d) The Manager is a New Jersey corporation formed and existing under the
laws of the State of New Jersey.
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7.2 Manager's Covenants. The Manager hereby covenants to the Physician
Members that:
(a) It will at all times act in a fiduciary manner with respect to the
Company and the Physician Members.
(b) Except as provided in Articles III and XI, it will serve as the Manager
of the Company until the Company is terminated without reconstitution; and
(c) It will cause the Company to carry adequate public liability, property
damage and other insurance as is customary in the business to be engaged in by
the Company.
ARTICLE VIII - ALLOCATIONS, ELECTIONS AND REPORTS
8.1 Profits and Losses.
(a) Except as otherwise provided herein, Profits and Losses of the Company
and all items of tax credit and tax preference shall be allocated among the
Members in accordance with their respective Percentage Interests. In the event
the Percentage Interests vary during any Fiscal Year, Profits and Losses and all
items of tax credit and tax preference for such Fiscal Year shall be allocated
among the Members as provided in Section 8.5 below.
(b) Losses allocated pursuant to this Section 8.1 shall not exceed the
maximum amount of Losses that can be so allocated without causing any Member to
have an Adjusted Capital Account Deficit at the end of any Fiscal Year. In the
event some but not all of the Members would have Adjusted Capital Account
Deficits as a consequence of an allocation of Losses pursuant to this
Section 8.1, the limitation set forth in this Section 8.1 shall be applied on a
Member by Member basis so as to allocate the maximum possible Losses to each
Member under Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations.
8.2 Sales Commission. The Sales Commission shall be allocated to the
Physician Members holding Units to the extent such Physician Members paid the
Sales Commission, and in proportion to their respective capital contributions
represented by such Units (i.e., $250 in Sales Commission per each such Unit).
The purpose of this Section 8.2 is to allocate the Sales Commission to those
Members who actually bore the burden of paying the Sales Commission.
8.3 Nonrecourse Deductions. Nonrecourse Deductions shall be allocated among
the Members in accordance with their respective Percentage Interests.
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8.4 Member Nonrecourse Deductions. Any Member Nonrecourse Deductions shall
be specially allocated to the Member who bears the economic risk of loss with
respect to the Member Nonrecourse Debt to which such Member Nonrecourse
Deductions are attributable in accordance with Treasury Regulations Section
1.704-2(i).
8.5 Allocations Between Transferor and Transferee. In the event of the
transfer of all or any part of a Member's Membership Interest (in accordance
with the provisions of this Agreement) at any time other than at the end of a
Fiscal Year, the change in any Member's Percentage Interest or the admission of
a new Member (in accordance with the terms of this Agreement), the transferring
Member or new Member's share of the Company's income, gain, loss, deductions and
credits, as computed both for accounting purposes and for federal income tax
purposes, shall be allocated between the transferor Member and the transferee
Member, or the new Member and the other Members, as the case may be, in the same
ratio as the number of days in such Fiscal 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 Company (or any part thereof) during such
Fiscal Year, then upon the mutual agreement of all the Members (excluding the
new Member and the transferring Member), the Company shall treat the periods
before and after the date of the transfer or admission as separate Fiscal Years
and allocate the Company's net income, gain, net loss, deductions and credits
for each of such deemed separate Fiscal Years of the Company. Notwithstanding
the foregoing, the Company's "allocable cash basis items," as that term is used
in Section 706(d)(2)(B) of the Code, shall be allocated as required by Section
706(d)(2) of the Code and the Treasury Regulations thereunder.
8.6 Gains from Capital Transactions. Gains from Capital Transactions during
any Fiscal Year shall be allocated as follows:
(a) First, to those Members whose Capital Accounts immediately prior to the
Capital Transaction were negative, in an amount sufficient to increase the
Capital Accounts to zero, but in the event sufficient gain is not recognized to
do so, then among them pro rata in proportion to their negative Capital
Accounts;
(b) Second, to the Members in an amount equal to the difference between the
Company Sales Proceeds to be distributed to each of the Members as provided in
Section 8.3 and the Capital Accounts of each respective Member as adjusted (if
necessary) by paragraph (a) above, but in the event sufficient gain is not
recognized to do so, then among the Members in an amount which, when credited to
the Capital Accounts of the Members, results in the Members' Capital Accounts
bearing the same ratio to one another as the ratio of the distribution of
Company Sales Proceeds to each of the Members, as provided in Section 9.3; and
thereafter
(c) Any remaining gain shall be allocated among the Members in accordance
with their respective Percentage Interests as of the date of the Capital
Transaction giving rise to the gain.
8.7 Contributed Property. In accordance with Code Section 704(c) and the
Treasury Regulations thereunder, income, gain, loss and deduction with respect
to any property contributed to the capital of the Company shall, solely for tax
purposes, be allocated among the Members so as to take
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account of any variation between the adjusted basis of such property to the
Company for federal income tax purposes and its initial Gross Asset Value at the
time of contribution.
Any elections or other decisions relating to such allocations shall be made
by the Members in any manner that reasonably reflects the purpose and intention
of this Agreement. Allocations pursuant to this Section 8.7 are solely for
purposes of federal, state and local taxes and shall not affect, or in any way
be taken into account in computing, any Member's Capital Account or share of
Profits, Losses, other items or Distributions pursuant to any provision of this
Agreement.
8.8 Minimum Gain Chargeback. If there is a net decrease in Company Minimum
Gain during any Fiscal Year, each Member shall be specially allocated items of
Company income and gain for such Fiscal Year (and, if necessary, subsequent
years) in an amount equal to such Member's share of the net decrease in Company
Minimum Gain, determined in accordance with Treasury Regulation Section
1.704-2(g). Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to each Member
pursuant thereto. The items to be so allocated shall be determined in accordance
with Treasury Regulations Sections 1.704-2(f) and 1.704- 2(j)(2). This Section
8.8 is intended to comply with the minimum gain chargeback requirement in
Treasury Regulation 1.704-2(f) and shall be interpreted consistently therewith.
8.9 Member Minimum Gain Chargeback. If there is a net decrease in Member
Minimum Gain attributable to a Member Nonrecourse Debt, as defined in Treasury
Regulation Section 1.704- 2(i)(4), during any Fiscal Year, each Member who has a
share of the Member Minimum Gain attributable to such Member Nonrecourse Debt,
determined in accordance with Treasury Regulation Section 1.704-2(i)(5), shall
be specially allocated items of Company income and gain for such Fiscal Year
(and, if necessary, subsequent Fiscal Years) in an amount equal to such Member's
share of the net decrease in Member Minimum Gain attributable to such Member
Nonrecourse Debt, determined in accordance with Treasury Regulation Section
1.704-2(i)(4) and (5). Allocations pursuant to the previous sentence shall be
made in proportion to the respective amounts required to be allocated to each
Member pursuant thereto. The items to be so allocated shall be determined in
accordance with Treasury Regulations Section 1.704-2(i)(4). This Section 8.8 is
intended to comply with the Member Minimum Gain chargeback requirement in
Treasury Regulation Section 1.704(i)(4) and shall be interpreted consistently
therewith.
8.10 Qualified Income Offset. If any Member unexpectedly receives an
adjustment, allocation or distribution as described in Treasury Regulations
Section 1.704-1(b)(2)(ii)(d)(4) through (6) which causes or increases a deficit
Capital Account balance in such Member's Capital Account (as determined in
accordance with such Regulation), items of Company income and gain shall be
specially allocated to each such Member in an amount and manner sufficient to
eliminate, to the extent required by the Regulations, the Adjusted Capital
Account Deficit of such Member as quickly as possible, provided that an
allocation pursuant to this Section 8.10 shall be made if and only to the extent
that such Member would have an Adjusted Capital Account Deficit after all other
allocations provided for in this Article VII have been tentatively made as if
this Section 8.10 were not in this Agreement. This provision is intended to be a
"qualified income offset," as defined in Treasury Regulation Section 1.704-
1(b)(2)(ii)(d), such Regulation being specifically incorporated herein by
reference.
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8.11 Gross Income Allocation. In the event any Member has a deficit Capital
Account at the end of any Fiscal Year which is in excess of the sum of (i) the
amount such Member is obligated to restore, and (ii) the amount such Member is
deemed to be obligated to restore pursuant to the penultimate sentences of
Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Member
shall be specially allocated items of Company income and gain in the amount of
such excess as quickly as possible, provided that an allocation pursuant to this
Section 8.11 shall be made if and only to the extent that such Member would have
a deficit Capital Account in excess of such sum after all other allocations
provided for in this Article VIII have been tentatively made as if this Section
8.11 and Section 8.10 hereof were not in this Agreement.
8.12 Section 754 Adjustment. To the extent an adjustment to the adjusted
tax basis of any Company asset pursuant to Code Section 734(b) or Code Section
743(b) is required, pursuant to Treasury Regulations Section
1.704-1(b)(2)(iv)(m)(2) or Treasury Regulations Section 1.704-
1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as
the result of a Distribution to a Member in complete liquidation of his interest
in the Company, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the asset)
or loss (if the adjustment decreases such basis) and such gain or loss shall be
specially allocated to the Members in accordance with their interests in the
Company in the event that Treasury Regulations Section 1.704-1(b)(2)(iv)(m)(2)
applies, or to the Members to whom such distribution was made in the event that
Treasury Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies.
8.13 Curative Allocations. The allocations set forth in Sections 8.1(b),
8.2, 8.3, 8.7, 8.8, 8.9, 8.10, 8.11 hereof (the "Regulatory Allocations") are
intended to comply with certain requirements of the Treasury Regulations. It is
the intent of the Members that, to the extent possible, all Regulatory
Allocations shall be offset either with other Regulatory Allocations or with
special allocations of other items of Company income, gain, loss or deduction
pursuant to this Section 8.13. Therefore, notwithstanding any other provision of
this Article VIII (other than the Regulatory Allocations), the Managers shall
make such offsetting special allocations of Company income, gain, loss or
deduction in whatever manner they determine appropriate so that, after such
offsetting allocations are made, each Member's Capital Account balance is, to
the extent possible, equal to the Capital Account balance such Member would have
had if the Regulatory Allocations were not part of the Agreement and all Company
items were allocated pursuant to Section 8.1(a). In exercising their discretion
under this Section 8.13, the Managers shall take into account future Regulatory
Allocations under Sections 8.7 and 8.8 that, although not yet made, are likely
to offset other Regulatory Allocations previously made under Sections 8.2 and
8.3.
8.14 Compliance with Treasury Regulations. The above provisions of this
Article VIII notwithstanding, it is specifically understood that the Manager may
without the consent of any Member make such elections, tax allocations and
adjustments, including amendments to this Agreement, as the Manager deem
necessary or appropriate to maintain to the greatest extent possible the
validity of the tax allocations set forth in this Agreement, particularly with
regard to Treasury Regulations under Code Section 704(b).
8.15 Tax Withholding. The Company shall be authorized to pay, on behalf of
any Member, any amounts to any federal, state or local taxing authority, as may
be necessary for the Company to
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comply with tax withholding provisions of the Code or other income tax or
revenue laws of any taxing authority. To the extent the Company pays any such
amounts that it may be required to pay on behalf of a Member, such amounts shall
be treated as a cash Distribution to such Member and shall reduce the amount
otherwise distributable to such Member.
ARTICLE IX - DISTRIBUTIONS
9.1 Company Cash Flow. Company Cash Flow for each Fiscal Year, to the
extent available, shall be distributed to the Members within 60 days of the end
of each Fiscal Year, or earlier in the discretion of the Manager, in accordance
with the Members respective Percentage Interests at the time of the
distribution.
9.2 Company Refinancing Proceeds. Company Refinancing Proceeds, to the
extent available, shall be distributed to the Members within 60 days of the
Capital Transaction giving rise to such proceeds, or earlier in the discretion
of the Managers, in accordance with the Members respective Percentage Interests
at the time of the distribution.
9.3 Company Sales Proceeds. Company Sale Proceeds, to the extent available
shall be distributed to the Members within 60 days of the Capital Transaction
giving rise to such proceeds, or earlier, in the discretion of the Manager, in
accordance with the Members respective Percentage Interests at the time of the
distribution.
9.4 Distributions in Liquidation. Upon liquidation of the Company, all the
Company's Property shall be liquidated or distributed as provided in Section
12.3 and Profits and Losses allocated accordingly. Proceeds from the liquidation
of the Company shall be distributed in accordance with the provisions of Section
12.3.
9.5 Limitation Upon Distributions. No Distribution shall be declared and
paid if payment of such Distribution would cause the Company to violate any
limitation on distributions provided in the Act.
ARTICLE X - TRANSFER OF INTERESTS AND ADMISSION OF MEMBERS
10.1 Transferability of Membership Interests.
(a) The term "transfer" when used in this Agreement with respect to a
Membership Interest includes a sale, assignment, gift, pledge, exchange, or any
other disposition (but does not include the issuance of new Membership Interests
pursuant to a Dilution Offering);
(b) Except as otherwise provided herein, the Manager shall not at any time
transfer or assigning its interest or obligation as Manager;
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(c) The Membership Interest of any Physician Member shall not be
transferred, in whole or in part, except in accordance with the conditions and
limitations set forth in Section 10.2 or Article XI;
(d) The transferee of a Membership Interest by assignment, operation of law
or otherwise, shall have only the rights, powers and privileges enumerated in
Section 10.3 or otherwise provided by law and may not be admitted to the Company
as a Member except as provided in Section 10.4;
(e) Notwithstanding any provision herein to the contrary, this Agreement
shall in no way restrict the issuance or transfers of stock of the Manager; and
(f) Notwithstanding any provision herein to the contrary, the issuance of
Membership Interests pursuant to a Dilution Offering and the admission of new
Members pursuant to a Dilution Offering shall be governed by the provisions of
Section 6.4 of this Agreement.
10.2 Restrictions on Transfers by Physician Members.
(a) All or part of a Membership Interest may be transferred by a Physician
Member only with the prior written approval of the Manager, which approval may
be granted or denied in its sole discretion.
(b) The Manager shall not approve any transfer of a Membership Interest,
except a pledge of any Membership Interest by the Manager to any bank, insurance
company or other financial institution to secure payment of indebtedness (a
"Permitted Pledge"), or otherwise unless the proposed transferee shall have
furnished the Manager with a sworn statement that:
(i) The proposed transferee proposes to acquire his or her Membership
Interest as a principal, for investment and not with a view to resale or
distribution;
(ii) The proposed transferee meets such requirements regarding
sophistication, income and net worth as required by applicable state and federal
securities laws;
(iii) The proposed transferee has met such net worth and income suitability
standards as have been established by the Manager;
(iv) The proposed transferee recognizes that investment in the Company
involves certain risks and has taken full cognizance of and understands all of
the risk factors related to the purchase of a Membership Interest; and
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(v) The proposed transferee has met all other requirements of the Manager
for the proposed transfer.
(c) Other than in the case of a Permitted Pledge, a transfer of a
Membership Interest may be made only if, prior to the date thereof, the Company
upon request receives an opinion of counsel, satisfactory in form and substance
to the Manager, that neither the offering nor the proposed transfer will require
registration under federal or applicable state securities laws or regulations.
10.3 Rights of Transferee. Unless admitted to the Company as a Member in
accordance with Section 10.4, the transferee of a Membership Interest or a part
thereof or any right, title or interest therein (including any transferee having
an interest in a Membership Interest as a result of a Permitted Pledge) shall
not be entitled to any of the rights, powers, or privileges of his or her
predecessor in interest, except that (s)he shall be entitled to receive and be
credited or debited with his or her proportionate share of Company Profits,
Losses, Gains from Capital Transactions, Company Cash Flow, Company Sales
Proceeds, Company Refinancing Proceeds and Distributions in liquidation.
10.4 Admission of Members. Except as otherwise provided in Section 6.4 and
Article XI, the Manager, or the transferee of all or part of the Membership
Interest of a Member, may be admitted to the Company as a Member upon furnishing
to the Manager all of the following:
(a) The written approval of a Majority in Interest of the Physician Members
(except the assignor Member), or the assignor Members alone, which approval may
be granted or denied in the sole discretion of such Members or Member (as the
case may be);
(b) The written approval of the Manager, which approval may be granted or
denied in the sole discretion of the Manager;
(c) Acceptance, in a form satisfactory to the Manager, of all the terms and
conditions of this Agreement and any other documents required in connection with
the operation of the Company pursuant to the terms of this Agreement;
(d) If the transferee is a corporation, a certified copy of a resolution of
its Board of Directors authorizing it to become a Member under the terms and
conditions of this Agreement;
(e) A properly executed power of attorney substantially identical to that
contained in Section 13.15;
(f) Such other documents or instruments as may be required in order to
effect his or her admission as a Member; and
(g) Payment of such reasonable expenses as may be incurred in connection
with his or her admission as a Member.
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10.5 Amendment of Articles of Organization and Certificate of
Qualification. The Manager shall take all steps necessary and appropriate to
prepare and record any amendments to the Articles of Organization, as may be
necessary or appropriate from time to time to comply with the requirements of
the Act, and shall take all steps necessary and appropriate to prepare and
record any and all documents necessary to qualify the Company to do business in
jurisdictions where the Company is doing business, any may for these purposes
exercise the power of attorney delivered to the Company pursuant to Sections
10.4 and 13.15.
10.6 Fundamental Changes. As provided in Section 4.1(c), if the Manager and
the Executive Committee approve a plan providing for the merger or consolidation
of the Company with another person or entity, or the sale of all or
substantially all of the Membership Interests, including without limitation the
exchange of Membership Interests for equity interests in another person or
entity or for cash or other consideration or combination thereof, then and in
such event, the Members shall be obligated to take or refrain from taking, as
the case may be, such actions as the plan may provide, including, without
limitations, executing such instruments, and providing such information as the
Manager shall reasonably request. Any plan described in this Section 10.6 may
also effect an amendment to the Operating Agreement or the adoption of a new
operating agreement in connection with the merger of the Company with another
person or entity as provided in Section 275.360 of the Act. The plan may also
provide that the Manager and its Affiliates shall receive fees for services
rendered in connection with the operation of the Company or any successor entity
following the consummation of the transactions described in the plan, and
neither the Company nor the Members shall have any right by virtue of this
Agreement in the income derived therefrom. Any securities or other consideration
to be distributed to the Members pursuant to the plan shall be distributed in
the manner set forth in Section12.3 as though the Company were being liquidated.
For this purpose only, the fair market value of the securities or other
consideration to be received pursuant to the plan shall be treated as "Profits"
and the capital accounts of the Members shall be increased in the manner
provided in Section 6.6. No Member shall be entitled to any appraisal or similar
rights in connection with a plan contemplated by this Section 10.6.
ARTICLE XI - OPTIONAL PURCHASE OF MEMBERSHIP INTERESTS ON CERTAIN EVENTS
11.1 Death. Upon the death of a Physician Member, the deceased Physician
Member's executor, administrator, or other legal or personal representative
shall give written notice of that fact to the Membership. The Manager shall have
the option to purchase at the Closing (as defined below) the Membership Interest
of the deceased Physician Member (whose executor, administrator or other legal
or personal representative shall then become obligated to sell such Membership
Interest) at the price determined in the manner provided in Section 11.6 of this
Agreement and on the terms and conditions provided in Section 11.7 of this
Agreement. The Manager shall have a period of thirty (30) days following the
date it first received notice of the death of the Physician (the "Option
Period") within which to notify in writing the deceased Physician's executor,
administrator or other legal or personal representative, whether the Manager
desires to purchase all or a portion of the Membership Interest of the deceased
Member. If the Manager does not elect to purchase the entire Membership Interest
of the deceased Physician Member before the expiration of the Option Period and
in the manner provided
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herein, the portion of the Membership Interest not purchased shall be held by
the deceased Physician Member's executor, administrator or other legal
representative pursuant to the terms of this Agreement. The Manager, in its sole
discretion, may elect to assign its rights to purchase the Membership Interest
of a deceased Physician Member under this Section 11.1 to the Company and, in
such case, the Company shall have the same rights as provided for the Manager
under this Section 11.1.
11.2 Bankruptcy, Insolvency or Assignment for Benefit of Creditors of a
Physician Member. In the event that an involuntary or voluntary proceeding under
the Federal Bankruptcy Code, as amended, is filed for or against any Physician
Member, or if any Physician Member shall make an assignment for the benefit of
his or her creditors, or if any Physician Member has a receiver or custodian
appointed for his assets, or any Physician Member generally fails to pay his or
her debts when due, the insolvent Physician Member shall give written notice
(the "Notice of Insolvency") to the Manager of the commencement of any such
proceeding or the occurrence of such event within five days of the first notice
to him or her of such commencement or occurrence of such event. The Manager
shall have the option to purchase at the Closing (as defined below) the
Membership Interest of the insolvent Physician Member (which insolvent Physician
Member or his trustee, custodian, receiver or other personal or legal
representative, as the case may be, shall then become obligated to sell such
Membership Interest) at the price determined in the manner provided in
Article 11.6 of this Agreement and on the terms and conditions provided in
Article 11.7 of this Agreement. The Manager shall have a period of thirty (30)
days following the date of either the Notice of Insolvency, or if such formal
notice is not given, the date the Manager first becomes aware of the financial
condition of the Physician Member as outlined in this Article 11.2 (the "Option
Period"), within which to notify in writing the insolvent Physician Member or
his trustee, custodian, receiver, or other legal or personal representative,
whether the Manager wishes to purchase all or a portion of the Membership
Interest of the insolvent Physician Member. If the Manager does not elect to
purchase the entire Membership Interest of the insolvent Physician Member before
the expiration of the Option Period and in the manner provided herein, the
portion of the Membership Interest not purchased shall be held by the insolvent
Member, his trustee, custodian, receiver or other legal or personal
representative pursuant to the terms of this Agreement. The Manager, in its sole
discretion, may elect to assign its rights to purchase the Membership Interest
of an insolvent Physician Member under this Section 11.2 to the Company and, in
such case, the Company shall have the same rights as provided for the Manager
under this Section 11.2.
11.3 Breach of Section 5.6. In the event the Manager either receives a
Notice of Withdrawal as provided in Section 5.6 or receives notice of a breach
of Section 5.6 by a Physician Member (the "Defaulting Physician Member"), the
Manager may elect, in its sole discretion, to treat such event as a default
under this Agreement and enforce the provisions of this Section 11.3. If the
Manager elects to enforce the provisions of this Section 11.3, the Manager shall
give written notice of such election (the "Notice of Default") to the Defaulting
Physician Member within 180 days of the date the Manager first received notice
of the defaulting event. Upon giving the Notice of Default, the Manager shall
have the option to purchase at the Closing (as defined below) the Membership
Interest of the Defaulting Physician Member (which Defaulting Physician Member
shall then become obligated to sell such Membership Interest) at the price
determined in the manner provided in Section 11.6 of this Agreement and on the
terms and conditions provided in Section 11.7 of this Agreement. The Manager
shall have a period of thirty (30) days following the date of the Notice of
Default (the "Option Period") within which to notify in writing the Defaulting
Physician Member, whether the Manager wishes to purchase
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all or a portion of the Membership Interest of the Defaulting Physician Member.
If the Manager does not elect to purchase the entire Membership Interest of the
Defaulting Physician Member before the expiration of the Option Period and in
the manner provided herein, the portion of the Membership Interest not purchased
shall be held by the Defaulting Physician Member pursuant to the terms of this
Agreement. The Manager, in its sole discretion, may elect to assign its rights
to purchase the Membership Interest of a Defaulting Physician Member under this
Section 11.3 to the Company and, in such case, the Company shall have the same
rights as provided for the Manager under this Section 11.3.
11.4 Domestic Proceeding. In the event that a spouse of a Physician Member
commences against a Physician Member, or a Physician Member is named in, a
Domestic Proceeding, the Physician Member shall give written notice (the "Notice
of Domestic Proceeding") to the Manager of the commencement of any such
proceeding within five days of the first notice to him or her of such
commencement. The Manager shall have the option to purchase at the Closing (as
defined below) the Membership Interest of the Physician Member involved in the
Domestic Proceeding (which Physician Member shall then become obligated to sell
such Membership Interest), at the price determined in the manner provided in
Section 11.6 of this Agreement and on the terms and conditions provided in
Section 11.7 of this Agreement. The Manager shall have a period of thirty (30)
days following the date of either the Notice of Domestic Proceeding, or if such
formal notice is not given, the date the Manager first becomes aware of the
domestic circumstances of the Physician Member as provided in this Section 11.4
(the "Option Period"), within which to notify in writing the Physician Member
involved in the Domestic Proceeding, whether the Manager wishes to purchase all
or a portion of the Membership Interest of such Physician Member. If the Manager
does not elect to purchase the Membership Interest of the Physician Member
involved in the Domestic Proceeding before the expiration of the Option Period
and in the manner provided herein, the portion of the Membership Interest not
purchased shall be held by such Physician Member pursuant to the terms of this
Agreement. The Manager, in its sole discretion, may elect to assign its rights
to purchase the Membership Interest of the Physician Member involved in the
Domestic Proceeding under this Section 11.4 to the Company and, in such case,
the Company shall have the same rights as provided for the Manager under this
Section 11.4.
11.5 Divestiture Option. If state or federal regulations or laws are
enacted or applied, or if any other legal developments occur, which, in the
opinion of the Manager adversely affect (or potentially adversely affect) the
operation of the Membership (e.g., the enactment or application of prohibitory
physician self-referral legislation against the Company or its Members), the
Manager shall promptly either, in its discretion, (i) take the steps outlined in
this Section 11.5 to divest the Physician Members of their Membership Interests,
or (ii) dissolve the Company as provided in Article XII. If the Manager chooses
option (i), it shall deliver a written notice to all of the Physician Members
(the "Notice of Election") and purchase such Membership Interests for its own
account. The purchase price to be paid for each Membership Interest shall be
determined in the manner as provided in Section 11.6 and shall be on the terms
and conditions as provided in Section 11.7. The transfer of the Membership
Interests and the payment of the purchase price (as provided in Section 11.6)
shall be made at such time as determined by the Manager to be in the best
interests of the Company and its Physician Members. Each Physician Member hereby
makes, constitutes and appoints the Manager, with full power of substitution,
his true and lawful attorney-in-fact, to take such actions and execute such
documents on his behalf to effect the transfer of his Membership Interest as
provided in this Section 11.5.
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11.6 Purchase Price. The purchase price to be paid for the Membership
Interest of any Physician Member whose interest is being purchased pursuant to
the provisions of Article 17.1, 17.2, 17.3, 17.4 or 17.5 (the "Withdrawing
Physician Member") shall be determined in the manner provided in this Article
17.6. The purchase price for the Membership Interest purchased pursuant to the
provisions of Sections 11.2, 11.3, 11.4 or 11.5 shall be an amount equal to the
lesser of (i) the fair market value of the Withdrawing Physician Member's
Membership Interest on the Valuation Date (prorated in the event that only a
portion of his or her Membership Interest is being purchased) as determined by
an Appraiser (as defined below) selected by the Manager, or (ii) the Withdrawing
Physician Member's share of the Company's book value, if any, (prorated in the
event that only a portion of his or her Membership Interest is being purchased)
as reflected by the Capital Account of the Withdrawing Physician Member
(unadjusted for any appreciation in Company assets and as reduced by
depreciation deductions claimed by the Company for tax purposes) as of the
Valuation Date (as defined below). In the case of a purchase of a Membership
Interest pursuant to the provisions of Section 11.1, the purchase price shall be
an amount equal to the greater of (i) two (2) times the aggregate distributions
made with respect to such Membership Interest pursuant to Section 9.1 during the
twelve-month period ending on the Valuation Date or (ii) the Withdrawing
Physician Member's share of the Company's book value determined in the manner
described above. For the purposes of this Section 11.6, the term "Appraiser"
shall mean an independent appraiser who is qualified in appraising membership
interests and who has at least five years experience. In determining fair market
value, the Appraiser shall take into consideration any outstanding indebtedness,
liabilities, liens and obligations of the Company and the relative Membership
Interests and capital accounts of all Members, as well as applying any customary
discounts for lack of liquidity and control. Such appraisal shall be conducted
in accordance with professional appraisal standards. The valuation of the
Appraiser shall be conclusive and binding upon the Company, the purchaser and
the Withdrawing Physician Member and his or her representatives. The
determination of the Withdrawing Physician Member's Capital Account on the
Valuation Date (as defined below) shall be made by the Company's internal
accountant (the "Company Accountant") upon a review of the Company's books of
account, and a formal audit is expressly waived. The statement of the Company
Accountant with respect to the Capital Account of the Withdrawing Physician
Member on the Valuation Date shall be binding and conclusive upon the Company,
the purchaser and the Withdrawing Physician Member and his representative. The
Manager, in its sole discretion, may pursue both of the above valuation methods
and choose the lesser value of the two as indicated above, or may designate and
follow only one of the methods in calculating the purchase price. The Valuation
Date shall be the last day of the month immediately preceding the month in which
occurs: (i) the death of a Physician Member, in the case of a purchase by reason
of death; (ii) the bankruptcy or insolvency of a Physician Member, in the case
of a purchase by reason of such bankruptcy or insolvency; (iii) the Notice of
Withdrawal or breach of Section 5.6 as provided in Article 11.3 in the case of a
purchase by reason thereof; (iv) the commencement of the Domestic Proceeding, in
the case of a purchase by reason thereof; or (v) the Notice of Election as
provided in Section 11.5, in the case of a purchase by reason thereof. Any
Physician Member whose Membership Interest is purchased pursuant to the
provisions of Section 11.2, 11.3, 11.4 or 11.5 shall be entitled only to the
purchase price which shall be paid at the Closing in cash (or by certified or
cashier's check) and shall not be entitled to any Company distributions made
after the Valuation Date. The transfer of a Membership Interest of a Withdrawing
Physician Member shall be deemed to occur as of the Valuation Date and the
Withdrawing Physician Member shall have no voting or other rights as a Physician
Member after such date. The purchaser shall be entitled to any
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distributions attributable to the transferred interest after the Valuation Date
and the Company shall have the right to deduct the amount of any such
distributions made to the Withdrawing Physician Member after the Valuation Date
from the purchase price.
11.7 Closing of Purchase and Sale. The Closing of any purchase and sale of
a Membership Interest pursuant to Section 11.1, 11.2, 11.3, 11.4 or 11.5 of this
Agreement shall take place at the principal office of the Company, or such other
place designated by the Manager, on the date determined as follows (the
"Closing"):
(a) In the case of a purchase and sale occurring by reason of the death of
a Physician Member as provided in Section 11.1 of this Agreement, the Closing
shall be held on the thirtieth day (or if such thirtieth day is not a business
day, the next business day following the thirtieth day) next following the last
to occur of:
(i) Qualification of the executor or personal administrator of the deceased
Physician Member's estate;
(ii) The date on which any necessary determination of the purchase price of
the Membership Interest to be purchased has been made; or
(iii) The date that coincides with the close of the Option Period.
(b) In the case of a purchase and sale occurring by reason of the
occurrence of one of the events described in Section 11.2, 11.3, 11.4 or 11.5 of
this Agreement, the Closing shall be held on the thirtieth day (or if such
thirtieth day is not a business day, the next business day following the
thirtieth day) next following the later to occur of:
(i) The date on which any necessary determination of the purchase price of
the Membership Interest to be purchased has been made; or
(ii) The date that coincides with the close of the Option Period.
At the Closing, although not necessary to effect the transfer, the
Withdrawing Physician Member shall concurrently with tender and receipt of the
applicable purchase price, deliver to the purchaser duly executed instruments of
transfer and assignment, assigning good and marketable title to the portion or
portions of the Withdrawing Physician Member's entire Membership Interest thus
purchased, free and clear from any liens or encumbrances or rights of others
therein. The parties acknowledge that occurrence of any of the triggering events
described in Section 11.1, 11.2, 11.3, 11.4 or 11.5 and compliance with all the
Articles of this Agreement, except the execution of the transfer documents by
the Withdrawing Member as provided above in this Section 11.7, are
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sufficient to effect the complete transfer of the Withdrawing Physician Member's
interest and the Withdrawing Physician Member shall be deemed to consent to
admission of the transferee as a substitute Physician Member. Notwithstanding
the date of the Closing or whether a Closing is successfully held, the transfer
of a Membership Interest of a Withdrawing Physician Member shall be deemed to
occur as of the Valuation Date as defined in Section 11.6. The deemed transfer
is effective regardless of whether the Withdrawing Physician Member performs the
duties set forth in this Section 11.7.
11.8 Terms and Conditions of Purchase. The Membership Interest of a
Physician Member shall not be transferred to any Member unless the requirements
of Sections 10.2 and 10.4 (b) through (g) are satisfied with respect to it. The
purchaser shall be liable for all obligations and liabilities connected with
that portion of the Membership Interest transferred to it unless otherwise
agreed in writing.
ARTICLE XII - DISSOLUTION AND LIQUIDATION OF THE COMPANY
12.1 Dissolution Events. The Company will be dissolved upon the happening
of any of the following events:
(a) The expiration of its term on December 31, 2047;
(b) The filing by, on behalf of, or against the Manager of any petition or
pleading, voluntary or involuntary, to declare the Manager bankrupt under any
bankruptcy law or act, or the commencement in any court of any proceeding,
voluntary or involuntary, to declare the Manager insolvent or unable to pay its
debts, or the appointment by any court or supervisory authority of a receiver,
trustee or other custodian of the property, assets or business of the Manager or
the assignment by it of all or any part of its property or assets for the
benefit of creditors, if said action, proceeding or appointment is not
dismissed, vacated or otherwise terminated within ninety (90) days of its
commencement;
(c) The determination of the Manager and Executive Committee in accordance
with Section 4.1(d) that the Company should be dissolved;
(d) The approval of a plan by the Manager and Executive Committee in
accordance with Section 4.1(c) providing for the merger, consolidation or sale
of Membership Interests as described in Section 10.6;
(e) The election of the Manager to dissolve the Company following the
occurrence of an event described in Article 11.5;
(f) The sale, exchange or other disposition of all or substantially all of
the Property of the Company without making provision for the replacement
thereof; or
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(g) Any other event resulting in the dissolution or termination of the
Company under the laws of the State of Kentucky.
12.2 Continuation. Upon the occurrence of any of the events described in
Section 12.1(b) above with respect to the Manager, the business of the Company
will be continued if within ninety (90) calendar days all of the remaining
Members elect to continue the business of the Company. If the Members fail to
continue the Company's business as provided in this Section, the Company will be
liquidated under Section 12.3.
12.3 Liquidation. Upon the happening of any of the events specified in
Section 12.1 and, if applicable, the failure to continue the business of the
Company under Section 12.2, the Manager, or any liquidating trustee elected by a
Majority in Interest of the Members, will commence as promptly as practicable to
wind up the Company's affairs unless the Manager or the liquidating trustee
(either, the "Liquidator") determines that an immediate liquidation of Company
assets would cause undue loss to the Company, in which event the liquidation may
be deferred for a time determined by the Liquidator to be appropriate. Assets of
the Company may be liquidated or distributed in kind, as the Liquidator
determines to be appropriate. The Members will continue to share Company Cash
Flow, Profits and Losses during the period of liquidation in the manner set
forth in Articles VIII and IX. The proceeds from liquidation of the Company,
including repayment of any debts of Members to the Company, and any Company
assets that are not sold in connection with the liquidation will be applied in
the following order of priority:
(a) To payment of the debts and satisfaction of the other obligations of
the Company, including without limitation debts and obligations to Members;
(b) To the establishment of any reserves deemed appropriate by the
Liquidator for any liabilities or obligations of the Company, which reserves
will be held for the purpose of paying liabilities or obligations and, at the
expiration of a period the Liquidator deems appropriate, will be distributed in
the manner provided in Section 12.3(c); and
(c) To the payment to the Members of the positive balances in their
respective Capital Accounts, pro rata, in proportion to the positive balances in
those capital accounts after giving effect to all allocations under Article VIII
and all distributions under Article IX for all prior periods, including the
period during which the process of liquidation occurs.
12.4 Articles of Dissolution. Upon the dissolution and completion of the
winding up of the Company, the Manager shall cause a Articles of Dissolution to
be executed on behalf of the Company and filed with the Secretary of State, and
the Manager shall execute, acknowledge and file any and all other instruments
necessary or appropriate to reflect the dissolution and winding up of the
Company.
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ARTICLE XIII - MISCELLANEOUS
13.1 Fiscal Year. The Fiscal Year will end on December 31, unless another
fiscal year-end is selected by the Managers.
13.2 Records. Proper and complete records and books of account shall be
kept by the Manager in which shall be entered fully and accurately all
transactions and such other matters relating to the Company's business as are
usually entered into records and books of account maintained by persons engaged
in business of like character. The records of the Company will be maintained at
the principal place of business of the Company, or at any other location the
Manager selects provided that the Company keep at its principal place of
business the records required by the Act to be maintained there. Appropriate
records in reasonable detail will be maintained to reflect income tax
information for the Members. Each Member may inspect and make copies of the
records maintained by the Company during reasonable business hours and upon
reasonable notice. Each Member, at his or her expense, may make copies of the
records maintained by the Company and may require an audit of the books of
account maintained by the Company to be conducted by the independent accountants
for the Company.
13.3 Reports. The Manager, at the expense of the Company, will cause to be
prepared in accordance with the method of accounting then used by the Company
and distributed to each Member within ninety (90) days after the end of each
Fiscal Year, a balance sheet as of the close of the Fiscal Year and the annual
income tax returns and related schedules of the Company for the Fiscal Year.
13.4 Reserves. The Manager may cause the Company to create reasonable
reserve accounts to be used exclusively for repairs and acquisition of
Additional Assets and for any other valid Company purpose. The Manager shall in
its sole discretion determine the amount of payments to such reserve accounts.
13.5 Notices. The Manager will notify the Members of any change in the
name, principal or registered office or registered agent of the Company. Any
notice or other communication required by this Agreement must be in writing.
Notices and other communications will be deemed to have been given when
delivered by hand or dispatched by telegraph, telex or other means of electronic
facsimile transmission, or three business days after being deposited in the
United States mail, postage prepaid, addressed to the Member to whom the notice
is intended to be given at his or her address set forth on Schedule I of this
Agreement or, in the case of the Company, to its principal place of business
provided for in Section 1.4. A Person may change his or her notice address by
notice in writing to the Company and to each other Member given under this
Section 13.5.
13.6 Amendments. Except as expressly provided in this Agreement in Section
4.1(h), no amendment of this Agreement will be valid or binding upon the
Members, nor will any waiver of any term of this Agreement be effective, unless
in writing and signed by the Manager and a majority of the members of the
Executive Committee.
13.7 Additional Documents. Each party agrees to execute and acknowledge all
documents and writings which the Manager may deem necessary or expedient in the
creation of this Company and
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the achievement of its purpose, specifically including but not limited to,
articles of organization and all amendments, as well as any cancellation
thereof.
13.8 Representations of Members. Each Member represents and warrants to the
Company and every other Member that (s)he (a) is fully aware of, and is capable
of bearing, the risks relating to an investment in the Company, (b) understands
that his or her interest in the Company has not been registered under the
Securities Act or the securities law of any jurisdiction in reliance upon
exemptions contained in those laws, and (c) has acquired his or her interest in
the Company for his or her own account, with the intention of holding the
interest for investment and without any intention of participating directly or
indirectly in any redistribution or resale of any portion of the interest in
violation of the Securities Act or any applicable law.
13.9 Survival of Rights. Except as herein otherwise provided to the
contrary, this Agreement shall be binding upon and inure to the benefit of the
parties, their successors and assigns.
13.10 Interpretation and Governing Law. When the context in which words are
used in this Agreement indicates that such is the intent, words in the singular
number shall include the plural and vice versa. The masculine gender shall
include the feminine and neuter. The Article and Section headings or titles and
the table of contents shall not define, limit, extend or interpret the scope of
this Agreement or any particular Article or Section. This Agreement shall be
governed and construed in accordance with the laws of the State of Kentucky
without giving effect to the conflicts of laws provisions thereof.
13.11 Severability. If any provision, sentence, phrase or word of this
Agreement or the application thereof to any Person or circumstance shall be held
invalid, the remainder of this Agreement, or the application of such provision,
sentence, phrase, or word to Persons or circumstances, other than those as to
which it is held invalid, shall not be affected thereby.
13.12 Agreement in Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument. In addition, this Agreement may contain
more than one counterpart of the signature pages and this Agreement may be
executed by the affixing of the signatures of each of the Members to one of such
counterpart signature pages; all of such signature pages shall be read as though
one, and they shall have the same force and effect as though all of the signers
had signed a single signature page.
13.13 Tax Matters Partner. For purposes of this Agreement, the Manager is
designated as the Tax Matters Partner (as defined in Section 6231 of the Code).
13.14 Third Parties. The agreements, covenants and representations
contained herein are for the benefit of the parties hereto inter se. Nothing in
this Agreement is intended to benefit any third parties including, without
limitation, any creditor of the Company and/or any Member. No creditor of the
Company or any Member will be entitled to require the Manager to solicit or
accept any loan or additional capital contribution for the Company or to enforce
any right which the Company or any Member may have against a Member, whether
arising under this Agreement or otherwise.
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<PAGE>
13.15 Power of Attorney. Each Physician Member hereby makes, constitutes
and appoints Dr. Joseph Jenkins and Thomas Driber, Ph.D., severally, with full
power of substitution, his true and lawful attorneys-in-fact, for him and in his
name, place and stead and for his use and benefit to sign and acknowledge, file
and record, any amendments hereto among the Members for the further purpose of
executing and filing on behalf of each Physician Member, any and all articles of
organization or other documents necessary to constitute the Company or to effect
the continuation of the Company, the admission or withdrawal of members, the
qualification of the Company in a foreign jurisdiction (or amendment to such
qualification), the admission of substitute Members or the dissolution or
termination of the Company, provided such continuation, admission, withdrawal,
qualification, or dissolution and termination are in accordance with the terms
of this Agreement.
The foregoing power of attorney is a special power of attorney coupled with
an interest, is irrevocable and shall survive the death or legal incapacity of
each Member. It may be exercised by any one of said attorneys by listing all of
the Members executing any instrument over the signature of the attorney-in-fact
acting for all of them. The power of attorney shall survive the delivery of an
assignment by a Member of the whole or any portion of his Unit. In those cases
in which the assignee of, or the successor to, a Member owning a Unit has been
approved by the Members for admission to the Company as a substitute Member, the
power of attorney shall survive for the sole purpose of enabling the Manager to
execute, acknowledge and file any instrument necessary to effect such
substitution.
This power of attorney shall not be affected by the subsequent incapacity
or mental incompetence of any Member.
13.16 Arbitration. Any dispute arising out of or in connection with this
Agreement or the breach thereof shall be decided by arbitration in Raleigh,
North Carolina in accordance with the then effective commercial arbitration
rules of the American Arbitration Association, and judgment thereof may be
entered in any court having jurisdiction thereof.
[The remainder of this page is intentionally left blank.]
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IN WITNESS WHEREOF, the undersigned, being the Manager and initial Members
of the Company, have caused this Agreement to be duly adopted by the Company as
of the _____ day of _________, 199__, and do hereby assume and agree to be bound
by and to perform all of the terms and provisions set forth in this Agreement.
MANAGER:
PRIME KIDNEY STONE TREATMENT, INC.,
a New Jersey corporation
Attest:
By:
__________________________ Thomas Driber, Ph.D., Vice President
Secretary
MEMBER:
PRIME KIDNEY STONE TREATMENT, INC.,
a New Jersey corporation
By:
Thomas Driber, Ph.D., Vice President
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<PAGE>
COUNTERPART SIGNATURE PAGE
By signing this Counterpart Signature Page, the undersigned acknowledges
his or her acceptance of that certain Operating Agreement of Kentucky I
Lithotripsy, LLC, and his or her intention to be legally bound thereby.
Dated this _________ day of ___________________, 199_.
---------------------------------------
Signature
-----------------------------------------
Printed Name
STATE OF _______________ )
)
COUNTY OF _____________ )
BEFORE ME, the undersigned Notary Public in and for the State and County
set forth above, on the _______ day of __________________, 199_, personally
appeared ___________________, and, being by me first duly sworn, stated that
(s)he signed this Counterpart Signature Page for the purpose set forth above and
that the statements contained therein are true.
-----------------------------------------
Signature of Notary Public
------------------------------------------
Printed Name of Notary
My Commission Expires:
___________________________
[SEAL]
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<PAGE>
OPERATING AGREEMENT OF KENTUCKY I LITHOTRIPSY, LLC
SCHEDULE I
Names and Address Initial Capital
of Members Contribution Percentage Interest
Prime Kidney Stone Treatment, Inc. $50,000 20%
1301 Capital of Texas Highway
Suite C-300
Austin, TX 78746
Limited partners as a whole $200,000 80%
TOTALS $250,000 100%
(1) Represents the principal portion of each Member's guaranty obligation,
as each Member's obligation under the Guaranty includes not only principal, but
also (as provided in the Guaranty) accrued and unpaid interest, late payment
penalties and all costs incurred by the Bank in collecting any defaulted
obligations. The principal amount of the loan is $550,000. The Manager will
guarantee 20% of the Loan (a $110,000 principal guaranty) as provided in the
Memorandum. The Physician Members will guarantee 1% of the loan (a $5,500
principal guaranty) for each Unit purchased as provided in the Memorandum.
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____________________________ _______________________________
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
1-800-682-7971
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 HEREBY 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, 1900 CHURCH STREET, SUITE 101, NASHVILLE, TENNESSEE
37203. 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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<PAGE>
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 WOMBLE CARLYLE SANDRIDGE & RICE, 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 1900 Church Street, Suite 101, Nashville, Tennessee 37203. 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 Womble Carlyle Sandridge &
Rice, 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
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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.
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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
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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
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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 "Stark 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 Stark II, in January, 1998, the Health Care Financing
Administration ("HCFA"), the federal agency responsible for administering the
Medicare program, published proposed Stark II regulations. The proposed
regulations outline the requirements that must be met for the Partnership's
proposed operations to comply with Stark II. If HCFA adopts the proposed Stark
II regulations as final, or if a reviewing court were to interpret the Stark II
statute using the proposed regulations as guidance, then the Partnership and its
physician Limited Partners may be in violation of Stark 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 Stark 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 Stark 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
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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.
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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 Womble
Carlyle Sandridge & Rice, 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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<PAGE>
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, Womble Carlyle Sandridge & Rice, 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
Loan 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 1900 Church Street, Suite
101, Nashville, Tennessee, 37203.
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
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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 faith deems 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
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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
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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
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"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
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have continued beyond their stated terms and applicable renewal periods and
could be canceled at any time. Blount 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
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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.
[The remainder of this page is intentionally left blank.]
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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.
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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.
[The remainder of this page is intentionally left blank.]
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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 1900 Church Street, Suite 101,
Nashville, Tennessee 37203. 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
---- ------
Joseph Jenkins, M.D. President
Cheryl Williams Treasurer and sole Director
Thomas J. Driber, Ph.D. Vice President
James Clark Secretary
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Descriptions of the background of the key executive officers and directors
of the General Partner appear below.
Joseph Jenkins, M.D. was recently elected President of the General Partner.
Dr. Jenkins has been President and Chief Executive of the Management Agent since
April 1996. From May 1990 until December 1991, Dr. Jenkins was a Vice President
of the Management Agent and previously practiced urology in Washington, North
Carolina. Dr. Jenkins has been President of the Management Agent since 1992 and
was recently elected to is Board of Directors. Dr. Jenkins is a board certified
urologist and is a founding member, the immediate past-president and currently a
Director of the American Lithotripsy Society.
Cheryl Williams is the sole Director and Treasurer of the General Partner.
Ms. Williams 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. Ms. Williams was Controller of Fairchild Aircraft
Corporation from August 1988 to October 1989. From 1985 to 1988, Ms. Williams
served as the Chief Financial Officer of APS Systems, Inc. Ms. Williams also
serves as the sole Director and Treasurer of the General Partner.
Thomas J. Driber, Ph.D. has been Vice President of the General Partner
since 1994. Dr. Driber 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, Dr. Driber 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. Dr. Driber 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. Dr. Driber received a Ph.D. in
Medical/Social Change Theory, Concentration: Ambulatory Medical Delivery Systems
from Walden University, Institute for Advanced Studies in Minneapolis, Minnesota
in 1984.
James Clark 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
William R. Jordan, 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
2008 Litho Place, Fayetteville, North Carolina 28304 and its phone number is
(800) 682- 7971. 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
---- ------
Joseph Jenkins, M.D. President, Chief Executive Officer
and Director
Kenneth S. Shifrin Director
W. Alan Terry Chief Financial Officer
Cheryl Williams Vice President and Director
Philip J. Gallina 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 Dr.
Jenkins, Mr. Shifrin and Ms. Williams. 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."
Kenneth S. Shifrin 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. Mr.
Shifrin 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.
W. Alan Terry has been Chief Financial Officer of the Management Agent
since 1991. In August, 1986, Mr. Terry 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.
Philip J. Gallina recently became the Secretary and Treasurer of the
Management Agent, having previously served as a Vice President since 1989. Mr.
Gallina is a Certified Public Accountant licensed in the state of Pennsylvania.
From 1980 through February 1989, Mr. Gallina served as Plant Controller for the
Westinghouse Motor Control and Enclosed Control Product Lines. Mr. Gallina is
also a Director, the Vice President, the Treasurer and the Secretary of MedTech
Investments, Inc., the Sales Agent.
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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."
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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 Barbara 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 Barbara 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 Dornier HM-3 and a Dornier
MFL-5000, both of which are fixed-based. The Columbia Surgery Center utilizes a
fixed-base Dornier HM-3. In eastern Tennessee, Park West Hospital in Knoxville
owns and operates a fixed-based Dornier HM-3. The University of Tennessee
Medical Center operates a Storz SL-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 Johnson City believed
by the General Partner to be a Dornier SubCompact S. The Johnson City area is
also served by a Dornier HM-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
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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, Murray-Calloway
County Hospital in Murray and T.J. Samson 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.
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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
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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) ("Stark
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 Stark 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
Stark II (the "Proposed Stark II Regulations"). The Proposed Stark II
Regulations and HCFA's accompanying commentary discuss the requirements that
equipment rental arrangements must meet in order to be protected transactions
under Stark II. It is not clear whether the Partnership's planned arrangements
with contracting hospitals meet all the requirements. If the Proposed Stark 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 Stark
II statute), then compliance Stark 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 Stark 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 Stark II Regulations as final or a
reviewing court's interpretation of the Stark II statute in reliance on the
Proposed Stark 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 Stark 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.
Fraud and Abuse. The provisions of the federal Social Security Act
addressing illegal remuneration (the "Anti-Kickback Statute") prohibit providers
and others from soliciting, receiving,
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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. v. Greber, 760 F.2d 68 (1985). The Greber
case was followed by the United States Court of Appeals for the Ninth Circuit,
United States v. Kats, 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
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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 Stark 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, Lourdes 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 Lourdes 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 Stark 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. Dr. William R. Jordan, 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. Dr. Jordan 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-Virginia I. 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. Virginia I 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 Barbara 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 Dornier HM-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 Dornier
HM-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 Dornier HM-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 Dornier
HM-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 Sherman 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 Dornier HM-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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SATISFY 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 Womble Carlyle Sandridge
& Rice, 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
Gain 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 Womble Carlyle
Sandridge & Rice, 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 Joseph Jenkins, M.D. and Thomas Driber, 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 Joseph Jenkins, M.D. and Thomas Driber, 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 Womble Carlyle Sandridge & Rice, a
Professional Limited Liability Company, of Winston-Salem, North Carolina. See
"Conflicts of Interest." On the Closing Date, Womble Carlyle Sandridge & Rice, 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.
-98-
Name of Prospective Investor Memorandum Number
FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP -
ARKANSAS I
A Limited Partnership Formed Under the Laws of Arkansas
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM
up to $322,220 in Cash
20 Units of Limited Partnership Interest
at $16,111 in Cash per Unit
THIS MEMORANDUM IS FURNISHED PURSUANT TO A CONFIDENTIALITY AGREEMENT
BETWEEN THE PARTNERSHIP AND THE INVESTOR WHOSE NAME APPEARS ABOVE. THE
CONFIDENTIALITY AGREEMENT PROHIBITS THE DISCLOSURE OF THE CONFIDENTIAL MATERIAL
CONTAINED IN THIS MEMORANDUM, EXCEPT TO THE EXTENT SUCH INVESTOR DEEMS IT
NECESSARY TO SHARE SUCH INFORMATION WITH HIS LEGAL, ACCOUNTING OR OTHER
FINANCIAL ADVISORS, WHO LIKEWISE SHALL BE BOUND BY THE SAME CONFIDENTIALITY
RESTRICTIONS SET FORTH IN THE CONFIDENTIALITY AGREEMENT.
Medtech Investments, Inc.
Exclusive Sales Agent
2008 Litho Place
Fayetteville, North Carolina 28304
1-800-682-7971
<PAGE>
The Date of this Memorandum is November 18, 1998
FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP - ARKANSAS I
up to $322,220 in Cash
up to 20 Units of Limited Partnership Interest
at $16,111 in Cash per Unit
Fayetteville Lithotripters Limited Partnership - Arkansas I, an Arkansas limited
partnership (the "Partnership") operated by its General Partner, Lithotripters,
Inc., a North Carolina corporation (the "General Partner"), hereby offers on the
terms set forth herein up to 20 Units (the "Units") of limited partnership
interest in the Partnership, at a price per Unit of $16,111 in cash. See "Terms
of the Offering." Each Unit will represent an initial 1% economic interest in
the Partnership. See "Risk Factors - Other Investment Risks - Dilution of
Limited Partners' Interest." The Partnership owns and operates two LithostarTM
second generation extracorporeal shock-wave lithotripters for the lithotripsy of
kidney stones. Each LithostarTM is installed in its own self-propelled Calumet
Coach (collectively, the Coaches with the installed LithostarsTM are referred to
herein as the "Mobile Lithotripsy Systems") enabling the Partnership to provide
lithotripsy services at various locations throughout Arkansas.
The Partnership intends to use the proceeds of this Offering primarily to
finance the cost of reconditioning the Coaches and renting loaner Mobile
Lithotripsy Systems from the General Partner or its Affiliates during the time
the Partnership's Mobile Lithotripsy Systems are being reconditioned. See "Use
of Proceeds." The cash purchase price is due at subscription; however,
prospective Investors who meet certain requirements may be able fund a portion
of their Unit purchase price with the proceeds of certain third-party financing.
See "Terms of the Offering - Limited Partner Loans." The Offering will terminate
on December 30, 1998 (or earlier upon the sale of all 20 Units as provided
herein), unless extended at the discretion of the General Partner for a period
not to exceed 180 days. ______________________________
Purchase of Units involves risks and is suitable only for persons of substantial
means who have no need for liquidity in this investment. Among other factors,
prospective investors should note that (1) the Partnership faces substantial
competition in the Service Area and (2) the health care industry is undergoing
significant government regulatory reforms. See "Risk Factors" and "The
Offering - Suitability Standards."
______________________________
Cash Selling Net Cash
Offering Price Commissions(1) Proceeds(2)
Per Unit(3) $ 16,111 $ 250 $ 15,861
Total Maximum(4) $322,220 $ 5,000 $317,220
(See Footnotes on Back of Cover Page)
See Glossary for capitalized terms used herein and not otherwise defined.
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<PAGE>
___________________________
(1) The Units will be sold on a "best-efforts" any or all basis by MedTech
Investments, Inc., a broker-dealer registered with the Securities and Exchange
Commission, a member of the National Association of Securities Dealers, Inc. and
an Affiliate of the General Partner (the "Sales Agent"). The Partnership will
pay the Sales Agent a $250 commission for each Unit sold and will reimburse the
Sales Agent for its Offering costs (not to exceed $7,500). The Partnership has
agreed to indemnify the Sales Agent against certain liabilities, including
liabilities under the Securities Act of 1933 (the "Securities Act"). See "Plan
of Distribution."
(2) Net Cash Proceeds do not reflect deduction of expenses payable by the
Partnership. See "Use of Proceeds." The price per Unit ($16,111) is payable in
cash upon 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 together with their subscription
packets, at least $2,500 cash and a Limited Partner Note payable to the Bank in
a maximum principal amount of up to $13,611 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. The General Partner,
however, reserves the right to sell less than one Unit as a minimum investment
on a limited basis, and to reject in whole or in part any subscription.
Purchases of fractional Units will be in multiples of one-half Units.
(4) Offering Proceeds will first be used by the Partnership to pay offering
costs and expenses (up to $37,250) and the remainder of the proceeds will be
used to finance the cost of reconditioning the Coaches and renting loaner Mobile
Lithotripsy Systems from the General Partner or its Affiliates during the time
the Partnership's Mobile Lithotripsy Systems are out of service due to the
reconditioning of the Coaches. See "Use of Proceeds." The Partnership seeks by
this Offering to sell up to 20 Units for an aggregate of up to $322,220 in cash
($317,220 net of Sales Agent's commissions). 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 acceptance of the Investor's subscription, rejection of the Investor's
subscription or termination of the Offering. The Partnership has set no minimum
number of Units to be sold in this Offering. Accordingly, upon the receipt and
acceptance of an Investor's subscription by the Partnership
ii
<PAGE>
Partner Loan. Upon admission as a Limited Partner, the Investor's
subscription funds will be released to the Partnership and the Loan Documents,
if any, will be released to the Bank. In the event a subscription is rejected,
all subscription funds (without interest), the Loan Documents, if any, and other
subscription documents held in escrow will be promptly returned to the rejected
Investor. The Offering will terminate on December 30, 1998, unless it is sooner
terminated by the General Partner, or unless extended for an additional period
not to exceed 180 days. See "The Offering - General." _______________________
THE UNITS ARE BEING OFFERED PURSUANT TO 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, AND AN EXEMPTION FROM REGISTRATION
PROVIDED IN SECTION 23-42-509(c) OF THE ARKANSAS CODE OF 1987
ANNOTATED, AS AMENDED, AND RULE 509.01(B) OF THE REGULATIONS
PROMULGATED THEREUNDER, AS AMENDED. A REGISTRATION STATEMENT RELATING
TO THESE SECURITIES HAS NOT BEEN FILED WITH ANY STATE SECURITIES
AGENCY OR 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 THE 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 VARIOUS STATE
SECURITIES LAWS. INVESTORS SHOULD PROCEED ONLY ON THE ASSUMPTION THAT
THEY MAY HAVE TO BEAR
iii
<PAGE>
THE ECONOMIC RISK OF AN INVESTMENT IN THE UNITS FOR AN INDEFINITE
PERIOD OF TIME. ______________
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
iv
<PAGE>
CONFIDENTIALITY RESTRICTIONS CONTAINED IN VARIOUS CONTRACTS WITH THIRD
PARTIES. ______________
THIS MEMORANDUM CONTAINS SUMMARIES, BELIEVED BY THE GENERAL PARTNER TO
BE ACCURATE, OF CERTAIN TERMS OF CERTAIN DOCUMENTS, BUT REFERENCE IS
HEREBY 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 "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, 2008 LITHO
PLACE, FAYETTEVILLE, NORTH CAROLINA 28304, 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
v
<PAGE>
CORRECT AS OF ANY TIME AFTER THE DATE OF THIS MEMORANDUM. THIS
MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY 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 CONTINUE TO RECEIVE FEES
WHETHER OR NOT THE PARTNERSHIP EARNS ANY ADDITIONAL 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.
______________
vi
<PAGE>
TABLE OF CONTENTS
RISK FACTORS...................................................................1
Operating Risks.......................................................1
Tax Risks.............................................................7
Other Investment Risks................................................8
THE PARTNERSHIP...............................................................11
TERMS OF THE OFFERING.........................................................12
The Units and Subscription Price.....................................12
Acceptance of Subscriptions..........................................12
Limited Partner Loans ...............................................13
Subscription Period; Closing.........................................14
Offering Exemption...................................................14
Suitability Standards................................................15
How to Invest........................................................16
Restrictions on Transfer of Units....................................17
PLAN OF DISTRIBUTION..........................................................18
BUSINESS ACTIVITIES...........................................................19
General ............................................................19
Treatment Methods for Kidney Stone Disease...........................19
The LithostarTM......................................................20
The Calumet Coaches..................................................21
Anticipated Partnership Expenditures.................................21
Acquisition of Additional Assets.....................................21
Hospital Contracts...................................................22
Management...........................................................23
Employees............................................................23
THE GENERAL PARTNER...........................................................24
COMPENSATION AND REIMBURSEMENT TO THE
GENERAL PARTNER AND ITS AFFILIATES...................................25
CONFLICTS OF INTEREST.........................................................27
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER...............................28
vii
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Page
COMPETITION...................................................................29
Affiliated Competition...............................................29
Other Competition....................................................29
REGULATION....................................................................31
Federal Regulation...................................................31
State Regulation.....................................................38
PRIOR ACTIVITIES..............................................................39
SOURCES AND APPLICATIONS OF FUNDS.............................................41
FINANCIAL CONDITION OF THE PARTNERSHIP........................................42
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF THE RESULTS OF OPERATIONS................................47
Nine Months Ended September 30, 1998 and September 30, 1997..........47
Year Ended December 31, 1997 and December 31, 1996...................47
Year Ended December 31, 1996 and December 31, 1995...................47
SUMMARY OF THE PARTNERSHIP AGREEMENT..........................................48
Nature of Limited Partnership Interest...............................48
Profits, Losses and Distributions....................................48
Management of the Partnership........................................50
Powers of the General Partner........................................50
Rights and Liabilities of the Limited Partners.......................51
Restrictions on Transfer of Partnership Interests....................52
Dissolution and Liquidation..........................................52
Optional Purchase of Limited Partner Interests.......................53
Dilution Offerings...................................................53
Arbitration..........................................................54
Power of Attorney....................................................54
Reports to Limited Partners..........................................54
Records ............................................................54
LEGAL MATTERS.................................................................55
GLOSSARY .....................................................................55
viii
<PAGE>
Appendix A AGREEMENT OF LIMITED PARTNERSHIP OF FAYETTEVILLE
LITHOTRIPTERS LIMITED PARTNERSHIP - ARKANSAS I
Appendix B BANK COMMITMENT (WITH EXHIBITS)
Appendix C FORM OF OPINION OF WOMBLE CARLYLE SANDRIDGE & RICE, PLLC
Appendix D NOTES TO FINANCIAL STATEMENTS
ix
<PAGE>
RISK FACTORS
Prior to subscribing for Units, Investors should carefully examine this entire
Memorandum, including the Appendices hereto, and should give particular
consideration to the general risks attendant to speculative investments and
investments in partnerships generally, and to the other special operating, tax
and other investment risks set forth below.
Operating Risks
General Risks of Operations. Although the General Partner and its personnel have
significant experience in managing lithotripsy enterprises, whether the
Partnership can continue to effectively operate and expand its business cannot
be accurately predicted. The benefits of an investment in the Partnership also
depend on many factors over which the Partnership has no control, including
competition, technological innovations rendering the 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 will be to
continue 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.
Dependence on Insurance Reimbursement. The prices the Partnership charges its
patients for the lithotripsy of kidney stones is significantly dependent upon
the amount of reimbursement private health care insurers allow for this
procedure. Most of the Partnership's patients pay for services directly from
private payment sources, primarily from third-party insurers such as Blue
Cross/Blue Shield and other commercial insurers. Coverage and payment levels for
these private payment sources vary depending upon the patient's individual
insurance policy. While the Partnership does not rely on Medicare reimbursement
for a substantial portion of its revenues,
1
<PAGE>
the Medicare program has historically influenced the setting of reimbursement
standards by private insurance programs. The Health Care Financing
Administration ("HCFA") has recently proposed rules which would establish a
prospective payment system for hospital outpatient procedures, including
lithotripsy. HCFA's proposed reimbursement rate for lithotripsy is $2,612. This
rate is lower than the typical charge for lithotripsy services currently charged
by the Partnership and could result in private payment sources such as
third-party insurers lowering the reimbursement rates they pay to the
Partnership. The General Partner anticipates that over time reimbursement
amounts for both the professional and technical components of the lithotripsy
procedure may continue to decrease. See "Regulation."
Reliability and Efficacy of the Partnership's Lithotripters. The
LithostarTM has a ten-year United States operating history, having received
premarket approval from the FDA for renal lithotripsy on September 30, 1988.
This approval followed a period of clinical testing beginning in February 1987
at four test sites in the United States, which was preceded by substantial
clinical testing of the LithostarTM at the Urological Clinic of the Johannes
Gutenberg University of Mainz, West Germany. The General Partner estimates that
more than 400 LithostarTM systems are currently operating in over twenty
countries, and the General Partner and its Affiliates operate over 30
LithostarsTM in other ventures. In the General Partner's opinion, the
LithostarTM has proven to be reliable and dependable medical equipment. Downtime
periods necessitated for maintenance or repairs of the Partnership's Mobile
Lithotripsy Systems will adversely affect Partnership revenues. In 1996, the FDA
approved a new higher intensity shock-head system for the LithostarTM, which the
General Partner believes has shortened procedure times. Both of the
Partnership's LithostarsTM have been upfitted with the new tube system. Based
upon a detailed follow-up study of 86,000 renal and 51,000 ureteral stones
treated on the LithostarTM in all of the General Partners's affiliated
partnerships using both the original and newer shock-head systems, the General
Partner notes an 86% total success rate with an overall retreatment rate of only
15%. This retreatment rate included stones of all sizes and locations, including
staghorn calculi which at times required multiple treatments. Based upon this
study and the General Partner's experience in doing well in excess of 128,000
cases over the past nine and one-half years in its affiliated limited
partnerships, the General Partner is of the opinion that the LithostarTM is
presently a very effective and sound alternative for the treatment of renal
stones.
Investors should note that some studies indicate that lithotripsy may cause high
blood pressure and tissue damage. The General Partner questions the reliability
of these studies and believes lithotripsy has become a widely accepted method
for the treatment of renal stones.
Technological Obsolescence. The history of lithotripsy of kidney stones as an
accepted treatment procedure is relatively recent, with the first clinical
trials being conducted in West Germany beginning in 1980 and the first premarket
approval for a renal lithotripter in the United States being granted by the FDA
in December 1984. Today, lithotripsy is the treatment procedure of choice for
kidney stone disease, having replaced other treatment methods. Published reports
indicate that certain researchers are attempting to improve a laser technology
to more easily eradicate kidney stones, and pharmaceutical companies and
researchers have attempted to develop
2
<PAGE>
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
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 "Business Activities - Anticipated Partnership
Expenditures" and "Sources and Application of Funds." Although the General
Partner maintains good relationships with certain commercial lending
institutions, it has not obtained a loan commitment from any party in any amount
on behalf of the Partnership and whether one would timely be forthcoming on
terms acceptable to the Partnership cannot be assured. The General Partner
and/or its Affiliates may, but are under no obligation to, make loans to the
Partnership, and there is no assurance that they would be willing or able to do
so at the time, in amounts and on terms required by the Partnership. While the
General Partner does not anticipate that it would cause the Partnership to incur
indebtedness unless cash generated from Partnership operations were at the time
expected to enable repayment of such loan in accordance with its terms, lower
than anticipated revenues and/or greater than anticipated expenses could result
in the Partnership's failure to make payments of principal or interest when due
under such a loan and the Partnership's equity being reduced or eliminated. In
such event, the Limited Partners could lose their entire investment.
Acquisition of Additional Assets. 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 Lithotripsy 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
Partnership's Mobile Lithotripsy Systems. The competing lithotripsy service
providers generally have existing contracts
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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. 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, neither the General Partner nor
its Affiliates are prohibited from engaging in any business or arrangement that
may compete with the Partnership. Several ventures affiliated with the General
Partner provide lithotripsy services in the Service Area's vicinity. See "Prior
Activities" and "Competition." Affiliates of the General Partner are planning
and conducting other limited partnership 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 continually convince physicians and potential patients of the
quality of the treatment it can provide, its reasonable 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 Limited Partners' ability 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. No assurance can be
given 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 as a felony 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 "Stark 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 Stark II, in January, 1998, the Health Care Financing Administration
("HCFA"), the federal agency responsible for administering the Medicare program,
published proposed Stark II regulations. Under the proposed regulations,
physician Limited Partner referrals of Medicare and Medicaid patients to
contracting hospitals for lithotripsy services would be prohibited. If HCFA
adopts the proposed Stark II regulations as final, or if a reviewing court were
to interpret the Stark II statute using the proposed regulations as guidance,
then the Partnership and its physician Limited Partners would be in violation of
Stark II. In such instance, the Partnership and/or its physician Limited
Partners may be required to refund any amounts collected from
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Medicare and Medicaid patients in violation of the statute, and they may be
subject to civil monetary penalties and/or exclusion from the Medicare and
Medicaid programs.
The Anti-Kickback Statute prohibits paying or receiving any remuneration in
exchange for making a referral for healthcare services which may be paid for by
Medicare, Medicaid or CHAMPUS. The law has been broadly interpreted to include
any payments which may induce or influence a physician to refer patients. One of
the federal agencies that enforces the Anti- Kickback Statute has issued several
"safe harbors" which, if complied with, mean the payment or transaction will be
deemed not to violate the law. This Offering does not comply with any "safe
harbor." There is limited guidance from reviewing courts regarding the
application of the broad language of the Anti-Kickback Statute to joint ventures
similar to the one described in this Offering. In order to prove violations of
the Anti-Kickback law, the government must establish that one or more parties
offered, solicited or paid remuneration to induce or reward referrals. The
government has said that in certain situations the mere offering of an
opportunity to invest in a venture would constitute illegal remuneration in
violation of the Anti-Kickback Statute. Although the General Partner believes
the structure and purpose of the Partnership are in compliance with the Anti-
Kickback Statute, no assurances can be given that government officials or a
reviewing court would agree. Violation of the Anti-Kickback Statute could
subject the Partnership, the General Partner and the physician Limited Partners
to criminal penalties, fines and/or exclusion from the Medicare and Medicaid
programs.
Regarding state law, various licensure requirements must be met for the
Partnership to provide mobile lithotripsy services in Arkansas. The Partnership
is in compliance with such requirements. See "Regulation - State Regulation".
Contract Terms and Termination. The Partnership provides lithotripsy services to
17 Contract Hospitals pursuant to 17 separate Hospital Contracts. Many, but not
all, of the Hospital Contracts grant the Partnership the exclusive right to
provide Lithotripsy Services at the particular Contract Hospitals.
Substantially, all of the Hospital Contracts provide for automatic renewal on a
year-to-year basis. Most of the Partnership's Hospital Contracts are terminated
without cause upon 90 days or less written notice by either party prior to any
renewal date or the noticed termination date, or upon customary events of
default. Although three other facilities recently terminated their contracts
with the Partnership due to competition or the acquisition of their own
lithotripter, the General Partner does not anticipate significant terminations
and believes it has a good relationship with many of the Contract Hospitals.
There is no assurance, however, that terminations will either not occur or that
the resulting impact to the Partnership would not have a material adverse effect
on Partnership operations. 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
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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 "Proposed Activities - Business Activities - Hospital
Contracts"and "Risk Factors - Competition."
Loss on Dissolution and Termination. Upon the dissolution and termination of the
Partnership, the proceeds realized from the liquidation of its assets, if any,
will be distributed to its partners only after satisfaction of the claims of all
creditors. Accordingly, the ability of a Limited Partner to recover all or any
portion of his investment under such circumstances will depend on the amount of
funds so realized and the claims to be satisfied therefrom. See "Summary of the
Partnership Agreement - Optional Purchase of Limited Partner Interests."
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. Siemens, the manufacturer of the LithostarTM, has
not assured Prime that its LithostarTM 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 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.
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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 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, however, 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 C TO THE MEMORANDUM). IT IS STRONGLY RECOMMENDED THAT EACH INVESTOR
INDE PENDENTLY CONSULT HIS PERSONAL TAX COUNSEL CONCERNING THE TAX CONSEQUENCES
ASSOCIATED WITH HIS OWNERSHIP OF AN INTEREST IN THE PARTNERSHIP. THE CONCLUSIONS
REACHED IN THE OPINION ARE RENDERED WITHOUT ASSURANCE THAT SUCH CONCLUSIONS HAVE
BEEN OR WILL BE ACCEPTED BY THE SERVICE OR THE COURTS.
THIS MEMORANDUM AND THE OPINION DO NOT DISCUSS, NOR WILL COUNSEL BE RENDERING AN
OPINION REGARDING, THE ESTATE AND GIFT TAX OR STATE AND LOCAL INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP. FURTHERMORE, INVESTORS SHOULD
NOTE THAT THE ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN
THE PARTNERSHIP MAY BE ADVERSELY AFFECTED BY FUTURE CHANGES IN THE FEDERAL
INCOME TAX LAWS, WHETHER BY FUTURE ACTS OF CONGRESS OR FUTURE ADMINISTRATIVE AND
JUDICIAL INTERPRETATIONS OF APPLICABLE FEDERAL INCOME TAX LAWS. ANY OF THE
FOREGOING MAY BE GIVEN RETROACTIVE EFFECT.
Possible Legislative or Other Actions Effecting Tax Consequences. The federal
income tax treatment of an investment in an equipment/service oriented limited
partnership such as the Partnership may be modified by legislative, judicial or
administrative action at any time, and any such action may retroactively affect
investments and commitments previously made. The rules dealing with federal
income taxation of limited partnerships are constantly under review by the
Service, resulting in revisions of its regulations and revised interpretations
of established concepts. In evaluating an investment in the Partnership each
Investor should consult with his personal tax advisor with respect to possible
legislative, judicial and administrative developments.
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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.
Partnership Allocations. The Partnership Agreement contains certain allocations
of profits and losses that could be reallocated by the Service if it were
determined that the allocations did not have "substantial economic effect." On
December 31, 1985 the Regulations dealing with the propriety of partnership
allocations were finalized. As a general rule, allocations of profits and losses
must have "substantial economic effect." Based upon current law, Counsel is of
the opinion that, if the question were litigated, it is more probable than not
that the allocation of profits and losses set forth in the Partnership Agreement
would be sustained for federal income tax purposes. This opinion is subject to
certain assumptions and qualifications. Investors are cautioned that the
foregoing opinion is based in part upon final regulations which have not been
extensively commented upon or construed by the courts.
Income in Excess of Distributions. The Partnership Agreement provides that in
each year annual Distributions may be made to the Partners. Excluded from the
definition of cash available for distribution is the amount of funds necessary
to discharge Partnership debts and to maintain certain cash reserves deemed
necessary by the General Partner. If Partnership Cash Flow is insufficient to
fund expenses and maintain adequate reserves, a Limited Partner could be subject
to income taxes payable out of personal funds to the extent of the Partnership's
income, if any, attributed to him without receiving from the Partnership
sufficient Distributions to pay the Limited Partner's tax with respect to such
income.
Other Investment Risks
Conflicts of Interest. The activities of the Partnership involve numerous
existing and potential conflicts of interest between the Partnership, the
General Partner and their Affiliates.
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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 has full authority to
supervise the business and affairs of the Partnership pursuant to the
Partnership Agreement and the Management Agreement. Limited Partners have no
right to participate in the management or conduct of the Partnership's business
and affairs. The General Partner, its employees and its Affiliates are not
required to devote their full time to the Partnership's affairs and intend to
continue devoting substantial time and effort in organizing and operating
partnerships and other ventures throughout the United States that are similar to
the Partnership. The General Partner will continue to devote such time to the
Partnership's business and affairs as it deems necessary and appropriate in the
exercise of reasonable judgment. The participation by any Limited Partner in the
management or control of the Partnership's affairs could render him generally
liable for the liabilities of the Partnership that could not be satisfied by
assets of the Partnership. See the Form of Legal Opinion of Womble Carlyle
Sandridge & Rice, a Professional Limited Liability Company, attached hereto as
Appendix C.
Limited Partners' Obligation to Return Certain Distributions. Except as provided
by other applicable law and provided that a Limited Partner does not participate
in the management 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, exceed the fair value of
the assets of the Partnership.
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"); provided that the Percentage Interests of the General Partner and
Initial Limited Partners, as in effect prior to the commencement of this
Offering, may not be diluted through Dilution Offerings (including this
Offering) by more than 20% in the aggregate without the prior written consent of
a Majority in Interest of all the Partners. Upon the sale of interests in the
Partnership in a Dilution Offering, the Percentage Interests of the Partners
will be proportionately diluted. See "Summary of the Partnership Agreement -
Dilution Offerings."
Liability Under Limited Partner Loan. Investors 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
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herein constitute legal advice. A Limited Partner's liability under a Limited
Partner Note continues regardless of whether the Limited Partner remains a
limited partner in the Partnership. As a consequence, such liability cannot be
avoided by claims, defenses or set-offs the Limited Partner may have against the
Partnership, the General Partner or their Affiliates. In addition to the
suitability requirements discussed below, any prospective Investor applying for
a Bank loan to fund a portion of his Unit purchase must be approved by the Bank
for purposes of his delivery of the Limited Partner Note. The Bank has
established its own criteria for approving the creditworthiness of a prospective
Investor and has not established objective minimum suitability standards.
Instead, the Bank is empowered to accept or reject prospective Investors.
Long-term Investment. The General Partner anticipates that the Partnership will
continue to operate the 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 Partnership conducted by an
independent third party based on various assumptions that may or may not occur.
A copy of this valuation will be made available on request. The offering price
of the Units is not, however, necessarily indicative of their value, if any, and
no assurance can be given that the Units, if and when transferable, could be
sold for the offering price or for any amount.
Limitation of General Partner's Liability and Indemnification. The Partnership
Agreement provides that the General Partner will not be liable to the
Partnership or to any Partner for errors in judgment or other acts or omissions
in connection with the Partnership as long as the General Partner, in good
faith, determined such course of conduct was in the best interest of the
Partnership, 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
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of its misfeasance or malfeasance than they would have absent the limitations in
the Partnership Agreement. The Partnership will indemnify the General Partner
against losses sustained by the General Partner in connection with the
Partnership, unless such losses came as a result of the General Partner's gross
negligence or willful misconduct. In the opinion of the SEC, indemnification for
liabilities arising out of the Securities Act is contrary to public policy and
therefore is unenforceable.
Insurance. Prime maintains active policies of insurance for the benefit of
itself and certain affiliated entities covering employee crime, workers'
compensation, business and commercial automobile operations, professional
liability, inland marine, business interruption, real property and commercial
liability risks. These policies include the Partnership, and the General Partner
believes that coverage limits of these policies are within acceptable norms for
the extent and nature of the risks covered. The Partnership is responsible for
its share of premium costs. There are certain types of losses, however, that are
either uninsurable or are not economically insurable. For instance, contractual
liability is generally not covered under Prime's policies. Should such losses
occur with respect to Partnership operations, or should losses exceed insurance
coverage limits, the Partnership could suffer a loss of the capital invested in
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 and the Limited Partners have the option to
purchase all the interest of a Limited Partner who (i) dies, (ii) becomes
incompetent, (iii) becomes insolvent or (iv) acquires a direct or indirect
ownership of an interest in a competing venture. The option purchase price is an
amount equal to the withdrawing 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 as reflected 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. See the form of the Partnership Agreement attached hereto as Appendix A
and "Summary of the Partnership Agreement - Optional Purchase of Limited Partner
Interests."
THE PARTNERSHIP
Fayetteville Lithotripters Limited Partnership - Arkansas I, an Arkansas
limited partnership (the "Partnership") was organized and created under the
Arkansas Uniform Limited Partnership Act (the "Act") on January 17, 1990.
The general partner of the Partnership is Lithotripters, Inc., a North
Carolina corporation (the "General Partner"), and a wholly owned subsidiary
of Prime Medical Services, Inc. ("Prime"). The General Partner currently
holds a 20% interest in the Partnership in its capacity as the general
partner and the existing limited partners (the "Initial Limited Partners")
currently hold the remaining 80% interest in the Partnership as limited
partners (including a 20.66% limited partner interest held by the General
Partner). In the event that
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all 20 Units offered hereby are sold, the General Partner will hold
approximately a 16% general partner interest in the Partnership, the
Initial Limited Partners will hold approximately a 64% limited partner
interest in the Partnership and the Investors who purchase the Units
offered hereby (the "New Limited Partners") will hold an aggregate 20%
interest in the Partnership. The Percentage Interests of the General
Partner and Initial Limited Partners (aggregate) will decrease 0.2% and
0.8%, respectively, for each Unit sold. The principal address of the
Partnership and the General Partner is 2008 Litho Place, Fayetteville,
North Carolina 28034. The telephone number of the Partnership and the
General Partner is (800) 682-7971.
TERMS OF THE OFFERING
The Units and Subscription Price
Fayetteville Lithotripters Limited Partnership - Arkansas I, a limited
partnership formed under the laws of the State of Arkansas, hereby offers
an aggregate of 20 Units of limited partner interest in the Partnership
(the "Units"). Each Unit represents an initial 1% economic interest in the
Partnership. See "Risk Factors - Other Investment Risks - Dilution of
Limited Partners' Interests." Each Investor may purchase not less than one
Unit. The General Partner may, however, in its sole discretion, sell less
than one Unit as a minimum investment and reject in whole or in part any
subscription. The price for each Unit is $16,111 in cash payable at
subscription; however, certain qualified Investors may purchase a portion
of the purchase price through the Limited Partner Loans the Partnership has
arranged with the Bank. See "Terms of the Offering - Limited Partner
Loans." The Proceeds of the Offering will first be used by the Partnership
to pay offering costs and expenses, and the remainder of the proceeds will
be used to recondition the Partnership's Coaches (estimated at $50,000
each) and pay for "loaner" Mobile Lithotripsy Systems during the time the
Partnership's Coaches are being reconditioned (estimated at $35,000 loaner
per month for a two month period). See "Sources and Applications of Funds."
The proceeds of this Offering cannot be calculated until the number of
Units sold has been determined at the Closing. To the extent the proceeds
of the Offering are insufficient to fund the costs described above, 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, however, that Partnership Cash Flow or debt financing will be
available for such purposes. See "Risk Factors - Operating Risks -
Partnership Limited Resources and Risks of Leverage."
Acceptance of Subscriptions
An Investor that pays the full amount of his or her Unit purchase price
with a check at subscription and whose subscription is received and
accepted by the Partnership, will become a Limited Partner in the
Partnership, and his or her subscription funds will be released from escrow
to the Partnership. Acceptance by the General Partner of a subscription of
an Investor that elects to finance a portion of the Unit purchase price
with the proceeds of a Limited Partner Note is conditioned upon the Bank's
approval of such loan. If the financing Investor is otherwise acceptable
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to the Partnership, after receipt of the Bank's approval, the Partnership
will inform the Escrow Agent that it has accepted the Investor's
subscription and the Escrow Agent will release the Loan Documents to the
Bank and the Bank will pay the proceeds from the Limited Partner Loan to
the Partnership. The Investor will become a Limited Partner in the
Partnership at the time the Bank releases the proceeds of his or her
Limited Partner Note to the Partnership. Subscriptions may be rejected in
whole or in part by the Partnership and need not be accepted in the order
received. To the extent the Partnership reduces an Investor's subscription
as provided above, the Investor's cash Unit purchase price, or the
principal amount of his Limited Partner Note, as the case may be, will be
proportionately refunded and reduced. Notice of acceptance of an Investor's
subscription to purchase Units and his Percentage Interest in the
Partnership will be furnished promptly after acceptance of the Investor's
Subscription.
Limited Partner Loans
The purchase price for the Units is payable in cash 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 B. If the prospective Investor wishes to finance a
portion of the purchase price of his Units as provided herein, he must
deliver to the Sales Agent upon submission of his Subscription Packet an
executed Limited Partner Note payable to the Bank and Note Addendum, the
form of which are attached as Exhibit A to the 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 $13,611. 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 to
him if he is approved for a Limited Partner Loan. The Loan and Security
Agreement also
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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 B.
If the prospective Investor is approved by the Bank and is acceptable to
the General Partner, the Escrow Agent will, upon acceptance of the
Investor's subscription by the General Partner, release the Loan Documents
to the Bank and the Bank will pay the proceeds of the Limited Partner Note
to the Partnership to fund a portion of the Investor's Unit purchase. The
prospective Investor will have substantial exposure under the Limited
Partner Note. Regardless of the results of Partnership operations, a
prospective Investor will remain liable to the Bank under his Limited
Partner Note according to its terms. The Bank can accelerate the entire
principal amount of the Limited Partner Note in the event the Bank in good
faith believes the prospect of timely payment or performance by the
prospective Investor is impaired or the Bank otherwise in good faith deems
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."
Subscription Period; Closing
The subscription period will commence on the date hereof and will terminate
at 5:00 p.m., Central time, on December 30, 1998 (the "Closing Date"),
unless sooner terminated by the General Partner or unless extended for an
additional period up to 180 days. See "Plan of Distribution."
Offering Exemption
The Units are being offered and will be sold in reliance on an exemption
from the registration requirements of the Securities Act of 1933, as
amended, provided by Section 4(2) thereof and Rule 506 of Regulation D
promulgated thereunder, as amended, and an exemption from registration
provided by Section 23-42-509(c) of the Arkansas Code of 1987 Annotated, as
amended, and Rule 509.01(B) of the regulations promulgated thereunder, as
amended. The suitability
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standards set forth below have been established in order to comply
with the terms of these offering exemptions.
Suitability Standards
In addition to the suitability requirements discussed below, each
Investor wishing to obtain a Limited Partner Loan must be approved by
the Bank. The Bank has established its own criteria for approving the
credit-worthiness of Investors and has not established objective
minimum suitability standards. The Bank has sole discretion to accept
or reject any Investor.
An investment in the Partnership involves a high degree of financial
risk and is suitable only for persons of substantial financial means
who have no need for liquidity in their investments and who can afford
to lose all of their investment. See "Terms of The Offering - Limited
Partner Loans." An Investor should not purchase a Unit if the Investor
does not have resources sufficient to bear the loss of the entire
amount of the purchase price, including any portion financed. The
General Partner anticipates selling Units only to individual
investors; however, the General Partner reserves the right to sell
Units to entities.
Because of the risks involved, the General Partner anticipates selling
the Units only to Investors residing in Arkansas who it reasonably
believes meet the definition of "accredited investor" as that term is
defined in Rule 501 under the Securities Act, but reserves the right
to sell to a limited number of Investors who are nonaccredited
investors. Certain institutions and the following individuals are
"accredited investors":
(1) An individual whose net worth (or joint net worth with his or her
spouse) exceeds $1,000,000 at the time of subscription;
(2) An individual who has had an individual income in excess of
$200,000 in each of the two most recent fiscal years and who
reasonably expects an individual income in excess of $200,000 in the
current year; or
(3) An individual who has had with his or her spouse a joint income in
excess of $300,000 in each of the two most recent fiscal years and who
reasonably expects a joint income in excess of $300,000 in the current
year.
Investors must also be at least 21 years old and otherwise duly
qualified to acquire and hold partnership interests. The General
Partner reserves the right to refuse to sell Units to any person,
subject to Federal and applicable state securities laws.
Each Investor must make an independent judgment, in consultation with
his own counsel, accountant, investment advisor or business advisor,
as to whether an investment in the Units is advisable. The fact that
an Investor meets the Partnership's suitability standards should in no
way be taken as an indication that an investment in the Units is
advisable for that Investor.
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It is anticipated that suitability standards comparable to those set
forth above will be imposed by the Partnership in connection with
resales, if any, of the Units. Transferability of Units is severely
restricted by the Partnership Agreement and the Subscription
Agreement. See "Summary of the Partnership Agreement."
Investors who wish to subscribe for Units must represent to the
Partnership that they meet the foregoing standards by completing and
delivering to the Sales Agent a Purchaser Questionnaire in the form
included in the Subscription Packet. Each Purchaser Representative, if
any, acting on behalf of an Investor in connection with this offering
must complete and deliver to the Sales Agent a Purchaser
Representative Questionnaire (a copy of which is available upon
request to the General Partner).
How to Invest
Investors who meet the qualifications for investment in the
Partnership and who wish to subscribe for Units may do so 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
(in the form included in the Subscription Packet), or in lieu thereof,
substituting the Investor's own personal executed financial statement,
as long as such substitute statement contains the same information as
in the form provided, 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 Investor is financing of a portion of the Unit purchase
price with 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 Bank
Commitment);
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f. If the Investor is financing of a portion of the Unit purchase
price with a Limited Partner Loan, by completing and signing (but not
dating) the Loan and Security Agreement (the form of which is included
in the Subscription Packet and is attached as Exhibit B to the Bank
Commitment);
g. If the Investor is financing of a portion of the Unit purchase
price with 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 Bank
Commitment);
h. If the Investor is financing a portion of the Unit purchase price
with a Limited Partner Loan, by completing and signing two copies of
the UCC-1 (the form of which is included in the Subscription Packet);
and
i. By delivering or mailing all of the foregoing together with a check
in the amount of $16,111 per Unit subscribed for, or $2,500 per Unit
subscribed for if the investor is financing a portion of the Unit
purchase price through a Limited Partner Loan, payable to
"First-Citizens as Escrow Agent for Litho L.P.-Arkansas I" to the
Sales Agent at 2008 Litho Place, Fayetteville, North Carolina 28304.
All information provided by Investors, including the information in
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.
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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 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 Interests."
PLAN OF DISTRIBUTION
Subscriptions for Units will be solicited by MedTech Investments,
Inc., the Sales Agent, which is an Affiliate of the General Partner.
The Sales Agent has entered into a Sales Agency Agreement with the
Partnership pursuant to which the Sales Agent has agreed to act as
exclusive agent for the placement of the Units on a "best efforts" any
or all basis. The Sales Agent is not obligated to purchase any Units.
The Sales Agent is a North Carolina Corporation that was formed on
December 23, 1987, and became a member of the National Association of
Securities Dealers on March 15, 1988. The Sales Agent will be engaged
in other similar offerings on behalf of the General Partner and its
Affiliates during the pendency of this offering and in the future. The
Sales Agent is a wholly owned subsidiary of Prime, which also owns all
the stock of the General Partner. Investors should note the material
relationship between the Sales Agent and the General Partner, and are
advised that the relationship creates conflicts in the Sales Agent's
performance of its due diligence responsibilities under the Federal
securities laws.
As compensation for its services, the Sales Agent will receive a
commission equal to $250 for each Unit sold. No other commissions will
be paid in connection with this Offering. Subject to the conditions as
provided above, the Sales Agent may be reimbursed by the Partnership
for its out-of-pocket expenses associated with the sale of the Units
in an amount not to exceed $7,500. 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.
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The subscription period will commence on the date hereof and will
terminate at 5:00 p.m., Little Rock, Arkansas time, on December 30,
1998, (or earlier, in the discretion of the General Partner), unless
extended at the discretion of the General Partner for an additional
period not to exceed 180 days.
The Partnership seeks by this Offering to sell a maximum of 20 Units
for a maximum of an aggregate of $322,220 in cash ($317,220 net of
Sales Agent Commissions). The Partnership has set no minimum number of
Units to be sold in this Offering. The subscription funds, and Loan
documents, if any, received from each Investor will be held in escrow
(which, in the case of cash subscription funds, shall be held in an
interest bearing escrow account with the Bank) until either the
Investor's subscription is accepted by the Partnership (and approved
by the Bank in the case of financed purchases of Units), the
Partnership rejects the subscription or the Offering is terminated.
Upon the receipt and acceptance of an Investor's subscription, which,
if the Investor intends to finance a portion of the Unit purchase
price with a Limited Partner Loan, will be conditioned upon the Bank's
approval of the Loan, the Investor will be admitted to the Partnership
as a Limited Partner. Upon admission as a Limited Partner, the
Investor's subscription funds will be released from escrow to the
Partnership, and the Loan Documents, if any, will be released to the
Bank which will pay the proceeds from the Limited Partner Note to the
Partnership. In the event a subscription is not accepted, all
subscription funds (without interest), the Loan Documents and other
subscription documents held in escrow will be promptly returned to the
rejected Investor. The Offering will terminate on December 30, 1998,
unless it is sooner terminated by the General Partner, or unless
extended for an additional period not to exceed 180 days. See "Terms
of the Offering - Subscription Period; Closing."
BUSINESS ACTIVITIES
General
The Partnership was formed to (i) acquire a Mobile Lithotripsy System
and operate it at various locations primarily in Arkansas, (ii)
improve the provision of health-care in the Partnership's service area
by taking advantage of both the technological innovations inherent in
the LithostarTM and the Partnership's quality assurance and outcome
analysis programs, and (iii) make cash distributions to its Partners
from revenues generated by the operation of the Mobile Lithotripsy
System. The Partnership owns and operates two Mobile Lithotripsy
Systems in the Service Area and has contracted with 17 hospitals, and
medical centers and ambulatory surgical centers to provide lithotripsy
services for a per procedure fee.
Treatment Methods for Kidney Stone Disease
Urolithiasis, or kidney stone disease, affects an estimated 600,000
persons per year in the United States. The exact cause of kidney stone
formation is unclear, although it has been attributed to diet,
climate, metabolism and certain medications. Approximately 75% of all
urinary
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stones pass spontaneously, usually within one to two weeks, and
require little or no clinical or surgical intervention. All other
kidney stones, however, require some form of medical or surgical
treatment. A number of methods are currently used to treat kidney
stones. These methods include drug therapy, cystoscopic procedures,
endoscopic procedures, laser procedures, open surgery, percutaneous
lithotripsy and extracorporeal shock wave lithotripsy. The type of
treatment a urologist chooses depends on a number of factors such as
the size of the stone, its location in the urinary system and whether
the stone is contributing to other urinary complications such as
blockage or infection. The extracorporeal shock wave lithotripter,
introduced in the United States from West Germany in 1984, has
dramatically changed the course of kidney stone disease treatment. The
General Partner estimates that currently up to 95% of all kidney
stones that require treatment can be treated by lithotripsy.
Lithotripsy involves the use of shock waves to disintegrate kidney
stones noninvasively.
The LithostarTM
The LithostarTM was developed as a cooperative venture between Siemens and
the Urological Clinic at Johannes Gutenberg University in Mainz, West
Germany. As a part of this venture, a LithostarTM prototype was
installed in March 1986 at the Urological Clinic at the University of
Mainz with successful results. On November 18, 1987 the LithostarTM
was unanimously recommended for approval by the FDA's advisory panel
of experts for urology devices. On September 30, 1988 the LithostarTM
received FDA premarket approval for use in the United States for renal
lithotripsy. On April 18, 1989, the FDA approved the LithostarTM for
mobile lithotripsy. On July 1, 1996, the FDA approved a new higher
intensity shock-head system for the LithostarTM which has since been
installed in both of the Partnership's LithostarsTM. Currently, the
General Partner estimates that more than 400 LithostarTM systems are
performing lithotripsy procedures in over 20 countries throughout the
world. All components of the LithostarTM are manufactured by Siemens,
a diversified multinational company.
The LithostarTM was designed with a view towards substantially improving
early lithotripsy technology. See "Proposed Activities - Treatment
Methods for Kidney Stone Disease - Extracorporeal Shock-Wave
Lithotripsy." Technological improvements incorporated into the
LithostarTM include an improved work station, a shock-wave component
that has eliminated the need for both water bath treatment and
disposable electrodes, and an excellent stone localization and imaging
system. Based upon its experience in its affiliated lithotripsy
ventures, the General Partner believes that most patients can be
treated with the LithostarTM without anesthesia of any kind. The
General Partner also believes that LithostarsTM upfitted with the
higher intensity shock-head system experience somewhat shorter
treatment durations.
Based upon its experience with 30 LithostarsTM in other limited
partnerships sponsored by the General Partner and its Affiliates, the
General Partner has found that the LithostarTM can crush most kidney
stones without anesthesia, cystoscopy or the insertion of ureteral
catheters. Because of the General Partner's belief in the superior
imaging of the LithostarTM, the General Partner believes that
lithotripsy with the LithostarTM provides for treatment of lower
ureteral
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stones, even impacted stones, thereby rendering urethroscopy
practically obsolete as a treatment of first choice.
The Calumet Coaches
The Calumet Coach is a self-propelled motor vehicle manufactured by the
Calumet Coach Company of Calumet City, Illinois. The Partnership's
Calumet Coach which houses its first LithostarTM was first placed in
operation by the Partnership in 1990 and its Calumet Coach which
houses the second LithostarTM was first placed in operation in 1982
and acquired by the Partnership in 1996. The Calumet Coach Company has
manufactured self-propelled coaches upfitted for the provision of
various medical services for since the early 1980's. It is estimated
by the manufacturer that it currently has over 200 self-propelled
medical service coaches in operation. The coaches have housed CT and
other imaging equipment, as well as lithotripsy machines of
manufacturers other than Siemens.
The Calumet Coach has been completely upfitted for the LithostarTM and
its clinical operations. In the procedure mode, with slide-outs
expanded, the interior square footage is approximately 276 square
feet. The coach is easy to drive and can be operated by a radiology
technician, thus there is no need for an additional or special driver.
Service for the Calumet Coaches is obtained on an as-needed basis. The
General Partner estimates that expenditures for maintenance and repair
have been incurred at a rate of approximately $15,000 per year per
Coach.
Anticipated Partnership Expenditures
Both of the Partnership's Coaches are scheduled to be reconditioned in
1999 and 2000, respectively at an estimated cost of $50,000 per Coach,
which amount would be paid to AK Associates, an Affiliate of the
General Partner engaged in the selling and refurbishment of medical
equipment trailers and coaches. See "Compensation and Reimbursement to
the General Partner and its Affiliates." Reconditioning of a Coach
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 Coach is being refurbished, the Partnership
would likely rent a replacement Mobile Lithotripsy System from the
General Partner or its Affiliates at an estimated per month rate of
$35,000. Any necessary Coach maintenance is likely to be performed by
an Affiliate of the General Partner at commercially reasonable rates.
See "Compensation and Reimbursement to the General Partner and its
Affiliates."
Acquisition of Additional Assets
If in the future the General Partner determines that it is in the best
interest of the Partnership to acquire (i) an additional Mobile
Lithotripsy System or (ii) any other assets related to
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the provision of lithotripsy services, the General Partner may,
without the consent of the Limited Partners, establish reserves or
borrow funds on behalf of the Partnership to acquire such assets, and
may use Partnership assets and revenues to secure and repay such
borrowings. Any additional borrowing by the Partnership will serve to
increase the risks associated with leverage.
Hospital Contracts
The Partnership has entered into Hospital Contracts with 17 Contract
Hospitals to operate the Mobile Lithotripsy Systems at the Contract
Hospitals. Most of the Hospital Contracts have an initial term of one
year and automatically renew for successive one-year periods unless
the Partnership or the hospital delivers to the other party written
notice of its decision not to renew the agreement at least 60 days
prior to the anticipated termination date. Most of the Hospital
Contracts are terminated without cause by either party on short
notice, generally 90 days or less. The Contract Hospitals are:
AMI National Park Medical Center, Hot Springs
BEC Surgery Center, Hot Springs
Baptist Medical Center, Little Rock
Baptist Memorial Medical Center, Little Rock
Baxter County Regional Hospital, Mountain Home
Conway Regional Hospital, Conway
Jefferson Regional Medical Center, Pine Bluff
The Medical Center of South Arkansas, El Dorado
Ouachita County Hospital, Camden
Physicians Surgery Center, Little Rock
Rebsaman Regional Medical Center, Jacksonville
Saline Memorial Hospital, Benton
Sparks Regional Medical Center, Fort Smith
St. Bernard's Regional Medical Center, Jonesboro
St. Joseph's Regional Health Center, Hot Springs
White County Memorial Hospital, Searcy
White River Medical Center, Batesville
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The Hospital Contracts require each hospital to provide the Mobile
Lithotripsy Systems with site pad space, utility hookups, nonphysician
medical personnel and billing and accounting services in exchange for
the right to collect a fee from each patient who undergoes a
Lithotripsy procedure at that hospital. The General Partner is
attempting to negotiate similar agreements with additional hospitals
or outpatient surgical centers located in Arkansas.
The Partnership or hospital charge a lithotripsy technology fee to
each patient treated with a LithostarTM which is separate and apart
from any professional fee charged by the physician who performs the
lithotripsy procedure. The technology fee received from privately
insured patients averages approximately $3,500 while the fee received
from government program patients is significantly less. There is no
assurance that these fee levels can be maintained as the lithotripsy
fees charged by the Partnership or hospitals are largely dependent
upon the amount of reimbursement private health care insurers will
allow for this procedure. In addition, most of the Hospital Contracts
provide that the fee charged to public program payors by the
Partnership for use of the lithotripter must at all times be equal to
or less than the lowest amount the Partnership charges any privately
insured patient. See "Risk Factors - Dependence on Insurance
Reimbursement."
Management
The Partnership has entered into a management agreement (the
"Management Agreement") with the General Partner whereby the General
Partner is obligated to supervise and coordinate the management and
administration of the operation of the Mobile Lithotripsy Systems on
behalf of the Partnership in exchange for a monthly management fee
equal to the greater of 7.5% of Partnership Cash Flow per month or
$8,000 per month. See "Compensation and Reimbursement to the General
Partner and its Affiliates." The General Partner's services under the
Management Agreement include training physicians in the proper use of
the LithostarsTM, monitoring technological developments in renal
lithotripsy and advising the Partnership of these developments,
arranging continuing education programs for qualified physicians who
use the LithostarsTM and providing advertising, billing, accounts
collection, equipment maintenance, medical supply inventory and other
incidental services necessary for the efficient operation of the
Mobile Lithotripsy Systems. Costs incurred by the General Partner in
performing its duties under the Management Agreement are the
responsibility of the Partnership. The General Partner's engagement
under the Management Agreement is as an independent contractor and
neither the Partnership nor its Limited Partners have any authority or
control over the method or manner in which the General Partner
performs its duties under the Management Agreement. The Management
Agreement is in the first 5-year renewal term and will be up for a
second renewal for an additional five-year term in 2000. Thereafter,
it will be automatically renewed for an additional term unless
terminated by the Partnership or the General Partner.
Employees
The Partnership employs as full time employees a total of four
registered technicians and four registered nurses.
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THE GENERAL PARTNER
General. The General Partner of the Partnership is Lithotripters,
Inc., a North Carolina corporation formed in November 1987 for the
purpose of sponsoring medical service limited partnerships. The
General Partner was founded by William R. Jordan, M.D. and became a
wholly owned subsidiary of Prime in 1996. See "Conflicts of Interest"
and "Prior Activities." The principal executive office of the General
Partner is located at 2008 Litho Place, Fayetteville, North Carolina
28304, and its telephone number is (800) 682-7971.
Management. The following table sets forth the names and respective
positions of the individuals serving as executive officers and
directors of the General Partner, many of whom were shareholders of
the General Partner prior to its acquisition by Prime and/or are
current shareholders and/or management personnel of Prime.
Name Office
Joseph Jenkins, M.D. President, Chief Executive Officer
and Director
Kenneth S. Shifrin Director
W. Alan Terry Chief Financial Officer
Cheryl Williams Vice President and Director
Philip J. Gallina Secretary and Treasurer
Supervision of the day-to-day management and administration of the
Partnership is the responsibility of the General Partner. The General
Partner itself is managed by a three-member Board of Directors
composed of Dr. Jenkins, Mr. Shifrin and Ms. Williams. The General
Partner is a wholly-owned subsidiary of Prime.
Descriptions of the background of the executive officers and directors
of the General Partner appear below.
Joseph Jenkins, M.D. has been President of Prime since April 1996.
From May 1990 until December 1991, Dr. Jenkins was a Vice President of
the General Partner and previously practiced urology in Washington,
North Carolina. Dr. Jenkins has been President of the General Partner
since 1992 and was recently elected to is Board of Directors. Dr.
Jenkins is a board certified urologist and is a founding member, the
immediate past-president and currently a Director of the American
Lithotripsy Society.
Kenneth S. Shifrin has been Chairman of the Board and a Director of
Prime since October 1989 and was recently elected a Director of the
General Partner following Prime's acquisition of all of the General
Partner's stock. Mr. Shifrin also has served in various capacities
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with American Physicians Service Group, Inc. ("APS") since February
1985, and is currently Chairman of the Board and Chief Executive
Officer of APS.
W. Alan Terry has been Chief Financial Officer of the General Partner
since 1991. In August, 1986, Mr. Terry 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 General Partner
and served in that capacity until April 1996.
Cheryl Williams is a Director and Vice President of the General
Partner. Ms. Williams has been Chief Financial Officer, Vice
President-Finance and Secretary of Prime since October 1989. Ms.
Williams was Controller of Fairchild Aircraft Corporation from
August 1988 to October 1989. From 1985 to 1988, Ms. Williams served as
the Chief Financial Officer of APS Systems, Inc.
Philip J. Gallina recently became the Secretary and Treasurer of the
General Partner, having previously served as a Vice President since
1989. Mr. Gallina is a Certified Public Accountant licensed in the
state of Pennsylvania. From 1980 through February 1989, Mr. Gallina
served as Plant Controller for the Westinghouse Motor Control and
Enclosed Control Product Lines. Mr. Gallina is also a Director, the
Vice President, the Treasurer and the Secretary of MedTech
Investments, Inc., the Sales Agent.
COMPENSATION AND REIMBURSEMENT TO THE
GENERAL PARTNER AND ITS AFFILIATES
The following summary describes the types and, where determinable, the
estimated amounts of reimbursements, compensation and other benefits
the General Partner and its Affiliates will receive in connection with
the continued operation and management of the Partnership and the
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 "Business Activities - Management and Administration"
and "Plan of Distribution."
1. Management Fee. Pursuant to the Management Agreement, the General
Partner has contracted with the Partnership to supervise the
management and administration of the day-to-day operations of the
Partnership's lithotripsy business for a monthly fee equal to the
greater of $8,000 or 7.5% of Partnership Cash Flow per month. All
costs incurred by the General Partner in performing its duties under
the Management Agreement are the responsibility of, and are paid
directly or reimbursed by, the Partnership. The General Partner is the
management agent for various affiliated lithotripsy ventures. As a
consequence, many of the General Partner's employees provide various
management and administrative services for numerous ventures,
including the Partnership.
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In order to properly allocate the costs of the General Partner's
employees and other overhead expenses among the entities for which
they provide services, such costs 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 and
overhead costs among various entities results in significant costs
savings for the Partnership. The management fee for any given month is
payable on or before the 30th day of the next succeeding month. The
Management Agreement is in its first five-year renewal term which
expires in 2000. The Management Agreement will be automatically
renewed for up to two additional successive five-year terms unless it
is earlier terminated by the Partnership or the General Partner. The
General Partner is reimbursed by the Partnership for all of its
out-of- pocket costs associated with the operation of the Partnership
and the Mobile Lithotripsy Systems, and the Partnership will pay or
reimburse to the General Partner all expenses related to this
Offering. No other fees or compensation will be payable to the General
Partner or its Affiliates for managing the Partnership other than the
management fee payable to the General Partner as provided in the
Management Agreement. The Partnership may, however, contract with the
General Partner or its Affiliates to render other services or provide
materials to the Partnership provided that the compensation is at the
then prevailing rate for the type of services and/or materials
provided.
2. Partnership Distributions. In its capacity as general partner of
the Partnership, the General Partner is entitled its distributable
share (20%, before dilution) of Partnership Cash Flow, Partnership
Sales Proceeds and Partnership Refinancing Proceeds as provided by the
Partnership Agreement. The General Partner also owns a 20.66% (before
dilution) limited partner interest in the Partnership and is entitled
to Distributions on account of such interest. See "Summary of the
Partnership Agreement - Profits, Losses and Distributions" and the
Partnership Agreement attached as Appendix B.
3. Sales Commissions. The Sales Agent, a wholly-owned subsidiary of
Prime, has entered into a Sales Agency Agreement with the Partnership
pursuant to which the Sales Agent has agreed to sell the Units on a
"best efforts" any or all basis. As compensation for its services, the
Sales Agent will receive a commission equal to $250 for each Unit sold
(up to an aggregate of $5,000). If the offering is successful, the
Sales Agent will also be reimbursed by the Partnership for its
out-of-pocket expenses associated with its sale of the Units in an
amount not to exceed $7,500. See "Plan of Distribution" and "Conflicts
of Interest."
4. Reconditioning of Coaches. It is anticipated that the General
Partner will cause the Partnership to contract with AK Associates, an
Affiliate of the General Partner, to recondition each of the
Partnership's Coaches in 1999 and 2000, respectively, at an estimated
per Coach cost of $50,000. In addition, it is anticipated that the
General Partner will cause the Partnership to contract with the
General Partner or its affiliates to rent "loaner" Mobile Lithotripsy
Systems during the time the Partnership's Coaches are being
reconditioned at an estimated per month price of $35,000 per unit.
Reconditioning is expected to take six to eight weeks. Accordingly, it
is anticipated that the Partnership will pay an aggregate of $140,000
to the General Partner and its Affiliates for loaner units over the
next two years. The Partnership may require additional loaner units or
rental time in the event any of the Partnership's Mobile Lithotripsy
Systems experience
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substantial down time for other maintenance or repairs. See "Business
Activities - Anticipated Partnership Expenditures."
5. Loans. The General Partner or its Affiliates will also receive
interest on loans, if any, made by them to the Partnership. See
"Conflicts of Interest." Neither the General Partner nor any of its
Affiliates are, however, obligated to make loans to the Partnership.
While the General Partner does not anticipate that it would cause the
Partnership to incur indebtedness unless cash generated from
Partnership operations were at the time expected to enable repayment
of such loan in accordance with its terms, lower than anticipated
revenues and/or greater than anticipated expenses could result in the
Partnership's failure to make payments of principal or interest when
due under such a loan and the Partnership's equity being reduced or
eliminated. In such event, the Limited Partners could lose their
entire investment.
CONFLICTS OF INTEREST
The operation of the Partnership involves numerous conflicts of
interest between the Partnership and the General Partner and its
Affiliates. Because the Partnership is operated by the General
Partner, such conflicts are not resolved through arm's length
negotiations, but through the exercise of the judgment of the General
Partner consistent with its fiduciary responsibility to the Limited
Partners and the Partnership's investment objectives and policies. The
General Partner, its Affiliates and employees of the General Partner
will in good faith continue to attempt to resolve potential conflicts
of interest with the Partnership, and the General Partner will act in
a manner that it believes to be in or not opposed to the best
interests of the Partnership.
The General Partner and its Affiliates will receive management fees
and broker-dealer sales commissions in connection with the business
operations of the Partnership and the sale of the Units that will be
paid regardless of whether any sums hereinafter are distributed to
Limited Partners. None of such fees, compensation and benefits has
been determined by arm's length negotiations. In addition, the
Partnership may contract with the General Partner or its Affiliates to
render other services or provide materials to the Partnership provided
that the compensation is at the then prevailing rate for the type of
services and/or materials provided. It is anticipated that the General
Partner and/or its Affiliates will receive fees for reconditioning the
Partnership's Coaches and rental payments in connection with the
provision of loaner Mobile Lithotripsy Systems during the time the
Coaches are being reconditioned. The General Partner will also receive
interest on loans, if any, it makes to the Partnership. See
"Compensation and Reimbursement to the General Partner and its
Affiliates."
The General Partner and its Affiliates will devote as much of their
time to the business of the Partnership as in their judgment is
reasonably required. Principals of 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,
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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 employees of the General Partner
engage in medical service activities for their own accounts. See
"Prior Activities." The General Partner may serve as a general partner
of other limited partnerships that are similar to the Partnership and
does not intend to devote its entire financial, personnel and other
resources to the Partnership. Except as 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. An affiliate of the General Partner, Prime Lithotripter
Operations, Inc. d/b/a Tennessee Valley Lithotripter, operates a
lithotripsy services venture that provides services to Arkansas
Methodist Hospital in Paragould, Arkansas. The General Partner is
planning other limited partnership offerings that would operate
lithotripsy businesses in other states. See "Competition."
The Sales Agent is MedTech Investments, Inc., which is an Affiliate of
the General Partner. Because of the Sales Agent's affiliation with the
General Partner, there are conflicts in the Sales Agent's performance
of its due diligence responsibilities under the federal securities
laws. See "Plan of Distribution."
The interests of the Limited Partners have not been separately
represented by independent counsel in the formulation of the
transactions described herein. The attorneys and accountants who have
performed and will perform services for the Partnership were retained
by the General Partner, and have in the past performed and are
expected in the future to perform similar services for the General
Partner, and Prime.
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER
The General Partner is accountable to the Partnership as a fiduciary
and consequently must exercise good faith in handling Partnership
affairs. This is a rapidly developing and changing area of the law and
Limited Partners who have questions concerning the duties of the
General Partner should consult with their counsel. Under the
Partnership Agreement, the General Partner and its Affiliates have no
liability to the Partnership or to any Partner for any loss suffered
by the Partner ship that arises out of any action or inaction of the
General Partner or its Affiliates if the General Partner or its
Affiliates, in good faith, determined that such course of conduct was
in the best interest of the Partnership and such course of conduct did
not constitute gross negligence or willful misconduct of the General
Partner or its Affiliates. Accordingly, Limited Partners have a more
limited right of action than they otherwise would absent the
limitations set forth in the Partnership Agreement. The General
Partner and its Affiliates will be indemnified by the Partnership
against any losses, judgments, liabilities, expenses and amounts paid
in settlement of any claims sustained by them in connection with the
Partnership, provided that the same were not the result of gross
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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.
Affiliated Competition
Affiliates of the General Partner presently provide mobile lithotripsy
services in Arkansas and in surrounding states. Prime Lithotripter
Operations, Inc., d/b/a Tennessee Valley Lithotripter, provides mobile
lithotripsy services at Arkansas Methodist Hospital in Paragould,
though its primary operations are in Tennessee. Other Affiliates of
the General Partner provide mobile lithotripsy services in the states
surrounding Arkansas.
Other Competition
The Partnership faces competition from other lithotripsy services
offered in the geographic area served by the Partnership. To the best
knowledge of the General Partner, Medstone provides a mobile
lithotripter at University Hospital of Arkansas in Little Rock,
Washington Regional Medical Center in Fayetteville, at Central
Arkansas Hospital in Searcy, Crawford Memorial Hospital in Van Buren,
Bates Medical Center in Bentonville, White River Medical Center in
Batesville (where the Partnership also operates a Mobile Lithotripsy
System) and in Texarkana. A mobile lithotripter (brand unknown)
provide services at North Arkansas Medical Center in Harrison. A
Dornier MFL-5000 provides fixed-base services at St. Vincent's in
Little Rock. Tenet Hospital provides a mobile Lithostar at St. Mary's
Regional Medical Center in Russellville and at Methodist Hospital in
Jonesboro. A mobile Lithostar provides services at Baxter County
Regional Hospital in Mountain Home (where the Partnership also
operates its Mobile Lithotripsy System). Other hospitals, ambulatory
surgery centers or other healthcare facilities in and around the
Service Area, including Missouri, may provide or have access to
lithotripsy services, whether fixed-base or mobile.
Other hospitals in the Service Area served by the Partnership may
operate lithotripters which are not extracorporeal shock-wave
lithotripters but rather use lasers or are electrohydraulic
lithotripters. The General Partner believes both these machines are
qualitatively inferior to the
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LithostarTM because the machines are limited to treatment of stones in
the ureter and because anesthesia is required prior to treatment. The
LithostarTM can be used on stones in locations other than the ureter
and no anesthesia is required generally. See "Proposed Activities -
Treatment Methods for Kidney Stone Disease".
The General Partner is generally unfamiliar with the cost of the
lithotripsy procedures offered by the Partnership's competitors. The
General Partner believes the Partnership has a competitive advantage
over many competitors because the LithostarTM is technologically
superior to many other lithotripters. This competitive advantage is
further enhanced by the General Partner's expertise in training
physicians in the low-intensity lithotripsy technique. See "Proposed
Activities - Description of the LithostarTM".
There is no assurance that new competing lithotripsy clinics will not
open in the future or that innovations in lithotripters or other
treatments of kidney stone disease will not make the LithostarTM
competitively obsolete. See "Risk Factors - Operating Risks -
Technological Obsolescence". In addition, the General Partner and its
Affiliates are not restricted from engaging in lithotripsy ventures
unassociated with the Partnership which may compete with the
Partnership.
The General Partner recently proposed to the Limited Partners for
approval an amendment to the Partnership Agreement designed to expand
the prohibition on competition by Limited Partners; however, not
enough Limited Partners voted to adopt the amendment, and the General
Partner withdrew it.
Siemens is under no obligation to the General Partner or the Partnership to
refrain from selling LithostarTM systems to urologists, hospitals or
other persons for use in Arkansas 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 services. Lithotripters can be obtained
from manufacturers other than Siemens. The General Partner is familiar
with many of the lithotripters offered by other manufacturers and
believes that while some may be offered for a lower purchase price
than the LithostarTM, their higher operating costs, particularly with
respect to electrode replacement costs not present with the
LithostarTM, make them more expensive than the LithostarTM in the long
run. Potential competitors also have access to newer and less
expensive lithotripters, including transportable models which are
capable of more efficiently serving multiple sites. Many potential
competitors of the Partnership, including hospitals and medical
centers, have financial resources, staffs and facilities substantially
greater than those of the Partnership and of the General Partner.
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REGULATION
Federal Regulation
The Partnership is 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 improvement,
loss of reimbursement, 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. The Partnership will be subject to federal government
oversight as the Partnership will seek reimbursement for its services
to patients who are beneficiaries of the Medicare and Medicaid
programs. Medicare reimbursement policies are statutorily created and
are regulated by the federal government. Currently, the Medicare
program pays for renal lithotripsy services under Part A (inpatient
hospital service) and Part B (outpatient and physician services)
benefits to the beneficiary.
Medicare has adopted a prospective payment, diagnostic-related
grouping ("DRG") based reimbursement system for Part A inpatient
hospital services. A DRG has been established for extracorporeal shock
wave lithotripsy services for renal kidney stones. The value of the
DRG, and thus the amount of reimbursement payable for the
nonprofessional service (nonphysician) component of the lithotripsy
service, is adjusted for various factors including, among others,
whether the facility is located in an urban area, local labor cost
indices and case-mix for the particular hospital or other facility at
which the service is provided. All of these factors are subject to
periodic recalculation and change depending upon events outside the
control of the Partnership. The General Partner believes that the
Partnership's lithotripsy procedures will not generally be subject to
the current DRG program because the DRG program applies only to
inpatient procedures, and lithotripsy procedures can be performed on
an outpatient basis for most patients.
The Balanced Budget Act of 1997 required HCFA to establish a
prospective payment system for outpatient procedures. 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 adjustment in a fashion similar to
the adjustments for inpatient reimbursement discussed in the preceding
paragraph. The proposed regulations state 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 will have an adverse
effect on the Partnership's revenues.
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
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effective date has been postponed indefinitely for reasons unrelated
to lithotripsy coverage. However, the proposed rules' commentary
discusses the history of attempts by HCFA several years ago to
authorize Medicare reimbursement for lithotripsy at ambulatory surgery
centers. These attempts (in 1990 and 1991) were enjoined by federal
courts in litigation initiated by the American Lithotripsy Society,
which challenged 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 the General
Partner's typical charges for the procedure. Medicare reimbursement is
not expected to constitute more than one-third of the Partnership's
revenues. However, the Medicare program has become an industry leader
in setting reimbursement standards which influence private insurance
programs. Therefore, implementation of the proposed outpatient
prospective payment system or ambulatory surgery center reimbursement
may negatively affect reimbursement by private insurance programs,
which 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 program in Arkansas is 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 Arkansas Medicaid program currently provides
reimbursement for lithotripsy services. The federal Personal
Responsibility and Work Opportunity Reconciliation Act of 1996
requires state health plans, such as the Arkansas Medicaid program, to
limit Medicaid coverage for certain otherwise eligible persons. The
General Partner does not believe this legislation will have a
significant impact on the Partnership's revenues. In addition, federal
regulations permit state health plans to limit the provision of
services based upon such criteria as medical necessity or other
criteria identified in utilization or medical review procedures. The
General Partner does not know whether the Arkansas Medicaid program
has taken or will take such steps.
Self-Referral Restrictions. Health care entities which seek
reimbursement for services covered by Medicare or Medicaid are subject
to federal regulation restricting referrals by
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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.
Section1395nn)("Stark II"). Lithotripsy services were not specifically
identified as a designated health service by this legislation, but the
prohibition includes any service which is provided to an individual
who is registered as an inpatient or outpatient of a hospital under
proposed regulations discussed below. Lithotripsy services provided by
the Partnership to Medicare and Medicaid patients are billed by the
contracting hospital in its name and under its Medicare and Medicaid
program provider numbers. Accordingly, these lithotripsy services
would likely be considered inpatient or outpatient services under
Stark II.
Following the passage of the Stark II legislation effective January 1,
1995, the General Partner determined that the statute did not apply to
the Partnership's lithotripsy services. Stark II applies only to
ownership interests in the entity that "furnishes" the designated
health care service. The physician-investors and the Partnership will
not have an ownership interest in any provider hospitals which offer
the lithotripsy services to the patients on an inpatient or outpatient
basis. See 42 U.S.C. Section 1395nn(a)(1)(A). Thus, by referring a
patient to a hospital offering the service, the physician-investors
will not be making a referral to an entity in which they maintain an
ownership interest for purposes of the application of Stark II.
This interpretation adopted by the General Partner was consistent with
the informal view of the General Counsel's Office of the U.S.
Department of Health and Human Services. Based upon this reasonable
interpretation of Stark II, by referring a patient to a hospital
furnishing the outpatient lithotripsy services "under arrangements"
with the Partnership, a physician investor in the Partnership is not
making a referral to an entity (the hospital) in which he or she has a
financial relationship.
On January 9, 1998, the Health Care Financing Administration ("HCFA"),
the federal agency responsible for administering the Medicare program,
published proposed regulations interpreting the Stark II statute (the
"Proposed Stark II Regulations"). The Proposed Stark II Regulations
and HCFA's accompanying commentary apply the physician referral
prohibitions of Stark II to the Partnership's typical practice of
contracting "under arrangements" with hospitals for treatment and
billing of Medicare and Medicaid patients. Under the Proposed Stark II
Regulations, physician Limited Partner referrals of Medicare and
Medicaid patients to contracting hospitals would be prohibited because
the Partnership is regarded as an entity that "furnishes" inpatient
and outpatient hospital services. HCFA, however, acknowledges in its
commentary to the Proposed Stark II Regulations that physician
overutilization of lithotripsy is unlikely and specifically solicits
comments on whether there should be a regulatory exception for
lithotripsy. HCFA has received a substantial volume of comments in
support of a regulatory exception for lithotripsy. HCFA
representatives have informally acknowledged to representatives of the
General Partner that some form of regulatory relief for lithotripsy
may be forthcoming; however, no assurances can be made that such will
be the case.
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At the present time the Stark II regulations are only proposed, and
HCFA has solicited public comments on them. The General Partner cannot
predict when final regulations will be issued or the substance of the
final regulations, but the interpretive provisions of the Proposed
Stark II Regulations may be viewed as HCFA's interim position until
final regulations are issued.
If the Proposed Stark 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 Stark II statute), then the
Partnership may be given the opportunity to bring its operations into
compliance. In the event the General Partner is unable to devise a
plan pursuant to which the Partnership may operate in compliance with
Stark II and its final regulations, the General Partner is obligated
under the Partnership Agreement either (i) to purchase the Investment
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 Stark II Regulations as final
or a reviewing court's interpretation of the Stark II statute in
reliance on the Proposed Stark II Regulations and in a manner adverse
to the Partnership operations would mean that the Partnership and its
physician Limited Partners are in violation of Stark 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.
The General Partner will continue to work through the American
Lithotripsy Association to encourage the adoption of legislation
supportive of urologists' ability to lawfully maintain ownership
interests in ventures that provide lithotripsy services to all of
their patients. Additionally, the General Partner will continue to
carefully review the Proposed Stark II Regulations and accompanying
HCFA commentary, and explore other alternative plans of operations
that would allow the Partnership to operate in compliance with Stark
II and its final regulations.
Fraud and Abuse. The provisions of the federal Social Security Act
addressing illegal remuneration (the "Anti-Kickback Statute") prohibit
providers and others from soliciting, receiving, offering or paying,
directly or indirectly, any remuneration in return for either making a
referral for a Medicare, Medicaid or CHAMPUS covered service or
ordering, arranging for or recommending any such covered service.
Violations of the Anti-Kickback Statute may be punished by a fine of
up to $25,000 or imprisonment for up to five (5) years, or both. In
addition, violations may be punished by substantial civil penalties
and/or exclusion from the Medicare and Medicaid programs. Regarding
exclusion, the Office of Inspector General ("OIG") of the Department
of Health and Human Services may exclude a provider from participation
in the Medicare program for a 5-year period upon a finding that the
Anti-Kickback Statute has been violated. After OIG
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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. v. Greber, 760 F.2d 68 (1985).
The Greber case was followed by the United States Court of Appeals for
the Ninth Circuit, United States v. Kats, 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. Although a
separate Safe Harbor was not adopted, HCFA noted in its commentary to
the Safe Harbor regulations that additional protection may be merited
for situations where a physician sees a patient in his or her own
office, makes a referral to an entity in which he or she has an
ownership interest and performs the service for which the referral is
made. In such cases, Medicare makes a payment to the facility for the
service it furnishes, which may result in a profit distribution to the
physician. HCFA noted that, with respect to the physician's
professional fee, such a referral is simply a referral to oneself, and
that in such situations, both the professional service fee and the
profit distribution from the associated facility
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fee that are generated from the referral may warrant protection. HCFA
stated that its primary concern regarding the above referral situation
was the investing physician's ability to profit from any diagnostic
testing that is generated from the services he or she performs. The
potential for overutilization posed by referrals for diagnostic
services is not present to the same degree with therapeutic services
such as lithotripsy where the necessity for the treatment can be
objectively determined; i.e., a renal stone can be definitely
determined before treatment.
The applicability of the Anti-Kickback Statute to physician
investments in health care businesses to which they refer patients and
which do not qualify for a Safe Harbor 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 best 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 Statute. Whether the
offering of ownership interests to investors who may refer patients to
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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 of the Partnership intends for all business
activities and operations of the Partnership to conform in all
respects with all applicable anti-kickback statutes (federal or
state). The General Partner does not believe that the Partnership's
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.
False Claims Statutes. The Partnership is also subject to federal and
state laws governing the submission of claims for reimbursement. These
laws generally prohibit an individual or entity from knowingly and
willfully presenting a claim (or causing a claim to be presented) for
payment from Medicare, Medicaid or other third party payors that is
false or fraudulent. The standard for "knowing and willful" includes
conduct that amounts to a reckless disregard for whether accurate
information is presented by claims processors. Penalties under these
statutes include substantial civil and criminal fines, exclusion from
the Medicare program and imprisonment. One of the most prominent of
these laws is the federal False Claims Act, which may be enforced by
the federal government directly, or by a qui tam private plaintiff on
the government's behalf. Under the federal False Claims Act, both the
government and the private plaintiff, if successful, are permitted to
recover substantial monetary penalties and judgments, as well as an
amount equal to three times actual damages. In recent cases, some qui
tam plaintiffs have taken the position that violations of the
Anti-Kickback provisions (discussed above) and Stark II (discussed
above) should also be prosecuted as violations of the federal False
Claims Act. The Partnership cannot assure that the government, upon
audit or review, would not take the position that billing errors,
employee misconduct or violations of other federal statutes, should
they occur, are violations of the federal False Claims Act or similar
statutes.
New Legislation. The General Partner is not aware of any bill
currently before Congress which, if enacted into law, would have an
adverse effect on the Partnership's operations in a fashion similar to
the Stark II and the Anti-Kickback laws discussed above. In the event
that
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legislation adversely affecting the operation of the Partnership's
business is enacted, the General Partner is obligated either to
purchase the Investment Interests of all the Limited Partners or to
dissolve the Partnership. See "Summary of the Partnership Agreement -
Optional Purchase of Investment Interests."
FTC Investigation. Issues relating to physician-owned health care
facilities have been investigated by the Federal Trade Commission
("FTC"), which investigated two lithotripsy limited partnerships
affiliated with the General Partner, to determine whether they posed
an unreasonable threat to competition in the health care field. The
General Partner and 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 entity in which it is the General Partner.
Ethical Considerations. The American Medical Association's Code of
Medical Ethics states that physicians should not refer patients to
facilities in which they have an ownership interest unless such
physician directly provides care or services to such patient at the
facility. Because physician investors will be providing lithotripsy
services, the General Partner believes that an investment by a
physician will not be in violation of the American Medical
Association's Code of Medical Ethics. In the event that the American
Medical Association changes its ethical code to preclude such
referrals by physicians and such ethical requirements are applied to
facilities or services which, at the time of adoption, are owned in
whole or in part by referring physicians, the Partnership and the
interests of the Limited Partners may be adversely affected.
State Regulation
In Arkansas, there is no certificate of need requirement for major
medical equipment or mobile health services. Hospitals which wish to
establish a new health service must give notice 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.
The Partnership will seek to comply with all applicable statutory and
regulatory requirements. Further regulations may be imposed in
Arkansas at any time in the future. Predictions as to the form or
content of such potential regulations would be highly speculative.
They could apply to the operation of the Mobile Lithotripsy System or
to the physicians who invest in the Partnership. Such restrictive
regulations could materially adversely affect the ability of the
Partnership to conduct its business.
THE GENERAL PARTNER AND THE PARTNERSHIP BELIEVE LITHOTRIPSY SERVICES
WILL CONTINUE TO BE SUBJECT TO INTENSE
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GOVERNMENTAL REGULATION AT THE FEDERAL AND STATE LEVELS AND,
THEREFORE, CANNOT PREDICT THE SCOPE AND EFFECT THEREOF.
PROSPECTIVE LIMITED PARTNERS SHOULD CONSULT WITH THEIR LEGAL COUNSEL
AS TO THE IMPLICATIONS OF FEDERAL AND STATE LAWS AND PROFESSIONAL
ETHICAL CODES DEALING WITH PHYSICIAN OWNERSHIP OF MEDICAL EQUIPMENT
AND FACILITIES BEFORE PURCHASING UNITS.
PRIOR ACTIVITIES
Prime, the sole shareholder of the General Partner, is the largest and
fastest growing provider of lithotripsy services in the United States,
providing lithotripsy services at approximately 400 hospitals and
surgery centers in 34 states, as well as delivering non-medical
services related to the operation of the lithotripters, including
scheduling, staffing, training, quality assurance, maintenance,
regulatory compliance and contracting with payors, hospitals and
surgery centers, while medical care is rendered by urologists
utilizing the lithotripters. Prime has an economic interest in 56
mobile and six fixed site lithotripters, all but two of which are
operated by Prime or the General Partner and its Affiliates. Prime
began providing lithotripsy services with an acquisition in 1992 and
has grown rapidly since that time through a total of ten acquisitions
with interests in 62 lithotripters. In April 1996, Prime acquired the
General Partner. The General Partner operates over 30 lithotripters
serving approximately 200 locations in 19 states. The acquisition of
the General Partner provided Prime with complementary geographic
coverage as well as additional expertise in forming and managing
lithotripsy operations. Prime and the General Partner's lithotripters
together performed approximately 31,000, or approximately 17%, of the
estimated 180,000 lithotripsy procedures performed in the United
States in 1995. Approximately 1,850 urologists utilized Prime and the
General Partner's lithotripters in 1995, representing approximately
25% of the estimated 7,300 active urologists in the United States.
Prime manages the operations of approximately 60 of its 62
lithotripters. All of its lithotripters are operated in connection
with hospitals or surgery centers. Prime operates its lithotripters as
the general partner of a limited partnership or through a subsidiary,
as is the case with the General Partner affiliated partnerships. Prime
provides a full range of management and other non-medical support
services to the lithotripsy operations, while medical care is provided
by urologists utilizing the facilities and certain medical support
services are provided by the hospital or surgery center. Urologists
are investors in 33 of its 40 operations.
Prime's lithotripters range in age from one to twelve years. Of its 62
lithotripters, 56 are mobile units mounted in tractor-trailers or
self-contained coaches serving locations in 34 states. Prime also
operates six fixed site lithotripters in five states. All of Prime's
fixed lithotripsy units are located and operated in conjunction with a
hospital or surgery center. Most of these locations are in major
metropolitan markets where the population can support such an
operation. Fixed site lithotripters generally cannot be economically
justified in other locations.
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Prime and the General Partner believe that they maintain the most
comprehensive quality outcomes database and information system in the
lithotripsy services industry. Prime has detailed information on over
100,000 procedures covering patient demographic information and
medical condition prior to treatment, the clinical and technical
parameters of the procedure and resulting outcomes. Information is
collected before, during and up to three months after the procedure
through internal data collection by doctors, nurses and technicians
and through patient questionnaires.
For numerous reasons, including differences in financial structure,
program size, economic conditions and distribution policies, the
success of the General Partner's Affiliates in the lithotripsy field
should not be considered as indicative of the operating results
obtainable by the Partnership.
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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 20 Units are sold and other
sources and their anticipated and estimated uses.
Sources of Funds Sale of 20 Units
Offering Proceeds(1) $322,220 (100.00%)
TOTAL SOURCES $322,220 (100.00%)
Application of Funds
Reconditioning of Two Coaches(2) $100,000 ( 31.03%)
Loaner Rental Costs(2) $140,000 ( 43.45%)
Reserves(3) $ 44,720 ( 13.88%)
Syndication Costs(4) $ 37,500 ( 11.64%)
TOTAL APPLICATIONS $322,220 (100.00%)
Notes to Sources and Applications of Funds Table
(1) Assumes all 20 Units are purchased by qualified Investors.
(2) It is anticipated that the General Partner will cause the
Partnership to contract with AK Associates, an Affiliate of the
General Partner, to recondition each of the Partnership's Coaches at
an estimated cost of $50,000 per Coach. During the time each Coach is
reconditioned (estimated at 6 - 8 weeks), it is anticipated that the
Partnership will rent from the General Partner or its Affiliates a
"loaner" Mobile Lithotripsy System at an estimated per month cost of
$35,000. The table assumes that each refurbishment will take two
months. See "Business Activities - Anticipated Partnership
Expenditures." The proceeds of this Offering cannot be calculated
until the number of Units sold has been determined at the Closing. To
the extent the proceeds of the Offering are insufficient to fund the
costs described ABOVE, 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."
(3) This amount includes the General Partner's estimate of reserves
for unanticipated time overruns in scheduled reconditioning or
unanticipated expenses in connection with the reconditioning.
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(4) Includes $5,000 in commissions payable to the Sales Agent,
reimbursement of $7,500 to the Sales Agent for out-of-pocket expenses
incurred in selling the Units and $25,000 in legal and accounting
costs associated with the preparation of this Memorandum.
FINANCIAL CONDITION OF THE PARTNERSHIP
Set forth on the following pages are the Partnership's internally
prepared accrual based (i) Income Statements for the years ended
December 31, 1995, December 31, 1996, December 31, 1997 and for the
period ended September 30, 1998, (ii) Balance Sheets as of December
31, 1996, December 31, 1997 and as of September 30, 1998, (iii) Cash
Flow Statements for the year ended December 31, 1995, December 31,
1996, December 31, 1997 and for the period ended September 30, 1998
and (iv) Statements of Partner's Equity for the years ended December
31, 1995, December 31, 1996, December 31, 1997 and for the period
ended September 30, 1998.
Past financial performance is not necessarily indicative of future
performance. There is no assurance that the Partnership will be able
to maintain its current revenues or earnings.
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MANAGEMENT'S DISCUSSION AND
ANALYSIS OF THE RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 and September 30, 1997
Revenues. Total revenues decreased $515,000 (18%) for the nine months
ended September 30, 1998 compared to the same period in 1997 related
to a 8% decline in the number of procedures performed, primarily due
to the loss of two contracts, that had generated 9% of total
procedures for the nine months ended September 30, 1997. In addition,
two hospitals, that provided approximately 20% of the procedures in
both periods, renegotiated their contracts resulting in a 24% decline
in revenue per case in the 1998 period. In addition, the partnership
experienced a decline in revenue per case.
Operating Expenses. Operating expenses declined by $95,000 (8%) for
the nine months ended September 30, 1998 compared to the same period
in 1997, due to a decline in management fees of $40,000 related to
lower cash flow generated by the lower revenues amounts discussed
above. In addition, equipment maintenance and repairs declined $30,000
related to the renegotiation of the equipment service agreement.
Overhead allocation declined $22,000 due to a decline in expenses
allocated by the General Partner related to cost containment programs
enacted and fewer procedures performed.
Other Income (Expense). Total other income (expense), net increased by
$400 (3%) due to the slight increase in interest income.
Year Ended December 31, 1997 and December 31, 1996
Revenues. Total revenues decreased $308,000 (8%) for the year ended
December 31, 1997 compared to the same period in 1996 related to a 4%
decline in the number of procedures performed, and a slight decline in
revenue per case.
Operating Expenses. Operating expenses decreased by $79,000 (5%) for
the year ended December 31, 1997 compared to the same period in 1996
due to an decrease of $53,000 in the overhead allocation by the
General Partner due to fewer procedures performed. In addition, other
operating expenses declined $32,000 due to fewer procedures performed.
Other Income (Expense). Total other income (expense), net increased by
$178,000 (116%) due to the partnership recognizing its proportional
share of the loss on disposal of the Louisiana-Arkansas JV unit in
1996, that did not repeat in 1997.
Year Ended December 31, 1996 and December 31, 1995
Revenues. Total revenues increased $490,000 (14%) for the year ended
December 31, 1996 compared to the same period in 1995, related to the
addition of a second lithotripter in early 1996
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Operating Expenses. Operating expenses increased by $147,000 (10%) for
the year ended December 31, 1996 compared to the same period in 1995,
due to an increase of $108,000 in the employee compensation and
benefits related to the addition of a second crew to staff the second
lithotripter added in early 1996. In addition, management fees rose
$54,000 due to higher cash flows generated by higher revenues
collected as compared to the prior year.
Other Income (Expense). Other income (expense), net decreased by
$176,000 (794%) due to the partnership recognizing its proportional
share of the loss on the disposal of the Louisiana-Arkansas JV unit in
1996.
SUMMARY OF THE PARTNERSHIP AGREEMENT
The Partnership Agreement sets forth the powers and purposes of the
Partnership and the respective rights and obligations of the General
Partner and the Limited Partners. The following is only a summary of
certain provisions of the Partnership Agreement, and does not purport
to be a complete statement of the various rights and obligations set
forth therein. A complete copy of the Partnership Agreement is set
forth as Appendix A to this Memorandum, and Investors are urged to
read the Partnership Agreement in its entirety and to review it with
their counsel and advisors.
Nature of Limited Partnership Interest
The Investors will acquire their interests in the Partnership in the
form of Units. For each Unit purchased, a cash payment of $16,111 is
required. The entire Unit purchase price is due in cash upon
subscription; however, certain qualified Investors may finance a
portion of the purchase price through Limited Partner Loans. See
"Terms of the Offering - Limited Partnership Loans." No Limited
Partner will have any liability for the debts and obligations of the
Partnership by reason of being a Limited Partner except to the extent
of (i) his or her Capital Contribution and liability under a Limited
Partner Loan, if any, (ii) his or her proportionate share of the
undistributed profits of the Partnership, and (iii) the amount of any
Distribution received from the Partnership at a time when its
liabilities exceed the fair value of its assets as provided by the
Act. See "Risk Factors - Other Investment Risks - Limited Partners'
Obligation to Return Certain Distributions." See also Form of Legal
Opinion of Womble Carlyle Sandridge & Rice, PLLC attached hereto as
Appendix C.
Profits, Losses and Distributions
The following is a Summary of certain provisions of the Partnership
Agreement relating to the allocation and distribution of the Profits,
Losses, Partnership Cash Flow, Partnership Refinancing Proceeds,
Partnership Sales Proceeds, and cash upon dissolution of the
Partnership. Because an understanding of the defined financial terms
is essential to an evaluation of the information presented below,
Investors should carefully review the definitions of the terms
appearing in the Glossary.
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1. Allocations of Profits and Losses.
(a) General. Generally, Profits and Losses, if any, for each Year of
the Partnership will be allocated proportionately among the Partners
based on their respective Percentage Interests in the Partnership;
provided that New Limited Partners will be allocated only Profits and
Losses that accrue after the date of their admission to the
Partnership as Limited Partners.
(b) Allocations. Profits and Losses allocated to a Partner will be
allocated at the end of the Year of the Partnership, and each such
Partner will receive his pro rata share of Profits and Losses based
upon the number of days such Partner was a member of the Partnership
during the Year of the Partnership. Notwithstanding the foregoing, the
Partnership's "allocable cash basis items," as that term is used in
Section 706(d)(2)(B) of the Code, will be allocated as required by
Section 706(d)(2) of the Code and the regulations promulgated
thereunder.
(c) Qualified Income Offset. If any Limited Partner unexpectedly
receives an adjustment, allocation or distribution as described in
Treasury Regulation Section 1.704- 1(b)(2)(ii)(d)(4) through (6) that
causes such Limited Partner to have a deficit Capital Account balance,
such Limited Partner will be allocated items of income and gain in an
amount and manner sufficient to eliminate such deficit balance as
quickly as possible. This provision is intended to be a "qualified
income offset" as defined in Regulation Section 1.704-1(b)(2)(ii)(d).
2. Distributions.
(a) Non-liquidation Distributions. Partnership Cash Flow for each Year
of the Partnership, to the extent available, will be distributed
within 60 days after the end of each Year of the Partnership, or
earlier in the discretion of the General Partner, proportionately
among the Partners based on their respective Percentage Interests in
the Partnership at the time of distribution. Partnership Sales
Proceeds and Partnership Refinancing Proceeds will be distributed
within 60 days of the capital transaction giving rise to such
proceeds, or earlier in the discretion of the General Partner,
proportionately among the Partners based on their respective
Percentage Interests in the Partnership. The New Limited Partners have
no rights to receive any distributions in the future that are made out
of the Initial Limited Partners' and General Partner's accrued but
undistributed Partnership Cash Flow as of the date the New Limited
Partners are admitted to the Partnership. New Limited Partners will be
entitled only to Partnership Cash Flow that accrues after the date of
their admission to the Partnership as Limited Partners
(b) Distribution Upon Dissolution. Upon the dissolution and
termination of the Partnership, the General Partner or, if there is
none, a representative of the Limited Partners, will liquidate the
assets of the Partnership. The proceeds of such liquidation will be
applied and distributed in the following order of priority: (a) First,
to the payment of the debts and liabilities of the Partnership, and
the expenses of liquidation; (b) Second, to the creation of any
reserves which the General Partner or the representative of the
Limited Partners may deem reasonably necessary for the payment of any
contingent or unforeseen liabilities or obligations of the Partnership
or of the General Partner arising out of or in connection with the
business and operation of the Partnership;
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and (c) Third, the balance, if any, will be distributed to the
Partners in accordance with the Partners' positive capital account
balances. Any General Partner with a negative capital account
following the distribution of liquidation proceeds or the liquidation
of its interest must contribute to the Partnership an amount equal to
such negative capital account on or before the end of the
Partnership's taxable year (or, if later, within ninety days after the
date of liquidation). Any capital so contributed shall be (i)
distributed to those Partners with positive capital accounts until
such capital accounts are reduced to zero, and/or (ii) used to
discharge recourse liabilities.
Management of the Partnership
The General has the sole right to manage the business of the
Partnership and at all times is required to exercise its
responsibilities in a fiduciary capacity. The consent of the Limited
Partners is not required for any sale or refinancing of the Mobile
Lithotripsy Systems, the purchase of additional Mobile Lithotripsy
Systems or the purchase of other new equipment or assets by the
Partnership. The General Partner will oversee the day-to-day affairs
of the Partnership pursuant to the Management Agreement. See "Business
Activities - Management."
Under the Partnership Agreement, if the General Partner is adjudged by
a court of competent jurisdiction to be liable to the Limited Partners
or the Partnership for acts of gross negligence or willful misconduct
in the performance of its duties under the terms of the Partnership
Agreement, the General Partner may be removed and another substituted
with the consent of all of the Limited Partners. The General Partner
may transfer all or a portion of its Partnership Interest only if, in
the opinion of the Partnership's accountant, the new general partner
has sufficient net worth and meets other requirements to assure that
the Partnership will continue to be treated as a partnership for
Federal tax purposes. Both the admission of any new shareholder and
the withdrawal of any shareholder from the General Partner may be done
without the approval of the Limited Partners.
Powers of the General Partner
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 General Partner, however, is
expressly prohibited from, among other things: (i) possessing
Partnership assets or assigning the rights of the Partnership in
Partnership assets, including the 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.
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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 and will not transact
business for the Partnership. Limited Partners are not required to
make any capital contributions to the Partnership except amounts
agreed by them to be paid, or pay or be personally liable for, any
expense, liability or obligation of the Partnership, except to the
extent (i) his or her Capital Contribution and liability under a
Limited Partner Loan, if any, (ii) his or her proportionate share of
the undistributed profits of the Partnership, and (iii) the amount of
any Distribution received from the Partnership at a time when its
liabilities exceed the fair value of its assets as provided by the
Act. See "Risk Factors - Limited Partners Obligations to Return
Certain Distributions."
The Limited Partners may not participate in or own an interest in any
competing lithotripsy venture, except with the approval of the General
Partner. The General Partner may elect to treat participation or
ownership by a Limited Partner in a competing venture as an event of
default, and such Limited Partner may be required to sell his
Partnership Interest. See "Optional Purchase of Limited Partner
Interests" below.
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Restrictions on Transfer of Partnership Interests
After acquisition of Units by Investors, no Partnership Interest nor
any Units may be transferred without the prior written consent of the
General Partner, which approval may be granted or denied in the sole
discretion of the General Partner, and subject to the satisfaction of
certain other conditions set forth in the Partnership Agreement. The
Partnership Agreement contains additional limitations on transfer,
including provisions prohibiting transfer that would cause the
termination of the Partnership, would violate federal or state
securities laws, would prevent the Partnership from being entitled to
use any method of depreciation which the Partnership might otherwise
be entitled to use, or would adversely affect the status of the
Partnership as a partnership for Federal income tax purposes. In
addition, the Partnership Agreement prohibits the holding or transfer
of a Partnership interest by or to a "tax exempt entity" (as defined
in Code Section 168(h)) which would affect the method or manner in
which the Partnership may depreciate Partnership assets. No transferee
of the Units will automatically become a Limited Partner. Admission of
a transferee to the Partnership as a Limited Partner requires the
fulfillment of other obligations enumerated in the Partnership
Agreement, including either the approval of all the Limited Partners
(except the assignor Limited Partner) and the General Partner, or the
approval of the assignor Limited Partner and the General Partner. Any
transferee of a Partnership Interest who has not been admitted to the
Partnership as a Partner shall not be entitled to any of the rights,
powers or privileges of his transferor except the right to receive and
be credited or debited with his proportionate share of Partnership
income, gains, profits, losses, deductions, credits or distributions.
A transferor Limited Partner will not be released from his or her
personal liability under the Limited Partner Loans, unless otherwise
specifically agreed by the Bank.
Dissolution and Liquidation
The Partnership will dissolve and terminate for any of the following
reasons:
1. The sale, exchange or disposition of all or substantially all of
the property of the Partnership without making provision for the
replacement thereof;
2. The expiration of its term on December 31, 2040;
3. The bankruptcy or occurrence of certain other events with respect
to the General Partner;
4. The election to dissolve the Partnership made by the General
Partner and a Majority in Interest of the Limited Partners; or
5. For any other reason which under the laws of the State of Arkansas
would cause a dissolution.
The retirement, resignation, bankruptcy, assignment for the benefit of
creditors, dissolution, death, disability or legal incapacity of a
general partner will not, however, result in a
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termination of the Partnership if the remaining general partner or
general partners, if any, elect to continue the business of the
Partnership, or if no general partner remains, if within 90 days of
the occurrence of one of such events, all of the Limited Partners
elect in writing to continue the Partnership and, if necessary,
designate a new general partner.
Upon dissolution, the General Partner or, if there is none, a
representative of the Limited Partners, will liquidate the
Partnership's assets and distribute the proceeds thereof in accordance
with the priorities set forth in the Partnership Agreement. See
"Profits, Losses and Distributions - Distributions - Distribution upon
Dissolution" above and "Optional Purchase of Limited Partner
Interests" below.
Optional Purchase of Limited Partner Interests
As provided in the Partnership Agreement, the General Partner and the
Limited Partners have an option to purchase all the interest of a
Limited Partner in the Partnership upon the occurrence with respect to
the Limited Partner of (i) death, (ii) bankruptcy or insolvency, (iii)
incompetency, or (iv) direct or indirect ownership of an interest in a
competing venture. Upon the occurrence of one or more of the preceding
events, the withdrawing Limited Partner, or his or her personal
representative, will have a brief period within which to sell his or
her entire Partnership Interest to a purchaser approved of by the
General Partner. If the withdrawing Limited Partner is unable to sell
his or her Partnership Interest as provided above, the General Partner
will then have the first option to purchase such Partnership Interest
and thereafter, the remaining Limited Partners will have the option to
purchase any of the Partnership Interest not purchased by the General
Partner. If the General Partner or Limited Partners elect to exercise
their respective options, the option purchase price will be equal to
the withdrawing Limited Partner's share of the Partnership's book
value, if any, as reflected by such Limited Partner's capital account
in the Partnership (unadjusted for any appreciation in Partnership
assets and as reduced by depreciation deductions claimed by the
Partnership for tax purposes). The withdrawing Limited Partner will
not be released from his obligations under any Limited Partner Loan
unless so agreed by the Bank. Furthermore, sale of his or her Limited
Partnership Interest may constitute an event of default under the
Limited Partner Loan, if any. See "Terms of Offering - Limited Partner
Loans." There can be no assurance that the option purchase price will
represent the fair market value of a Limited Partner's interest in the
Partnership. Because Partnership losses, depreciation deductions and
Distributions reduce capital accounts, and because appreciation in
Partnership assets is not reflected in capital accounts, it is the
opinion of the General Partner that the option purchase price will be
nominal in amount.
Dilution Offerings
The General Partner has the authority to periodically offer and sell
additional limited partnership interests in the Partnership through
Dilution Offerings to local urologists who are not investors in the
Partnership ("Qualified Investors"). The primary purpose of Dilution
Offerings would be (i) to raise additional capital for any legitimate
Partnership purpose and (ii) to assure the highest quality of patient
care by admitting Qualified Investors to the Partnership who will be
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dedicated and motivated as owners to follow the Partnership's
treatment protocol, and comply with its quality assurance and outcome
analysis programs.
Any sale of limited partnership interests in a Dilution Offering will
result in 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 will be proportionately reduced as a
result of a successful Dilution Offering. The Percentage Interests of
the General Partner and the Initial Limited Partners, as in effect
prior to this Offering, may not be diluted through Dilution Offerings
(including this Offering) by more than 20% in the aggregate without
the prior written consent of a Majority in Interest of all the
Partners. Any additional limited partnership interests offered in a
Dilution Offering will be sold for a price no lower than their fair
market value as determined by the General Partner, in its sole
discretion, at the time of this Offering.
Arbitration
The Partnership Agreement provides that disputes arising thereunder
shall be resolved by submission to arbitration in Arkansas in
accordance with the then prevailing commercial arbitration rules of
the American Arbitration Association.
Power of Attorney
Each Investor, by executing the Subscription Agreement, irrevocably
appoints Dr. Joseph Jenkins and Dr. David Vela, severally, to act as
attorneys-in-fact to execute the Partnership Agreement, any amendments
thereto and any certificate of limited partnership filed by the
General Partner. The Partnership Agreement, in turn, contains
provisions by which each Limited Partner irrevocably appoints Dr.
Joseph Jenkins, to act as his or her attorney-in-fact to make,
execute, swear to and file any documents necessary to the conduct of
the Partnership's business, such as deeds of conveyance of real or
personal property as well as any amendment to the Partnership
Agreement or to any certificate of limited partnership which
accurately reflects actions properly taken by the Partners.
Reports to Limited Partners
Within 90 days after the end of each Year of the Partnership, the
General Partner will send to each person who was a Limited Partner at
any time during such year such tax information, including, without
limitation, Federal Tax Schedule K-1, as will be reasonably necessary
for the preparation by such person of his federal income tax return,
and such other financial information as may be required by the Act.
Records
Proper and complete records and books of account will be kept by the
General Partner in which will be entered fully and accurately all
transactions and other matters relative to the
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Partnership's business as are usually entered into records and books
of account maintained by persons engaged in business of a like
character. The Partnership books and records will be kept according to
the method of accounting determined by the General Partner. The
Partnership's fiscal year will be the calendar year. The books and
records will be located at the office of the General Partner, and will
be open to the reasonable inspection and examination of the Limited
Partners or their duly authorized representatives during normal
business hours.
LEGAL MATTERS
Certain legal matters in connection with the Units offered hereby will
be passed upon for the Partnership by Womble Carlyle Sandridge & Rice,
a Professional Limited Liability Company, of Winston-Salem, North
Carolina. See "Conflicts of Interest." On the Closing Date, Womble
Carlyle Sandridge & Rice, a Professional Limited Liability Company
will render an opinion, the form of which is attached as Appendix C to
this Memorandum, with respect to certain federal income tax
consequences of an investment in Units. See "Tax Aspects of the
Offering."
GLOSSARY
Certain terms in this Memorandum shall have the following meanings:
Act. The Act means the Arkansas Revised Limited Partnership Act, as in
effect on the date hereof.
Affiliate. An Affiliate is (i) any person, partnership corporation,
association or other legal entity ("person") directly or indirectly
controlling, controlled by or under common control with another
person, (ii) any person owning or controlling 10% or more of the
outstanding voting interests of such other person, (iii) any officer,
director or partner of such person and (iv) if such other person is an
officer, director or partner, any entity for which such person acts in
such capacity.
AK Associates. AK Associates, Inc., a subsidiary of Prime. It is
anticipated that the Partnership will contract with AK Associates to
recondition the Coaches with the proceeds of the Offering.
Bank. First-Citizens Bank & Trust Company.
Capital Account. The Partnership capital account of a Partner as
computed pursuant to Article XII of the Partnership Agreement.
Capital Contributions. All capital contributions made by a Partner or
his predecessor in interest which shall include, without limitation,
contributions made pursuant to Article VII of the Partnership
Agreement.
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Capital Transaction. Any transaction which, were it to generate
proceeds, would produce Partnership Sales Proceeds or Partnership
Refinancing Proceeds.
Closing Date. 5:00 p.m., Central Time, on December 30, 1998 (or
earlier) in the discretion of the General Partner. The Closing Date
may be extended for a period of up to 180 days in the discretion of
the General Partner.
Coaches. The two self-propelled mobile vehicles manufactured by the
Calumet Coach Company, Calumet City, Illinois, upfitted to house the
LithostarsTM.
Code. The Internal Revenue Code of 1986, or corresponding provisions
of subsequent, superseding revenue laws.
Contract Hospitals. The 17 hospitals, medical centers and ambulatory
surgery centers to which the Partnership provides lithotripsy services
pursuant to 17 separate Hospital Contracts.
Counsel. Counsel to the Partnership, Womble Carlyle Sandridge & Rice,
a Professional Limited Liability Company, P.O. Drawer 84,
Winston-Salem, North Carolina 27102.
Dilution Offering. The issuance, offering and sale by the Partnership
of additional partnership interests in the future.
Distributions. Cash or other property, from any source, distributed to
Partners.
Escrow Agent. First-Citizens Bank & Trust Company.
FDA. The United States Food and Drug Administration.
Financial Statement. The Purchaser Financial Statement, included in
the Subscription Packet accompanying this Memorandum, to be furnished
by the Investors for review by the General Partner and the Bank in
connection with their decision to accept or reject a subscription.
General Partner. The general partner of the Partnership,
Lithotripters, Inc., a North Carolina corporation, and a wholly owned
subsidiary of Prime Medical Services, Inc.
Hospital Contracts. The 17 separate lithotripsy services agreements
the Partnership has entered into with the contract Hospitals.
Initial Limited Partners. The Individuals who were Limited Partners
prior to the commencement of this Offering.
Investors. Potential purchasers of Units.
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Limited Partner Loan. The loan to be made by the Bank to certain
qualified Investors that wish to finance a portion of the Unit
purchase price.
Limited Partner Note. The promissory note from an Investor financing a
portion of the Unit purchase price to the Bank in the principal amount
of $13,611 per Unit, the proceeds of which will be paid directly to
the Partnership. The form of the Limited Partner Note (including the
Note Addendum attached thereto) is attached as Exhibit A to the Bank
Commitment which is attached hereto as Appendix B.
Limited Partners. The Limited Partners are those Investors in the
Units admitted to the Partnership and any person admitted as a
substitute Limited Partner in accordance with the provisions of the
Partnership Agreement.
LithostarTM. The two LithostarTM model extracorporeal shock wave
lithotripters manufactured by Siemens and owned by the Partnership.
Loan and Security Agreement. The agreement to be executed in
conjunction with the Limited Partner Note by an Investor who finances
a portion of the Unit purchase price through a Limited Partner Loan.
The form of the Loan and Security Agreement is attached as Exhibit B
to the Bank Commitment which is attached hereto as Appendix B.
Loan Documents. The Bank Commitment, the Limited Partner Note, the
Loan and Security Agreement, the Security Agreement and UCC-1,
collectively.
Loss. The net loss (including capital losses and excluding Net Gains
from Capital Transactions) of the Partnership for each year as
determined by the Partnership for federal income tax purposes.
Memorandum. This Confidential Private Placement Memorandum, including
all Appendices hereto, and any amendment or supplement hereto.
Mobile Lithotripsy Systems. The two Coaches with the installed and
operational LithostarsTM owned and operated by the Partnership.
Net Gains from Capital Transactions. The gains realized by the
Partnership as a result of or upon any sale, exchange, condemnation or
other disposition of the capital assets of the Partnership (which
assets shall include Code Section 1231 assets) or as a result of or
upon the damage or destruction of such capital assets.
New Limited Partner. Any Investor admitted to the Partnership as a
Limited Partner.
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Nonrecourse Deductions. A deduction as set forth in Treasury
Regulations Section 1.704-2(b)(1). The amount of Nonrecourse
Deductions for a given Year equals the excess, if any, of the net
increase, if any, in the amount of Partnership Minimum Gain during
such Year over the aggregate amount of any Distributions during such
Year of proceeds of a Nonrecourse Liability that are allocable to an
increase in Partnership Minimum Gain, determined according to the
provisions of Treasury Regulations Section 1.704-2(h).
Nonrecourse Liability. Any Partnership liability (or portion thereof)
for which no Partner bears the "economic risk of loss," within the
meaning of Treasury Regulations Section 1.704-2(i).
Offering. The offering of Units pursuant to this Memorandum.
Partner Minimum Gain. An amount, with respect to each Partner
Nonrecourse Debt, equal to the Partnership Minimum Gain that would
result if such Partner Nonrecourse Debt were treated as a Nonrecourse
Liability, determined in accordance with Treasury Regulations Section
1.704-2(i).
Partner Nonrecourse Debt. Any nonrecourse debt (for the purposes of
Treasury Regulations Section 1.1001-2) of the Partnership for which
any Partner bears the "economic risk of loss," within the meaning of
Treasury Regulations Section 1.752-2.
Partner Nonrecourse Deductions. Deductions as described in Treasury
Regulations Section 1.704-2(i)(2). The amount of Partner Nonrecourse
Deductions with respect to a Partner Nonrecourse Debt for any Year
equals the excess, if any, of the net increase, if any, in the amount
of Partner Minimum Gain attributable to such Partner Nonrecourse Debt
during such Year over the aggregate amount of any Distributions during
that Year to the Partner that bears the economic risk of loss for such
Partner Nonrecourse Debt to the extent such Distributions are from the
proceeds of such Partner Nonrecourse Debt and are allocable to an
increase in Partner Minimum Gain attributable to such Partner
Nonrecourse Debt, determined in accordance with Treasury Regulations
Section 1.704-2(i).
Partners. The General Partner and the Limited Partners, collectively,
when no distinction is required by the context in which the term is
used herein.
Partnership. Fayetteville Lithotripters Limited Partnership - Arkansas
I, an Arkansas limited partnership.
Partnership Agreement. The Partnership's Agreement of Limited
Partnership, the form of which is attached hereto as Appendix A, as
the same may be amended from time to time.
Partnership Cash Flow. For the applicable period the excess, if any,
of (A) the sum of (i) all gross receipts from any source for such
period, other than from Partnership loans, Capital Transactions and
Capital Contributions, and (ii) any funds released by the Partnership
from
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previously established reserves, over (B) the sum of (i) all cash
expenses paid by the Partnership for such period, (ii) the amount of
all payments of principal on loans to the Partnership, (iii) capital
expenditures of the Partnership, and (iv) such reasonable reserves as
the General Partner shall deem necessary or prudent to set aside for
future repairs, improvements, or equipment replacement or additions,
or to meet working capital requirements or foreseen or unforeseen
future liabilities and contingencies of the Partnership; provided,
however, that the amounts referred to in (B) (i), (ii) and (iii) above
shall be taken into account only to the extent not funded by Capital
Contributions, loans or paid out of previously established reserves.
Such term shall also include all other funds deemed available for
distribution and designated as "Partnership Cash Flow" by the General
Partner.
Partnership Interest. The interest of a Partner in the Partnership as
defined by the Act and the Partnership Agreement.
Partnership Minimum Gain. Gain as defined in Treasury Regulations
Section 1.704-2(d).
Partnership Refinancing Proceeds. The cash realized from the
refinancing of Partnership assets after retirement of any secured
loans and less (i) payment of all expenses relating to the transaction
and (ii) establishment of such reasonable reserves as the General
Partner shall deem necessary or prudent to set aside for future
repairs, improvements, or equipment replacement or additions, or to
meet working capital requirements or foreseen or unforeseen future
liabilities or contingencies of the Partnership.
Partnership Sales Proceeds. The cash realized from the sale, exchange,
casualty or other disposition of all or a portion of Partnership
assets after the retirement of all secured loans and less (i) the
payment of all expenses related to the transaction and (ii)
establishment of such reasonable reserves as the General Partner shall
deem necessary or prudent to set aside for future repairs,
improvements, or equipment replacement or additions, or to meet
working capital requirements or foreseen or unforeseen future
liabilities or contingencies of the Partnership.
Percentage Interest. The interest of each Partner in the Partnership,
to be determined in the case of each Investor by reference to the
percentage opposite his or her name set forth in Exhibit A to the
Partnership Agreement. Each Unit sold pursuant to this offering
represents an initial 1% economic interest. The Percentage Interest
will be set forth in Exhibit A to the Partnership Agreement or any
other document or agreement, as a percentage or a fraction or on any
numerical basis deemed appropriate by the General Partner.
Prime. Prime Medical Services, Inc. a publicly held Delaware
corporation and parent of the General Partner, AK Associates and the
Sales Agent.
Prime Rate. The rate of interest periodically established by the Bank
and identified as such in literature published and circulated within
the Bank's offices.
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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,
member of the National Association of Securities Dealers, Inc. and an
Affiliate of certain members of the General Partner's management
personnel.
SEC. The United States Securities and Exchange Commission.
Securities Act. The Securities Act of 1933, as amended.
Security Agreement. The agreement to be executed in conjunction with
the Limited Partner Note by an Investor who finances the purchase
price of his Units as provided herein. The form of the Security
Agreement is attached as Exhibit C to the Bank Commitment which is
attached hereto as Appendix B.
Service. The Internal Revenue Service.
Service Area. The state of Arkansas.
Siemens. Siemens Medical Systems, Inc. and its Affiliates.
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
completed by Investors in connection with their subscription for
Units.
UCC-1. The Uniform Commercial Code Financing Statement, two copies of
which are attached to the Subscription Packet and are to be executed
in conjunction with the Limited Partner Note by an Investor who
finances a portion of the Unit purchase price through a Limited
Partner Loan. The UCC-1 will be used by the Bank to perfect its
security interest in such Investor's share of Distributions.
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Units. The 20 equal limited partner interests in the Partnership
offered pursuant to this Memorandum for a price per Unit of $16,111 in
cash.
Year of the Partnership. An annual accounting period ending on
December 31 of each year during the term of the Partnership.
_________________________
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Name of Prospective Investor Memorandum Number
TEXAS LITHOTRIPSY LIMITED PARTNERSHIP I L.P.
A Limited Partnership Formed Under the Laws of Texas
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM
up to $251,500 in Cash
20 Units of Limited Partnership Interest
at $12,575 in Cash per Unit
THIS MEMORANDUM IS FURNISHED PURSUANT TO A CONFIDENTIALITY
AGREEMENT BETWEEN THE PARTNERSHIP AND THE INVESTOR WHOSE NAME
APPEARS ABOVE. THE CONFIDENTIALITY AGREEMENT PROHIBITS THE
DISCLOSURE OF THE CONFIDENTIAL MATERIAL CONTAINED IN THIS
MEMORANDUM, EXCEPT TO THE EXTENT SUCH INVESTOR DEEMS IT NECESSARY
TO SHARE SUCH INFORMATION WITH HIS LEGAL, ACCOUNTING OR OTHER
FINANCIAL ADVISORS, WHO LIKEWISE SHALL BE BOUND BY THE SAME
CONFIDENTIALITY RESTRICTIONS SET FORTH IN THE CONFIDENTIALITY
AGREEMENT.
Medtech Investments, Inc.
Exclusive Sales Agent
2008 Litho Place
Fayetteville, North Carolina 28304
1-800-682-7971
<PAGE>
The Date of this Memorandum is December 9, 1998
TEXAS LITHOTRIPSY LIMITED PARTNERSHIP I L.P.
up to $251,500 in Cash
up to 20 Units of Limited Partnership Interest
at $12,575 in Cash per Unit
Texas Lithotripsy Limited Partnership I L.P., a Texas limited partnership (the
"Partnership") operated by its General Partner, Lithotripters, Inc., a North
Carolina corporation (the "General Partner"), hereby offers on the terms set
forth herein up to 20 Units (the "Units") of limited partnership interest in the
Partnership, at a price per Unit of $12,575 in cash. See "Terms of the
Offering." Each Unit will represent an initial 0.83% economic interest in the
Partnership. See "Risk Factors - Other Investment Risks - Dilution of Limited
Partners' Interest." The Partnership owns and operates two LithostarTM second
generation extracorporeal shock-wave lithotripters for the lithotripsy of kidney
stones. The LithostarsTM are installed in a self-propelled Coach and a mobile
Trailer (collectively, each Coach/Trailer with the installed LithostarTM is
referred to herein as a "Mobile Lithotripsy System") enabling the Partnership to
provide lithotripsy services at various locations throughout south Texas (the
"Service Area").
The Partnership intends to use the proceeds of this Offering primarily to
finance the cost of upgrading one of the LithostarsTM, and the cost of
reconditioning the Coach and renting a loaner Mobile Lithotripsy System from the
General Partner or its Affiliates during the time the Coach is being
reconditioned. See "Use of Proceeds." The cash purchase price is due at
subscription; however, prospective Investors who meet certain requirements may
be able fund a portion of their Unit purchase price with the proceeds of certain
third-party financing. See "Terms of the Offering - Limited Partner Loans." The
Offering will terminate on January 20, 1999 (or earlier upon the sale of all 20
Units as provided herein), unless extended at the discretion of the General
Partner for a period not to exceed 180 days.
______________________________
Purchase of Units involves risks and is suitable only for persons of substantial
means who have no need for liquidity in this investment. Among other factors,
prospective investors should note that (1) the Partnership faces substantial
competition in the Service Area and (2) the health care industry is undergoing
significant government regulatory reforms. See "Risk Factors" and "The
Offering - Suitability Standards."
______________________________
Cash Selling Net Cash
Offering Price Commissions(1) Proceeds(2)
Per Unit(3) $ 12,575 $ 250 $ 12,275
Total Maximum(4) $251,500 $ 5,000 $246,500
(See Footnotes on Back of Cover Page)
See Glossary for capitalized terms used herein and not otherwise defined.
<PAGE>
___________________________
(1) The Units will be sold on a "best-efforts" any or all basis by
MedTech Investments, Inc., a broker-dealer registered with the Securities
and Exchange Commission, a member of the National Association of Securities
Dealers, Inc. and an Affiliate of the General Partner (the "Sales Agent").
The Partnership will pay the Sales Agent a $250 commission for each Unit
sold and will reimburse the Sales Agent for its Offering costs (not to
exceed $7,500). The Partnership has agreed to indemnify the Sales Agent
against certain liabilities, including liabilities under the Securities Act
of 1933 (the "Securities Act"). See "Plan of Distribution."
(2) Net Cash Proceeds do not reflect deduction of expenses payable by
the Partnership. See "Use of Proceeds." The price per Unit ($12,575) is
payable in cash upon 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 together with their subscription packets, at
least $2,500 cash and a Limited Partner Note payable to the Bank in a
maximum principal amount of up to $10,075 per Unit to be purchased, a Loan
and Security Agreement, Security Agreement and two Uniform Commercial Code
Financing Statements ("UCC-1s") (collectively, the "Loan Documents"). See
"Terms of the Offering - Limited Partner Loans" and the forms of the
Limited Partner Note, the Loan and Security Agreement and Security
Agreement attached to the Form of 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. The General
Partner, however, reserves the right to sell less than one Unit as a
minimum investment on a limited basis, and to reject in whole or in part
any subscription. Purchases of fractional Units will be in multiples of
one-half Units.
(4) Offering Proceeds will first be used by the Partnership to pay
offering costs and expenses (up to $37,250) and the remainder of the
proceeds will be used to finance the cost of upgrading one of the
LithostarsTM by installing a higher intensity shock head, and the cost of
reconditioning the Coach and renting a loaner Mobile Lithotripsy System
from the General Partner or its Affiliates during the time one of the
Partnership's Mobile Lithotripsy Systems is out of service due to the
reconditioning of the Coach. See "Use of Proceeds." The Partnership seeks
by this Offering to sell up to 20 Units for an aggregate of up to $251,500
in cash ($246,500 net of Sales Agent's commissions). All subscription funds
and Loan Documents will be held in an interest bearing escrow account with
First-Citizens Bank & Trust Company, which is headquartered in Raleigh,
North Carolina and has approximately 330 offices in Virginia and North
Carolina, until the acceptance of the Investor's subscription
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(and approval by the Bank if the Investor is financing a portion of
the Unit purchase price through a Limited Partner Loan), rejection of the
Investor's subscription or termination of the Offering. The Partnership has
set no minimum number of Units to be sold in this Offering. Accordingly,
upon the receipt and acceptance of an Investor's subscription by the
Partnership as provided herein, such Investor will be admitted to the
Partnership as a Limited Partner, provided that acceptance of subscriptions
by an Investor that elects to finance a portion of his or her Unit purchase
price is conditioned upon approval by the Bank of his or her Limited
Partner Loan. Upon admission as a Limited Partner, the Investor's
subscription funds will be released to the Partnership and the Loan
Documents, if any, will be released to the Bank. In the event a
subscription is rejected, all subscription funds (without interest), the
Loan Documents, if any, and other subscription documents held in escrow
will be promptly returned to the rejected Investor. The Offering will
terminate on January 20, 1999, unless it is sooner terminated by the
General Partner, or unless extended for an additional period not to exceed
180 days. See "The Offering - General."
_______________________
THE UNITS ARE BEING OFFERED PURSUANT TO 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, AND AN EXEMPTION FROM STATE
REGISTRATION PROVIDED BY THE NATIONAL SECURITIES MARKETS IMPROVEMENT
ACT OF 1996. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS
NOT BEEN FILED WITH ANY STATE SECURITIES AGENCY OR 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 THE 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
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CONDITIONS INCLUDING THE AVAILABILITY OF AN EXEMPTION UNDER THE
SECURITIES ACT OF 1933 AND VARIOUS STATE SECURITIES LAWS. 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. ______________
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
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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.
______________
THIS MEMORANDUM CONTAINS SUMMARIES, BELIEVED BY THE GENERAL PARTNER TO
BE ACCURATE, OF CERTAIN TERMS OF CERTAIN DOCUMENTS, BUT REFERENCE IS
HEREBY 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, 2008 LITHO
PLACE, FAYETTEVILLE, NORTH CAROLINA 28304, 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.
______________
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<PAGE>
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 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 CONTINUE TO RECEIVE FEES
WHETHER OR NOT THE PARTNERSHIP EARNS ANY ADDITIONAL 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.
______________
vi
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Page
TABLE OF CONTENTS
Page
RISK FACTORS...................................................................1
Operating Risks.......................................................1
Tax Risks.............................................................7
Other Investment Risks................................................9
THE PARTNERSHIP...............................................................12
TERMS OF THE OFFERING.........................................................13
The Units and Subscription Price.....................................13
Acceptance of Subscriptions..........................................13
Limited Partner Loans ...............................................14
Subscription Period; Closing.........................................15
Offering Exemption...................................................15
Suitability Standards................................................16
How to Invest........................................................17
Restrictions on Transfer of Units....................................18
PLAN OF DISTRIBUTION..........................................................19
BUSINESS ACTIVITIES...........................................................20
General ............................................................20
Treatment Methods for Kidney Stone Disease...........................20
The LithostarTM......................................................21
The Coach and Trailer................................................22
Anticipated Partnership Expenditures.................................22
Acquisition of Additional Assets.....................................22
Hospital Contracts...................................................22
Management...........................................................23
Employees............................................................24
THE GENERAL PARTNER...........................................................24
COMPENSATION AND REIMBURSEMENT TO THE
GENERAL PARTNER AND ITS AFFILIATES...................................26
CONFLICTS OF INTEREST.........................................................27
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER...............................29
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COMPETITION...................................................................29
Affiliated Competition...............................................29
Other Competition....................................................30
REGULATION....................................................................31
Federal Regulation...................................................31
State Regulation.....................................................38
PRIOR ACTIVITIES..............................................................39
SOURCES AND APPLICATIONS OF FUNDS.............................................41
FINANCIAL CONDITION OF THE PARTNERSHIP........................................42
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF THE RESULTS OF OPERATIONS................................47
Ten Months Ended October 31, 1998 and October 31, 1997...............47
Year Ended December 31, 1997 and December 31, 1996...................47
Year Ended December 31, 1996 and December 31, 1995...................47
SUMMARY OF THE PARTNERSHIP AGREEMENT..........................................48
Powers of the General Partner........................................50
Rights and Liabilities of the Limited Partners.......................51
Restrictions on Transfer of Partnership Interests....................51
Dissolution and Liquidation..........................................52
Noncompetition Agreement and Protection of Confidential Information..52
Optional Purchase of Limited Partner Interests.......................53
Dilution Offerings...................................................53
Arbitration..........................................................54
Power of Attorney....................................................54
Reports to Limited Partners..........................................54
Records ............................................................55
LEGAL MATTERS.................................................................55
GLOSSARY .....................................................................55
viii
<PAGE>
Appendix A AGREEMENT OF LIMITED PARTNERSHIP OF TEXAS LITHOTRIPSY
LIMITED PARTNERSHIP I L.P.
Appendix B FORM OF BANK COMMITMENT (WITH EXHIBITS)
Appendix C FORM OF OPINION OF WOMBLE CARLYLE SANDRIDGE & RICE, PLLC
Appendix D NOTES TO FINANCIAL STATEMENTS
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RISK FACTORS
Prior to subscribing for Units, Investors should carefully examine this
entire Memorandum, including the Appendices hereto, and should give particular
consideration to the general risks attendant to speculative investments and
investments in partnerships generally, and to the other special operating, tax
and other investment risks set forth below.
Operating Risks
General Risks of Operations. Although the General Partner and its personnel
have significant experience in managing lithotripsy enterprises, whether the
Partnership can continue to effectively operate and expand its business cannot
be accurately predicted. The benefits of an investment in the Partnership also
depend on many factors over which the Partnership has no control, including
competition, technological innovations rendering the 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 will be to
continue 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.
Dependence on Insurance Reimbursement. The prices the Partnership are able
to charge its patients for the lithotripsy of kidney stones is significantly
dependent upon the amount of reimbursement private health care insurers allow
for this procedure. Most of the Partnership's patients pay for services directly
from private payment sources, primarily from third-party insurers such as Blue
Cross/Blue Shield and other commercial insurers. Coverage and payment levels for
these private payment sources vary depending upon the patient's individual
insurance policy. While the Partnership does not rely on Medicare reimbursement
for a substantial portion of its revenues,
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the Medicare program has historically influenced the setting of
reimbursement standards by private insurance programs. The Health Care Financing
Administration ("HCFA") has recently proposed rules which would establish a
prospective payment system for hospital outpatient procedures, including
lithotripsy. HCFA's proposed reimbursement rate for lithotripsy is $2,612. This
rate is lower than the typical charge for lithotripsy services currently charged
by the Partnership and could result in private payment sources such as
third-party insurers lowering the reimbursement rates they pay to the
Partnership. The General Partner anticipates that over time reimbursement
amounts for both the professional and technical components of the lithotripsy
procedure may continue to decrease. See "Regulation."
Reliability and Efficacy of the Partnership's Lithotripters.The LithostarTM
has a ten-year United States operating history, having received premarket
approval from the FDA for renal lithotripsy on September 30, 1988. This approval
followed a period of clinical testing beginning in February 1987 at four test
sites in the United States, which was preceded by substantial clinical testing
of the LithostarTM at the Urological Clinic of the Johannes Gutenberg University
of Mainz, West Germany. The General Partner estimates that more than 400
LithostarTM systems are currently operating in over twenty countries, and the
General Partner and its Affiliates operate over 30 LithostarsTM in other
ventures. In the General Partner's opinion, the LithostarTM has proven to be
reliable and dependable medical equipment; however, downtime periods
necessitated for maintenance or repairs of the Partnership's Mobile Lithotripsy
Systems will adversely affect Partnership revenues. In 1996, the FDA approved a
new higher intensity shock-head system for the LithostarTM, which the General
Partner believes has shortened procedure times. Only one of the Partnership's
LithostarsTM has been upfitted with the new tube system. The other LithostarTM
is scheduled to be upgraded in 1999. Based upon a detailed follow-up study of
86,000 renal and 51,000 ureteral stones treated on the LithostarTM in all of the
General Partners's affiliated partnerships using both the original and newer
shock-head systems, the General Partner notes an 86% total success rate with an
overall retreatment rate of only 15%. This retreatment rate included stones of
all sizes and locations, including staghorn calculi which at times required
multiple treatments. Based upon this study and the General Partner's experience
in doing well in excess of 128,000 cases over the past nine and one-half years
in its affiliated limited partnerships, the General Partner is of the opinion
that the LithostarTM is presently a very effective and sound alternative for the
treatment of renal stones.
Investors should note that some studies indicate that lithotripsy may cause
high blood pressure and tissue damage. The General Partner questions the
reliability of these studies and believes lithotripsy has become a widely
accepted method for the treatment of renal stones.
Technological Obsolescence. The history of lithotripsy of kidney stones as
an accepted treatment procedure is relatively recent, with the first clinical
trials being conducted in West Germany beginning in 1980 and the first premarket
approval for a renal lithotripter in the United States being granted by the FDA
in December 1984. Today, lithotripsy is the treatment procedure of choice for
kidney stone disease, having replaced other treatment methods. Published reports
indicate that certain researchers are attempting to improve a laser technology
to more easily
2
<PAGE>
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
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 "Business Activities - Anticipated Partnership
Expenditures" and "Sources and Application of Funds." Although the General
Partner maintains good relationships with certain commercial lending
institutions, it has not obtained a loan commitment from any party in any amount
on behalf of the Partnership and whether one would timely be forthcoming on
terms acceptable to the Partnership cannot be assured. The General Partner
and/or its Affiliates may, but are under no obligation to, make loans to the
Partnership, and there is no assurance that they would be willing or able to do
so at the time, in amounts and on terms required by the Partnership. While the
General Partner does not anticipate that it would cause the Partnership to incur
indebtedness unless cash generated from Partnership operations were at the time
expected to enable repayment of such loan in accordance with its terms, lower
than anticipated revenues and/or greater than anticipated expenses could result
in the Partnership's failure to make payments of principal or interest when due
under such a loan and the Partnership's equity being reduced or eliminated. In
such event, the Limited Partners could lose their entire investment.
Acquisition of Additional Assets. 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 Lithotripsy 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. Several competing fixed-site and mobile lithotripters are
currently operating in and around the Service Area in direct competition with
the Partnership's Mobile
3
<PAGE>
Lithotripsy Systems. The competing lithotripsy service providers generally
have existing contracts with hospitals and other facilities, or are hospitals,
themselves. There is no assurance that other parties will not, in the future,
operate fixed-site or mobile lithotripters in and around the Service Area. To
the General Partner's knowledge, no manufacturers are restricted from selling
their lithotripters to other parties in the Service Area. In addition, except as
provided by law, neither the General Partner nor its Affiliates are prohibited
from engaging in any business or arrangement that may compete with the
Partnership. Several ventures affiliated with the General Partner provide
lithotripsy services in the Service Area's vicinity. See "Prior Activities" and
"Competition." Affiliates of the General Partner are planning and conducting
other limited partnership 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
continually convince physicians and potential patients of the quality of the
treatment it can provide, its reasonable 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 Limited Partners' ability 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 as a felony 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 "Stark 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 Stark II, in January, 1998, the Health Care Financing
Administration ("HCFA"), the federal agency responsible for administering the
Medicare program, published proposed Stark II regulations. Under the proposed
regulations, physician Limited Partner referrals of Medicare and Medicaid
patients to contracting hospitals for lithotripsy services would be prohibited.
If HCFA adopts the proposed Stark II regulations as final, or if a reviewing
court were to interpret the Stark II statute using the proposed regulations as
guidance, then the Partnership and its physician Limited Partners would be in
violation of Stark II. In such instance, the Partnership
4
<PAGE>
and/or its physician Limited Partners may be required to refund any amounts
collected from Medicare and Medicaid patients in violation of the statute, and
they may be subject to civil monetary penalties and/or exclusion from the
Medicare and Medicaid programs.
The Anti-Kickback Statute prohibits paying or receiving any remuneration in
exchange for making a referral for healthcare services which may be paid for by
Medicare, Medicaid or CHAMPUS. The law has been broadly interpreted to include
any payments which may induce or influence a physician to refer patients. One of
the federal agencies that enforces the Anti- Kickback Statute has issued several
"safe harbors" which, if complied with, result in the payment or transaction
being deemed not to violate the law. This Offering does not comply with any
"safe harbor." There is limited guidance from reviewing courts regarding the
application of the broad language of the Anti-Kickback Statute to joint ventures
similar to the one described in this Offering. In order to prove violations of
the Anti-Kickback law, the government must establish that one or more parties
offered, solicited or paid remuneration to induce or reward referrals. The
government has said that in certain situations the mere offering of an
opportunity to invest in a venture would constitute illegal remuneration in
violation of the Anti-Kickback Statute. Although the General Partner believes
that the structure and purpose of the Partnership is in compliance with the
Anti- Kickback Statute, there is no assurance 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 Stark 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.
Regarding state law, various licensure requirements must be met for the
Partnership to provide mobile lithotripsy services in Texas, and the General
Partner has complied with such requirements. See "Regulation - State
Regulation."
Contract Terms and Termination. The Partnership provides lithotripsy
services to 8 Contract Hospitals pursuant to 8 separate Hospital Contracts.
Many, but not all, of the Hospital Contracts grant the Partnership the exclusive
right to provide Lithotripsy Services at the particular Contract Hospitals.
Substantially all of the Hospital Contracts provide for automatic renewal on a
year-to-year basis. Four of the Hospital Contracts are terminable without cause
upon 90 days or less written notice by either party prior to any renewal date or
the noticed termination date, or upon customary events of default. The General
Partner believes it has a good relationship with the Contract Hospitals and does
not anticipate significant terminations. There is no assurance, however, that
terminations will either not occur or that the resulting impact to the
Partnership would not have a material adverse effect on Partnership operations.
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, provisions permitting termination in the
event certain laws or
5
<PAGE>
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 "Proposed Activities - Business Activities -
Hospital Contracts"and "Risk Factors - Competition."
Loss on Dissolution and Termination. Upon the dissolution and termination
of the Partnership, the proceeds realized from the liquidation of its assets, if
any, will be distributed to its partners only after satisfaction of the claims
of all creditors. Accordingly, the ability of a Limited Partner to recover all
or any portion of his investment under such circumstances will depend on the
amount of funds so realized and the claims to be satisfied therefrom. See
"Summary of the Partnership Agreement - Optional Purchase of Limited Partner
Interests."
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. Siemens, the manufacturer of the LithostarTM, has
not assured Prime that its LithostarsTM 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 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
6
<PAGE>
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 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, however, and there is no assurance that any deductions,
or the period in which deductions may be claimed, will not be challenged by the
Service. Each Investor should carefully review the following risk factors and
consult his own tax advisor with respect to the federal, state and local income
tax consequences of an investment in the Partnership.
THE TAX RISKS SET FORTH IN THIS SECTION ARE NOT INTENDED TO BE AN EXHAUSTIVE
LIST OF THE GENERAL OR SPECIFIC TAX RISKS RELATING TO THE PURCHASE OF UNITS IN
THE PARTNERSHIP. EACH INVESTOR IS DIRECTED TO THE FULL OPINION OF COUNSEL
(APPENDIX C TO THE MEMORANDUM). IT IS STRONGLY RECOMMENDED THAT EACH INVESTOR
INDE PENDENTLY CONSULT HIS PERSONAL TAX COUNSEL CONCERNING THE TAX CONSEQUENCES
ASSOCIATED WITH HIS OWNERSHIP OF AN INTEREST IN THE PARTNERSHIP. THE CONCLUSIONS
REACHED IN THE OPINION ARE RENDERED WITHOUT ASSURANCE THAT SUCH CONCLUSIONS HAVE
BEEN OR WILL BE ACCEPTED BY THE SERVICE OR THE COURTS.
THIS MEMORANDUM AND THE OPINION DO NOT DISCUSS, NOR WILL COUNSEL BE RENDERING AN
OPINION REGARDING, THE ESTATE AND GIFT TAX OR STATE AND LOCAL INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP. FURTHERMORE, INVESTORS SHOULD
NOTE THAT THE ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN
THE PARTNERSHIP MAY BE ADVERSELY AFFECTED BY FUTURE CHANGES IN THE FEDERAL
INCOME TAX LAWS, WHETHER BY FUTURE ACTS OF CONGRESS OR FUTURE ADMINISTRATIVE AND
JUDICIAL INTERPRETATIONS OF APPLICABLE FEDERAL INCOME TAX LAWS. ANY OF THE
FOREGOING MAY BE GIVEN RETROACTIVE EFFECT.
Possible Legislative or Other Actions Effecting Tax Consequences. The
federal income tax treatment of an investment in an equipment/service oriented
limited partnership such as the Partnership may be modified by legislative,
judicial or administrative action at any time, and any such action may
retroactively affect investments and commitments previously made. The rules
dealing with federal income taxation of limited partnerships are constantly
under review by the
7
<PAGE>
Service, resulting in revisions of its regulations and revised
interpretations of established concepts. In evaluating an investment in the
Partnership each Investor should consult with his personal tax advisor with
respect to possible legislative, judicial and administrative developments.
Disqualification of Employee Benefit Plans. Purchase of Units in the
Partnership may cause certain Limited Partners, certain hospitals and
out-patient centers, the Partnership, and employees of the foregoing to be
treated under Section 414(m) of the Code as being employed in the aggregate by a
single employer or "affiliated service group" for purposes of minimum coverage,
participation and other employee benefit plan requirements imposed by the Code.
In contrast, an employer not affiliated under Section 414(m) need only consider
its own employees in determining whether its employee benefit plans satisfy Code
requirements. Aggregation of employees could cause the disqualification of the
retirement plans of certain Limited Partners and related entities. Aggregation
could also require the value of the vested retirement benefit of a highly
compensated employee who is a participant in a disqualified plan to be included
in his gross income, regardless of whether the employee is a Limited Partner.
These rules may adversely affect Investors who are currently involved in a
medical practice joint venture, regardless of their purchase of Units in the
Partnership. The General Partner and 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.
Partnership Allocations. The Partnership Agreement contains certain
allocations of profits and losses that could be reallocated by the Service if it
were determined that the allocations did not have "substantial economic effect."
On December 31, 1985 the Regulations dealing with the propriety of partnership
allocations were finalized. As a general rule, allocations of profits and losses
must have "substantial economic effect." Based upon current law, Counsel is of
the opinion that, if the question were litigated, it is more probable than not
that the allocation of profits and losses set forth in the Partnership Agreement
would be sustained for federal income tax purposes. This opinion is subject to
certain assumptions and qualifications. Investors are cautioned that the
foregoing opinion is based in part upon final regulations which have not been
extensively commented upon or construed by the courts.
Income in Excess of Distributions. The Partnership Agreement provides that
in each year annual Distributions may be made to the Partners. Excluded from the
definition of cash available for distribution is the amount of funds necessary
to discharge Partnership debts and to maintain certain cash reserves deemed
necessary by the General Partner. If Partnership Cash Flow is insufficient to
fund expenses and maintain adequate reserves, a Limited Partner could be subject
to income taxes payable out of personal funds to the extent of the Partnership's
income, if any, attributed to him without receiving from the Partnership
sufficient Distributions to pay the Limited Partner's tax with respect to such
income.
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Passive Income and Losses The General Partner expects the Partnership will
realize taxable income and not taxable losses during the next five years of
operation. Nevertheless, if it realizes taxable losses, the use of such losses
by the Limited Partners will generally be limited by Code Section 469. Code
Section 469 provides limitations for the use of taxable losses attributable to
"passive activities." Code Section 469 operates generally to prohibit passive
losses from being used except against income from passive activities.
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 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 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.
Taxable Income The Partnership Agreement provides that in each year of the
Part nership, annual Distributions may be made to the Partners. Excluded from
the definition of cash available for Distributions, however, is the amount of
funds necessary to amortize Partnership debts and to maintain certain cash
reserves deemed necessary by the General Partner. The Partnership may also incur
significant capital costs that may have to be paid out of Partnership revenues.
Thus, taxable income may very well exceed cash available for distribution.
Because of the circumstances outlined above, if Partnership cash flow falls
substantially below a certain level, 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.
Other Investment Risks
Conflicts of Interest. The activities of the Partnership involve numerous
existing and potential conflicts of interest between the Partnership, the
General Partner and their Affiliates. See "Compensation and Reimbursement to the
General Partner and its Affiliates," "General Partner," "Competition" and
"Conflicts of Interest."
No Participation in Management. The General Partner has full authority to
supervise the business and affairs of the Partnership pursuant to the
Partnership Agreement and the Management Agreement. Limited Partners have no
right to participate in the management or conduct of the Partnership's business
and affairs. The General Partner, its employees and its Affiliates are not
required to devote their full time to the Partnership's affairs and intend to
continue
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devoting substantial time and effort to organizing and operating
partnerships and other ventures throughout the United States that are similar to
the Partnership. The General Partner will continue to devote such time to the
Partnership's business and affairs as it deems necessary and appropriate in the
exercise of reasonable judgment. The participation by any Limited Partner in the
management or control of the Partnership's affairs could render him generally
liable for the liabilities of the Partnership that could not be satisfied by
assets of the Partnership. See the Form of Legal Opinion of Womble Carlyle
Sandridge & Rice, a Professional Limited Liability Company, attached hereto as
Appendix C.
Limited Partners' Obligation to Return Certain Distributions. Except as
provided by other applicable law and provided that a Limited Partner does not
participate in the management of the Partnership, he or she 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 with respect to their Partnership interests
and liabilities for which the recourse of creditors is limited to specific
property of the limited partnership, exceed the fair value of the assets of the
Partnership, except that the fair value of property that is subject to a
liability for which recourse of creditors is limited shall be included in the
Partnership assets only to the extent that the fair value of such property
excludes 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"); provided that the Percentage Interests of the General
Partner and Initial Limited Partners, as in effect prior to the commencement of
this Offering, may not be diluted through Dilution Offerings (including this
Offering) by more than 20% in the aggregate without the prior written consent of
a Majority in Interest of all the Partners. Upon the sale of interests in the
Partnership in a Dilution Offering, the Percentage Interests of the Partners
will be proportionately diluted. See "Summary of the Partnership Agreement -
Dilution Offerings."
Liability Under Limited Partner Loan. Investors 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 the Limited Partnership 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
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requirements discussed below, any prospective Investor applying for a Bank
loan to fund a portion of his Unit purchase must be approved by the Bank for
purposes of his delivery of the Limited Partner Note. The Bank has established
its own criteria for approving the creditworthiness of a prospective Investor
and has not established objective minimum suitability standards. Instead, the
Bank is empowered to accept or reject prospective Investors.
Long-term Investment. The General Partner anticipates that the Partnership
will continue to operate the 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.
Arbitrary Offering Price. The offering price of the Units has been
determined by the General Partner based upon valuation of the Partnership
conducted by an independent third party based on various assumptions that may or
may not occur. A copy of this valuation will be made available on request. The
offering price of the Units is not, however, necessarily indicative of their
value, if any, and no assurance can be given that the Units, if and when
transferable, could be sold for the offering price or for any amount.
Limitation of General Partner's Liability and Indemnification. The
Partnership Agreement provides that the General Partner will not be liable to
the Partnership or to any Partner for errors in judgment or other acts or
omissions in connection with the Partnership as long as the General Partner, in
good faith, determined such course of conduct was in the best interest of the
Partnership, and such course of conduct did not constitute willful misconduct or
gross negligence. Therefore, the Limited Partners may have a more limited right
of action against the General Partner in the event of its misfeasance or
malfeasance than they would have absent the limitations in the Partnership
Agreement. The Partnership will indemnify the General Partner against losses
sustained by the General Partner in connection with the Partnership, unless such
losses came as a result of the General Partner's gross negligence or willful
misconduct. In the opinion of the SEC, indemnification
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for liabilities arising out of the Securities Act is contrary to public
policy and therefore is unenforceable.
Insurance. Prime maintains active policies of insurance for the benefit of
itself and certain affiliated entities covering employee crime, workers'
compensation, business and commercial automobile operations, professional
liability, inland marine, business interruption, real property and commercial
liability risks. These policies include the Partnership, and the General Partner
believes that coverage limits of these policies are within acceptable norms for
the extent and nature of the risks covered. The Partnership is responsible for
its share of premium costs. There are certain types of losses, however, that are
either uninsurable or are not economically insurable. For instance, contractual
liability is generally not covered under Prime's policies. Should such losses
occur with respect to Partnership operations, or should losses exceed insurance
coverage limits, the Partnership could suffer a loss of the capital invested in
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 and the Limited Partners have the
option to purchase all the interest of a Limited Partner who (i) dies, (ii)
becomes insolvent or (iii) acquires a direct or indirect ownership of an
interest in a competing venture. The option purchase price is an amount equal to
the withdrawing 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 as reflected 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.
See the form of the Partnership Agreement attached hereto as Appendix A and
"Summary of the Partnership Agreement - Optional Purchase of Limited Partner
Interests."
THE PARTNERSHIP
Texas Lithotripsy Limited Partnership I L.P., a Texas limited partnership
(the "Partnership") was organized and created under the Texas Revised Limited
Partnership Act (the "Act") on June 5, 1990. The general partner of the
Partnership is Lithotripters, Inc., a North Carolina corporation (the "General
Partner"), and a wholly owned subsidiary of Prime Medical Services, Inc.
("Prime"). The General Partner currently holds a 20% interest in the Partnership
in its capacity as the general partner and the existing limited partners (the
"Initial Limited Partners") currently hold the remaining 80% interest in the
Partnership as limited partners (including a 26.5% limited partner interest held
by the General Partner and a 13% limited partner interest held by Affiliates of
the General Partner). In the event that all 20 Units offered hereby are sold,
the General Partner will hold approximately a 17% general partner interest in
the Partnership, the Initial Limited Partners will hold approximately a 67%
limited partner interest in the Partnership and the Investors who purchase the
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Units offered hereby (the "New Limited Partners") will hold an aggregate
16.67% interest in the Partnership. The Percentage Interests of the General
Partner and Initial Limited Partners (aggregate) will decrease by approximately
0.166% and 0.664%, respectively, for each Unit sold. The principal address of
the Partnership and the General Partner is 2008 Litho Place, Fayetteville, North
Carolina 28034. The telephone number of the Partnership and the General Partner
is (800) 682-7971.
TERMS OF THE OFFERING
The Units and Subscription Price
Texas Lithotripsy Limited Partnership I L.P., a limited partnership formed
under the laws of the State of Texas, hereby offers an aggregate of 20 Units of
limited partner interest in the Partnership (the "Units"). Each Unit represents
an initial 0.83% economic interest in the Partnership. See "Risk Factors - Other
Investment Risks - Dilution of Limited Partners' Interests." Each Investor may
purchase not less than one Unit. The General Partner may, however, in its sole
discretion, sell less than one Unit as a minimum investment and reject in whole
or in part any subscription. The price for each Unit is $12,575 in cash payable
at subscription; however, certain qualified Investors may fund a portion of the
purchase price through Limited Partner Loans the Partnership has arranged with
the Bank. See "Terms of the Offering - Limited Partner Loans." The Proceeds of
the Offering will first be used by the Partnership to pay offering costs and
expenses, and the remainder of the proceeds will be used to upgrade one of the
Partnership's LithostarsTM (estimated at $75,000), to recondition the
Partnership's Coach (estimated at $50,000) and to pay for a "loaner" Mobile
Lithotripsy System during the time the Partnership's Coach is being
reconditioned (estimated at $8,750 loaner per week for a seven week period). See
"Sources and Applications of Funds." The proceeds of this Offering cannot be
calculated until the number of Units sold has been determined at the Closing. To
the extent the proceeds of the Offering are insufficient to fund the costs
described above, 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, however, that Partnership Cash Flow or debt
financing will be available for such purposes. See "Risk Factors - Operating
Risks - Partnership Limited Resources and Risks of Leverage."
Acceptance of Subscriptions
An Investor that pays the full amount of his or her Unit purchase price
with a check at subscription and whose subscription is received and accepted by
the Partnership, will become a Limited Partner in the Partnership, and his or
her subscription funds will be released from escrow to the Partnership.
Acceptance by the General Partner of a subscription of an Investor that elects
to finance a portion of the Unit purchase price with the proceeds of a Limited
Partner Note is conditioned upon the Bank's approval of such loan. If the
financing Investor is otherwise acceptable to the Partnership, after receipt of
the Bank's approval, the Partnership will inform the Escrow Agent that it has
accepted the Investor's subscription and the Escrow Agent will release the Loan
Documents to the Bank and the Bank will pay the proceeds from the Limited
Partner Loan to the
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Partnership. The Investor will become a Limited Partner in the Partnership
at the time the Bank releases the proceeds of his or her Limited Partner Note to
the Partnership. Subscriptions may be rejected in whole or in part by the
Partnership and need not be accepted in the order received. To the extent the
Partnership reduces an Investor's subscription as provided above, the Investor's
cash Unit purchase price, or the principal amount of his Limited Partner Note,
as the case may be, will be proportionately refunded and reduced. Notice of
acceptance of an Investor's subscription to purchase Units and his Percentage
Interest in the Partnership will be furnished promptly after acceptance of the
Investor's Subscription.
Limited Partner Loans
The purchase price for the Units is payable in cash 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 B.
If the prospective Investor wishes to finance a portion of the purchase price of
his Units as provided herein, he or she must deliver to the Sales Agent upon
submission of his Subscription Packet an executed Limited Partner Note payable
to the Bank and Note Addendum, the form of which are attached as Exhibit A to
the Loan Commitment, a Loan and Security Agreement, the form of which is
attached as Exhibit B to the Loan Commitment, a Security Agreement, the form of
which is attached as Exhibit C to the Loan Commitment and two UCC-1's, the form
of which are attached to the Subscription Packet (collectively, the "Loan
Documents"). In no event may the maximum amount borrowed per Unit exceed
$10,075. 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
January 1999), 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 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
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prospective Investor's percentage Partnership Interest to fund installment
payments due on the prospective Investor's Limited Partner Note. See the form of
the Loan and Security Agreement attached as Exhibit B to the Loan Commitment
which is attached hereto as Appendix B.
If the prospective Investor is approved by the Bank and is acceptable to
the General Partner, the Escrow Agent will, upon acceptance of the Investor's
subscription by the General Partner, release the Loan Documents to the Bank and
the Bank will pay the proceeds of the Limited Partner Note to the Partnership to
fund a portion of the Investor's Unit purchase. The prospective Investor will
have substantial exposure under the Limited Partner Note. Regardless of the
results of 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 faith deems
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."
Subscription Period; Closing
The subscription period will commence on the date hereof and will terminate
at 5:00 p.m., Central time, on January 20, 1999 (the "Closing Date"), unless
sooner terminated by the General Partner or unless extended for an additional
period up to 180 days. See "Plan of Distribution."
Offering Exemption
The Units are being offered and will be sold in reliance on an exemption
from the registration requirements of the Securities Act of 1933, as amended,
provided by Section 4(2) thereof and Rule 506 of Regulation D promulgated
thereunder, as amended, and an exemption from state registration provided by the
National Securities Markets Improvement Act of 1996. The suitability standards
set forth below have been established in order to comply with the terms of these
offering exemptions.
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Suitability Standards
In addition to the suitability requirements discussed below, each Investor
wishing to obtain a Limited Partner Loan must be approved by the Bank. The Bank
has established its own criteria for approving the credit-worthiness of
Investors and has not established objective minimum suitability standards. The
Bank has sole discretion to accept or reject any Investor.
An investment in the Partnership involves a high degree of financial risk
and is suitable only for persons of substantial financial means who have no need
for liquidity in their investments and who can afford to lose all of their
investment. See "Terms of The Offering - Limited Partner Loans." An Investor
should not purchase a Unit if the Investor does not have resources sufficient to
bear the loss of the entire amount of the purchase price, including any portion
financed. The General Partner anticipates selling Units only to individual
investors; however, the General Partner reserves the right to sell Units to
entities.
Because of the risks involved, the General Partner anticipates selling the
Units only to Investors residing in Texas who it reasonably believes meet the
definition of "accredited investor" as that term is defined in Rule 501 under
the Securities Act, but reserves the right to sell up to 35 Investors who are
nonaccredited investors. Certain institutions and the following individuals are
"accredited investors":
(1) An individual whose net worth (or joint net worth with his or her spouse)
exceeds $1,000,000 at the time of subscription;
(2) An individual who has had an individual income in excess of $200,000 in each
of the two most recent fiscal years and who reasonably expects an individual
income in excess of $200,000 in the current year; or
(3) An individual who has had with his or her spouse a joint income in excess of
$300,000 in each of the two most recent fiscal years and who reasonably expects
a joint income in excess of $300,000 in the current year.
Investors must also be at least 21 years old and otherwise duly qualified
to acquire and hold partnership interests. The General Partner reserves the
right to refuse to sell Units to any person, subject to Federal and applicable
state securities laws.
Each Investor must make an independent judgment, in consultation with his
own counsel, accountant, investment advisor or business advisor, as to whether
an investment in the Units is advisable. The fact that an Investor meets the
Partnership's suitability standards should in no way be taken as an indication
that an investment in the Units is advisable for that Investor.
It is anticipated that suitability standards comparable to those set forth
above will be imposed by the Partnership in connection with resales, if any, of
the Units. Transferability of Units
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is severely restricted by the Partnership Agreement and the Subscription
Agreement. See "Summary of the Partnership Agreement."
Investors who wish to subscribe for Units must represent to the Partnership
that they meet the foregoing standards by completing and delivering to the Sales
Agent a Purchaser Questionnaire in the form included in the Subscription Packet.
Each Purchaser Representative, if any, acting on behalf of an Investor in
connection with this offering must complete and deliver to the Sales Agent a
Purchaser Representative Questionnaire (a copy of which is available upon
request to the General Partner).
How to Invest
Investors who meet the qualifications for investment in the Partnership and
who wish to subscribe for Units may do so 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 (in
the form included in the Subscription Packet), or in lieu thereof, substituting
the Investor's own personal executed financial statement, as long as such
substitute statement contains the same information as in the form provided, 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 Investor is financing a portion of the Unit purchase price with 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 Form of Bank Commitment);
f. If the Investor is financing a portion of the Unit purchase price with 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 Form of Bank Commitment);
g. If the Investor is financing a portion of the Unit purchase price with 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 Form of Bank Commitment);
h. If the Investor is financing a portion of the Unit purchase price with a
Limited Partner Loan, by completing and signing two copies of the UCC-1 (the
form of which is included in the Subscription Packet); and
i. By delivering or mailing all of the foregoing together with a check in
the amount of $12,575 per Unit subscribed for, or $2,500 per Unit subscribed
for, if the investor is financing a portion of the Unit purchase price through a
Limited Partner Loan, payable to "First-Citizens as Escrow Agent for Texas I
L.P." to the Sales Agent at 2008 Litho Place, Fayetteville, North Carolina
28304.
All information provided by Investors, including the information in 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
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acquire only the rights of the assignor in the profits and capital of the
Partnership and not the rights of a Limited Partner, unless such assignee
becomes a substituted Limited Partner. An assignee may not become a substituted
Limited Partner without (i) either the written consent of the assignor and the
General Partner, or the consent of a Majority in Interest of the Limited
Partners (except the assignor Limited Partner) and the General Partner, (ii) the
submission of certain documents and (iii) the payment of expenses incurred by
the Partnership in effecting the substitution. An assignee, regardless of
whether he becomes a substituted Limited Partner, will be subject to and bound
by all the terms and conditions of the Partnership Agreement with respect to the
assigned Units. See "Summary of the Partnership Interest - Restrictions on
Transfer of Partnership Interests."
PLAN OF DISTRIBUTION
Subscriptions for Units will be solicited by MedTech Investments, Inc., the
Sales Agent, which is an Affiliate of the General Partner. The Sales Agent has
entered into a Sales Agency Agreement with the Partnership pursuant to which the
Sales Agent has agreed to act as exclusive agent for the placement of the Units
on a "best efforts" any or all basis. The Sales Agent is not obligated to
purchase any Units.
The Sales Agent is a North Carolina Corporation that was formed on December
23, 1987, and became a member of the National Association of Securities Dealers
on March 15, 1988. The Sales Agent will be engaged in other similar offerings on
behalf of the General Partner and its Affiliates during the pendency of this
offering and in the future. The Sales Agent is a wholly owned subsidiary of
Prime, which also owns all the stock of the General Partner. Investors should
note the material relationship between the Sales Agent and the General Partner,
and are advised that the relationship creates conflicts in the Sales Agent's
performance of its due diligence responsibilities under the Federal securities
laws.
As compensation for its services, the Sales Agent will receive a commission
equal to $250 for each Unit sold. No other commissions will be paid in
connection with this Offering. Subject to the conditions as provided above, the
Sales Agent may be reimbursed by the Partnership for its out-of-pocket expenses
associated with the sale of the Units in an amount not to exceed $7,500. 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., Austin, Texas time, on January 20, 1999, (or earlier, in the
discretion of the General Partner), unless extended at the discretion of the
General Partner for an additional period not to exceed 180 days.
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The Partnership seeks by this Offering to sell a maximum of 20 Units for a
maximum of an aggregate of $251,500 in cash ($246,500 net of Sales Agent
Commissions). The Partnership has set no minimum number of Units to be sold in
this Offering. The subscription funds, and Loan documents, if any, received from
each Investor will be held in escrow (which, in the case of cash subscription
funds, shall be held in an interest bearing escrow account with the Bank) until
either the Investor's subscription is accepted by the Partnership (and approved
by the Bank in the case of financed purchases of Units), the Partnership rejects
the subscription or the Offering is terminated. Upon the receipt and acceptance
of an Investor's subscription, which, if the Investor intends to finance a
portion of the Unit purchase price with a Limited Partner Loan, will be
conditioned upon the Bank's approval of the Loan, the Investor will be admitted
to the Partnership as a Limited Partner. Upon admission as a Limited Partner,
the Investor's subscription funds will be released from escrow to the
Partnership, and the Loan Documents, if any, will be released to the Bank which
will pay the proceeds from the Limited Partner Note to the Partnership. In the
event a subscription is not accepted, all subscription funds (without interest),
the Loan Documents and other subscription documents held in escrow will be
promptly returned to the rejected Investor. The Offering will terminate on
January 20, 1999, unless it is sooner terminated by the General Partner, or
unless extended for an additional period not to exceed 180 days. See "Terms of
the Offering - Subscription Period; Closing."
BUSINESS ACTIVITIES
General
The Partnership was formed to (i) acquire the Mobile Lithotripsy Systems
and operate it at various locations primarily in south Texas, (ii) improve the
provision of health-care in the Partnership's service area by taking advantage
of both the technological innovations inherent in the LithostarTM and the
Partnership's quality assurance and outcome analysis programs, and (iii) make
cash distributions to its Partners from revenues generated by the operation of
the Mobile Lithotripsy Systems. The Partnership owns and operates two Mobile
Lithotripsy Systems in the Service Area and has contracted with 8 hospitals and
medical centers to provide lithotripsy services for a per procedure fee.
Treatment Methods for Kidney Stone Disease
Urolithiasis, or kidney stone disease, affects an estimated 600,000 persons
per year in the United States. The exact cause of kidney stone formation is
unclear, although it has been attributed to diet, climate, metabolism and
certain medications. Approximately 75% of all urinary stones pass spontaneously,
usually within one to two weeks, and require little or no clinical or surgical
intervention. All other kidney stones, however, require some form of medical or
surgical treatment. A number of methods are currently used to treat kidney
stones. These methods include drug therapy, cystoscopic procedures, endoscopic
procedures, laser procedures, open surgery, percutaneous lithotripsy and
extracorporeal shock wave lithotripsy. The type of treatment a urologist
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chooses depends on a number of factors such as the size of the stone, its
location in the urinary system and whether the stone is contributing to other
urinary complications such as blockage or infection. The extracorporeal shock
wave lithotripter, introduced in the United States from West Germany in 1984,
has dramatically changed the course of kidney stone disease treatment. The
General Partner estimates that currently up to 95% of all kidney stones that
require treatment can be treated by lithotripsy. Lithotripsy involves the use of
shock waves to disintegrate kidney stones noninvasively.
The LithostarTM
The LithostarTM was developed as a cooperative venture between Siemens and
the Urological Clinic at Johannes Gutenberg University in Mainz, West Germany.
As a part of this venture, a Lithostar prototype was installed in March 1986 at
the Urological Clinic at the University of Mainz with successful results. On
November 18, 1987 the LithostarTM was unanimously recommended for approval by
the FDA's advisory panel of experts for urology devices. On September 30, 1988
the LithostarTM received FDA premarket approval for use in the United States for
renal lithotripsy. On April 18, 1989, the FDA approved the LithostarTM for
mobile lithotripsy. On July 1, 1996, the FDA approved a new higher intensity
shock-head system for the LithostarTM which has since been installed in one of
the Partnership's LithostarsTM and is scheduled to be installed in the other
LithostarTM in 1999. Currently, the General Partner estimates that more than 400
LithostarTM systems are performing lithotripsy procedures in over 20 countries
throughout the world. All components of the LithostarTM are manufactured by
Siemens, a diversified multinational company.
The LithostarTM was designed with a view towards substantially improving
early lithotripsy technology. See "Proposed Activities - Treatment Methods for
Kidney Stone Disease - Extracorporeal Shock-Wave Lithotripsy." Technological
improvements incorporated into the LithostarTM include an improved work station,
a shock-wave component that has eliminated the need for both water bath
treatment and disposable electrodes, and an excellent stone localization and
imaging system. Based upon its experience in its affiliated lithotripsy
ventures, the General Partner believes that most patients can be treated with
the LithostarTM without anesthesia of any kind. The General Partner also
believes that LithostarsTM upfitted with the higher intensity shock-head system
experience somewhat shorter treatment durations.
Based upon its experience with over 30 LithostarsTM in other limited
partnerships sponsored by the General Partner and its Affiliates, the General
Partner has found that the LithostarTM can fragment most kidney stones without
anesthesia, cystoscopy or the insertion of ureteral catheters. Because of the
General Partner's belief in the superior imaging of the LithostarTM, the General
Partner believes that lithotripsy with the LithostarTM provides for treatment of
lower ureteral stones, even impacted stones, thereby rendering ureteroscopy
practically obsolete as a treatment of first choice.
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The Coach and Trailer
The Partnership's Coach and Trailer, each of which houses a LithostarTM,
were acquired by the Partnership in 1991 and early 1998, respectively. The Coach
and the Trailer have each been completely upfitted for the LithostarTM and its
clinical operations. Service for the Coach and the Trailer is obtained on an
as-needed basis. The General Partner estimates that expenditures for maintenance
and repair have been incurred at a rate of approximately $15,000 per year per
Unit.
Anticipated Partnership Expenditures
The Partnership's LithostarTM that has not been upgraded with the new high
intensity shock head, is scheduled to receive such upgrade in 1999 at an
estimated cost of $75,000. The General Partner anticipates that the upgrade
process will be brief and will not interfere with the Partnership's normal
lithotripsy service. The Partnership's Coach is scheduled to be reconditioned in
1999 at an estimated cost of $50,000. The Partnership's Trailer is scheduled to
be reconditioned in 2003 at an estimated cost of $65,000. The reconditioning
payments would be paid to AK Associates, an Affiliate of the General Partner
engaged in the selling and refurbishment of medical equipment trailers and
coaches. See "Compensation and Reimbursement to the General Partner and its
Affiliates." Reconditioning 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 the Coach and Trailer are being Reconditioned, the Partnership will
likely rent a replacement Mobile Lithotripsy System from the General Partner or
its Affiliates at an estimated per week rate of $8,750. Any necessary Coach or
Trailer maintenance is likely to be performed by an Affiliate of the General
Partner at commercially reasonable rates. See "Compensation and Reimbursement to
the General Partner and its Affiliates."
Acquisition of Additional Assets
If in the future the General Partner determines that it is in the best
interest of the Partnership to acquire (i) an additional Mobile Lithotripsy
System or (ii) any other assets related to the provision of lithotripsy
services, the General Partner may, without the consent of the Limited Partners,
establish reserves or borrow funds on behalf of the Partnership to acquire such
assets, and may use Partnership assets and revenues to secure and repay such
borrowings. Any additional borrowing by the Partnership will serve to increase
the risks associated with leverage.
Hospital Contracts
The Partnership has entered into Hospital Contracts with 8 Contract
Hospitals to operate the Mobile Lithotripsy Systems at the Contract Hospitals.
Most of the Hospital Contracts have an initial term of one year and
automatically renew for successive one-year periods unless the Partnership or
the hospital delivers to the other party written notice of its decision not to
renew the agreement at least 60 days prior to the anticipated termination date.
Four of the Hospital Contracts
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are also terminable without cause at any time by either party on short
notice, generally 90 days or less. The Contract Hospitals are:
AMI Brownsville Medical Center, Brownsville
Citizens Medical Center, Victoria
Doctors Regional Medical Center, Corpus Christi
Knapp Medical Center, Weslaco
McAllen Medical Center, McAllen
Mercy Regional Medical Center, Laredo
Spohn Hospital, Corpus Christi
Valley Baptist Medical Center, Harlingen
The terms of certain Hospital Contracts prohibit the Partnership from
expanding operations into certain areas of south Texas not currently served by
the Partnership.
The Hospital Contracts require each hospital to provide the Mobile
Lithotripsy Systems with site pad space, utility hookups, nonphysician medical
personnel and billing and accounting services in exchange for the right to
collect a fee from each patient who undergoes a Lithotripsy procedure at that
hospital. The General Partner is attempting to negotiate similar agreements with
additional hospitals or outpatient surgical centers located in south Texas.
The Partnership or the hospital charges a lithotripsy technology fee to
each patient treated with a LithostarTM which is separate and apart from any
professional fee charged by the physician who performs the lithotripsy
procedure. The technology fee received from privately insured patients averages
approximately $3,500 while the fee received from government program patients is
significantly less. There is no assurance that these fee levels can be
maintained as the lithotripsy fees charged by the Partnership or hospitals are
largely dependent upon the amount of reimbursement private health care insurers
will allow for this procedure. In addition, most of the Hospital Contracts
provide that the fee charged to public program payors by the Partnership for use
of the lithotripter must at all times be equal to or less than the lowest amount
the Partnership charges any privately insured patient. See "Risk Factors -
Dependence on Insurance Reimbursement."
Management
The Partnership has entered into a management agreement (the "Management
Agreement") with the General Partner whereby the General Partner is obligated to
supervise and coordinate the management and administration of the operation of
the Mobile Lithotripsy Systems on behalf of the Partnership in exchange for a
monthly management fee equal to the greater of 7.5%
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of Partnership Cash Flow per month or $8,000 per month. See "Compensation and
Reimbursement to the General Partner and its Affiliates." The General Partner's
services under the Management Agreement include training physicians in the
proper use of the LithostarsTM, monitoring technological developments in renal
lithotripsy and advising the Partnership of these developments, arranging
education programs for qualified physicians who use the LithostarsTM and
providing advertising, billing, accounts collection, equipment maintenance,
medical supply inventory and other incidental services necessary for the
efficient operation of the Mobile Lithotripsy Systems. Costs incurred by the
General Partner in performing its duties under the Management Agreement are the
responsibility of the Partnership. The General Partner's engagement under the
Management Agreement is as an independent contractor and neither the Partnership
nor its Limited Partners have any authority or control over the method or manner
in which the General Partner performs its duties under the Management Agreement.
The Management Agreement is in the first 5-year renewal term and will be up for
a second renewal for an additional five-year term in 2001. Thereafter, it will
be automatically renewed for an additional term unless terminated by the
Partnership or the General Partner.
Employees
The Partnership employs as full time employees a total of two registered
technicians, two registered nurses and one driver.
THE GENERAL PARTNER
General. The General Partner of the Partnership is Lithotripters, Inc., a
North Carolina corporation formed in November 1987 for the purpose of sponsoring
medical service limited partnerships. The General Partner was founded by William
R. Jordan, M.D. and became a wholly owned subsidiary of Prime in 1996. See
"Conflicts of Interest" and "Prior Activities." The principal executive office
of the General Partner is located at 2008 Litho Place, Fayetteville, North
Carolina 28304, and its telephone number is (800) 682-7971.
Management. The following table sets forth the names and respective
positions of the individuals serving as executive officers and directors of the
General Partner, many of whom were shareholders of the General Partner prior to
its acquisition by Prime and/or are current shareholders and/or management
personnel of Prime.
Name Office
Joseph Jenkins, M.D. President, Chief Executive Officer
and Director
Kenneth S. Shifrin Director
W. Alan Terry Chief Financial Officer
Cheryl Williams Vice President and Director
Philip J. Gallina Secretary and Treasurer
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Supervision of the day-to-day management and administration of the
Partnership is the responsibility of the General Partner. The General Partner
itself is managed by a three-member Board of Directors composed of Dr. Jenkins,
Mr. Shifrin and Ms. Williams. The General Partner is a wholly-owned subsidiary
of Prime.
Descriptions of the background of the executive officers and directors of
the General Partner appear below.
Joseph Jenkins, M.D. has been President of Prime since April 1996. From May
1990 until December 1991, Dr. Jenkins was a Vice President of the General
Partner and previously practiced urology in Washington, North Carolina. Dr.
Jenkins has been President of the General Partner since 1992 and was recently
elected to is Board of Directors. Dr. Jenkins is a board certified urologist and
is a founding member, past-president and currently a Director of the American
Lithotripsy Society.
Kenneth S. Shifrin has been Chairman of the Board and a Director of Prime
since October 1989 and was recently elected a Director of the General Partner
following Prime's acquisition of all of the General Partner's stock. Mr. Shifrin
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.
W. Alan Terry has been Chief Financial Officer of the General Partner since
1991. In August, 1986, Mr. Terry 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 General Partner and served in that capacity until April 1996.
Cheryl Williams is a Director and Vice President of the General Partner.
Ms. Williams has been Chief Financial Officer, Vice President-Finance and
Secretary of Prime since October 1989. Ms. Williams was Controller of Fairchild
Aircraft Corporation from August 1988 to October 1989. From 1985 to 1988,
Ms. Williams served as the Chief Financial Officer of APS Systems, Inc.
Philip J. Gallina recently became the Secretary and Treasurer of the
General Partner, having previously served as a Vice President since 1989. Mr.
Gallina is a Certified Public Accountant licensed in the state of Pennsylvania.
From 1980 through February 1989, Mr. Gallina served as Plant Controller for the
Westinghouse Motor Control and Enclosed Control Product Lines. Mr. Gallina is
also a Director, the Vice President, the Treasurer and the Secretary of MedTech
Investments, Inc., the Sales Agent.
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COMPENSATION AND REIMBURSEMENT TO THE
GENERAL PARTNER AND ITS AFFILIATES
The following summary describes the types and, where determinable, the
estimated amounts of reimbursements, compensation and other benefits the General
Partner and its Affiliates will receive in connection with the continued
operation and management of the Partnership and the 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 "Business Activities - Management and Administration" and
"Plan of Distribution."
1. Management Fee. Pursuant to the Management Agreement, the General
Partner has contracted with the Partnership to supervise the management and
administration of the day-to-day operations of the Partnership's lithotripsy
business for a monthly fee equal to the greater of $8,000 or 7.5% of Partnership
Cash Flow per month. All costs incurred by the General Partner in performing its
duties under the Management Agreement are the responsibility of, and are paid
directly or reimbursed by, the Partnership. The General Partner is the
management agent for various affiliated lithotripsy ventures. As a consequence,
many of the General Partner's employees provide various management and
administrative services for numerous ventures, including the Partnership. In
order to properly allocate the costs of the General Partner's employees and
other overhead expenses among the entities for which they provide services, such
costs 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 and overhead costs among various entities results in significant costs
savings for the Partnership. The management fee for any given month is payable
on or before the 30th day of the next succeeding month. The Management Agreement
is in its first five-year renewal term which expires in 2001. The Management
Agreement will be automatically renewed for up to two additional successive
five-year terms unless it is earlier terminated by the Partnership or the
General Partner. The General Partner is reimbursed by the Partnership for all of
its out-of- pocket costs associated with the operation of the Partnership and
the Mobile Lithotripsy Systems, and the Partnership will pay or reimburse to the
General Partner all expenses related to this Offering. No other fees or
compensation will be payable to the General Partner or its Affiliates for
managing the Partnership other than the management fee payable to the General
Partner as provided in the Management Agreement. The Partnership may, however,
contract with the General Partner or its Affiliates to render other services or
provide materials to the Partnership provided that the compensation is at the
then prevailing rate for the type of services and/or materials provided.
2. Partnership Distributions. In its capacity as general partner of the
Partnership, the General Partner is entitled its distributable share (20%,
before dilution) of Partnership Cash Flow, Partnership Sales Proceeds and
Partnership Refinancing Proceeds as provided by the Partnership Agreement. The
General Partner also owns a 26.5% (before dilution) limited partner interest in
the Partnership, and Affiliates of the General Partner own an aggregate 13%
limited partner interest in the Partnership. Both groups are entitled to
Distributions on account
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of such interest. See "Summary of the Partnership Agreement - Profits,
Losses and Distributions" and the Partnership Agreement attached as Appendix B.
3. Sales Commissions. The Sales Agent, a wholly-owned subsidiary of Prime,
has entered into a Sales Agency Agreement with the Partnership pursuant to which
the Sales Agent has agreed to sell the Units on a "best efforts" any or all
basis. As compensation for its services, the Sales Agent will receive a
commission equal to $250 for each Unit sold (up to an aggregate of $5,000). If
the offering is successful, the Sales Agent will also be reimbursed by the
Partnership for its out-of-pocket expenses associated with its sale of the Units
in an amount not to exceed $7,500. See "Plan of Distribution" and "Conflicts of
Interest."
4. Reconditioning of Coach and Trailer. It is anticipated that the General
Partner will cause the Partnership to contract with AK Associates, an Affiliate
of the General Partner, to recondition the Partnership's Coach and Trailer in
1999 and 2003, respectively, at an estimated cost of $50,000 and $65,000,
respectively. In addition, it is anticipated that the General Partner will cause
the Partnership to contract with the General Partner or its affiliates to rent
"loaner" Mobile Lithotripsy Systems during the time the Coach and Trailer are
being reconditioned at an estimated per week price of $8,750 per unit.
Reconditioning is expected to take six to eight weeks. Accordingly, it is
anticipated that the Partnership will pay an aggregate of $122,500 to the
General Partner and its Affiliates for loaner units over the next four 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 "Business Activities - Anticipated
Partnership Expenditures."
5. Loans. The General Partner or its Affiliates will also receive interest
on loans, if any, made by them to the Partnership. See "Conflicts of Interest."
Neither the General Partner nor any of its Affiliates are, however, obligated to
make loans to the Partnership. While the General Partner does not anticipate
that it would cause the Partnership to incur indebtedness unless cash generated
from Partnership operations were at the time expected to enable repayment of
such loan in accordance with its terms, lower than anticipated revenues and/or
greater than anticipated expenses could result in the Partnership's failure to
make payments of principal or interest when due under such a loan and the
Partnership's equity being reduced or eliminated. In such event, the Limited
Partners could lose their entire investment.
CONFLICTS OF INTEREST
The operation of the Partnership involves numerous conflicts of interest
between the Partnership and the General Partner and its Affiliates. Because the
Partnership is operated by the General Partner, such conflicts are not resolved
through arm's length negotiations, but through the exercise of the judgment of
the General Partner consistent with its fiduciary responsibility to the Limited
Partners and the Partnership's investment objectives and policies. The General
Partner, its Affiliates and employees of the General Partner will in good faith
continue to attempt to resolve
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potential conflicts of interest with the Partnership, and the General
Partner will act in a manner that it believes to be in or not opposed to the
best interests of the Partnership.
The General Partner and its Affiliates will receive management fees and
broker-dealer sales commissions in connection with the business operations of
the Partnership and the sale of the Units that will be paid regardless of
whether any sums hereinafter are distributed to Limited Partners. None of such
fees, compensation and benefits has been determined by arm's length
negotiations. In addition, the Partnership may contract with the General Partner
or its Affiliates to render other services or provide materials to the
Partnership provided that the compensation is at the then prevailing rate for
the type of services and/or materials provided. It is anticipated that the
General Partner and/or its Affiliates will receive fees for reconditioning the
Partnership's Coach and Trailer and rental payments in connection with the
provision of loaner Mobile Lithotripsy Systems during the time the Coach and
Trailer are being reconditioned. The General Partner will also receive interest
on loans, if any, it makes to the Partnership. See "Compensation and
Reimbursement to the General Partner and its Affiliates."
The General Partner and its Affiliates will devote as much of their time to
the business of the Partnership as in their judgment is reasonably required.
Principals of 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 employees of the General Partner
engage in medical service activities for their own accounts. See "Prior
Activities." The General Partner may serve as a general partner of other limited
partnerships that are similar to the Partnership and does not intend to devote
its entire financial, personnel and other resources to the Partnership. Except
as 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. Several Affiliates of the General Partner
currently operate separate lithotripsy services businesses in Texas. The General
Partner is planning other limited partnership offerings that would operate
lithotripsy businesses in other states. See "Competition."
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
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the General Partner, and have in the past performed and are expected in the
future to perform similar services for the General Partner, and Prime.
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER
The General Partner is accountable to the Partnership as a fiduciary and
consequently must exercise good faith in handling Partnership affairs. This is a
rapidly developing and changing area of the law and Limited Partners who have
questions concerning the duties of the General Partner should consult with their
counsel. Under the Partnership Agreement, the General Partner and its Affiliates
have no liability to the Partnership or to any Partner for any loss suffered by
the Partner ship that arises out of any action or inaction of the General
Partner or its Affiliates if the General Partner or its Affiliates, in good
faith, determined that such course of conduct was in the best interest of the
Partnership and such course of conduct did not constitute gross negligence or
willful misconduct of the General Partner or its Affiliates. Accordingly,
Limited Partners have a more limited right of action than they otherwise would
absent the limitations set forth in the Partnership Agreement. The General
Partner and its Affiliates will be indemnified by the Partnership against any
losses, judgments, liabilities, expenses and amounts paid in settlement of any
claims sustained by them in connection with the Partnership, provided that the
same were not the result of gross negligence or willful misconduct on the part
of the General Partner or its Affiliates. Insofar as indemnification for
liabilities under the Securities Act may be permitted to persons controlling the
Partnership pursuant to the foregoing provisions, the Partnership has been
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and therefore is unenforceable.
COMPETITION
Many 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.
Affiliated Competition
The Partnership faces competition from lithotripters placed in service in
Texas, and, to a lesser extent, from lithotripters located in adjacent states,
including lithotripters owned by other partnerships affiliated with the General
Partner. The General Partner has organized the following limited partnerships in
Texas: (i) Texas Lithotripsy Limited Partnership II L.P. ("Texas II"), which
operates primarily in the Fort Worth area; (ii) Texas Lithotripsy Limited
Partnership III L.P., which operates in the San Antonio area; (iii) Texas
Lithotripsy Limited Partnership IV, L.P. ("Texas IV"), which operates primarily
in the Dallas area; (iv) Texas Lithotripsy Limited Partnership V, L.P.,
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which operates primarily in northwestern Texas; and (iv) Texas Lithotripsy
Limited Partnership VI L.P., which operates primarily in the Austin and Round
Rock areas. The General Partner has also organized Fayetteville Lithotripters
Limited Partnership-Louisiana I, which operates throughout Louisiana and in
Beaumont, Texas, and Fayetteville Lithotripters Limited Partnership-Arkansas I,
which operates throughout Arkansas and northeast Texas. Another Affiliate of the
Partnership, Texas ESWL/Laser Lithotripter, Ltd. ("ESWL") provides mobile
lithotripsy services in certain areas of Texas. Texas II, Texas IV and ESWL will
merge as of January 1, 1999, and the surviving entity will attempt to expand
operations outside the service areas currently served by the constituent
partnerships. Although the General Partner anticipates that the Partnership will
continue to operate primarily in the Service Area, the actual itinerary for the
Mobile Lithotripsy System is expected to be influenced by the number of patients
in particular areas and pad site arrangements with various hospitals and
outpatient surgical centers. See "Business Activities - Operation of the
LithostarTM Mobile System."
Other Competition
Several hospitals and other facilities in the Service Area have access to
lithotripters which are in direct competition with the Partnership. In McAllen,
McAllen Regional Medical Center operates a fixed-base Dornier unit. In
Edinburgh, Bruce Enterprises provides a transportable lithotripter (brand
unknown) at Edinburgh Hospital. In Alice, Alice Physicians and Surgeons Hospital
operates a Medstone unit. Other hospitals, ambulatory surgery centers or other
facilities may offer extracorporeal shock-wave lithotripsy services of which the
General Partner is not aware.
The terms of certain Hospital Contracts prohibit the Partnership from
expanding operations into certain areas of south Texas not currently served by
the Partnership.
Other hospitals in the Service Area served by the Partnership may operate
lithotripters which are not extracorporeal shock-wave lithotripters but rather
use lasers or are electrohydraulic lithotripters. The General Partner believes
both these machines are qualitatively inferior to the Partnership's LithostarsTM
because the machines are limited to treatment of stones in the ureter and
because anesthesia is required prior to treatment. The LithostarTM can be used
on stones in locations other than the ureter and no anesthesia is required
generally. See "Proposed Activities - Treatment Methods for Kidney Stone
Disease."
The General Partner is generally unfamiliar with the cost of the
lithotripsy procedures offered by the Partnership's competitors. The General
Partner believes the Partnership has a competitive advantage over many
competitors because the LithostarTM is technologically superior to many other
lithotripters. This competitive advantage is further enhanced by Litho's
expertise in training physicians in the low-intensity lithotripsy technique. See
"Proposed Activities - Description of the LithostarTM."
No assurances can be given that new competing lithotripsy clinics will not
open in the future or that innovations in lithotripters or other treatments of
kidney stone disease will not
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make the LithostarTM competitively obsolete. See "Risk Factors-Operating
Risks - Technological Obsolescence." In addition, the General Partner and its
Affiliates are not restricted from engaging in lithotripsy ventures unassociated
with the Partnership which may compete with the Partnership.
Siemens is under no obligation to the General Partner or the Partnership to
refrain from selling LithostarTM systems to urologists, hospitals or other
persons for use in Texas 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 services. Lithotripters can be
obtained from manufacturers other than Siemens. The General Partner is familiar
with many of the lithotripters offered by other manufacturers and believes that
while some may be offered for a lower purchase price than the LithostarTM, their
higher operating costs, particularly with respect to electrode replacement costs
not present with the LithostarTM, make them more expensive than the LithostarTM
in the long run. Potential competitors also have access to newer and less
expensive lithotripters, including transportable models which are capable of
more efficiently serving multiple sites. Many potential competitors of the
Partnership, including hospitals and medical centers, have financial resources,
staffs and facilities substantially greater than those of the Partnership and of
the General Partner.
REGULATION
Federal Regulation
The Partnership is 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 improvement, loss of reimbursement,
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. The Partnership is subject to federal government oversight
because the Partnership will seek reimbursement for its services to patients who
are beneficiaries of the Medicare and Medicaid programs. Medicare reimbursement
policies are statutorily created and are regulated by the federal government.
Currently, the Medicare program pays for renal lithotripsy services under Part A
(inpatient hospital service) and Part B (outpatient and physician services)
benefits to the beneficiary.
Medicare has adopted a prospective payment, diagnostic-related grouping
("DRG") based reimbursement system for Part A inpatient hospital services. A DRG
has been established for extracorporeal shock wave lithotripsy services for
renal kidney stones. The value of the DRG, and thus the amount of reimbursement
payable for the nonprofessional service (nonphysician) component of the
lithotripsy service, is adjusted for various factors including, among others,
whether the facility is located in an urban area, local labor cost indices and
case-mix for the particular
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hospital or other facility at which the service is provided. All of these
factors are subject to periodic recalculation and change depending upon events
outside the control of the Partnership. The General Partner believes that the
Partnership's lithotripsy procedures are not subject to the current DRG program
because the DRG program applies only to inpatient procedures, and lithotripsy
procedures can be performed on an outpatient basis for most patients.
The Balanced Budget Act of 1997 required HCFA to establish a prospective
payment system for outpatient procedures. 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 adjustment in a
fashion similar to the adjustments for inpatient reimbursement discussed in the
preceding paragraph. The proposed regulations state 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 will have an adverse effect on the Partnership's
revenues.
The General Partner may make the Mobile Lithotripsy System available at
ambulatory surgery centers. 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.
However, the proposed rules' commentary discusses the history of attempts by
HCFA several years ago to authorize Medicare reimbursement for lithotripsy at
ambulatory surgery centers. These attempts (in 1990 and 1991) were enjoined by
federal courts in litigation initiated by the American Lithotripsy Society,
which challenged 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 the General Partner's
typical charge for the procedure. Medicare reimbursement is not be expected to
constitute more than one-third of the Partnership's revenues. However, the
Medicare program has become an industry leader in setting reimbursement
standards which influence private insurance programs. Therefore, implementation
of the proposed outpatient prospective payment system or ambulatory surgery
center reimbursement may negatively affect reimbursement by private insurance
programs, which 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
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limitations on future physician reimbursement increases tied to annual
expenditure targets legislated annually by Congress or set based upon
recommendation of the Secretary of the U.S. Department of Health and Human
Services. Medicare has in the past, with regard to other Part B services such as
cataract implant surgery, imposed significant reductions in reimbursement based
upon changes in technology. HCFA has produced a lengthy report which concludes
that professional fees for lithotripsy are overvalued. Thus, future decreases in
reimbursement are probable.
The Medicaid program in Texas is 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 Texas Medicaid program
currently provides reimbursement for lithotripsy services. The federal Personal
Responsibility and Work Opportunity Reconciliation Act of 1996 requires state
health plans, such as the Texas Medicaid program, to limit Medicaid coverage for
certain otherwise eligible persons. The General Partner does not believe this
legislation significantly impacts the Partnership's revenues. In addition,
federal regulations permit state health plans to limit the provision of services
based upon such criteria as medical necessity or other criteria identified in
utilization or medical review procedures. The General Partner does not know
whether the Texas Medicaid program has taken or will take such steps.
Self-Referral Restrictions. Health care entities which seek reimbursement
for services covered by Medicare or Medicaid are subject to federal regulation
restricting referrals by certain physicians. 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)("Stark II"). Lithotripsy services were not specifically
identified as a designated health service by this legislation, but the
prohibition includes any service which is provided to an individual who is
registered as an inpatient or outpatient of a hospital under proposed
regulations discussed below. Lithotripsy services provided by the Partnership to
Medicare and Medicaid patients are billed by the contracting hospital in its
name and under its Medicare and Medicaid program provider numbers. Accordingly,
these lithotripsy services would likely be considered inpatient or outpatient
services under Stark II.
Following the passage of the Stark II legislation effective January 1,
1995, the General Partner determined that the statute did not apply to the
Partnership's lithotripsy services. Stark II applies only to ownership interests
in the entity that "furnishes" the designated health care service. The
physician-investors and the Partnership will not have an ownership interest in
any provider hospitals which offer the lithotripsy services to the patients on
an inpatient or outpatient basis. See 42 U.S.C.Section 1395nn(a)(1)(A). Thus, by
referring a patient to a hospital offering the service, the physician-investors
will not be making a referral to an entity in which they maintain an ownership
interest for purposes of the application of Stark II.
This interpretation adopted by the General Partner was consistent with the
informal view of the General Counsel' Office of the U.S. Department of Health
and Human Services. Based upon this reasonable interpretation of Stark II, by
referring a patient to a hospital furnishing the outpatient lithotripsy services
"under arrangements" with the Partnership, a physician investor in the
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Partnership is not making a referral to an entity (the hospital) in which he or
she has a financial relationship.
On January 9, 1998, the Health Care Financing Administration ("HCFA"), the
federal agency responsible for administering the Medicare program, published
proposed regulations interpreting the Stark II statute (the "Proposed Stark II
Regulations"). The Proposed Stark II Regulations and HCFA's accompanying
commentary apply the physician referral prohibitions of Stark II to the
Partnership's typical practice of contracting "under arrangements" with
hospitals for treatment and billing of Medicare and Medicaid patients. Under the
Proposed Stark II Regulations, physician Limited Partner referrals of Medicare
and Medicaid patients to contracting hospitals would be prohibited because the
Partnership is regarded as an entity that "furnishes" inpatient and outpatient
hospital services. HCFA, however, acknowledges in its commentary to the Proposed
Stark II Regulations that physician overutilization of lithotripsy is unlikely
and specifically solicits comments on whether there should be a regulatory
exception for lithotripsy. HCFA has received a substantial volume of comments in
support of a regulatory exception for lithotripsy. HCFA representatives have
informally acknowledged to representatives of the General Partner that some form
of regulatory relief for lithotripsy may be forthcoming; however, no assurances
can be made that such will be the case.
At the present time the Stark II regulations are only proposed, and HCFA
has solicited public comments on them. The General Partner cannot predict when
final regulations will be issued or the substance of the final regulations, but
the interpretive provisions of the Proposed Stark I Regulations may be viewed
as HCFA's interim position until final regulations are issued.
If the Proposed Stark 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 Stark II statute), then the Partnership may be given the
opportunity to bring its operations into compliance.
HCFA's adoption of the current Proposed Stark II Regulations as final or a
reviewing court' interpretation of the Stark II statute in reliance on the
Proposed Stark II Regulations and in a manner adverse to the Partnership
operations would mean that the Partnership and its physician Limited Partners
are in violation of Stark 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.
The General Partner will continue to work through the American Lithotripsy
Association to encourage the adoption of legislation supportive of urologists'
ability to lawfully maintain ownership interests in ventures that provide
lithotripsy services to all of their patients. Additionally, the General Partner
will continue to carefully review the Proposed Stark II Regulations
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and accompanying HCFA commentary, and explore other alternative plans of
operations that would allow the Partnership to operate in compliance with Stark
II and its final regulations.
Fraud and Abuse. The provisions of the federal Social Security Act
addressing illegal remuneration (the "Anti-Kickback Statute") prohibit providers
and others from soliciting, receiving, offering or paying, directly or
indirectly, any remuneration in return for either making a referral for a
Medicare, Medicaid or CHAMPUS covered service or ordering, arranging for or
recommending any such covered service. Violations of the Anti-Kickback Statute
may be punished by a fine of up to $25,000 or imprisonment for up to five (5)
years, or both. In addition, violations may be punished by substantial civil
penalties and/or exclusion from the Medicare and Medicaid programs. Regarding
exclusion, the Office of Inspector General ("OIG") of the Department of Health
and Human Services may exclude a provider from participation in the Medicare
program for a 5-year period upon a finding that the Anti-Kickback Statute has
been violated. After OIG establishes a factual basis for excluding a provider
from the program, the burden of proof shifts to the provider to prove the
Anti-Kickback Statute has not been violated.\
The Limited Partners are to receive cash Distributions from the
Partnership. Since it is anticipated that some of the Limited Partners will be
physicians or 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. v. Greber, 760 F.2d 68 (1985). The Greber
case was followed by the United States Court of Appeals for the Ninth Circuit,
United States v. Kats, 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.
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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. Although a separate Safe Harbor was not adopted, HCFA
noted in its commentary to the Safe Harbor regulations that additional
protection may be merited for situations where a physician sees a patient in his
or her own office, makes a referral to an entity in which he or she has an
ownership interest and performs the service for which the referral is made. In
such cases, Medicare makes a payment to the facility for the service it
furnishes, which may result in a profit distribution to the physician. HCFA
noted that, with respect to the physician' professional fee, such a referral is
simply a referral to oneself, and that in such situations, both the professional
service fee and the profit distribution from the associated facility fee that
are generated from the referral may warrant protection. HCFA stated that its
primary concern regarding the above referral situation was the investing
physician' ability to profit from any diagnostic testing that is generated from
the services he or she performs. The potential for overutilization posed by
referrals for diagnostic services is not present to the same degree with
therapeutic services such as lithotripsy where the necessity for the treatment
can be objectively determined; i.e., a renal stone can be definitely determined
before treatment.
The applicability of the Anti-Kickback Statute to physician investments in
health care businesses to which they refer patients and which do not qualify for
a Safe Harbor 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'
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' 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 best 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
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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 Statute. Whether the offering of
ownership interests to investors who may refer patients to the Partnership might
constitute a violation of this law must be determined in each case based upon
the specific facts involved. The various mechanisms in place to avoid providing
a financial benefit to prospective Limited Partners for any referrals of
patients (including the requirement that all distributions of earnings to
Limited Partners be made in proportion to their investment interest), the fact
lithotripsy is a therapeutic treatment the need of which can be objectively
determined, and the existence in the General Partner' view of valid business
reasons to engage in this transaction, form the basis in part of the General
Partner' belief that this Offering is in compliance with legal requirements.
The General Partner of the Partnership intends for all business activities
and operations of the Partnership to conform in all respects with all applicable
anti-kickback statutes (federal or state). The General Partner does not believe
that the Partnership' 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
do not violate the Anti-Kickback Statute. A prospective Limited Partner with
questions concerning these matters should seek advice from his or her
independent counsel.
False Claims Statutes. The Partnership is also subject to federal and state
laws governing the submission of claims for reimbursement. These laws generally
prohibit an individual or entity from knowingly and willfully presenting a claim
(or causing a claim to be presented) for payment from Medicare, Medicaid or
other third party payors that is false or fraudulent. The standard for "knowing
and willful" includes conduct that amounts to a reckless disregard for whether
accurate information is presented by claims processors. Penalties under these
statutes include substantial civil and criminal fines, exclusion from the
Medicare program and imprisonment. One
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of the most prominent of these laws is the federal False Claims Act, which
may be enforced by the federal government directly, or by a qui tam private
plaintiff on the government' behalf. Under the federal False Claims Act, both
the government and the private plaintiff, if successful, are permitted to
recover substantial monetary penalties and judgments, as well as an amount equal
to three times actual damages. In recent cases, some qui tam plaintiffs have
taken the position that violations of the Anti-Kickback provisions (discussed
above) and Stark II (discussed above) should also be prosecuted as violations of
the federal False Claims Act. The Partnership cannot assure that the government,
upon audit or review, would not take the position that billing errors, employee
misconduct or violations of other federal statutes, should they occur, are
violations of the federal False Claims Act or similar statutes.
New Legislation. The General Partner is not aware of any bill currently
before Congress which, if enacted into law, would have an adverse effect on the
Partnership' operations in a fashion similar to the Stark II and the
Anti-Kickback laws discussed above.
FTC Investigation. Issues relating to physician-owned health care
facilities have been investigated by the Federal Trade Commission ("FTC"), which
investigated two lithotripsy limited partnerships affiliated with the General
Partner, to determine whether they posed an unreasonable threat to competition
in the health care field. The General Partner and 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 entity in
which it is the General Partner.
Ethical Considerations. The American Medical Association's Code of Medical
Ethics states that physicians should not refer patients to facilities in which
they have an ownership interest unless such physician directly provides care or
services to such patient at the facility. Because physician investors will be
providing lithotripsy services, the General Partner believes that an investment
by a physician will not be in violation of the American Medical Association's
Code of Medical Ethics. In the event that the American Medical Association
changes its ethical code to preclude such referrals by physicians and such
ethical requirements are applied to facilities or services which, at the time of
adoption, are owned in whole or in part by referring physicians, the Partnership
and the interests of the Limited Partners may be adversely affected.
State Regulation
Texas no longer requires a certificate of need for the acquisition or use
of major medical equipment or the establishment of clinical health services. Nor
does Texas impose licensure requirements for the provision of lithotripsy
services. However, the lithotripter must be registered with the Texas Department
of Health, Bureau of Radiation Control, and radiologic technologists must be
certified by the state. The Partnership has been complying and will continue to
comply with these requirements.
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Texas law prohibits paying or accepting any money for soliciting patients.
To the best knowledge of the General Partner, the Partnership does not engage in
any payment practices prohibited by Texas law. The Texas legislature recently
passed the Treatment Facilities Marketing Act, which prohibits certain
solicitation and remuneration practices, but it applies only to mental health
and chemical dependency facilities and not to lithotripsy services.
The Partnership will seek to comply with all applicable statutory and
regulatory requirements. Further regulations may be imposed in Texas at any time
in the future. Predictions as to the form or content of such potential
regulations would be highly speculative. They could apply to the operation of
the Mobile Lithotripsy System or to the physicians who invest in the
Partnership. Such restrictive regulations could materially adversely affect the
ability of the Partnership to conduct its business.
THE GENERAL PARTNER AND THE PARTNERSHIP BELIEVE LITHOTRIPSY SERVICES WILL
CONTINUE TO BE SUBJECT TO INTENSE GOVERNMENTAL REGULATION AT THE FEDERAL AND
STATE LEVELS AND, THEREFORE, CANNOT PREDICT THE SCOPE AND EFFECT THEREOF.
PROSPECTIVE LIMITED PARTNERS SHOULD CONSULT WITH THEIR LEGAL COUNSEL AS TO THE
IMPLICATIONS OF FEDERAL AND STATE LAWS AND PROFESSIONAL ETHICAL CODES DEALING
WITH PHYSICIAN OWNERSHIP OF MEDICAL EQUIPMENT AND FACILITIES BEFORE PURCHASING
UNITS.
PRIOR ACTIVITIES
Prime, the sole shareholder of the General Partner, is the largest and
fastest growing provider of lithotripsy services in the United States, providing
lithotripsy services at over 400 hospitals and surgery centers in 34 states, as
well as delivering non-medical services related to the operation of the
lithotripters, including scheduling, staffing, training, quality assurance,
maintenance, regulatory compliance and contracting with payors, hospitals and
surgery centers, while medical care is rendered by urologists utilizing the
lithotripters. Prime has an economic interest in 56 mobile and six fixed site
lithotripters, all but two of which are operated by Prime or the General Partner
and its Affiliates. Prime began providing lithotripsy services with an
acquisition in 1992 and has grown rapidly since that time through a total of ten
acquisitions with interests in 62 lithotripters. In April 1996, Prime acquired
the General Partner. The General Partner operates over 30 lithotripters serving
approximately 200 locations in 19 states. The acquisition of the General Partner
provided Prime with complementary geographic coverage as well as additional
expertise in forming and managing lithotripsy operations. Prime and the General
Partner's lithotripters together performed approximately 31,000, or
approximately 17%, of the estimated 180,000 lithotripsy procedures performed in
the United States in 1995. Approximately 1,850 urologists utilized Prime and the
General Partner's lithotripters in 1995, representing approximately 25% of the
estimated 7,300 active urologists in the United States.
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Prime manages the operations of approximately 60 of its 62 lithotripters.
All of its lithotripters are operated in connection with hospitals or surgery
centers. Prime operates its lithotripters as the general partner of a limited
partnership or through a subsidiary, as is the case with the General Partner
affiliated partnerships. Prime provides a full range of management and other
non-medical support services to the lithotripsy operations, while medical care
is provided by urologists utilizing the facilities and certain medical support
services are provided by the hospital or surgery center. Urologists are
investors in 33 of its 40 operations.
Prime's lithotripters range in age from one to twelve years. Of its 62
lithotripters, 56 are mobile units mounted in tractor-trailers or self-contained
coaches serving locations in 34 states. Prime also operates six fixed site
lithotripters in five states. All of Prime's fixed lithotripsy units are located
and operated in conjunction with a hospital or surgery center. Most of these
locations are in major metropolitan markets where the population can support
such an operation. Fixed site lithotripters generally cannot be economically
justified in other locations.
Prime and the General Partner believe that they maintain the most
comprehensive quality outcomes database and information system in the
lithotripsy services industry. Prime has detailed information on over 100,000
procedures covering patient demographic information and medical condition prior
to treatment, the clinical and technical parameters of the procedure and
resulting outcomes. Information is collected before, during and up to three
months after the procedure through internal data collection by doctors, nurses
and technicians and through patient questionnaires.
For numerous reasons, including differences in financial structure, program
size, economic conditions and distribution policies, the success of the General
Partner's Affiliates in the lithotripsy field should not be considered as
indicative of the operating results obtainable by the Partnership.
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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 20 Units are sold and other sources and
their anticipated and estimated uses.
Sources of Funds Sale of 20 Units
Offering Proceeds(1) $251,500 (100.00%)
TOTAL SOURCES $251,500 (100.00 %)
Application of Funds
Upgrade of LithostarTM $ 75,000 ( 29.82%)
Reconditioning of Coach(2) 50,000 ( 19.88%)
Loaner Rental Costs(2) 61,250 ( 24.35%)
Reserves(3) 27,750 ( 11.03%)
Syndication Costs(4) 37,500 ( 14.91%)
TOTAL APPLICATIONS $251,500 (100.00%)
Notes to Sources and Applications of Funds Table
(1) Assumes all 20 Units are purchased by qualified Investors.
(2) It is anticipated that in 1999 the Partnership will upgrade one of its
LithostarsTM with a high intensity shockhead at an estimated cost of $75,000. It
is further anticipated that in 1999 the General Partner will cause the
Partnership to contract with AK Associates, an Affiliate of the General Partner,
to recondition the Partnership's Coach at an estimated cost of $50,000. During
the time the Coach is reconditioned (estimated at 6 - 8 weeks), it is
anticipated that the Partnership will rent from the General Partner or its
Affiliates a "loaner" Mobile Lithotripsy System at an estimated per week cost of
$8,750. The table assumes that each refurbishment will take seven weeks. See
"Business Activities - Anticipated Partnership Expenditures." The proceeds of
this Offering cannot be calculated until the number of Units sold has been
determined at the Closing. To the extent the proceeds of the Offering are
insufficient to fund the costs described above, 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."
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(3) This amount includes the General Partner's estimate of reserves for
unanticipated time overruns in scheduled reconditioning or unanticipated
expenses in connection with the reconditioning or upgrade.
(4) Includes $5,000 in commissions payable to the Sales Agent,
reimbursement of $7,500 to the Sales Agent for out-of-pocket expenses incurred
in selling the Units and $25,000 in legal and accounting costs associated with
the preparation of this Memorandum.
FINANCIAL CONDITION OF THE PARTNERSHIP
Set forth on the following pages are the Partnership's internally prepared
accrual based (i) Income Statements for the years ended December 31, 1995,
December 31, 1996, December 31, 1997 and for the period ended October 31, 1998,
(ii) Balance Sheets as of December 31, 1996, December 31, 1997 and as of October
31, 1998, (iii) Cash Flow Statements for the year ended December 31, 1995,
December 31, 1996, December 31, 1997 and for the period ended October 31, 1998
and (iv) Statements of Partner's Equity for the years ended December 31, 1995,
December 31, 1996, December 31, 1997 and for the period ended October 31, 1998.
Past financial performance is not necessarily indicative of future
performance. There is no assurance that the Partnership will be able to maintain
its current revenues or earnings.
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MANAGEMENT'S DISCUSSION AND
ANALYSIS OF THE RESULTS OF OPERATIONS
Ten Months Ended October 31, 1998 and October 31, 1997
Revenues. Total revenues increased $136,380 (7%) for the ten months ended
October 31, 1998 compared to the same period in 1997 related to an 15% increase
in the number of procedures performed primarily due to the addition of a second
lithotripter in early 1998. In addition, the Partnership experienced a decrease
in revenue per case.
Operating Expenses. Operating expenses increased by $170,311 (21%) for the
ten months ended October 31, 1998 compared to the same period in 1997, due to
costs related to the operation of the second unit, including an increase of
$66,065 in other operating expenses, including property taxes, fuel, medical
supplies and travel costs, an increase of employee compensation of $55,910, and
an increase in depreciation and amortization of $30,532.
Other Income (Expense). Total other income (expense), net increased by
$3,437 (56%) due to the increase in interest income.
Year Ended December 31, 1997 and December 31, 1996
Revenues. Total revenues increased $47,646 (2%) for the year ended December
31, 1997 compared to the same period in 1996 related to a 7% decrease in the
number of procedures performed, and a increase in revenue per case.
Operating Expenses. Operating expenses decreased by $69,207 (7%) for the
year ended December 31, 1997 compared to the same period in 1996, due to a
decrease of $86,083 in overhead allocation, which is based on procedures
performed, due to the decline in procedures, and partially offset by a $29,508
decline in other operating expenses.
Other Income (Expense). Total other income (expense), net decreased by
$6,164 (42%) due to the decrease in interest income.
Year Ended December 31, 1996 and December 31, 1995
Revenues. Total revenues increased $402,126 (21%) for the year ended
December 31, 1996 compared to the same period in 1995, related to a 17% increase
in the number of procedures performed, and a slight increase in revenue per
case.
Operating Expenses. Operating expenses increased by $60,991 (6%) for the
year ended December 31, 1996 compared to the same period in 1995, due to an
increase in overhead allocation of $84,764, which is based on procedures
performed, due to the increase in procedures, and partially offset by a $31,096
decline in equipment maintenance and repair.
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Other Income (Expense). Other income (expense), net increased by $5,228
(56%) due to a increase in interest income.
SUMMARY OF THE PARTNERSHIP AGREEMENT
The Partnership Agreement sets forth the powers and purposes of the
Partnership and the respective rights and obligations of the General Partner and
the Limited Partners. The following is only a summary of certain provisions of
the Partnership Agreement, and does not purport to be a complete statement of
the various rights and obligations set forth therein. A complete copy of the
Partnership Agreement is set forth as Appendix A to this Memorandum, and
Investors are urged to read the Partnership Agreement in its entirety and to
review it with their counsel and advisors.
Nature of Limited Partnership Interest
The Investors will acquire their interests in the Partnership in the form
of Units. For each Unit purchased, a cash payment of $12,575 is required. The
entire Unit purchase price is due in cash upon subscription; however, certain
qualified Investors may finance a portion of the purchase price through Limited
Partner Loans. See "Terms of the Offering - Limited Partnership Loans." No
Limited Partner will have any liability for the debts and obligations of the
Partnership by reason of being a Limited Partner except to the extent of (i) his
or her Capital Contribution and liability under a Limited Partner Loan, if any,
(ii) his or her proportionate share of the undistributed profits of the
Partnership, and (iii) the amount of any Distribution received from the
Partnership at a time when its liabilities, other than liabilities to Partners
with respect to their Partnership Interests and liabilities for which the
recourse of creditors is limited to specific property of the Partnership, exceed
the fair value of its assets, except that the fair value of property that is
subject to a liability for which recourse of creditors is limited shall be
included in the Partnership Assets only to the extent that the fair value of the
property exceeds that liability, as provided by the Act. See "Risk Factors -
Other Investment Risks - Limited Partners' Obligation to Return Certain
Distributions." See also Form of Legal Opinion of Womble Carlyle Sandridge &
Rice, PLLC attached hereto as Appendix C.
Profits, Losses and Distributions
The following is a Summary of certain provisions of the Partnership
Agreement relating to the allocation and distribution of the Profits, Losses,
Partnership Cash Flow, Partnership Refinancing Proceeds, Partnership Sales
Proceeds, and cash upon dissolution of the Partnership. Because an understanding
of the defined financial terms is essential to an evaluation of the information
presented below, Investors should carefully review the definitions of the terms
appearing in the Glossary.
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1. Allocations of Profits and Losses.
(a) General. Generally, Profits and Losses, if any, for each Year of the
Partnership will be allocated proportionately among the Partners based on their
respective Percentage Interests in the Partnership; provided that New Limited
Partners will be allocated only Profits and Losses that accrue after the date of
their admission to the Partnership as Limited Partners.
(b) Allocations. Net gains and net losses from Capital Transactions (a part
of Profits and Losses), if any, shall be allocated first. Each Partner will
receive his pro rata share of Profits and Losses based upon the number of days
such Partner was a member of the Partnership during the Year of the Partnership.
Notwithstanding the foregoing, the Partnership's "allocable cash basis items,"
as that term is used in Section 706(d)(2)(B) of the Code, will be allocated as
required by Section 706(d)(2) of the Code and the treasury regulations
promulgated thereunder.
(c) Qualified Income Offset. If any Limited Partner unexpectedly receives
an adjustment, allocation or distribution as described in Treasury Regulation
Section 1.704- 1(b)(2)(ii)(d)(4) through (6) that causes such Limited Partner to
have a deficit Capital Account balance, such Limited Partner will be allocated
items of income and gain in an amount and manner sufficient to eliminate such
deficit balance as quickly as possible. This provision is intended to be a
"qualified income offset" as defined in Regulation Section 1.704-1(b)(2)(ii)(d).
2. Distributions.
(a) Non-liquidation Distributions. Partnership Cash Flow for each Year of
the Partnership, to the extent available, will be distributed within 60 days
after the end of each Year of the Partnership, or earlier in the discretion of
the General Partner, proportionately among the Partners based on their
respective Percentage Interests in the Partnership at the time of distribution.
Partnership Sales Proceeds and Partnership Refinancing Proceeds will be
distributed within 60 days of the Capital Transaction giving rise to such
proceeds, or earlier in the discretion of the General Partner, proportionately
among the Partners based on their respective Percentage Interests in the
Partnership as of the date of the Capital Transaction giving rise to such
proceeds. The New Limited Partners have no rights to receive any distributions
in the future that are made out of the Initial Limited Partners' and General
Partner's accrued but undistributed Partnership Cash Flow as of the date the New
Limited Partners are admitted to the Partnership. New Limited Partners will be
entitled only to Partnership Cash Flow that accrues after the date of their
admission to the Partnership as Limited Partners
(b) Distribution Upon Dissolution. Upon the dissolution and termination of
the Partnership, the General Partner or, if there is none, a representative of
the Limited Partners, will liquidate the assets of the Partnership. The proceeds
of such liquidation will be applied and distributed in the following order of
priority: (a) first, to the payment of the debts and liabilities of the
Partnership, and the expenses of liquidation; (b) second, to the creation of any
reserves which the General Partner or the representative of the Limited Partners
may deem reasonably necessary for the payment of any contingent or unforeseen
liabilities or obligations of the Partnership or of the
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General Partner arising out of or in connection with the business and
operation of the Partnership; and (c) third, the balance, if any, will be
distributed to the Partners in accordance with the Partners' positive capital
account balances. Any General Partner with a negative capital account following
the distribution of liquidation proceeds or the liquidation of its interest must
contribute to the Partnership an amount equal to such negative capital account
on or before the end of the Partnership's taxable year (or, if later, within
ninety days after the date of liquidation). Any capital so contributed shall be
(i) distributed to those Partners with positive capital accounts until such
capital accounts are reduced to zero, and/or (ii) used to discharge recourse
liabilities.
Management of the Partnership
The General Partner has the sole right to manage the business of the
Partnership and at all times is required to exercise its responsibilities in a
fiduciary capacity. The consent of the Limited Partners is not required for any
sale or refinancing of the Mobile Lithotripsy Systems, the purchase of
additional Mobile Lithotripsy Systems or the purchase of other new Partnership
assets. The General Partner will oversee the day-to-day affairs of the
Partnership pursuant to the Management Agreement. See "Business Activities -
Management."
Under the Partnership Agreement, if the General Partner is adjudged by a
court of competent jurisdiction to be liable to the Limited Partners or the
Partnership for acts of gross negligence or willful misconduct in the
performance of its duties under the terms of the Partnership Agreement, the
General Partner may be removed and another substituted with the consent of all
of the Limited Partners. The General Partner may transfer all or a portion of
its Partnership Interest only if, in the opinion of the Partnership's
accountant, the new general partner has sufficient net worth and meets other
requirements to assure that the Partnership will continue to be treated as a
partnership for Federal tax purposes. Both the admission of any new shareholder
and the withdrawal of any shareholder from the General Partner may be done
without the approval of the Limited Partners.
Powers of the General Partner
The General Partner may, in its absolute discretion, borrow money, acquire,
encumber, hold title to, pledge, sell, release or otherwise dispose of, all or
any part of the Partnership's assets, when and upon such terms as it determines
to be in the best interest of the Partnership, employ such persons as it deems
necessary for the operation of the Partnership and deposit, withdraw, invest,
pay, retain (including the establishment of reserves) and distribute the
Partnership's funds. The General Partner, however, is expressly prohibited from,
among other things: (i) possessing Partnership assets or assigning the rights of
the Partnership in Partnership assets, including the Mobile Lithotripsy Systems,
for other than Partnership purposes; (ii) admitting Limited Partners except as
provided in the Partnership Agreement; (iii) performing any act (other than an
act required by the Partnership Agreement or any act taken in good faith
reliance upon Counsel's opinion) which would, at the time such act occurred,
subject any Limited Partner to liability as a general partner in any
jurisdiction; and (iv) performing any act in contravention of the
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Partnership Agreement or which would make it possible to carry on the
ordinary business of the Partnership.
Rights and Liabilities of the Limited Partners
The Limited Partners do not have any right to participate in the management
of the business of the Partnership and will not transact business for the
Partnership. Limited Partners are not required to make any capital contributions
to the Partnership except amounts agreed by them to be paid, or pay or be
personally liable for, any expense, liability or obligation of the Partnership,
except to the extent (i) his or her Capital Contribution and liability under a
Limited Partner Loan, if any, (ii) his or her proportionate share of the
undistributed profits of the Partnership, and (iii) the amount of any
Distribution received from the Partnership at a time when its liabilities, other
than liabilities to Partners with respect to their Partnership Interests and
liabilities for which the recourse of creditors is limited to specific property
of the Partnership, exceed the fair value of its assets, except that the fair
value of property that is subject to a liability for which recourse of creditors
is limited shall be included in the Partnership assets only to the extent that
the fair value of the property exceeds that liability, as provided by the Act.
See "Risk Factors - Limited Partners Obligations to Return Certain
Distributions."
The Limited Partners may not participate in or own an interest in any
competing lithotripsy venture, except with the approval of the General Partner.
See "Limited Partner Competition and Disclosure Restrictions" below. The General
Partner may elect to treat participation or ownership by a Limited Partner in a
competing venture as an event of default, and such Limited Partner may be
required to sell his Partnership Interest. See "Optional Purchase of Limited
Partner Interests" below.
Restrictions on Transfer of Partnership Interests
After acquisition of Units by Investors, no Partnership Interest nor any
Units may be transferred without the prior written consent of the General
Partner, which approval may be granted or denied in the sole discretion of the
General Partner, and subject to the satisfaction of certain other conditions set
forth in the Partnership Agreement. The Partnership Agreement contains
additional limitations on transfer, including provisions prohibiting transfer
that would cause the termination of the Partnership, would violate federal or
state securities laws, would prevent the Partnership from being entitled to use
any method of depreciation which the Partnership might otherwise be entitled to
use, or would adversely affect the status of the Partnership as a partnership
for Federal income tax purposes. In addition, the Partnership Agreement
prohibits the holding or transfer of a Partnership interest by or to a "tax
exempt entity" (as defined in Code Section 168(h)) which would affect the method
or manner in which the Partnership may depreciate Partnership assets. No
transferee of the Units will automatically become a Limited Partner. Admission
of a transferee to the Partnership as a Limited Partner requires the fulfillment
of other obligations enumerated in the Partnership Agreement, including either
the approval of all the Limited Partners (except the assignor Limited Partner)
and the General Partner, or the approval of the assignor Limited Partner and the
General Partner. Any transferee of a Partnership Interest who has not been
admitted to the Partnership as a
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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 the Limited Partner Loans, unless otherwise
specifically agreed by the Bank.
Dissolution and Liquidation
The Partnership will dissolve and terminate for any of the following
reasons:
1. The sale, exchange or disposition of all or substantially all of the
property of the Partnership without making provision for the replacement
thereof;
2. The expiration of its term on December 31, 2040;
3. The bankruptcy or occurrence of certain other events with respect to the
General Partner;
4. The election to dissolve the Partnership made by the General Partner and
a Majority in Interest of the Limited Partners; or
5. Any other reason which under the laws of the State of Texas would cause
a dissolution.
The retirement, resignation, bankruptcy, assignment for the benefit of
creditors, dissolution, death, disability or legal incapacity of a general
partner will not, however, result in a termination of the Partnership if the
remaining general partner or general partners, if any, elect to continue the
business of the Partnership, or if no general partner remains, if within 90 days
of the occurrence of one of such events, all of the Limited Partners elect in
writing to continue the Partnership and, if necessary, designate a new general
partner.
Upon dissolution, the General Partner or, if there is none, a
representative of the Limited Partners, will liquidate the Partnership's assets
and distribute the proceeds thereof in accordance with the priorities set forth
in the Partnership Agreement. See "Profits, Losses and Distributions -
Distributions - Distribution upon Dissolution" above and "Optional Purchase of
Limited Partner Interests" below.
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
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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.
Optional Purchase of Limited Partner Interests
As provided in the Partnership Agreement, the General Partner and the
Limited Partners have an option to purchase all the interest of a Limited
Partner in the Partnership upon the occurrence with respect to the Limited
Partner of (i) death, (ii) bankruptcy, insolvency or assignment for benefit of
creditors, or (iii) direct or indirect ownership of an interest in a competing
venture. Upon the occurrence of one or more of the preceding events, the
withdrawing Limited Partner, or his or her personal representative, will have a
brief period within which to sell his or her entire Partnership Interest to a
purchaser approved of by the General Partner. If the withdrawing Limited Partner
is unable to sell his or her Partnership Interest as provided above, the General
Partner will then have the option to purchase such Partnership Interest. If the
General Partner elects to exercise its option, the option purchase price will be
equal to the withdrawing Limited Partner's share of the Partnership's book
value, if any, as reflected by such Limited Partner's capital account in the
Partnership (unadjusted for any appreciation in Partnership assets and as
reduced by depreciation deductions claimed by the Partnership for tax purposes).
The withdrawing Limited Partner will not be released from his obligations under
any Limited Partner Loan unless so agreed by the Bank. Furthermore, sale of his
or her Limited Partnership Interest may constitute an event of default under the
Limited Partner Loan, if any. See "Terms of Offering - Limited Partner Loans."
There can be no assurance that the option purchase price will represent the fair
market value of a Limited Partner's interest in the Partnership. Because
Partnership losses, depreciation deductions and Distributions reduce capital
accounts, and because appreciation in Partnership assets is not reflected in
capital accounts, it is the opinion of the General Partner that the option
purchase price will be nominal in amount.
Dilution Offerings
The General Partner has the authority to periodically offer and sell
additional limited partnership interests in the Partnership through Dilution
Offerings to local south Texas urologists who are not investors in the
Partnership ("Qualified Investors"). The primary purpose of Dilution
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Offerings would be (i) to raise additional capital for any legitimate
Partnership purpose including upgrading the Partnership's Lithostar Mobile
System and (ii) to assure the highest quality of patient care by admitting
Qualified Investors to the Partnership who will be dedicated and motivated as
owners to follow the Partnership s treatment protocol, and comply with its
quality assurance and outcome analysis programs.
Any sale of limited partnership interests in a Dilution Offering will
result in the proportionate dilution of the 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 will be proportionately reduced as a result of a successful Dilution
Offering. The Percentage Interests of the General Partner and the Initial
Limited Partners, as in effect prior to this Offering, may not be diluted
through Dilution Offerings (including this Offering) by more than 20% in the
aggregate without the prior written consent of a Majority in Interest of all the
Partners. Any additional limited partnership interests offered in a Dilution
Offering will be sold for a price no lower than their fair market value as
determined by the General Partner, in its sole discretion, at the time of this
Offering.
Arbitration
The Partnership Agreement provides that disputes arising thereunder shall
be resolved by submission to arbitration in Laredo, Texas in accordance with the
then prevailing commercial arbitration rules of the American Arbitration
Association.
Power of Attorney
Each Investor, by executing the Subscription Agreement, irrevocably
appoints Dr. Joseph Jenkins and Dr. David Vela, severally, to act as
attorneys-in-fact to execute the Partnership Agreement, any amendments thereto
and any certificate of limited partnership filed by the General Partner. The
Partnership Agreement, in turn, contains provisions by which each Limited
Partner irrevocably appoints Dr. Joseph Jenkins, to act as his or her
attorney-in-fact to make, execute, swear to and file any documents necessary to
the conduct of the Partnership's business, such as deeds of conveyance of real
or personal property as well as any amendment to the Partnership Agreement or to
any certificate of limited partnership which accurately reflects actions
properly taken by the Partners.
Reports to Limited Partners
Within 90 days after the end of each Year of the Partnership, the General
Partner will send to each person who was a Limited Partner at any time during
such year such tax information, including, without limitation, Federal Tax
Schedule K-1, as will be reasonably necessary for the preparation by such person
of his federal income tax return, and such other financial information as may be
required by the Act.
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Records
Proper and complete records and books of account will be kept by the
General Partner in which will be entered fully and accurately all transactions
and other matters relative to the Partnership's business as are usually entered
into records and books of account maintained by persons engaged in business of a
like character. The Partnership books and records will be kept according to the
method of accounting determined by the General Partner. The Partnership's fiscal
year will be the calendar year. The books and records will be located at the
office of the General Partner, and will be open to the reasonable inspection and
examination of the Limited Partners or their duly authorized representatives
during normal business hours.
LEGAL MATTERS
Certain legal matters in connection with the Units offered hereby will be
passed upon for the Partnership by Womble Carlyle Sandridge & Rice, a
Professional Limited Liability Company, of Winston-Salem, North Carolina. See
"Conflicts of Interest." On the Closing Date, Womble Carlyle Sandridge & Rice, a
Professional Limited Liability Company will render an opinion, the form of which
is attached as Appendix C to this Memorandum, with respect to certain federal
income tax consequences of an investment in Units. See "Tax Aspects of the
Offering."
GLOSSARY
Certain terms in this Memorandum shall have the following meanings:
Act. The Act means the Texas Revised Limited Partnership Act, as in
effect on the date hereof.
Affiliate. An Affiliate is (i) any person, partnership corporation,
association or other legal entity ("person") directly or indirectly
controlling, controlled by or under common control with another person,
(ii) any person owning or controlling 10% or more of the outstanding voting
interests of such other person, (iii) any officer, director or partner of
such person and (iv) if such other person is an officer, director or
partner, any entity for which such person acts in such capacity.
AK Associates. AK Associates, Inc., a subsidiary of Prime. It is
anticipated that the Partnership will contract with AK Associates to
recondition the Partnership's Coach with the proceeds of the Offering.
Bank. First-Citizens Bank & Trust Company.
Capital Account. The Partnership capital account of a Partner as
computed pursuant to Article XII of the Partnership Agreement.
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Capital Contributions. All capital contributions made by a Partner or
his predecessor in interest which shall include, without limitation,
contributions made pursuant to Article VII of the Partnership Agreement.
Capital Transaction. Any transaction which, were it to generate
proceeds, would produce Partnership Sales Proceeds or Partnership
Refinancing Proceeds.
Closing Date. 5:00 p.m., Central Time, on January 20, 1999 (or
earlier) in the discretion of the General Partner. The Closing Date may be
extended for a period of up to 180 days in the discretion of the General
Partner.
Coach. The Partnership's self-propelled mobile vehicle manufactured by
the Calumet Coach Company, Calumet City, Illinois, upfitted to house a
LithostarTM.
Code. The Internal Revenue Code of 1986, or corresponding provisions
of subsequent, superseding revenue laws.
Contract Hospitals. The 8 hospitals, medical centers and ambulatory
surgery centers to which the Partnership provides lithotripsy services
pursuant to 8 separate Hospital Contracts.
Counsel. Counsel to the Partnership, Womble Carlyle Sandridge & Rice,
a Professional Limited Liability Company, P.O. Drawer 84, Winston-Salem,
North Carolina 27102.
Dilution Offering. The issuance, offering and sale by the Partnership
of additional partnership interests in the future.
Distributions. Cash or other property, from any source, distributed to
Partners.
Escrow Agent. First-Citizens Bank & Trust Company.
FDA. The United States Food and Drug Administration.
Financial Statement. The Purchaser Financial Statement, included in
the Subscription Packet accompanying this Memorandum, to be furnished by
the Investors for review by the General Partner and the Bank in connection
with their decision to accept or reject a subscription.
General Partner. The general partner of the Partnership,
Lithotripters, Inc., a North Carolina corporation, and a wholly owned
subsidiary of Prime Medical Services, Inc.
Hospital Contracts. The 8 separate lithotripsy services agreements the
Partnership has entered into with the contract Hospitals.
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Initial Limited Partners. The Individuals who were Limited Partners
prior to the commencement of this Offering.
Investors. Potential purchasers of Units.
Limited Partner Loan. The loan to be made by the Bank to certain
qualified Investors that wish to finance a portion of the Unit purchase
price.
Limited Partner Note. The promissory note from an Investor financing a
portion of the Unit purchase price to the Bank in the principal amount of
$10,075 per Unit, the proceeds of which will be paid directly to the
Partnership. The form of the Limited Partner Note (including the Note
Addendum attached thereto) is attached as Exhibit A to the Form of Bank
Commitment which is attached hereto as Appendix B.
Limited Partners. The Limited Partners are those Investors in the
Units admitted to the Partnership and any person admitted as a substitute
Limited Partner in accordance with the provisions of the Partnership
Agreement.
LithostarTM. The two LithostarTM model extracorporeal shock wave
lithotripters manufactured by Siemens and owned by the Partnership.
Loan and Security Agreement. The agreement to be executed in
conjunction with the Limited Partner Note by an Investor who finances a
portion of the Unit purchase price through a Limited Partner Loan. The form
of the Loan and Security Agreement is attached as Exhibit B to the Form of
Bank Commitment which is attached hereto as Appendix B.
Loan Documents. The Form of Bank Commitment, the Limited Partner Note,
the Loan and Security Agreement, the Security Agreement and UCC-1,
collectively.
Loss. The net loss (including capital losses and excluding Net Gains
from Capital Transactions) of the Partnership for each year as determined
by the Partnership for federal income tax purposes.
Memorandum. This Confidential Private Placement Memorandum, including
all Appendices hereto, and any amendment or supplement hereto.
Mobile Lithotripsy Systems. The Coach and Trailer with the installed
and operational LithostarsTM owned and operated by the Partnership.
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.
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New Limited Partner. Any Investor admitted to the Partnership as a
Limited Partner.
Nonrecourse Deductions. A deduction as set forth in Treasury
Regulations Section 1.704-2(b)(1). The amount of Nonrecourse Deductions for
a given Year equals the excess, if any, of the net increase, if any, in the
amount of Partnership Minimum Gain during such Year over the aggregate
amount of any Distributions during such Year of proceeds of a Nonrecourse
Liability that are allocable to an increase in Partnership Minimum Gain,
determined according to the provisions of Treasury Regulations Section
1.704-2(h).
Nonrecourse Liability. Any Partnership liability (or portion thereof)
for which no Partner bears the "economic risk of loss," within the meaning
of Treasury Regulations Section 1.704- 2(i).
Offering. The offering of Units pursuant to this Memorandum.
Partner Minimum Gain. An amount, with respect to each Partner
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result
if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Treasury Regulations Section 1.704-2(i).
Partner Nonrecourse Debt. Any nonrecourse debt (for the purposes of
Treasury Regulations Section 1.1001-2) of the Partnership for which any
Partner bears the "economic risk of loss," within the meaning of Treasury
Regulations Section 1.752-2.
Partner Nonrecourse Deductions. Deductions as described in Treasury
Regulations Section 1.704-2(i)(2). The amount of Partner Nonrecourse
Deductions with respect to a Partner Nonrecourse Debt for any Year equals
the excess, if any, of the net increase, if any, in the amount of Partner
Minimum Gain attributable to such Partner Nonrecourse Debt during such Year
over the aggregate amount of any Distributions during that Year to the
Partner that bears the economic risk of loss for such Partner Nonrecourse
Debt to the extent such Distributions are from the proceeds of such Partner
Nonrecourse Debt and are allocable to an increase in Partner Minimum Gain
attributable to such Partner Nonrecourse Debt, determined in accordance
with Treasury Regulations Section 1.704-2(i).
Partners. The General Partner and the Limited Partners, collectively,
when no distinction is required by the context in which the term is used
herein.
Partnership. Texas Lithotripsy Limited Partnership I L.P., an Texas
limited partnership.
Partnership Agreement. The Partnership's Agreement of Limited
Partnership, the form of which is attached hereto as Appendix A, as the
same may be amended from time to time.
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Partnership Cash Flow. For the applicable period the excess, if any,
of (A) the sum of (i) all gross receipts from any source for such period,
other than from Partnership loans, Capital Transactions and Capital
Contributions, and (ii) any funds released by the Partnership from
previously established reserves, over (B) the sum of (i) all cash expenses
paid by the Partnership for such period, (ii) the amount of all payments of
principal on loans to the Partnership, (iii) capital expenditures of the
Partnership, and (iv) such reasonable reserves as the General Partner shall
deem necessary or prudent to set aside for future repairs, improvements, or
equipment replacement or additions, or to meet working capital requirements
or foreseen or unforeseen future liabilities and contingencies of the
Partnership; provided, however, that the amounts referred to in (B) (i),
(ii) and (iii) above shall be taken into account only to the extent not
funded by Capital Contributions, loans or paid out of previously
established reserves. Such term shall also include all other funds deemed
available for distribution and designated as "Partnership Cash Flow" by the
General Partner.
Partnership Interest. The interest of a Partner in the Partnership as
defined by the Act and the Partnership Agreement.
Partnership Minimum Gain. Gain as defined in Treasury Regulations
Section 1.704-2(d).
Partnership Refinancing Proceeds. The cash realized from the
refinancing of Partnership assets after retirement of any secured loans and
less (i) payment of all expenses relating to the transaction and (ii)
establishment of such reasonable reserves as the General Partner shall deem
necessary or prudent to set aside for future repairs, improvements, or
equipment replacement or additions, or to meet working capital requirements
or foreseen or unforeseen future liabilities or contingencies of the
Partnership.
Partnership Sales Proceeds. The cash realized from the sale, exchange,
casualty or other disposition of all or a portion of Partnership assets
after the retirement of all secured loans and less (i) the payment of all
expenses related to the transaction and (ii) establishment of such
reasonable reserves as the General Partner shall deem necessary or prudent
to set aside for future repairs, improvements, or equipment replacement or
additions, or to meet working capital requirements or foreseen or
unforeseen future liabilities or contingencies of the Partnership.
Percentage Interest. The interest of each Partner in the Partnership,
to be determined in the case of each Investor by reference to the
percentage opposite his or her name set forth in Exhibit A to the
Partnership Agreement. Each Unit sold pursuant to this offering represents
an initial 0.83% economic interest. The Percentage Interest will be set
forth in Exhibit A to the Partnership Agreement or any other document or
agreement, as a percentage or a fraction or on any numerical basis deemed
appropriate by the General Partner.
Prime. Prime Medical Services, Inc. a publicly held Delaware
corporation and parent of the General Partner, AK Associates and the Sales
Agent.
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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,
member of the National Association of Securities Dealers, Inc. and an
Affiliate of certain members of the General Partner's management personnel.
SEC. The United States Securities and Exchange Commission.
Securities Act. The Securities Act of 1933, as amended.
Security Agreement. The agreement to be executed in conjunction with
the Limited Partner Note by an Investor who finances the purchase price of
his Units as provided herein. The form of the Security Agreement is
attached as Exhibit C to the Form of Bank Commitment which is attached
hereto as Appendix B.
Service. The Internal Revenue Service.
Service Area. South Texas.
Siemens. Siemens Medical Systems, Inc. and its Affiliates.
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
completed by Investors in connection with their subscription for Units.
Trailer. The Partnership's Trailer upfitted to house a LithostarTM.
The Trailer is transported from site to site by a tractor truck.
60
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UCC-1. The Uniform Commercial Code Financing Statement, two copies of
which are attached to the Subscription Packet and are to be executed in
conjunction with the Limited Partner Note by an Investor who finances a
portion of the Unit purchase price through a Limited Partner Loan. The
UCC-1 will be used by the Bank to perfect its security interest in such
Investor's share of Distributions.
Units. The 20 equal limited partner interests in the Partnership
offered pursuant to this Memorandum for a price per Unit of $12,575 in
cash.
Year of the Partnership. An annual accounting period ending on
December 31 of each year during the term of the Partnership.
_________________________
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OPERATING AGREEMENT
OF
WASHINGTON UROLOGICAL SERVICES, LLC
(A Washington Limited Liability Company)
Dated: ____________, 199__
THE LLC MEMBERSHIP INTERESTS REPRESENTED BY THIS OPERATING AGREEMENT HAVE NOT
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES ACTS OR LAWS OF ANY STATE IN
RELIANCE UPON EXEMPTIONS UNDER THOSE ACTS OR LAWS. THE SALE OR OTHER DISPOSITION
OF THE MEMBERSHIP INTERESTS IS RESTRICTED AS STATED IN THIS OPERATING AGREEMENT,
AND IN ANY EVENT IS PROHIBITED UNLESS THE LLC RECEIVES AN OPINION OF COUNSEL
SATISFACTORY TO IT AND ITS COUNSEL THAT SUCH SALE OR OTHER DISPOSITION CAN BE
MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY
APPLICABLE STATE SECURITIES ACTS AND LAWS. BY ACQUIRING THE MEMBERSHIP INTEREST
REPRESENTED BY THIS OPERATING AGREEMENT, EACH MEMBER REPRESENTS THAT IT WILL NOT
SELL OR OTHERWISE DISPOSE OF ITS MEMBERSHIP INTEREST WITHOUT REGISTRATION OR
OTHER COMPLIANCE WITH THE AFORESAID ACTS AND THE RULES AND REGULATIONS ISSUED
THEREUNDER.
<PAGE>
TABLE OF CONTENTS
ARTICLE I - FORMATION OF THE COMPANY...........................................1
1.1 Formation....................................................1
1.2 Name.........................................................1
1.3 Registered Office and Registered Agent.......................1
1.4 Principal Place of Business..................................1
1.5 Purposes and Powers..........................................1
1.6 Term.........................................................2
1.7 Nature of Members' Interests.................................2
ARTICLE II - DEFINITIONS.......................................................2
2.1 Definitions..................................................2
ARTICLE III - MANAGEMENT OF THE COMPANY.......................................11
3.1 The Managing Board..........................................11
3.2 Specific Authority of the Managing Board....................11
3.3 Limitation on Authority of Managing Board...................13
3.4 Termination of the Management Agreement.....................14
3.5 Specific Authority of Managing Board........................14
3.6 Number, Term and Qualification..............................15
3.7 Removal and Replacement.....................................15
3.8 Authority as to Third Persons...............................15
3.9 Compensation and Expenses...................................15
3.10 Action by the Managing Board................................15
3.11 Action Without Meeting. ...................................16
3.12 Meeting by Communications Device. .........................16
3.13 Authorized Representative of Company. .....................16
3.14 Indemnification of Managing Board Members and Sun. ........16
3.15 Limitation on Liability. ..................................17
3.16 Liability for Return of Capital Contribution. .............17
ARTICLE IV - RIGHTS AND OBLIGATIONS OF MEMBERS................................17
4.1 Names and Addresses of Members..............................17
4.2 No Management by Members....................................17
4.3 Election of Member Designees................................17
4.4 Action by Members...........................................17
4.5 Operation of Lithotripter System............................18
4.6 Outside Activities..........................................18
4.7 Disclosure of Confidential Information......................19
4.8 Limited Liability...........................................20
ARTICLE V - CAPITAL CONTRIBUTIONS,
GUARANTIES AND DILUTION OFFERINGS....................................20
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5.1 Member's Contribution.......................................20
5.3 Dilution Offerings..........................................20
5.4 Conditions to the Capital Contributions of the Members......20
5.5 Capital Accounts............................................21
ARTICLE VI - REPRESENTATIONS, WARRANTIES AND
COVENANTS OF THE MANAGING BOARD......................................22
6.1 Managing Board's Representations and Warranties.............22
6.2 Managing Board's Covenants..................................22
ARTICLE VII - ALLOCATIONS, ELECTIONS AND REPORTS..............................22
7.1 Profits and Losses..........................................22
7.2 Sales Commission............................................23
7.3 Nonrecourse Deductions......................................23
7.4 Member Nonrecourse Deductions...............................23
7.5 Allocations Between Transferor and Transferee...............23
7.6 Gains from Capital Transactions.............................24
7.7 Contributed Property........................................24
7.8 Minimum Gain Chargeback.....................................24
7.9 Member Minimum Gain Chargeback..............................24
7.10 Qualified Income Offset.....................................25
7.11 Gross Income Allocation.....................................25
7.12 Section 754 Adjustment......................................25
7.13 Curative Allocations........................................26
7.14 Compliance with Treasury Regulations........................26
7.15 Tax Withholding.............................................26
ARTICLE VIII - DISTRIBUTIONS..................................................26
8.1 Company Cash Flow...........................................26
8.2 Company Refinancing Proceeds................................26
8.3 Company Sales Proceeds......................................26
8.4 Distributions in Liquidation................................27
8.5 Limitation Upon Distributions...............................27
ARTICLE IX - TRANSFER OF INTERESTS AND ADMISSION OF MEMBERS...................27
9.1 Transferability of Membership Interests.....................27
9.2 Restrictions on Transfers by Members........................28
9.3 Rights of Transferee........................................28
9.4 Admission of Members........................................29
9.5 Amendment of Certificate of Formation and Qualification.....29
9.6 Fundamental Changes.........................................29
ARTICLE X - OPTIONAL PURCHASE OF MEMBERSHIP INTERESTS
ON CERTAIN EVENTS....................................................30
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10.1 Death.......................................................30
10.2 Bankruptcy, Insolvency or Assignment for Benefit
of Creditors of a Member..............31
10.3 Default under Guaranties....................................32
10.4 Breach of Section 4.6.......................................32
10.5 Domestic Proceeding.........................................33
10.6 Divestiture Option..........................................34
10.7 Purchase Price..............................................35
10.8 Closing of Purchase and Sale................................36
10.9 Terms and Conditions of Purchase............................37
ARTICLE XI - DISSOLUTION AND LIQUIDATION OF THE COMPANY.......................37
11.1 Dissolution Events..........................................37
11.2 Continuation................................................38
11.3 Liquidation.................................................38
11.4 Certificate of Cancellation.................................39
ARTICLE XII - MISCELLANEOUS...................................................39
12.1 Fiscal Year.................................................39
12.2 Records.....................................................39
12.3 Reports.....................................................39
12.4 Reserves....................................................39
12.5 Notices.....................................................39
12.6 Amendments..................................................40
12.7 Additional Documents........................................40
12.8 Representations of Members..................................40
12.9 Survival of Rights..........................................40
12.10 Interpretation and Governing Law............................40
12.11 Severability................................................40
12.12 Agreement in Counterparts...................................40
12.13 Tax Matters Partner.........................................41
12.14 Third Parties...............................................41
12.15 Power of Attorney...........................................41
12.16 Arbitration.................................................41
Attachments:
Schedule I - Names, Initial Capital Contributions and Percentage Interests of
the Members
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OPERATING AGREEMENT
OF
WASHINGTON UROLOGICAL SERVICES, LLC
THIS OPERATING AGREEMENT of WASHINGTON UROLOGICAL SERVICES, LLC (the "Company"),
a limited liability company organized pursuant to the Washington Limited
Liability Company Act, is executed effective as of the ____ day of
______________, 199__, by and among the Company and the persons executing this
Agreement as the Members (as defined below).
ARTICLE I - FORMATION OF THE COMPANY
1.1 Formation. The Company was formed on August 31, 1998 upon the filing
with the Secretary of State of the Certificate of Formation of the Company. In
consideration of the mutual premises and covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree that the rights and obligations of the
parties and the administration and termination of the Company shall be governed
by this Agreement, the Certificate of Formation and the Act.
1.2 Name. The name of the Company is as set forth on the cover page of this
Agreement. The Managing Board may change the name of the Company from time to
time as it deems advisable, provided that appropriate amendments to this
Agreement and the Certificate of Formation and necessary filings under the Act
are first obtained.
1.3 Registered Office and Registered Agent. The Company's registered office
shall be at 520 Pike Street, Seattle, Washington 98101 and the name of its
initial registered agent at such address shall be the CT Corporation System.
1.4 Principal Place of Business. The principal place of business of the
Company shall be located at 15195 National Avenue, Suite 203, Los Gatos,
California 95032, or at any other place or places as the Managing Board may from
time to time deem necessary or advisable.
1.5 Purposes and Powers.
(a) The purpose and business of the Company shall be: (i) to operate
one or more transportable lithotripters (or any other renal stone treatment
equipment) for the treatment of renal stones primarily in the area of the
State of Washington west of the Cascade Mountains, or in such other
location(s) as the Managing Board may determine to be in the best interests
of the Company; (ii) to acquire and operate in the future any other
therapeutic urological device or equipment provided that such device or
equipment has received FDA premarket approval at the time it is acquired by
the Company; (iii) to acquire an interest in any business entity,
including, without limitation, a limited partnership, limited liability
company or corporation, that engages in any business activity described in
this Section
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1.5; and (iv) to engage in any and all activities incidental or
related to the foregoing, upon and subject to the terms and conditions of
this Agreement.
(b) The Company shall have any and all powers which are necessary or
desirable to carry out the purposes and business of the Company, to the
extent the same may be legally exercised by limited liability companies
under the Act. The Company shall carry out the foregoing activities
pursuant to the arrangements set forth in the Certificate of Formation and
this Agreement.
1.6 Term. The Company shall continue in existence until the close of
the Company's business on December 31, 2020, unless the Company is earlier
dissolved and its affairs wound up in accordance with the provisions of
this Agreement or the Act.
1.7 Nature of Members' Interests. The Membership Interests of the
Members in the Company shall be personal property for all purposes. Legal
title to all Company assets shall be held in the name of the Company.
Neither any Member nor a successor, representative or assign of such
Member, shall have any right, title or interest in or to any Property owned
by the Company or the right to partition any Property owned by the Company.
Membership Interests are evidenced by the execution of this Agreement by
the Members.
ARTICLE II - DEFINITIONS
2.1 Definitions. The following terms used in this Agreement shall have
the following meanings (unless otherwise expressly provided herein):
2.1.1"Act" means the Washington Limited Liability Company Act, as the
same may be amended from time to time.
2.1.2 "Adjusted Capital Account Deficit" means, with respect to any
Member, the deficit balance, if any, in such Member's Capital Account as of
the end of the relevant Fiscal Year, after giving effect to the following
adjustments:
(i) Credit to such Capital Account any amounts to which such
Member is obligated to restore or is deemed to be obligated to restore
pursuant to the penultimate sentences of Treasury Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5); and
(ii) Debit to such Capital Account the items described in
Sections 1.704- 1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and
1.704-1(b)(2)(ii)(d)(6) of the Treasury Regulations.
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Treasury
Regulations and shall be interpreted consistently therewith.
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2.1.3 "Adjusted Capital Contributions" means, as of any day, a
Member's Capital Contributions adjusted as follows:
(i) Increased by the amount of any Company liabilities which, in
connection with Distributions, are assumed by such Member or are
secured by any Company Property distributed to such Member; and
(ii) Reduced by the amount of cash and the value of any Company
property distributed to such Member and the amount of any liabilities
of such Member assumed by the Company or which are secured by any
property contributed by such Member to the Company.
In the event any Member transfers all or any portion of his or
her Membership Interest in accordance with the terms of this
Agreement, his or her transferee shall succeed to the Adjusted Capital
Contribution of the transferor to the extent it relates to the
transferred Membership Interest or portion thereof.
2.1.4 "Affiliate" of a specified Person means (i) any Person
directly or indirectly controlling, controlled by or under common
control with the specified Person; (ii) any Person owning or
controlling 10% or more of the outstanding voting interest of such
specified Person; (iii) any officer, director or partner of such
specified Person; and (iv) if the specified Person is an officer,
director or partner, any entity for which the specified Person acts in
such capacity.
2.1.5 "Agreement" means this Operating Agreement, as amended from
time to time.
2.1.6 "Bank" means First Citizens Bank & Trust Company, its
successor in interest, or any other commercial financial institution
providing financing to the Company.
2.1.7 "Bankruptcy" means with respect to a Member, when such
Member (i) makes an assignment for the benefit of creditors; (ii)
files a voluntary petition in bankruptcy; (iii) is adjudged a bankrupt
or insolvent, or has entered against him or her an order for relief,
in any bankruptcy or insolvency proceeding; (iv) files a petition or
answer seeking for himself or herself any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief
under any statute, law or regulation; (v) files an answer or other
pleading admitting or failing to contest the material allegations of a
petition filed against him or her in any proceeding of the type
described in clauses (i)-(iv) above; or (vi) seeks, consents to or
acquiesces in the appointment of a trustee, receiver or liquidator of
the Member or of all or any substantial part of his or her properties.
"Bankruptcy" shall also be deemed to have occurred to a Member 120
days after the commencement of any proceeding against such Member
seeking reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any statute, law or
regulation, if the proceeding has not been dismissed, or if within 90
days after the appointment without his or her consent or acquiescence
of a trustee, receiver or liquidator of the Member or of all or any
substantial part of his or her properties, the appointment is not
vacated or stayed, or within 90 days after the expiration of any such
stay, the appointment is not vacated.
2.1.8 "Capital Account" means, with respect to any Member, the
capital account maintained for such Member in accordance with Section
5.5 of this Agreement.
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2.1.9 "Capital Contribution" means all contributions to the
Company of cash or property (valued for this purpose at initial gross
fair market value as determined by the contributing Member and the
Managing Board) made by a Member or his or her predecessor in interest
which shall include, without limitation, those contributions made
pursuant to Article V of this Agreement.
2.1.10 "Capital Transaction" means any transactions undertaken by
the Company or by any company or partnership in which the Company owns
an interest, which, were it to generate proceeds, would produce
Company Sales Proceeds or Company Refinancing Proceeds.
2.1.11 "Certificate of Formation" means the Certificate of
Formation of the Company filed with the Secretary of State, as amended
or restated from time to time.
2.1.12 "Code" means the Internal Revenue Code of 1986, as amended
from time to time (and any corresponding provisions of succeeding
law).
2.1.13 "Company Cash Flow" for any period means the excess, if
any, of (A) the sum of (i) all gross receipts from any source for such
period, other than from Company loans, Capital Transactions and
Capital Contributions, and (ii) any funds released by the Company from
previously established reserves, over (B) the sum of (i) all cash
expenses paid by the Company for such period (including any
compensation to the Members and their Affiliates); (ii) all amounts
paid by the Company in such period on account of the amortization of
the principal of any debts or liabilities of the Company (including
loans from any Member); (iii) capital expenditures of the Company; and
(iv) a reasonable reserve for future expenditures as provided by
Section 13.4; 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
Company Cash Flow by the Managing Board.
2.1.14 "Company Minimum Gain" means gain as defined in Treasury
Regulations Section 1.704-2(d).
2.1.15 "Company Refinancing Proceeds" means (i) the cash realized from
the financing or refinancing of all or any portion of any Company assets,
less the retirement of any related secured loans, the payment of all
expenses relating to the transaction and the establishment of such
reasonable reserves as the Managing Board shall deem prudent or necessary
and (ii) the Company's allocable portion of cash realized by an entity in
which the Company owns an interest from such entity financing or
refinancing all or any portion of such entity's assets, less the retirement
of any related secured loans and the payment of all expenses relating to
such transaction.
2.1.16 "Company Sales Proceeds" means (i) the cash realized from the
sale, exchange, condemnation, casualty or other disposition of all or any
portion of any Company assets not in the ordinary course of business, less
the retirement of any related secured loans, the payment of all expenses
relating to the transaction and the establishment of such reasonable
reserves as the Managing Board shall deem prudent or necessary and (ii) the
Company's allocable portion of cash realized by an entity in which the
Company owns an interest from the sale, exchange, condemnation, casualty or
other
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disposition of all or any portion of such entity's assets not in the
ordinary course of business, less the retirement of any related secured
loans and the payment of all expenses relating to such transaction.
2.1.17 "Depreciation" means, for each Fiscal Year, an amount equal to
the depreciation, amortization, or other cost recovery deduction allowable
with respect to an asset for such Fiscal Year, except that if the Gross
Asset Value of an Asset differs from its adjusted basis for federal income
tax purposes at the beginning of such Fiscal Year, Depreciation shall be an
amount which bears the same ratio to such beginning Gross Asset Value as
the federal income tax depreciation, amortization, or other cost recovery
deduction for such Fiscal Year bears to such beginning adjusted tax basis;
provided, however, that if the adjusted basis for federal income tax
purposes of an asset at the beginning of such Fiscal Year is zero,
Depreciation shall be determined with reference to such beginning Gross
Asset Value using any reasonable method selected by the Managing Board.
2.1.18 "Dilution Offering" means, as provided in Article V of this
Agreement, the future offering of additional Membership Interests in the
Company by the Managing Board. Except as otherwise provided in Article V,
any successful Dilution Offering will proportionately reduce the Percentage
Interests of the then current Members in the Company.
2.1.19 "Distribution" means any money or other property distributed to
a Member with respect to the Member's Membership Interest, but shall not
include any payment to a Member for materials or services rendered nor any
reimbursement to a Member for expenses permitted in accordance with this
Agreement.
2.1.20 "Domestic Proceeding" means any divorce, annulment, separation
or similar domestic proceeding between a married couple.
2.1.21 "Encumbrance" means any lien, pledge, encumbrance, collateral
assignment or hypothecation.
2.1.22 "Equipment" means the equipment to be acquired by the Company
and used in the operation of the Lithotripter System including the mobile
transport vehicle, the transportable lithotripter and miscellaneous medical
equipment and supplies, and any similar additional equipment acquired by
the Company in the future.
2.1.23 "FDA" means the United States Food and Drug Administration.
2.1.24 "Fiscal Year" means an annual accounting period ending December
31 of each year during the term of the Company, unless otherwise specified
by the Managing Board.
2.1.25 "Gains from Capital Transactions" means the gains realized by
the Company as a result of or upon any sale, exchange, condemnation or
other disposition of capital assets of the Company or any entity in which
the Company shall own an interest (which assets shall include Code Section
1231 assets and all real and personal property) or as a result of or upon
the damage to or destruction of such capital assets.
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2.1.26 "Gross Asset Value" means, with respect to any asset, the
asset's adjusted basis for federal income tax purposes, except as follows:
(i) The initial Gross Asset Value of any asset contributed by a
Member to the Company shall be the gross fair market value of such
asset, as determined by the contributing Member and the Managing
Board, provided that, if the contributing Member is a member of the
Managing Board, such Member shall abstain from the determination of
the fair market value of a contributed asset;
(ii) The Gross Asset Values of all Company assets shall be
adjusted to equal their respective gross fair market values, as
determined by the Managing Board, as of the following times: (a) the
acquisition of an additional interest in the Company (other than upon
the initial formation of the Company) by any new or existing Member in
exchange for more than a de minimis Capital Contribution; (b) the
distribution by the Company to a Member of more than a de minimis
amount of Company property as consideration for an interest in the
Company; and (c) the liquidation of the Company within the meaning of
Treasury Regulations Section 1.704-1(b)(2)(ii)(g); provided, however,
that the adjustments pursuant to clauses (a) and (b) above shall be
made only if the Managing Board reasonably determine that such
adjustments are necessary or appropriate to reflect the relative
economic interests of the Members in the Company;
(iii) The Gross Asset Value of any Company asset distributed to
any Member shall be adjusted to equal the gross fair market value of
such asset on the date of distribution as determined by the
distributee and the Managing Board, provided that, if the distributee
is a member of the Managing Board, such Member shall abstain from the
determination of the fair market value of the distributed asset; and
(iv) The Gross Asset Values of Company assets shall be increased
(or decreased) to reflect any adjustments to the adjusted basis of
such assets pursuant to Code Section 734(b) or Code Section 743(b),
but only to the extent that such adjustments are taken into account in
determining Capital Accounts pursuant to Treasury Regulations Section
1.704-1(b)(2)(iv)(m) and Sections 2.1.47(vi) and 7.12 hereof;
provided, however, that Gross Asset Values shall not be adjusted
pursuant to this Section 2.1.26(iv) to the extent the Managing Board
determine that an adjustment pursuant to Section 2.1.26(ii) hereof is
necessary or appropriate in connection with a transaction that would
otherwise result in an adjustment pursuant to this Section 2.1.26(iv).
If the Gross Asset Value of an asset has been determined or adjusted
pursuant to Section 2.1.26(i), Section 2.1.26(ii), or Section
2.1.26(iv) hereof, such Gross Asset Value shall thereafter be adjusted
by the Depreciation taken into account with respect to such asset for
purposes of computing Profits, Gains from Capital Transactions or
Losses.
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2.1.27 "Guaranty" means the Guaranty Agreement pursuant to which
each Member will guarantee a portion of the Company's obligation to
the Bank under the Loan. The form of Guaranty Agreement is included in
the Subscription Packet accompanying the Memorandum.
2.1.28 "Lithotripter System" means the mobile transport vehicle
and operational lithotripter.
2.1.29 "Loan" means the loan of up to $550,000 from the Bank to
the Company. Loan proceeds will be used by the Company to (i) acquire
a transportable lithotripter with options (estimated at $400,000),
(ii) acquire and upfit a mobile van to transport the lithotripter
(estimated at $50,000), (iii) pay the applicable state sales and use
taxes on the purchase of the lithotripter and van (estimated to be
$38,700), and (iv) serve as working capital (estimated at $61,300).
2.1.30 "Losses from Capital Transactions" means the losses
realized by the Company as a result of or upon any sales exchange,
condemnation or other disposition of the capital assets of the Company
(which include Code Section 1231 assets) or as a result of or upon the
damage or destruction of such capital assets.
2.1.31 "Management Agent" means Sun Medical Technologies, Inc.,
the initial management agent of the Company, and any other Person that
succeeds such management agent in its capacity as management agent.
2.1.32 "Management Agreement" means the agreement pursuant to
which the Management Agent will provide daily management services to
the Company.
2.1.33 "Majority in Interest" means, with respect to any
referenced group of Members, a combination of any of such Members who,
in the aggregate, own more than fifty percent (50%) of the Percentage
Interests owned by all of such referenced group of Members.
2.1.34 "Managing Board" means the four person board of managers
comprised of two designees appointed by Sun and two designees elected
by the non-Sun affiliated Members of the Company, and which has the
management authority set forth in Article III.
2.1.35 "Member" means each Person designated as a member of the
Company on Schedule I hereto, or any additional member admitted as a
member of the Company in accordance with Article IX. "Members" refers
to such Persons as a group.
2.1.36 "Member Minimum Gain" means an amount, with respect to
each Member Nonrecourse Debt, equal to the Company Minimum Gain that
would result if such Member Nonrecourse Debt were treated as a
Nonrecourse Liability, determined in accordance with Treasury
Regulations Section 1.704-2(i).
2.1.37 "Member Nonrecourse Debt" means any nonrecourse debt (for
the purposes of Treasury Regulations Section 1.1001-2) of the Company
for which any Member bears the "economic risk of loss," within the
meaning of Treasury Regulations Section 1.752-2.
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2.1.38 "Member Nonrecourse Deductions" means deductions as
described in Treasury Regulations Section 1.704-2(i). The amount of
Member Nonrecourse Deductions with respect to a Member Nonrecourse
Debt for any Fiscal Year equals the excess, if any, of (A) the net
increase, if any, in the amount of Member Minimum Gain attributable to
such Member Nonrecourse Debt during such Fiscal Year, over (B) the
aggregate amount of any Distributions during that Fiscal Year to the
Member that bears the economic risk of loss for such Member
Nonrecourse Debt to the extent such Distributions are from the
proceeds of such Member Nonrecourse Debt and are allocable to an
increase in Member Minimum Gain attributable to such Member
Nonrecourse Debt, determined in accordance with Treasury Regulations
Section 1.704-2(i).
2.1.39 "Membership Interest" means all of a Member's rights in
the Company, including without limitation, the Member's share of the
Profits and Losses of the Company, the right to receive Distributions,
any right to vote and any right to participate in the management of
the Company as provided in the Act and this Agreement.
2.1.40 "Memorandum" means the Confidential Private Placement
Memorandum of the Company dated December 21, 1998, as amended or as
supplemented.
2.1.41 "Nonrecourse Deductions" means deductions as set forth in
Treasury Regulations Section 1.704-2(b)(1). The amount of Nonrecourse
Deductions for a given Fiscal Year equals the excess, if any, of (A)
the net increase, if any, in the amount of Company Minimum Gain during
such Fiscal Year, over (B) the aggregate amount of any Distributions
during such Fiscal Year of proceeds of a Nonrecourse Liability that
are allocable to an increase in Company Minimum Gain, determined
according to the provisions of Treasury Regulations Section
1.704-2(h).
2.1.42 "Nonrecourse Liability" means any Company liability (or
portion thereof) for which no Member bears the "economic risk of
loss," within the meaning of Treasury Regulations Section 1.752-2.
2.1.43 "Offering" means the initial offering of Units in the
Company pursuant to the Memorandum.
2.1.44 "Percentage Interest" means the percentage which the
Capital Contributions of a Member of the Company bears to the Capital
Contributions of all Members. As provided in Article V, a Member's
Percentage Interest may be reduced by a future Dilution Offering. The
Members' Percentage Interests in the Company as of the date hereof are
as set forth in Schedule I attached hereto. Any future adjustments in
the Member's Percentage Interests, due to future Dilution Offerings or
otherwise, will be reflected by revisions to Schedule I.
2.1.45 "Person" means an individual, a foreign or domestic
corporation, a professional corporation, a partnership, a limited
partnership, a limited liability company, a foreign limited liability
company, an unincorporated association, or other legal entity.
2.1.46 "Prime" means Prime Medical Services, Inc., a publicly
held Delaware corporation and parent of Sun.
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2.1.47 "Profits and Losses" means, for each Fiscal Year, an
amount equal to the Company's taxable income or loss for such Fiscal
Year (excluding Gains from Capital Transactions), determined in
accordance with Code Section 703(a) (for this purpose, all items of
income, gain, loss, or deduction required to be stated separately
pursuant to Code Section 703(a)(1) shall be included in taxable income
or loss), with the following adjustments:
(i) Any income of the Company that is exempt from federal income
tax and not otherwise taken into account in computing Profits and
Losses pursuant to this definition (excluding Gains from Capital
Transactions) shall be added to such taxable income or loss;
(ii) Any expenditures of the Company described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B)
expenditures pursuant to Treasury Regulations Section
1.704-1(b)(2)(iv)(i), and not otherwise taken into account in
computing Profits or Losses pursuant to this Section 2.1.47 shall be
subtracted from such taxable income or loss;
(iii) In the event the Gross Asset Value of any Company asset is
adjusted pursuant to Section 2.1.26, the amount of such adjustment
shall be taken into account as gain or loss from the disposition of
such asset for purposes of computing Profits or Losses;
(iv) Gain or loss resulting from any disposition of Company
property with respect to which gain or loss is recognized for federal
income tax purposes shall be computed by reference to the Gross Asset
Value of the property disposed of, notwithstanding that the adjusted
tax basis of such property differs from its Gross Asset Value;
(v) In lieu of the depreciation, amortization, and other cost
recovery deductions taken into account in computing such taxable
income or loss, there shall be taken into account Depreciation for
such fiscal year or other period, computed in accordance with the
definition of Depreciation set out hereof;
(vi) To the extent an adjustment to the adjusted tax basis of any
Company asset pursuant to Code Section 734(b) or Code Section 743(b)
is required pursuant to Treasury Regulations Section
1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining
Capital Accounts as a result of a distribution other than in
liquidation of a Member's interest in the Company, the amount of such
adjustment shall be treated as an item of gain (if the adjustment
increases the basis of the asset) or loss (if the adjustment decreases
the basis of the asset) from the disposition of the asset and shall be
taken into account for purposes of computing Profits or Losses;
(vii) Notwithstanding any other provision of this Section 2.1.47,
any items which are specially allocated pursuant to Sections 7.3, 7.4,
7.8, 7.9, 7.10, 7.11, 7.12 or 7.13 hereof shall not be taken into
account in computing Profits or Losses.
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The amounts of the items of Company income, gain, loss or
deduction available to be specially allocated pursuant to Sections
7.3, 7.4, 7.8, 7.9, 7.10, 7.11, 7.12 or 7.13 hereof shall be
determined by applying rules analogous to those set forth in Sections
(i) through (vi) above.
2.1.48 "Property" means any and all property acquired by the
Company, real and/or personal (including, without limitation,
intangible property).
2.1.49 "Pro Rata Basis" means in connection with an allocation or
distribution in proportion to the respective Percentage Interests of
the class of Members to which reference is made.
2.1.50 "Sales Agency Agreement" means the sales agency agreement
through which MedTech Investments, Inc., an Affiliate of Sun and a
broker-dealer company registered with the Securities and Exchange
commission and a member of the National Association of Securities
Dealers, Inc. shall offer and sell the membership interest of the
Company pursuant to the Memorandum.
2.1.51 "Sales Commission" means the $100.00 sales commission paid
to MedTech Investments, Inc. for each Unit sold to parties other than
Sun and its Affiliates.
2.1.52 "Secretary of State" means the Secretary of State of
Washington.
2.1.53 "Service" means the Internal Revenue Service.
2.1.54 "Service Area" means the geographic region in which the
Company operations are expected to be conducted and which will include
the area of the State of Washington west of the Cascade Mountains.
2.1.55 "Sun" means Sun Medical Technologies, Inc., a California
corporation wholly owned by Prime, and an initial Member of the
Company.
2.1.56 "Tax Matters Partner" means the Person designated by the
Managing Board as the "tax matters partner," as that term is defined
in the Code.
2.1.57 "Transfer" means sell, assign, transfer, lease or
otherwise dispose of property, including without limitation an
interest in the Company.
2.1.58 "Treasury Regulations" means the Income Tax Regulations
and Temporary Regulations promulgated under the Code, as such
regulations may be amended from time to time (including corresponding
provisions of succeeding regulations).
2.1.59 "Units" means the 100 equal membership interests in the
Company offered pursuant to the Memorandum for a price per Unit of
$1,500 in cash and personal guaranty of 1% of the Company's
obligations under the Loan.
2.1.60 "Withdrawing Member" has the meaning assigned to it in
Article X.
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ARTICLE III - MANAGEMENT OF THE COMPANY
3.1 The Managing Board.
(a) Except as otherwise may be expressly provided in this
Agreement, the Certificate of Formation or the Act, all decisions
with respect to the management of the business and affairs of the
Company shall be made by action of the Managing Board. The
Managing Board shall have full and complete authority, power and
discretion to manage and control the business of the Company, to
make all decisions regarding those matters and to perform any and
all other acts or activities customary or incident to the
management of the Company's business, except only as to those
acts and things as to which approval by the Members is expressly
required by this Agreement. The Managing Board may delegate
responsibility for the day-to-day management of the Company to
any Person retained by the Managing Board (including Members or
their Affiliates) who shall have and exercise on behalf of the
Company all powers and rights necessary or convenient to carry
out such management responsibilities.
(b) The members of the Managing Board shall be under no duty
to devote all of their time to the business of the Company, but
shall devote only such time as they deem necessary to conduct the
Company business and to operate and manage the Company in an
efficient manner.
(c) The Managing Board may charge to the Company all
ordinary and necessary costs and expenses, direct and indirect,
attributable to the activities, conduct and management of the
business of the Company. The costs and expenses to be borne by
the Company shall include, but are not limited to, all
expenditures incurred in acquiring and financing the Equipment or
other Company property, legal and accounting fees and expenses,
salaries of employees of the Company, consulting and quality
assurance fees paid to independent contractors, insurance
premiums and interest.
3.2 Specific Authority of the Managing Board. Without limiting the
generality of Section 3.1 above, and except as otherwise prohibited by this
Agreement or the Act, the Managing Board shall have and exercise on behalf of
the Company all powers and rights necessary or convenient to carry out the
purposes of the Company. Such powers shall include, without limitation, the
following:
(a) To conduct the Offering and acquire the Lithotripter System;
(b) Subject to the limitations set forth in Sections 3.3(f) and 3.3(h), to
purchase, hold, manage, lease, license and dispose of Company assets, including
the purchase, exchange, trade, or sale of Company assets at such price, or
amount, for cash, securities or other property and upon such terms, as the
Managing Board deems to be in the best interests of the Company; provided, that
should the Company assets be exchanged or traded for securities or other
property (the "Replacement Property") the Managing Board shall have the same
powers with regard to the Replacement Property as it does towards the property
traded;
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(c) To exercise the option of the Company to purchase a Member's Membership
Interest pursuant to Article X;
(d) To determine the travel itinerary and site locations for the
Lithotripter System or other Company technology;
(e) Subject to the limitations set forth in Section 3.3(g), to acquire (i)
additional Lithotripter Systems, (ii) any other assets related to the provision
of lithotripsy treatment services, or (iii) any other assets or equipment or an
interest in another entity consistent with the purposes of the Company as
provided in Section 1.5 (collectively, the "Additional Assets"), at such times
and at such price and upon such terms, as the Managing Board deems to be in the
best interest of the Company;
(f) Subject to the limitations set forth in Section 3.3(h), to borrow money
for any Company purpose and, if security is required therefor, to subject to any
security device any portion of the Property of the Company, to obtain
replacements of any other security device, to repay, in whole or in part,
refinance, increase, modify, consolidate or extend any Encumbrance or other
security device;
(g) To deposit, withdraw, invest, pay, retain (including the establishment
of reserves) and distribute the Company funds in accordance with the provisions
of this Agreement;
(h) To consent to the modifications, renewal or extension of any
obligations to the Company of any Person or of any agreement to which the
Company is a party or of which it is a beneficiary;
(i) To enter into and carry out contracts and agreements and any or all
other documents and instruments, and to do any and all such other things as may
be in furtherance of Company purposes or necessary or appropriate to the conduct
of the Company activities;
(j) Subject to the limitations set forth in Section 3.3(c), to adjust,
compromise, settle or refer to arbitration any claim against or in favor of the
Company, and to institute, prosecute and defend any actions or proceedings
relating to the Company, its business and property;
(k) To make all decisions related to principles and methods of accounting
and federal income tax elections;
(l) Generally to possess and exercise any and all rights, powers and
privileges of managers under the Act and the laws of the State of Washington;
(m) To do and perform all such other acts and things and to execute,
acknowledge and deliver any and all other documents or instruments in connection
with any or all of the foregoing;
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(n) To engage or retain one or more persons to perform acts or provide
materials as may be required by the Company, at the Company's expense, and to
compensate such person or persons at a rate to be set by the Managing Board,
provided that the compensation is at the then prevailing rate for the type of
services and materials provided, or both. Any person, whether a Member, an
Affiliate of a Member or otherwise may be employed or engaged by the Company to
render services and provide materials, including, but not limited to, management
services, professional services, accounting services, quality assessment
services, legal services, marketing services, maintenance services or provide
materials; and if such person is a Member or an Affiliate of a Member, he or she
shall be entitled to, and shall be paid compensation for said services or
materials, anything in this Agreement to the contrary notwithstanding, provided
that the compensation to be received for such services or materials is
competitive in price and terms with then prevailing rate for the type of
services and/or materials provided. The Company, pursuant to the terms of a
Management Agreement, will contract with the Management Agent with respect to
the supervision and coordination of the management and administration of the
day-to-day operations of the Lithotripter System for an initial quarterly fee
equal to 7.5% of Company net profits per calendar quarter. Costs incurred by the
Management Agent in performing its duties as management agent shall be paid as
agreed to by the Company and Management Agent and as specifically set forth in
the Management Agreement. The Company may also make arrangements with hospitals,
other treatment facilities and qualified physicians desiring to use the
Lithotripter System for treatment of patients. Owning an interest in the Company
shall not be a condition to using the Lithotripter System. Subject to the
limitations set forth in Section 4.6, any Person, whether a Member, an Affiliate
of a Member or otherwise, that contracts with the Company to render services and
provide materials, including the Management Agent and its Affiliates, may engage
in or possess an interest in other business ventures of any nature and
description independently or with others, including, but not limited to, the
operation of a mobile lithotripsy treatment unit similar to the Lithotripter
System, whether or not such business ventures are in direct or indirect
competition with the Company, and neither the Company nor the Members shall have
any right by virtue of this Agreement in and to said independent ventures or to
the income or profits derived therefrom; and
(o) Subject to the limitations set forth in Sections 3.3(d) and 3.3(g), to
cause the Company to engage in a Dilution Offering as provided in Section 5.3.
3.3 Limitation on Authority of Managing Board. Notwithstanding anything to
the contrary in this Agreement, the Managing Board shall undertake the following
actions upon receiving the prior written consent of the Members representing
two-thirds of the aggregate interests in the Company:
(a) Any act in contravention of this Agreement or the Certificate of
Formation;
(b) Any act which would make it impossible to carry on the ordinary
business of the Company, other than a transfer of all or substantially all of
the assets of the Company;
(c) Confess a material judgment against the Company in connection with any
threatened or pending legal action;
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(d) Cause the Company to engage in a Dilution Offering as provided in
Section 5.3 pursuant to which the Percentage Interests of the existing Members
are diluted by more than 15% in the aggregate; and
(e) Institute and carry out any plan providing for the merger,
consolidation or sale of Membership Interests or any other actions outlined in
Section 9.6 hereof;
(f) Sell any Company assets in a single transaction or series of related
transactions with an aggregate fair market value in excess of $50,000;
(g) Adopt the annual Company capital and operating budget, including the
approval of the Company's Purchase Price Formula (as that term is defined in
Section 10.7), provided, that in the case of approvals of Company operating
budget expenditures involving compensation or reimbursement to Members or
Affiliates of Members engaged by the Company to render services and/or provide
materials (collectively, the "Affiliated Contracting Parties"), the Affiliated
Contracting Parties shall abstain from voting on the approval of such Company
expenditures;
(h) Incurring any single capital expenditure in excess of $50,000 not
contemplated in the Company's annual capital and operating budget, or incurring
any long-term debt or any single borrowing of the Company in excess of $50,000
not contemplated in the Company's annual capital and operating budget;
(i) Amend the Operating Agreement;
(j) Modify the purposes of the Company's business as set forth in Section
1.5; or
(k) Accept or reject the Company's right of first refusal to provide the
Alternative Services as described in Section 4.6 below (provided that Sun and
its Affiliates shall abstain from voting on such right of first refusal).
3.4 Termination of the Management Agreement. Except as otherwise provided
herein or in the Management Agreement, the Company may, in the event such action
is in the best interests of the Company, exercise its right to terminate the
Management Agreement and select a replacement Management Agent for the Company
upon the prior written consent of the Managing Board and a Majority in Interest
of the Members. In the event of a deadlock of the Managing Board and/or the
Members, the decision of whether or not to terminate the Management Agreement
shall be submitted to binding arbitration in accordance with Section 12.16
hereof.
3.5 Specific Authority of Managing Board. Notwithstanding Sections 3.1, 3.2
and 3.3, the Managing Board shall have and may exercise on behalf of the Company
the following powers:
(a) To prepare or cause to be prepared reports, statements and other
relevant information for distribution to Members; and
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(b) To open accounts and deposit and maintain funds in the name of the
Company in banks or savings and loan associations.
3.6 Number, Term and Qualification. The Managing Board shall consist of
four (4) managers, comprised of two designees appointed by Sun (the "Sun
Designees") and two designees elected annually pursuant to the vote of a
Majority in Interest of the Members (excluding Sun and its Affiliates) (the
"Member Designees"). One of the Sun Designees, as determined in the sole
discretion of Sun, shall serve as the Chairman of the Managing Board (the
"Chairman"). The Chairman shall only have the authority to act on behalf of the
Company as specifically set forth herein, or as otherwise approved and
authorized by the Managing Board and Members. The Members may, upon their
unanimous consent, change the number of managers serving on the Managing Board.
Each manager shall continue to hold office until his or her death, resignation
or removal and replacement by his or her designating party. Managers need not be
residents of the State of Washington or Members of the Company, and may be any
Person selected by Sun or the other Members (excluding Sun and its Affiliates).
3.7 Removal and Replacement. Sun and the other Members (excluding Sun and
its Affiliates) may remove and replace one or more of their respective
designated managers at any time, with or without cause; provided, however, that
written notice of such removal and replacement must be given to the Managing
Board and all Members at least five (5) days before the effective date of
removal and replacement.
3.8 Authority as to Third Persons. Notwithstanding Sections 3.3, 3.4 and
3.5 the signed statement of the Chairman reciting that he or she has the
authority or the necessary approvals of either the Managing Board or the Members
for any action, as to any third Person, shall be conclusive evidence of the
authority of the Managing Board to take that action and of compliance with
Sections 3.3 or 3.4, if applicable. Each Member will promptly execute
instruments determined by the Managing Board to be appropriate to evidence the
authority of the Managing Board to consummate any transaction permitted by this
Agreement.
3.9 Compensation and Expenses. The members of the Managing Board shall not
receive any compensation from the Company for serving as managers, but all
expenses incurred by the managers in connection with their service as managers
will be paid or promptly reimbursed by the Company. Nothing contained in this
Section 3.8 is intended to affect the Percentage Interest of a manager as a
Member or the amounts that may be payable to a manager by reason of his or her
respective Percentage Interests.
3.10 Action by the Managing Board. Any action to be taken by the Managing
Board under this Agreement may be taken at a meeting of the Managing Board held
on such terms, and after such notice as the members of the Managing Board may
establish; provided, however, that notice of a meeting of the Managing Board
must be given to all members entitled to vote at the meeting at least five (5)
days before the date of the meeting. All of the members of the Managing Board in
office shall constitute a quorum for the transaction of business at a meeting of
the Managing Board, and the affirmative vote of a three-fourths of such members
shall constitute the act of the Managing Board, unless a different affirmative
vote is otherwise specifically provided for herein. A Managing Board
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member who is present at a meeting of the Managing Board at which action on
any Company matter is taken is deemed to have assented to the action taken
unless he or she objects at the beginning of the meeting (or promptly upon
arrival) to the holding, or transacting of business at, the meeting, or unless
his or her dissent or abstention is entered in the minutes of the meeting or
unless he or she shall file written notice of his or her dissent or abstention
to such action with the presiding officer of the meeting before its adjournment
or with the Chairman immediately after adjournment of the meeting. The right of
dissent or abstention shall not apply to a member of the Managing Board who
voted in favor of such action.
3.11 Action Without Meeting. Unless otherwise provided in this Agreement,
any action required or permitted to be taken at a meeting of the Managing Board
may be taken without a meeting if the action is taken by all members of the
Managing Board. Such action must be evidenced by one or more written consents
signed by each member before or after such action, describing the action taken,
and included in the records of the Company. Action taken without a meeting is
effective when the last manager signs the consent, unless the consent specifies
a different effective date.
3.12 Meeting by Communications Device. Unless otherwise provided in this
Agreement, the Managing Board may permit any or all members to participate in a
meeting by, or conduct the meeting through the use of, any means of
communication by which all members participating may simultaneously hear each
other during the meeting. A member participating in a meeting by this means is
deemed to be present in person at the meeting.
3.13 Authorized Representative of Company. Sun is hereby appointed an
authorized representative and agent of the Company and the Managing Board for
the sole purpose of negotiating, making, entering and executing on behalf of the
Company any and all contracts and agreements and any or all other documents and
instruments, and to do any and all such other things as may be necessary or
appropriate to conducting and consummating the Offering. Such actions shall
include, but shall not be limited to, the formation of the Company, the
finalization of the Loan from the Bank, the offering of Units to investors
through the Sales Agent pursuant to the Sales Agency Agreement, providing for
the escrow of the Offering proceeds and Guaranties with the Bank and the
termination thereof, and the acceptance and rejection of investor subscription
applications for purchases of Units. Upon the termination of the Offering and
the closing of the Loan by Sun, the authority granted to it pursuant to this
Section 3.12 shall be null and void and become of no further force or effect.
3.14 Indemnification of Managing Board Members and Sun. Subject to the
limitations set forth in this Section 3.13, all of the acts and deeds taken or
performed by Sun and its officers, directors, and employees in the name of the
Company while acting on behalf of the Company in conducting and consummating the
Offering as set forth in Section 3.12 above, shall, upon the completion thereof,
be ratified, adopted and approved in all respects as the duly authorized and
official acts and deeds of the Company. In addition, Sun, the Managing Board and
its members shall have no liability to the Company which arises out of any
action or inaction of Sun or the Managing Board if Sun and the Managing Board
and its members in good faith determined that such course of conduct was in the
best interest of the Company and such course of conduct did not constitute gross
negligence or willful misconduct of Sun, the Managing Board and its members. The
Company shall indemnify Sun and the members of the Managing Board against any
direct and actual losses, liabilities, damages or
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expenses (including court cost and reasonable attorney's fees but excluding
consequential damages) that Sun and any of the members incur in connection with
the Company but only to the extent that such parties acted in good faith,
without gross negligence, and in a manner reasonably believed to be in the best
interests of the Company. Any attorney's fees or other litigation expenses
incurred by Sun or a member of the Managing Board shall be advanced to such
party within thirty (30) days of receipt of a written demand therefor, together
with an undertaking by or on behalf of the party to repay to the Company such
amount if it is ultimately determined that such party is not entitled to be
indemnified by the Company pursuant to this Section 3.13.
3.15 Limitation on Liability. No member of the Managing Board shall be
liable to the Company for monetary damages for an act or omission in such
person's capacity as a manager, except for (i) acts or omissions that involve
intentional misconduct or a knowing violation of law; (ii) any distributions
received from the Company in violation of the Act; and (iii) any transaction
from which a manager derived an improper personal benefit. Any repeal or
modification of this section shall not adversely affect the right or protection
of a director existing at the time of such repeal or modification.
3.16 Liability for Return of Capital Contribution. The Managing Board and
its members shall not be liable for the return of the Capital Contributions of
the Members, and upon dissolution, the Members shall look solely to the assets
of the Company.
ARTICLE IV - RIGHTS AND OBLIGATIONS OF MEMBERS
4.1 Names and Addresses of Members. The names, addresses and Percentage
Interests of the Members are as reflected in Schedule I attached hereto and made
a part hereof, which Schedule shall be amended by the Company upon the effective
date of any Transfer or subsequent issuance of any Membership Interest.
4.2 No Management by Members. The Members in their capacity as Members
shall not take part in the management or control of the business, nor transact
any business for the Company, nor shall they have power to sign for or to bind
the Company. The Company may, however, contract with one or more Members to act
as the local medical director(s) for the Lithotripter System. No Member may
withdraw from the Company except as expressly permitted herein.
4.3 Election of Member Designees. The Members (excluding Sun and its
Affiliates), pursuant to a vote of a Majority in Interest, shall elect two
managers annually to serve on the Managing Board. The Members (excluding Sun and
its Affiliates) shall have the power to remove and replace such managers as set
forth in Section 3.6.
4.4 Action by Members. Any action to be taken by the Members under the Act
or this Agreement may be taken (i) at a meeting of the Members held on such
terms, and after such notice as the Managing Board may establish; provided,
however, that notice of a meeting of Members must be given to all Members
entitled to vote at the meeting at least five (5) days before the date of the
meeting, or (ii) by written action of either the Members representing two-thirds
of the aggregate interests in the Company or a Majority in Interest, whichever
is applicable; provided, however, that any action requiring
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the consent of all Members under the Act or this Agreement taken by written
action must be signed by all Members. No notice need be given of action proposed
to be taken by written action, or an approval given by written action, unless
specifically required by this Agreement or the Act. Such written actions must be
kept with the records of the Company.
4.5 Operation of Lithotripter System. The Members shall not operate or
utilize the Lithotripter System or other Company equipment except pursuant to
(i) an agreement with the Company; or (ii) any other arrangement specifically
approved by the Managing Board.
4.6 Outside Activities. The Members agree that they owe fiduciary duties to
the Company and, as a consequence, each Member agrees that he, she or it
(including his, her or its Affiliates) shall not engage in "Outside Activities"
(as defined below) in the Service Area while he, she or it is a Member of the
Company, except as otherwise provided below. The phrase "Outside Activities"
means directly or indirectly owning, leasing or subleasing a lithotripter (or
any similar equipment or competing devices used for treating renal stone
disease) or any other urological therapeutic equipment acquired by the Company.
Prohibited indirect ownership shall include the direct or indirect ownership of
any interest in a business venture (through stock ownership, partnership
interest ownership, ownership by or through a close family member, or as
otherwise determined in good faith by the Managing Board) involving the
ownership, purchase, lease, sublease, promotion, management or operation of a
lithotripter (or similar equipment or competing devices used for treating renal
or biliary stone disease), unless the Managing Board determines that such
activity by the Members is not detrimental to the best interests of the Company.
Upon the termination or transfer of a Member's interest in the Company for
any reason (including a transfer pursuant to Section 10.4 hereof), other than a
material breach of this Agreement by the Company which is not cured in a timely
manner, the withdrawing Member shall not, for a period of two (2) years
following the date of his, her or its withdrawal, engage in any Outside
Activities in the Service Area.
In the event a Member wishes and intends to engage in an Outside Activity
in the Service Area, he, she or it must provide written notice of such intent to
the Managing Board prior to engaging in the Outside Activity. The written notice
shall be deemed an election by the Member to withdraw from the Company (the
"Notice of Withdrawal"), and shall give the Company the purchase rights as
provided in Section 10.4 hereof. After the Notice of Withdrawal, the former
Member may engage in an Outside Activity in the Service Area only after waiting
the period of two years specified in this Section 4.6. In the event of breach of
the waiting period, the Company shall be entitled to any remedy at law or equity
with respect to such breach, including without limitation an injunction or suit
for damages.
If a Member during his, her or its participation in the Company engages in
an Outside Activity in the Service Area without first notifying the Managing
Board in violation of this Section 4.6, the Member shall be deemed to have given
a Notice of Withdrawal on the date the Managing Board first becomes aware of the
Member's Outside Activity in the Service Area. Upon receiving a Member's Notice
of Withdrawal or equivalent thereof, the Company may invoke the purchase rights
provided in Section 10.4 and shall be entitled to any other remedy at law or
equity including without limitation an injunction or suit for damages.
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Notwithstanding any provisions of this Section 4.6 to the contrary, it is
understood and agreed by the parties hereto that Sun and its Affiliates, to the
extent permitted by contract and applicable laws, will at the earliest
practicable date after the date hereof cease to provide lithotripsy services at
any location in the Service Area and will use their reasonable best efforts to
either terminate their existing contracts and assist the Company in negotiating
new contracts on its own behalf with such facilities in the Service Area
currently being served by Sun or its Affiliates, or assign all related service
contracts from such discontinued operations to the Company. However, in certain
limited circumstances it may be in the best interest of the Company (as
determined by the Managing Board) for Sun, or an Affiliate of Sun, to contract
directly with a hospital or other treatment facility as agent for the Company
and such activities shall not be deemed a violation of this Section 4.6. In such
circumstances Sun or its Affiliate (as the case may be) will contract solely for
the benefit of the Company, and unless otherwise agreed to by Sun (or its
Affiliate) and the Managing Board, Sun (or its Affiliate) shall not receive any
compensation as a result of such agreements.
In addition, in the event Sun or its Affiliates desire to expand any of
their urological medical treatment services in the Service Area to include
services using equipment other than lithotripsy equipment (other than
replacement parts or models for Sun's or its Affiliates' existing lithotripsy
equipment in the Service Area) (the "Alternative Services"), Sun, or its
Affiliate, as the case may be, shall give written notice of such intent (the
"Notice of Intent") to the Managing Board prior to engaging in such Alternative
Services. Upon receiving the Notice of Intent, the Company shall have a 60-day
right of first refusal to provide the Alternative Services on the same terms and
conditions as Sun, or its Affiliate, proposes to provide them in the Service
Area. Upon the expiration of the Company's right of first refusal, Sun, or its
Affiliate, as the case may be, may commence providing the Alternative Services
and neither the Company nor the Members shall have any right by virtue of this
Agreement in and to the income or profits derived therefrom.
4.7 Disclosure of Confidential Information. Each Member acknowledges and
agrees that his, her or its participation in the Company under this Agreement
necessarily involves his, her or its understanding of and access to certain
trade secrets and other confidential information pertaining to the business of
the Company. Accordingly, each Member agrees that at all times during his, her
or its participation in the Company as a Member and thereafter, he, she or it
will not, directly or indirectly, without the express written authority of the
Company, unless required by law or directed by a applicable legal authority
having jurisdiction over the Member, disclose or use for the benefit of any
person, corporation or other entity (other than the Company), or himself,
herself or itself, (i) any trade, technical, operational, management or other
secrets, any patient or customer lists or other confidential or secret data, or
any other proprietary, confidential or secret information of the Company or (ii)
any confidential information concerning any of the financial arrangements,
financial positions, hospital or physician contracts, third party payor
arrangements, quality assurance and outcome analysis programs, competitive
status, customer or supplier matters, internal organizational matters, technical
abilities, or other business affairs of or relating to the Company. The Members
acknowledge that all of the foregoing constitutes proprietary information, which
is the exclusive property of the Company. The obligations imposed in this
Section 4.7 shall not apply to information that is in the public domain at the
time of disclosure or is known by the Member independently of his, her or its
participation in the Company. In the event of breach of this Section 4.7 as
determined by the Managing Board, the Company shall be entitled to any
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remedy at law or equity with respect to such breach, including without
limitation, an injunction or suit for damages.
4.8 Limited Liability. No Member shall be required to make any contribution
to the capital of the Company except as set forth in Article V, nor shall any
Member in his, her or its capacity as such be bound by, or personally liable
for, any expense, liability or obligation of the Company except to the extent of
his, her or its (i) interest in the Company, (ii) Guaranties of Company
obligations, and (iii) obligation to return Distributions made to him, her or it
under certain circumstances as required by the Act.
ARTICLE V - CAPITAL CONTRIBUTIONS,
GUARANTIES AND DILUTION OFFERINGS
5.1 Member's Contribution. Each Member hereby agrees to contribute and
shall contribute to the capital of the Company on the date of his, her or its
admission to the Company the cash amount set forth opposite his, her or its name
on Schedule I attached hereto.
5.2 No Interest. Except as otherwise provided herein, no interest shall be
paid on any contribution to the capital of the Company.
5.3 Dilution Offerings. Subject to the limitations set forth in Section
3.3(d), if the Managing Board determines that it is in the best interest of the
Company, the Managing Board may, from time to time, cause the Company to issue,
offer and sell additional Membership Interests in the Company (a "Dilution
Offering") to local urologists who are not already Members ("Qualified
Investors"). The primary purpose of any Dilution Offering would be to raise
additional capital for any legitimate Company purpose as set forth in Section
1.5. Any Membership Interests offered by the Company in a Dilution Offering
shall be sold in the manner and according to the terms prescribed in the sole
discretion of the Managing Board; provided, however, that any additional
Membership Interests offered in a Dilution Offering will be sold for a purchase
price per 1% Membership Interest determined by the Purchase Price Formula set
forth in Section 10.7. The parties hereto agree that the Purchase Price Formula
shall reflect the fair market value of a Membership Interest and the Purchase
Price Formula shall be subject to revision from time to time as set forth in
Section 3.3(g). Any sale of additional Membership Interests will result in the
proportionate dilution of the Company Percentage Interests of the existing
Members. Any investor acquiring a Membership Interest in a Dilution Offering
shall agree to be bound by the terms of this Agreement, and shall be
automatically admitted as a Member of the Company notwithstanding any other
provisions in this Agreement to the contrary. Any adjustment in the Members'
Percentage Interests resulting from a Dilution Offering shall be set forth on
Schedule I attached hereto.
5.4 Conditions to the Capital Contributions of the Members. The obligation
of the Members to make cash Capital Contributions hereunder are subject to the
condition that the representations, warranties, agreements and covenants of the
Managing Board set forth in Article VI of this Agreement are and shall be true
and correct or have been and will have been complied with in all
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material respects on the date such Capital Contributions are required to be
made, except to the extent that any such representation or warranty expressly
pertains to an earlier date.
5.5 Capital Accounts. A Capital Account shall be established for each
Member and shall be credited with each Member's Capital Contributions pursuant
to Section 5.1. All contributions of property to the Company by a Member shall
be valued and credited to the Member's Capital Account at such property's gross
fair market value on the date of contribution as determined by the contributing
Member and the Managing Board. All distributions of Property to the Member by
the Company shall be valued and debited against the Member's Capital Account at
such Property's gross fair market value on the date of distribution as
determined by the Managing Board. Each Member's Capital Account shall at all
times be determined and maintained pursuant to the principles of this Section
5.5 and Treasury Regulations Section 1.704-1(b)(2)(iv). A Member shall not be
entitled to withdraw any part of his or her Capital Account except as otherwise
specifically provided herein. Each Member's Capital Account shall be increased
in accordance with such Regulations by:
(i) The amount of Profits allocated to the Member pursuant to this
Agreement;
(ii) The amount of all Gains From Capital Transactions allocated to the
Member pursuant to this Agreement; and
(iii) The amount of any Company liabilities assumed by the Member or which
are secured by any Company property distributed to such Member.
Each Member's Capital Account shall be decreased in accordance with such
Regulations by:
(i) The amount of Losses allocated to the Member pursuant to this
Agreement;
(ii) The amount of Company Cash Flow distributed to the Member pursuant to
this Agreement;
(iii) The amount of Company Sales Proceeds and Company Refinancing Proceeds
distributed to the Member pursuant to this Agreement; and (iv) The amount of any
liabilities of the Member assumed by the Company or which are secured by any
property contributed by such Member to the Company.
In addition, each Member's Capital Account shall be subject to such other
adjustments as may be required in order to comply with the capital account
maintenance requirements of Section 704(b) of the Code.
In the event that the Managing Board shall determine that it is prudent to
modify the manner in which the Capital Accounts, or any debits or credits
thereto (including, without limitation, debits or credits relating to
liabilities that are secured by contributed or distributed property or that are
assumed by the Company or the Members), are computed in order to comply with
such Treasury Regulations, the Managing Board may make such modification,
provided that it is not likely to have a material effect
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on the amounts distributable to any Member upon dissolution of the Company.
The Managing Board also shall (i) make any adjustments that are necessary or
appropriate to maintain equality between the Capital Accounts of the Members and
the amount of Company capital reflected on the Company's balance sheet, as
computed for book purposes, in accordance with Treasury Regulations Section
1.704- 1(b)(2)(iv)(g), and (ii) make any appropriate modifications in the event
unanticipated events might otherwise cause this Agreement not to comply with
Treasury Regulations Section 1.704-1(b).
ARTICLE VI - REPRESENTATIONS, WARRANTIES AND
COVENANTS OF THE MANAGING BOARD
6.1 Managing Board's Representations and Warranties. The Managing Board
hereby represents and warrants to the Members that:
(a) The Company is a limited liability company formed in accordance with
and validly existing under the Act and the other applicable laws of the State of
Washington;
(b) The interest in the Company of the Members will have been duly
authorized or created and validly issued and the Members shall have no personal
liability to contribute money to the Company other than the amounts agreed to be
contributed by them in the manner and on the terms set forth in this Agreement,
subject, however, to such limitations as may be imposed under the Act; and
(c) No material breach or default adverse to the Company exists under the
terms of any other material agreement affecting the Company.
6.2 Managing Board's Covenants. The Managing Board hereby covenants to the
Members that:
(a) It will at all times act in a fiduciary manner with respect to the
Company and the Members.
(b) It will cause the Company to carry adequate public liability, property
damage and other insurance as is customary in the business to be engaged in by
the Company.
ARTICLE VII - ALLOCATIONS, ELECTIONS AND REPORTS
7.1 Profits and Losses.
(a) Except as otherwise provided herein, Profits and Losses of the Company
and all items of tax credit and tax preference shall be allocated among the
Members in
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accordance with their respective Percentage Interests. In the event the
Percentage Interests vary during any Fiscal Year, Profits and Losses and all
items of tax credit and tax preference for such Fiscal Year shall be allocated
among the Members as provided in Section 7.5 below.
(b) Losses allocated pursuant to this Section 7.1 shall not exceed the
maximum amount of Losses that can be so allocated without causing any Member to
have an Adjusted Capital Account Deficit at the end of any Fiscal Year. In the
event some but not all of the Members would have Adjusted Capital Account
Deficits as a consequence of an allocation of Losses pursuant to this
Section 7.1, the limitation set forth in this Section 7.1 shall be applied on a
Member by Member basis so as to allocate the maximum possible Losses to each
Member under Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations.
7.2 Sales Commission. The Sales Commission shall be allocated to the
Members holding Units to the extent such Members paid the Sales Commission, and
in proportion to their respective capital contributions represented by such
Units (i.e., $100 in Sales Commission per each such Unit). The purpose of this
Section 7.2 is to allocate the Sales Commission to those Members who actually
bore the burden of paying the Sales Commission.
7.3 Nonrecourse Deductions. Nonrecourse Deductions shall be allocated among
the Members in accordance with their respective Percentage Interests.
7.4 Member Nonrecourse Deductions. Any Member Nonrecourse Deductions shall
be specially allocated to the Member who bears the economic risk of loss with
respect to the Member Nonrecourse Debt to which such Member Nonrecourse
Deductions are attributable in accordance with Treasury Regulations Section
1.704-2(i).
7.5 Allocations Between Transferor and Transferee. In the event of the
transfer of all or any part of a Member's Membership Interest (in accordance
with the provisions of this Agreement) at any time other than at the end of a
Fiscal Year, the change in any Member's Percentage Interest or the admission of
a new Member (in accordance with the terms of this Agreement), the transferring
Member or new Member's share of the Company's income, gain, loss, deductions and
credits, as computed both for accounting purposes and for federal income tax
purposes, shall be allocated between the transferor Member and the transferee
Member, or the new Member and the other Members, as the case may be, in the same
ratio as the number of days in such Fiscal 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 Company (or any part thereof) during such
Fiscal Year, then upon the mutual agreement of all the Members (excluding the
new Member and the transferring Member), the Company shall treat the periods
before and after the date of the transfer or admission as separate Fiscal Years
and allocate the Company's net income, gain, net loss, deductions and credits
for each of such deemed separate Fiscal Years of the Company. Notwithstanding
the foregoing, the Company's "allocable cash basis items," as that term is used
in Section 706(d)(2)(B) of the Code, shall be allocated as required by Section
706(d)(2) of the Code and the Treasury Regulations thereunder.
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7.6 Gains from Capital Transactions. Gains from Capital Transactions during
any Fiscal Year shall be allocated as follows:
(a) First, to those Members whose Capital Accounts immediately prior to the
Capital Transaction were negative, in an amount sufficient to increase the
Capital Accounts to zero, but in the event sufficient gain is not recognized to
do so, then among them pro rata in proportion to their negative Capital
Accounts;
(b) Second, to the Members in an amount equal to the difference between the
Company Sales Proceeds to be distributed to each of the Members as provided in
Section 8.3 and the Capital Accounts of each respective Member as adjusted (if
necessary) by paragraph (a) above, but in the event sufficient gain is not
recognized to do so, then among the Members in an amount which, when credited to
the Capital Accounts of the Members, results in the Members' Capital Accounts
bearing the same ratio to one another as the ratio of the distribution of
Company Sales Proceeds to each of the Members, as provided in Section 8.3; and
thereafter
(c) Any remaining gain shall be allocated among the Members in accordance
with their respective Percentage Interests as of the date of the Capital
Transaction giving rise to the gain.
7.7 Contributed Property. In accordance with Code Section 704(c) and the
Treasury Regulations thereunder, income, gain, loss and deduction with respect
to any property contributed to the capital of the Company shall, solely for tax
purposes, be allocated among the Members so as to take account of any variation
between the adjusted basis of such property to the Company for federal income
tax purposes and its initial Gross Asset Value at the time of contribution.
Any elections or other decisions relating to such allocations shall be made
by the Members in any manner that reasonably reflects the purpose and intention
of this Agreement. Allocations pursuant to this Section 7.7 are solely for
purposes of federal, state and local taxes and shall not affect, or in any way
be taken into account in computing, any Member's Capital Account or share of
Profits, Losses, other items or Distributions pursuant to any provision of this
Agreement.
7.8 Minimum Gain Chargeback. If there is a net decrease in Company Minimum
Gain during any Fiscal Year, each Member shall be specially allocated items of
Company income and gain for such Fiscal Year (and, if necessary, subsequent
years) in an amount equal to such Member's share of the net decrease in Company
Minimum Gain, determined in accordance with Treasury Regulation Section
1.704-2(g). Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to each Member
pursuant thereto. The items to be so allocated shall be determined in accordance
with Treasury Regulations Sections 1.704-2(f) and 1.704- 2(j)(2). This Section
7.8 is intended to comply with the minimum gain chargeback requirement in
Treasury Regulation 1.704-2(f) and shall be interpreted consistently therewith.
7.9 Member Minimum Gain Chargeback. If there is a net decrease in Member
Minimum Gain attributable to a Member Nonrecourse Debt, as defined in Treasury
Regulation Section 1.704- 2(i)(4), during any Fiscal Year, each Member who has a
share of the Member Minimum Gain
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attributable to such Member Nonrecourse Debt, determined in accordance with
Treasury Regulation Section 1.704-2(i)(5), shall be specially allocated items of
Company income and gain for such Fiscal Year (and, if necessary, subsequent
Fiscal Years) in an amount equal to such Member's share of the net decrease in
Member Minimum Gain attributable to such Member Nonrecourse Debt, determined in
accordance with Treasury Regulation Section 1.704-2(i)(4) and (5). Allocations
pursuant to the previous sentence shall be made in proportion to the respective
amounts required to be allocated to each Member pursuant thereto. The items to
be so allocated shall be determined in accordance with Treasury Regulations
Section 1.704-2(i)(4). This Section 8.8 is intended to comply with the Member
Minimum Gain chargeback requirement in Treasury Regulation Section 1.704(i)(4)
and shall be interpreted consistently therewith.
7.10 Qualified Income Offset. If any Member unexpectedly receives an
adjustment, allocation or distribution as described in Treasury Regulations
Section 1.704-1(b)(2)(ii)(d)(4) through (6) which causes or increases a deficit
Capital Account balance in such Member's Capital Account (as determined in
accordance with such Regulation), items of Company income and gain shall be
specially allocated to each such Member in an amount and manner sufficient to
eliminate, to the extent required by the Regulations, the Adjusted Capital
Account Deficit of such Member as quickly as possible, provided that an
allocation pursuant to this Section 7.10 shall be made if and only to the extent
that such Member would have an Adjusted Capital Account Deficit after all other
allocations provided for in this Article VII have been tentatively made as if
this Section 7.10 were not in this Agreement. This provision is intended to be a
"qualified income offset," as defined in Treasury Regulation Section 1.704-
1(b)(2)(ii)(d), such Regulation being specifically incorporated herein by
reference.
7.11 Gross Income Allocation. In the event any Member has a deficit Capital
Account at the end of any Fiscal Year which is in excess of the sum of (i) the
amount such Member is obligated to restore, and (ii) the amount such Member is
deemed to be obligated to restore pursuant to the penultimate sentences of
Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Member
shall be specially allocated items of Company income and gain in the amount of
such excess as quickly as possible, provided that an allocation pursuant to this
Section 7.11 shall be made if and only to the extent that such Member would have
a deficit Capital Account in excess of such sum after all other allocations
provided for in this Article VII have been tentatively made as if this Section
7.11 and Section 7.10 hereof were not in this Agreement.
7.12 Section 754 Adjustment. To the extent an adjustment to the adjusted
tax basis of any Company asset pursuant to Code Section 734(b) or Code Section
743(b) is required, pursuant to Treasury Regulations Section
1.704-1(b)(2)(iv)(m)(2) or Treasury Regulations Section 1.704-
1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as
the result of a Distribution to a Member in complete liquidation of his interest
in the Company, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the asset)
or loss (if the adjustment decreases such basis) and such gain or loss shall be
specially allocated to the Members in accordance with their interests in the
Company in the event that Treasury Regulations Section 1.704-1(b)(2)(iv)(m)(2)
applies, or to the Members to whom such distribution was made in the event that
Treasury Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies.
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7.13 Curative Allocations. The allocations set forth in Sections 7.1(b),
7.2, 7.3, 7.7, 7.8, 7.9, 7.10, and 7.11 hereof (the "Regulatory Allocations")
are intended to comply with certain requirements of the Treasury Regulations. It
is the intent of the Members that, to the extent possible, all Regulatory
Allocations shall be offset either with other Regulatory Allocations or with
special allocations of other items of Company income, gain, loss or deduction
pursuant to this Section 7.13. Therefore, notwithstanding any other provision of
this Article VII (other than the Regulatory Allocations), the Managing Board
shall make such offsetting special allocations of Company income, gain, loss or
deduction in whatever manner they determine appropriate so that, after such
offsetting allocations are made, each Member's Capital Account balance is, to
the extent possible, equal to the Capital Account balance such Member would have
had if the Regulatory Allocations were not part of the Agreement and all Company
items were allocated pursuant to Section 7.1(a). In exercising its discretion
under this Section 7.13, the Managing Board shall take into account future
Regulatory Allocations under Sections 7.8 and 7.9 that, although not yet made,
are likely to offset other Regulatory Allocations previously made under Sections
7.3 and 7.4.
7.14 Compliance with Treasury Regulations. The above provisions of this
Article VII notwithstanding, it is specifically understood that the Managing
Board may without the consent of any Member make such elections, tax allocations
and adjustments, including amendments to this Agreement, as the Managing Board
deem necessary or appropriate to maintain to the greatest extent possible the
validity of the tax allocations set forth in this Agreement, particularly with
regard to Treasury Regulations under Code Section 704(b).
7.15 Tax Withholding. The Company shall be authorized to pay, on behalf of
any Member, any amounts to any federal, state or local taxing authority, as may
be necessary for the Company to comply with tax withholding provisions of the
Code or other income tax or revenue laws of any taxing authority. To the extent
the Company pays any such amounts that it may be required to pay on behalf of a
Member, such amounts shall be treated as a cash Distribution to such Member and
shall reduce the amount otherwise distributable to such Member.
ARTICLE VIII - DISTRIBUTIONS
8.1 Company Cash Flow. Company Cash Flow for each Fiscal Year, to the
extent available, shall be distributed to the Members within 60 days of the end
of each Fiscal Year, or earlier in the discretion of the Managing Board, in
accordance with the Members respective Percentage Interests at the time of the
distribution.
8.2 Company Refinancing Proceeds. Company Refinancing Proceeds, to the
extent available, shall be distributed to the Members within 60 days of the
Capital Transaction giving rise to such proceeds, or earlier in the discretion
of the Managing Board, in accordance with the Members respective Percentage
Interests at the time of the distribution.
8.3 Company Sales Proceeds. Company Sale Proceeds, to the extent available
shall be distributed to the Members within 60 days of the Capital Transaction
giving rise to such proceeds, or
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earlier, in the discretion of the Managing Board, in accordance with the
Members respective Percentage Interests at the time of the distribution.
8.4 Distributions in Liquidation. Upon liquidation of the Company, all the
Company's Property shall be liquidated or distributed as provided in Section
11.3 and Profits and Losses allocated accordingly. Proceeds from the liquidation
of the Company shall be distributed in accordance with the provisions of Section
11.3.
8.5 Limitation Upon Distributions. No Distribution shall be declared and
paid if payment of such Distribution would cause the Company to violate any
limitation on distributions provided in the Act or provided in any agreement
entered into by the Company for the express purpose of obtaining financing for
Company operations.
ARTICLE IX - TRANSFER OF INTERESTS AND ADMISSION OF MEMBERS
9.1 Transferability of Membership Interests.
(a) The term "transfer" when used in this Agreement with respect to a
Membership Interest includes a sale, assignment, gift, pledge, exchange, or any
other disposition (but does not include the issuance of new Membership Interests
pursuant to a Dilution Offering);
(b) The Membership Interest of any Member shall not be transferred, in
whole or in part, except in accordance with the conditions and limitations set
forth in Section 9.2 or Article X;
(c) The transferee of a Membership Interest by assignment, operation of law
or otherwise, shall have only the rights, powers and privileges enumerated in
Section 9.3 or otherwise provided by law and may not be admitted to the Company
as a Member except as provided in Section 9.4;
(d) Notwithstanding any provision herein to the contrary, this Agreement
shall in no way restrict the issuance or transfers of stock of Sun or its
Affiliates; and
(e) Notwithstanding any provision herein to the contrary, the issuance of
Membership Interests pursuant to a Dilution Offering and the admission of new
Members pursuant to a Dilution Offering shall be governed by the provisions of
Section 5.3 of this Agreement.
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9.2 Restrictions on Transfers by Members.
(a) All or part of a Membership Interest may be transferred by a Member
only with the prior written approval of the Managing Board, which approval may
be granted or denied in its sole discretion.
(b) The Managing Board shall not approve any transfer of a Membership
Interest, except a pledge of any Membership Interest by the Managing Board to
any bank, insurance company or other financial institution to secure payment of
indebtedness (a "Permitted Pledge"), or otherwise unless the proposed transferee
shall have furnished the Managing Board with a sworn statement that:
(i) The proposed transferee proposes to acquire his or her Membership
Interest as a principal, for investment and not with a view to resale or
distribution;
(ii) The proposed transferee meets such requirements regarding
sophistication, income and net worth as required by applicable state and federal
securities laws;
(iii) The proposed transferee has met such net worth and income suitability
standards as have been established by the Managing Board;
(iv) The proposed transferee recognizes that investment in the Company
involves certain risks and has taken full cognizance of and understands all of
the risk factors related to the purchase of a Membership Interest; and
(v) The proposed transferee has met all other requirements of the Managing
Board for the proposed transfer.
(c) Other than in the case of a Permitted Pledge, a transfer of a
Membership Interest may be made only if, prior to the date thereof, the Company
upon request receives an opinion of counsel, satisfactory in form and substance
to the Managing Board, that neither the offering nor the proposed transfer will
require registration under federal or applicable state securities laws or
regulations.
9.3 Rights of Transferee. Unless admitted to the Company as a Member in
accordance with Section 9.4, the transferee of a Membership Interest or a part
thereof or any right, title or interest therein (including any transferee having
an interest in a Membership Interest as a result of a Permitted Pledge) shall
not be entitled to any of the rights, powers, or privileges of his or her
predecessor in interest, except that (s)he shall be entitled to receive and be
credited or debited with his or her proportionate share of Company Profits,
Losses, Gains from Capital Transactions, Company Cash Flow, Company Sales
Proceeds, Company Refinancing Proceeds and Distributions in liquidation.
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9.4 Admission of Members. Except as otherwise provided in Section 5.3 and
Article X, the transferee of all or part of the Membership Interest of a Member,
may be admitted to the Company as a Member upon furnishing to the Managing Board
all of the following:
(a) The written approval of a Majority in Interest of the Members (except
the assignor Member), or the assignor Member alone, which approval may be
granted or denied in the sole discretion of such Members or Member (as the case
may be);
(b) The written approval of the Managing Board, which approval may be
granted or denied in the sole discretion of the Managing Board;
(c) Acceptance, in a form satisfactory to the Managing Board, of all the
terms and conditions of this Agreement and any other documents required in
connection with the operation of the Company pursuant to the terms of this
Agreement;
(d) If the transferee is a corporation, a certified copy of a resolution of
its Board of Directors authorizing it to become a Member under the terms and
conditions of this Agreement;
(e) A properly executed power of attorney substantially identical to that
contained in Section 12.15;
(f) Such other documents or instruments as may be required in order to
effect his or her admission as a Member; and
(g) Payment of such reasonable expenses as may be incurred in connection
with his or her admission as a Member.
9.5 Amendment of Certificate of Formation and Qualification. The Managing
Board shall take all steps necessary and appropriate to prepare and record any
amendments to the Certificate of Formation, as may be necessary or appropriate
from time to time to comply with the requirements of the Act, and shall take all
steps necessary and appropriate to prepare and record any and all documents
necessary to qualify the Company to do business in jurisdictions where the
Company is doing business, and may for these purposes exercise the power of
attorney delivered to the Company pursuant to Sections 9.4 and 12.15.
9.6 Fundamental Changes. As provided in Section 3.3(e), if the Managing
Board and the Members representing two-thirds of the aggregate interests in the
Company approve a plan providing for the merger or consolidation of the Company
with another person or entity, or the sale of all or substantially all of the
Membership Interests, including without limitation the exchange of Membership
Interests for equity interests in another person or entity or for cash or other
consideration or combination thereof, then and in such event, the Members shall
be obligated to take or refrain from taking, as the case may be, such actions as
the plan may provide, including, without limitations, executing such
instruments, and providing such information as the Managing Board shall
reasonably request. Any plan described in this Section 9.6 may also effect an
amendment to the Certificate of Formation or Operating
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Agreement, or the adoption of a new operating agreement in connection with
the merger of the Company with another person or entity as provided in Section
25.15.410 of the Act. The plan may also provide that the Managing Board members
shall receive fees for services rendered in connection with the operation of the
Company or any successor entity following the consummation of the transactions
described in the plan, and neither the Company nor the Members shall have any
right by virtue of this Agreement in the income derived therefrom. Any
securities or other consideration to be distributed to the Members pursuant to
the plan shall be distributed in the manner set forth in Section 11.3 as though
the Company were being liquidated. For this purpose only, the fair market value
of the securities or other consideration to be received pursuant to the plan
shall be treated as "Profits" and the capital accounts of the Members shall be
increased in the manner provided in Section 5.5. No Member shall be entitled to
any appraisal or similar rights in connection with a plan contemplated by this
Section 9.6.
ARTICLE X - OPTIONAL PURCHASE OF MEMBERSHIP INTERESTS
ON CERTAIN EVENTS
10.1 Death. Upon the death of a Member, the deceased Member's executor,
administrator, or other legal or personal representative shall give written
notice of that fact to the Managing Board. The Company shall have the option to
purchase at the Closing (as defined below) the Membership Interest of the
deceased Member (whose executor, administrator or other legal or personal
representative shall then become obligated to sell such Membership Interest) at
the price determined in the manner provided in Section 10.7 of this Agreement
and on the terms and conditions provided in Section 10.8 of this Agreement. The
Company shall have a period of thirty (30) days following the date it first
received notice of the death of the Member (the "First Option Period") within
which to notify in writing the deceased Member's executor, administrator or
other legal or personal representative, whether the Company desires to purchase
all or a portion of the Membership Interest of the deceased Member. If the
Company does not elect to purchase the entire Membership Interest of the
deceased Member before the expiration of the First Option Period and in the
manner provided herein, the Members shall have the option to purchase all or any
part of the Membership Interest of the deceased Member not purchased by the
Company at the price determined in the manner provided in Section 10.7 of this
Agreement and on the terms and conditions provided in Section 10.8 of this
Agreement. Any Member desiring to purchase any part or all of the remaining
Membership Interest of the deceased Member shall deliver to the Managing Board a
written election to purchase all or a specified portion of such Membership
Interest within the ten (10) day period immediately following the close of the
First Option Period (the "Second Option Period"). If the Members in the
aggregate elect to purchase more than the Membership Interest then available,
each electing Member shall have a priority, up to that portion specified in his
or her notice of election, to purchase such proportion of the Membership
Interest of the deceased Member then available as his or her Percentage Interest
bears to the aggregate Percentage Interests of the Members electing to purchase.
That portion of the deceased Member's Membership Interest not purchased on such
a priority basis shall be allocated in one or more successive allocations to
those remaining Members electing to purchase more of the Membership Interest
than they have a priority right, up to the portion specified in their respective
elections, in the proportion that each of their Percentage Interests bears to
the aggregate Percentage Interest of all of them.
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Within the ten (10) day period immediately following the close of the
Second Option Period (the "Confirmation Period"), the Managing Board shall
inform each electing Member of the portion of the Membership Interest of the
deceased Member as to which his or her election is effective. The Managing Board
shall give notice to the deceased Member within the ten (10) day period
following the close of the Confirmation Period (the "Notification Period") of
the election by the Members to exercise their option. Such notice shall indicate
the portion of the deceased Member's Membership Interest that will be purchased
by each of the purchasing Members and the Company, if any. Any portion of the
Membership Interest not purchased by the Company and Members shall be held by
the deceased Member's executor, administrator or other legal representative
pursuant to the terms of this Agreement.
10.2 Bankruptcy, Insolvency or Assignment for Benefit of Creditors of a
Member. In the event that an involuntary or voluntary proceeding under the
Federal Bankruptcy Code, as amended, is filed for or against any Member, or if
any Member shall make an assignment for the benefit of his or her creditors, or
if any Member has a receiver or custodian appointed for his or her assets, or
any Member generally fails to pay his or her debts when due, the insolvent
Member shall give written notice (the "Notice of Insolvency") to the Managing
Board of the commencement of any such proceeding or the occurrence of such event
within five days of the first notice to him or her of such commencement or
occurrence of such event. The Company shall have the option to purchase at the
Closing (as defined below) the Membership Interest of the insolvent Member
(which insolvent Member or his trustee, custodian, receiver or other personal or
legal representative, as the case may be, shall then become obligated to sell
such Membership Interest) at the price determined in the manner provided in
Section 10.7 of this Agreement and on the terms and conditions provided in
Section 10.8 of this Agreement. The Company shall have a period of thirty (30)
days following the date of either the Notice of Insolvency, or if such formal
notice is not given, the date the Managing Board first becomes aware of the
financial condition of the Member as outlined in this Article 10.2 (the "First
Option Period"), within which to notify in writing the insolvent Member or his
trustee, custodian, receiver, or other legal or personal representative, whether
the Company wishes to purchase all or a portion of the Membership Interest of
the insolvent Member. If the Company does not elect to purchase the entire
Membership Interest of the insolvent Member before the expiration of the First
Option Period and in the manner provided herein, the Members shall have the
option to purchase all or any part of the Membership Interest of the insolvent
Member not purchased by the Company at the price determined in the manner
provided in Section 10.7 of this Agreement and on the terms and conditions
provided in Section 10.8 of this Agreement. Any Member desiring to purchase any
part or all of the remaining Membership Interest of the insolvent Member shall
deliver to the Managing Board a written election to purchase all or a specified
portion of such Membership Interest within the ten (10) day period immediately
following the close of the First Option Period (the "Second Option Period"). If
the Members in the aggregate elect to purchase more than the Membership Interest
then available, each electing Member shall have a priority, up to that portion
specified in his or her notice of election, to purchase such proportion of the
Membership Interest of the insolvent Member then available as his or her
Percentage Interest bears to the aggregate Percentage Interests of the Members
electing to purchase. That portion of the insolvent Member's Membership Interest
not purchased on such a priority basis shall be allocated in one or more
successive allocations to those remaining Members electing to purchase more of
the Membership Interest than they have a priority right, up to the portion
specified in their respective elections, in the proportion that each of their
Percentage Interests bears to the aggregate Percentage Interest of all of them.
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Within the ten (10) day period immediately following the close of the
Second Option Period (the "Confirmation Period"), the Managing Board shall
inform each electing Member of the portion of the Membership Interest of the
insolvent Member as to which his or her election is effective. The Managing
Board shall give notice to the insolvent Member within the ten (10) day period
following the close of the Confirmation Period (the "Notification Period") of
the election by the Members to exercise their option. Such notice shall indicate
the portion of the insolvent Member's Membership Interest that will be purchased
by each of the purchasing Members and the Company, if any. Any portion of the
Membership Interest not purchased by the Company and Members shall be held by
the insolvent Member, his or her trustee, custodian, receiver or other legal or
personal representative pursuant to the terms of this Agreement.
10.3 Default under Guaranties. Notwithstanding any other provision of this
Article X to the contrary, if any of the events outlined in Sections 10.1 or
10.2 or any other defaulting event outlined in the Guaranty (the "Defaulting
Events") should occur with respect to a Member (the "Defaulting Member"), and
the Managing Board determines (in its sole discretion) that such event may
result in default and acceleration of an obligation secured by the Guaranty
unless another guarantor acceptable to the Bank can be substituted in the place
of the Defaulting Member, then the Managing Board shall have the right to
immediately take the steps as outlined in this Section 10.3 to prevent such
default. Upon the Managing Board receiving notice of a Defaulting Event as
provided above, the Managing Board, in its sole discretion, shall immediately
have the right to either (i) sell the entire Membership Interest of the
Defaulting Member to an investor approved of by the Managing Board, (ii)
purchase for the Company's account the entire Membership Interest of the
Defaulting Member, or (iii) sell the entire Membership Interest of the
Defaulting Member to one or more of the other Members. The Defaulting Member
shall sell his or her Membership Interest to the purchaser at the purchase price
determined in the manner as provided in Section 10.7 and on the terms and
conditions as provided in Section 10.8. The transfer of the Membership Interest,
the payment of the purchase price, and the assumption of the Defaulting Member's
obligations under his or her Guaranty (as provided in Section 10.7), shall be
made at such time as determined by the Managing Board in order to avoid the
default and acceleration of the obligation secured by the Guaranty. Each Member
hereby makes, constitutes and appoints the Chairman, with full power of
substitution, his or her true and lawful attorney-in-fact, to take such actions
and execute such documents on his or her behalf to effect the transfer of his or
her Membership Interest as provided in this Section 10.3, in the event such
Member becomes a Defaulting Member.
10.4 Breach of Section 4.6. In the event the Managing Board either receives
a Notice of Withdrawal as provided in Section 4.6 or receives notice of a breach
of Section 4.6 by a Member (the "Competing Member"), the Managing Board may
elect, in its sole discretion, to treat such event as a default under this
Agreement and enforce the provisions of this Section 10.4. In the event of a
deadlock of the Managing Board, the Managing Board's determination of whether to
treat a Member's Notice of Withdrawal under Section 4.6 or the notice of a
Member's breach of Section 4.6 as a default under this Agreement shall be
submitted to binding arbitration in accordance with Section 12.16 hereof. If the
Managing Board (pursuant to its own vote or the decision of an arbitrator)
elects to enforce the provisions of this Section 10.4, the Managing Board shall
give written notice of such election (the "Notice of Default") to the Competing
Member within 180 days of the date the Managing Board first received notice of
the defaulting event. Upon giving the Notice of Default, the Company shall have
the option to purchase at the Closing (as defined below) the Membership Interest
of the Competing Member
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(which Competing Member shall then become obligated to sell such Membership
Interest) at the price determined in the manner provided in Section 10.7 of this
Agreement and on the terms and conditions provided in Section 10.8 of this
Agreement. The Company shall have a period of thirty (30) days following the
date of the Notice of Default (the "First Option Period") within which to notify
in writing the Competing Member, whether the Company wishes to purchase all or a
portion of the Membership Interest of the Competing Member. If the Company does
not elect to purchase the entire Membership Interest of the Competing Member
before the expiration of the First Option Period and in the manner provided
herein, the Members shall have the option to purchase all or any part of the
Membership Interest of the Competing Member not purchased by the Company at the
price determined in the manner provided in Section 10.7 of this Agreement and on
the terms and conditions provided in Section 10.8 of this Agreement. Any Member
desiring to purchase any part or all of the remaining Membership Interest of the
Competing Member shall deliver to the Managing Board a written election to
purchase all or a specified portion of such Membership Interest within the ten
(10) day period immediately following the close of the First Option Period (the
"Second Option Period"). If the Members in the aggregate elect to purchase more
than the Membership Interest then available, each electing Member shall have a
priority, up to that portion specified in his or her notice of election, to
purchase such proportion of the Membership Interest of the Competing Member then
available as his or her Percentage Interest bears to the aggregate Percentage
Interests of the Members electing to purchase. That portion of the Competing
Member's Membership Interest not purchased on such a priority basis shall be
allocated in one or more successive allocations to those remaining Members
electing to purchase more of the Membership Interest than they have a priority
right, up to the portion specified in their respective elections, in the
proportion that each of their Percentage Interests bears to the aggregate
Percentage Interest of all of them.
Within the ten (10) day period immediately following the close of the
Second Option Period (the "Confirmation Period"), the Managing Board shall
inform each electing Member of the portion of the Membership Interest of the
Competing Member as to which his or her election is effective. The Managing
Board shall give notice to the Competing Member within the ten (10) day period
following the close of the Confirmation Period (the "Notification Period") of
the election by the Members to exercise their option. Such notice shall indicate
the portion of the Competing Member's Membership Interest that will be purchased
by each of the purchasing Members and the Company, if any. Any portion of the
Membership Interest not purchased by the Company and Members shall be held by
the Competing Member pursuant to the terms of this Agreement.
10.5 Domestic Proceeding. In the event that a spouse of a Member commences
against a Member, or a Member is named in, a Domestic Proceeding, the Member
shall give written notice (the "Notice of Domestic Proceeding") to the Managing
Board of the commencement of any such proceeding within five days of the first
notice to him or her of such commencement. The Company shall have the option to
purchase at the Closing (as defined below) the Membership Interest of the Member
involved in the Domestic Proceeding (which Member shall then become obligated to
sell such Membership Interest), at the price determined in the manner provided
in Section 10.7 of this Agreement and on the terms and conditions provided in
Section 10.8 of this Agreement. The Company shall have a period of thirty (30)
days following the date of either the Notice of Domestic Proceeding, or if such
formal notice is not given, the date the Managing Board first becomes aware of
the domestic circumstances of the Member as provided in this Section 10.5 (the
"First Option Period"), within which to notify in
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writing the Member involved in the Domestic Proceeding, whether the Company
wishes to purchase all or a portion of the Membership Interest of such Member.
If the Company does not elect to purchase the Membership Interest of the Member
involved in the Domestic Proceeding before the expiration of the First Option
Period and in the manner provided herein, the Members shall have the option to
purchase all or any part of the Membership Interest of the Member involved in
the Domestic Proceeding not purchased by the Company at the price determined in
the manner provided in Section 10.7 of this Agreement and on the terms and
conditions provided in Section 10.8 of this Agreement. Any Member desiring to
purchase any part or all of the remaining Membership Interest of the Member
involved in the Domestic Proceeding shall deliver to the Managing Board a
written election to purchase all or a specified portion of such Membership
Interest within the ten (10) day period immediately following the close of the
First Option Period (the "Second Option Period"). If the Members in the
aggregate elect to purchase more than the Membership Interest then available,
each electing Member shall have a priority, up to that portion specified in his
or her notice of election, to purchase such proportion of the Membership
Interest of the Member involved in the Domestic Proceeding then available as his
or her Percentage Interest bears to the aggregate Percentage Interests of the
Members electing to purchase. That portion of the Member's Membership Interest
not purchased on such a priority basis shall be allocated in one or more
successive allocations to those remaining Members electing to purchase more of
the Membership Interest than they have a priority right, up to the portion
specified in their respective elections, in the proportion that each of their
Percentage Interests bears to the aggregate Percentage Interest of all of them.
Within the ten (10) day period immediately following the close of the
Second Option Period (the "Confirmation Period"), the Managing Board shall
inform each electing Member of the portion of the Membership Interest of the
Member involved in the Domestic Proceeding as to which his or her election is
effective. The Managing Board shall give notice to the Member involved in the
Domestic Proceeding within the ten (10) day period following the close of the
Confirmation Period (the "Notification Period") of the election by the Members
to exercise their option. Such notice shall indicate the portion of the Member's
Membership Interest that will be purchased by each of the purchasing Members and
the Company, if any. Any portion of the Membership Interest not purchased by the
Company and Members shall be held by such Member involved in the Domestic
Proceeding pursuant to the terms of this Agreement.
10.6 Divestiture Option. If state or federal regulations or laws are
enacted or applied, or if any other legal developments occur, which, in the
opinion of the Managing Board adversely affect (or potentially adversely affect)
the operation of the Company (e.g., the enactment or application of prohibitory
physician self-referral legislation against the Company or its Members), the
Managing Board shall promptly notify the Members of the applicable legal
development and in good faith diligently work with the Members to devise a plan
pursuant to which the Company may avoid such adverse effect, including the
modification of this Agreement and any other contracts or agreements entered
into by the Company. In the event the Managing Board and Members are unable to
devise such a plan within a reasonable time period, the Managing Board shall
elect, in its discretion, to either (i) take the steps outlined in this Section
10.6 to divest the Members of their Membership Interests, or (ii) dissolve the
Company as provided in Article XI. If the Managing Board chooses option (i), it
shall deliver a written notice of such decision to all of the Members and Sun
shall purchase such Membership Interests for its own account. The purchase price
to be paid for each Membership Interest shall be determined in the
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manner as provided in Section 10.7 and shall be on the terms and conditions
as provided in Section 10.8. The transfer of the Membership Interests, the
payment of the purchase price and the assumption of the Members' obligations
under their respective Guaranties (as provided in Section 10.7) shall be made at
such time as determined by the Managing Board to be in the best interests of the
Company and its Members. In the event of the transfer of the Membership
Interests of all the Members to Sun pursuant to option (i) above, the transfer
of the Membership Interests, the payment of the purchase price and the
assumption of the Members' obligations under their respective Guaranties (as
provided in Section 10.7) shall be made either as of the effective date of the
applicable legal development giving rise to the divestiture, or at such earlier
date as determined by the Managing Board to be in the best interests of the
Company and its Members. Each Member hereby makes, constitutes and appoints the
Chairman, with full power of substitution, his, her or its true and lawful
attorney-in-fact, to take such actions and execute such documents on his, her or
its behalf to effect the transfer of his, her or its Membership Interest as
provided in this Section 10.6. The foregoing power of attorney shall not be
affected by the subsequent incapacity, mental incompetence, dissolution or
bankruptcy of any Member.
10.7 Purchase Price. The purchase price to be paid for the Membership
Interest of any Member whose interest is being purchased pursuant to the
provisions of Sections 10.1, 10.2, 10.3, 10.4, 10.5 or 10.6 (the "Withdrawing
Member") shall be determined in the manner provided in this Section 10.7. The
purchase price for a Membership Interest purchased pursuant to the provisions of
Sections 10.2, 10.3 or 10.4 shall be an amount equal to the Withdrawing Member's
share of the Company's book value, if any, (prorated in the event that only a
portion of his or her Membership Interest is being purchased) as reflected by
the Capital Account of the Withdrawing Member (unadjusted for any appreciation
in Company assets and as reduced by depreciation deductions claimed by the
Company for tax purposes) as of the Valuation Date (as defined below). The
determination of the Withdrawing Member's Capital Account on the Valuation Date
(as defined below) shall be made by the Company's internal accountant (the
"Company Accountant") upon a review of the Company's books of account, and a
formal audit is expressly waived. The statement of the Company Accountant with
respect to the Capital Account of the Withdrawing Member on the Valuation Date
shall be binding and conclusive upon the Company, the purchaser and the
Withdrawing Member and his, her or its representative. In the case of a purchase
of a Membership Interest pursuant to the provisions of Sections 10.1, 10.5 or
10.6, the purchase price shall be an amount equal to two (2) times the aggregate
distributions made with respect to such Membership Interest pursuant to Section
8.1 during the twelve-month period ending on the Valuation Date (the "Purchase
Price Formula"). The Purchase Price Formula shall be subject to revision from
time to time as set forth in Section 3.3(g). The Valuation Date shall be the
last day of the month immediately preceding the month in which occurs: (i) the
death of a Member, in the case of a purchase by reason of death; (ii) the
bankruptcy or insolvency of a Member, in the case of a purchase by reason of
such bankruptcy or insolvency; (iii) the notice of Defaulting Event as provided
in Section 10.3, in the case of a purchase occurring by reason of one of such
events; (iv) the Notice of Withdrawal or breach of Section 4.6 as provided in
Section 10.4 in the case of a purchase by reason thereof; (v) the commencement
of the Domestic Proceeding, in the case of a purchase by reason thereof; or (iv)
the Notice of Election as provided in Section 10.6, in the case of a purchase by
reason thereof. Any Member whose Membership Interest is purchased pursuant to
the provisions of Sections 10.1, 10.2, 10.3, 10.4, 10.5 or 10.6 shall be
entitled only to the purchase price which shall be paid at the Closing in cash
(or by certified or cashier's check) and shall not be entitled to any Company
distributions made after the Valuation Date. If as of the date of the Closing
the Withdrawing Member still has an outstanding
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personal obligation under the Guaranty (the "Obligation"), the purchasing
Member (or Members, as the case may be, in proportion to their share of the
purchased Membership Interest) shall assume the Obligation, indemnify the
Withdrawing Member from the Obligation, and take such steps deemed necessary by
the Managing Board to formally evidence the assumption of the Obligation,
including without limitation, executing such documents and providing such
financial information to the Bank (as the case may be) to evidence the
assumption of the Obligation, and obtain, if possible, the release of the
Withdrawing Member from the Obligation. The transfer of a Membership Interest of
a Withdrawing Member shall be deemed to occur as of the Valuation Date and the
Withdrawing Member shall have no voting or other rights as a Member after such
date. The purchaser shall be entitled to any distributions attributable to the
transferred interest after the Valuation Date and the Company shall have the
right to deduct the amount of any such distributions made to the Withdrawing
Member after the Valuation Date from the purchase price.
10.8 Closing of Purchase and Sale. The Closing of any purchase and sale of
a Membership Interest pursuant to Sections 10.1, 10.2, 10.3, 10.4, 10.5 or 10.6
of this Agreement shall take place at the principal office of the Company, or
such other place designated by the Managing Board, on the date determined as
follows (the "Closing"):
(a) In the case of a purchase and sale occurring by reason of the death of
a Member as provided in Section 10.1 of this Agreement, the Closing shall be
held on the thirtieth day (or if such thirtieth day is not a business day, the
next business day following the thirtieth day) immediately following the last to
occur of:
(i) Qualification of the executor or personal administrator of the deceased
Member's estate;
(ii) The date on which any necessary determination of the purchase price of
the Membership Interest to be purchased has been made; or
(iii) The date that coincides with the close of the First Option Period, if
the option exercised by the Company is with respect to the entire Membership
Interest of the deceased Member, or the date that coincides with the close of
the Notification Period, if the option exercised by the Company is with respect
to less than all of the Membership Interest of the deceased Member or the
Company does not exercise its option.
(b) In the case of a purchase and sale occurring by reason of the
occurrence of one of the events described in Sections 10.2, 10.3, 10.4, 10.5 or
10.6 of this Agreement, the Closing shall be held on the thirtieth day (or if
such thirtieth day is not a business day, the next business day following the
thirtieth day) immediately following the later to occur of:
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(i) The date on which any necessary determination of the purchase price of
the Membership Interest to be purchased has been made; or
(ii) The date that coincides with the close of the First Option Period, if
the option exercised by the Company is with respect to the entire Membership
Interest of the Member whose interest is being transferred, or the date that
coincides with the close of the Notification Period, if the option exercised by
the Company is with respect to less than all the Membership Interest of such
Member or the Company does not exercise its option.
At the Closing, although not necessary to effect the transfer, the
Withdrawing Member shall concurrently with tender and receipt of the applicable
purchase price, deliver to the purchaser duly executed instruments of transfer
and assignment, assigning good and marketable title to the portion or portions
of the Withdrawing Member's entire Membership Interest thus purchased, free and
clear from any liens or encumbrances or rights of others therein. The parties
acknowledge that occurrence of any of the triggering events described in
Sections 10.1, 10.2, 10.3, 10.4, 10.5 or 10.6 and compliance with all the
Articles of this Agreement, except the execution of the transfer documents by
the Withdrawing Member as provided above in this Section 10.8, are sufficient to
effect the complete transfer of the Withdrawing Member's interest and the
Withdrawing Member shall be deemed to consent to admission of the transferee as
a substitute Member. Notwithstanding the date of the Closing or whether a
Closing is successfully held, the transfer of a Membership Interest of a
Withdrawing Member shall be deemed to occur as of the Valuation Date as defined
in Section 10.7. The deemed transfer is effective regardless of whether the
Withdrawing Member performs the duties set forth in this Section 10.8.
10.9 Terms and Conditions of Purchase. The Membership Interest of a Member
shall not be transferred to any Member unless the requirements of Sections 9.2
and 9.4 (b) through (g) are satisfied with respect to it. The purchaser shall be
liable for all obligations and liabilities connected with that portion of the
Membership Interest transferred to it unless otherwise agreed in writing.
ARTICLE XI - DISSOLUTION AND LIQUIDATION OF THE COMPANY
11.1 Dissolution Events. The Company will be dissolved upon the happening
of any of the following events:
(a) The expiration of its term on December 31, 2020;
(b) The determination of the Managing Board and the Members representing
two-thirds of the aggregate interests of the Company that the Company should be
dissolved;
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(c) Pursuant to Section 3.3(e), the approval of a plan by the Managing
Board and the Members providing for the merger, consolidation or sale of
Membership Interests as described in Section 9.6;
(d) The election of the Managing Board to dissolve the Company following
the occurrence of an event described in Section 10.6;
(e) The sale, exchange or other disposition of all or substantially all of
the Property of the Company without making provision for the replacement
thereof;
(f) The Bankruptcy or dissolution of a Member or the occurrence of any
other event which terminates the continued membership of any Member, unless
there is at least one remaining Member and the business of the Company is
continued by the written consent of a Majority in Interest of the remaining
Members within ninety (90) days of the occurrence of such event; or
(g) Any other event resulting in the dissolution or termination of the
Company under the laws of the State of Washington.
11.2 Continuation. Upon the occurrence of any of the events described in
Section 11.1(f) above with respect to any of the Members, the business of the
Company will be continued if within ninety (90) calendar days a Majority in
Interest of the remaining Members elect to continue the business of the Company.
If the Members fail to continue the Company's business as provided in this
Section 11.2, the Company will be liquidated under Section 11.3.
11.3 Liquidation. Upon the happening of any of the events specified in
Section 11.1 and, if applicable, the failure to continue the business of the
Company under Section 11.2, the Managing Board, or any liquidating trustee
elected by a Majority in Interest of the Members, will commence as promptly as
practicable to wind up the Company's affairs unless the Managing Board or the
liquidating trustee (either, the "Liquidator") determines that an immediate
liquidation of Company assets would cause undue loss to the Company, in which
event the liquidation may be deferred for a time determined by the Liquidator to
be appropriate. Assets of the Company may be liquidated or distributed in kind,
as the Liquidator determines to be appropriate. The Members will continue to
share Company Cash Flow, Profits and Losses during the period of liquidation in
the manner set forth in Articles VII and VIII. The proceeds from liquidation of
the Company, including repayment of any debts of Members to the Company, and any
Company assets that are not sold in connection with the liquidation will be
applied in the following order of priority:
(a) To payment of the debts and satisfaction of the other obligations of
the Company, including without limitation debts and obligations to Members;
(b) To the establishment of any reserves deemed appropriate by the
Liquidator for any liabilities or obligations of the Company, which reserves
will be held for the purpose of paying liabilities or obligations and, at the
expiration of a period the Liquidator deems appropriate, will be distributed in
the manner provided in Section 11.3(c); and
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(c) To the payment to the Members of the positive balances in their
respective Capital Accounts, pro rata, in proportion to the positive balances in
those capital accounts after giving effect to all allocations under Article VII
and all distributions under Article VIII for all prior periods, including the
period during which the process of liquidation occurs.
11.4 Certificate of Cancellation. Upon the dissolution and completion of
the winding up of the Company, the Managing Board shall cause a Certificate of
Cancellation to be executed on behalf of the Company and filed with the
Secretary of State, and the Managing Board shall execute, acknowledge and file
any and all other instruments necessary or appropriate to reflect the
dissolution and winding up of the Company.
ARTICLE XII - MISCELLANEOUS
12.1 Fiscal Year. The Fiscal Year will end on December 31, unless another
fiscal year-end is selected by the Managing Board.
12.2 Records. Proper and complete records and books of account shall be
kept by the Managing Board in which shall be entered fully and accurately all
transactions and such other matters relating to the Company's business as are
usually entered into records and books of account maintained by persons engaged
in business of like character. The records of the Company will be maintained at
the principal place of business of the Company, or at any other location the
Managing Board selects provided that the Company keep at its principal place of
business the records required by the Act to be maintained there. Appropriate
records in reasonable detail will be maintained to reflect income tax
information for the Members. Each Member may inspect and make copies of the
records maintained by the Company during reasonable business hours and upon
reasonable notice. Each Member, at his or her expense, may make copies of the
records maintained by the Company and may require an audit of the books of
account maintained by the Company to be conducted by the independent accountants
for the Company.
12.3 Reports. The Managing Board, at the expense of the Company, will cause
to be prepared in accordance with the method of accounting then used by the
Company and distributed to each Member within ninety (90) days after the end of
each Fiscal Year, a balance sheet as of the close of the Fiscal Year and the
annual income tax returns and related schedules of the Company for the Fiscal
Year.
12.4 Reserves. The Managing Board may cause the Company to create
reasonable reserve accounts to be used exclusively for repairs and acquisition
of Additional Assets and for any other valid Company purpose. The Managing Board
shall in its sole discretion determine the amount of payments to such reserve
accounts.
12.5 Notices. The Managing Board will notify the Members of any change in
the name, principal or registered office or registered agent of the Company. Any
notice or other communication required by this Agreement must be in writing.
Notices and other communications will be deemed to have been given when
delivered by hand or dispatched by telegraph, telex or other means of electronic
facsimile transmission, or three business days after being deposited in the
United States mail, postage
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prepaid, addressed to the Member to whom the notice is intended to be given
at his or her address set forth on Schedule I of this Agreement or, in the case
of the Company, to its principal place of business provided for in Section 1.4.
A Person may change his or her notice address by notice in writing to the
Company and to each other Member given under this Section 12.5.
12.6 Amendments. As expressly provided in this Agreement in Section 3.3(h),
no amendment of this Agreement will be valid or binding upon the Members, nor
will any waiver of any term of this Agreement be effective, unless in writing
and signed by the Managing Board and the Members representing two-thirds of the
aggregate interests in the Company.
12.7 Additional Documents. Each party agrees to execute and acknowledge all
documents and writings which the Managing Board may deem necessary or expedient
in the creation of this Company and the achievement of its purpose, specifically
including but not limited to, a certificate of formation and all amendments, as
well as any cancellation thereof.
12.8 Representations of Members. Each Member represents and warrants to the
Company and every other Member that (s)he (a) is fully aware of, and is capable
of bearing, the risks relating to an investment in the Company, (b) understands
that his or her interest in the Company has not been registered under the
Securities Act of 1933, as amended, or the securities law of any jurisdiction in
reliance upon exemptions contained in those laws, and (c) has acquired his or
her interest in the Company for his or her own account, with the intention of
holding the interest for investment and without any intention of participating
directly or indirectly in any redistribution or resale of any portion of the
interest in violation of the Securities Act of 1933, as amended, or any
applicable law.
12.9 Survival of Rights. Except as herein otherwise provided to the
contrary, this Agreement shall be binding upon and inure to the benefit of the
parties, their successors and assigns.
12.10 Interpretation and Governing Law. When the context in which words are
used in this Agreement indicates that such is the intent, words in the singular
number shall include the plural and vice versa. The masculine gender shall
include the feminine and neuter. The Article and Section headings or titles and
the table of contents shall not define, limit, extend or interpret the scope of
this Agreement or any particular Article or Section. This Agreement shall be
governed and construed in accordance with the laws of the State of Washington
without giving effect to the conflicts of laws provisions thereof.
12.11 Severability. If any provision, sentence, phrase or word of this
Agreement or the application thereof to any Person or circumstance shall be held
invalid, the remainder of this Agreement, or the application of such provision,
sentence, phrase, or word to Persons or circumstances, other than those as to
which it is held invalid, shall not be affected thereby.
12.12 Agreement in Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument. In addition, this Agreement may contain
more than one counterpart of the signature pages and this Agreement may be
executed by the affixing of the signatures of each of the Members to one of such
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counterpart signature pages; all of such signature pages shall be read as though
one, and they shall have the same force and effect as though all of the signers
had signed a single signature page. 12.13 Tax Matters Partner. For purposes of
this Agreement, the Managing Board shall designate either a Member or a member
of the Managing Board as the Tax Matters Partner (as defined in Section 6231 of
the Code).
12.14 Third Parties. The agreements, covenants and representations
contained herein are for the benefit of the parties hereto inter se. Nothing in
this Agreement is intended to benefit any third parties including, without
limitation, any creditor of the Company and/or any Member. No creditor of the
Company or any Member will be entitled to require the Managing Board to solicit
or accept any loan or additional capital contribution for the Company or to
enforce any right which the Company or any Member may have against a Member,
whether arising under this Agreement or otherwise.
12.15 Power of Attorney. Each Member hereby makes, constitutes and appoints
Stan Johnson, or his successor in interest as determined by the Managing Board,
severally, with full power of substitution, his true and lawful
attorneys-in-fact, for him and in his name, place and stead and for his use and
benefit to sign and acknowledge, file and record, any amendments hereto among
the Members for the further purpose of executing and filing on behalf of each
Member, any and all articles of organization or other documents necessary to
constitute the Company or to effect the continuation of the Company, the
admission or withdrawal of members, the qualification of the Company in a
foreign jurisdiction (or amendment to such qualification), the admission of
substitute Members or the dissolution or termination of the Company, provided
such continuation, admission, withdrawal, qualification, or dissolution and
termination are in accordance with the terms of this Agreement.
The foregoing power of attorney is a special power of attorney coupled with
an interest, is irrevocable and shall survive the death, legal incapacity,
dissolution or Bankruptcy of each Member. It may be exercised by said attorney
by listing all of the Members executing any instrument over the signature of the
attorney-in-fact acting for all of them. The power of attorney shall survive the
delivery of an assignment by a Member of the whole or any portion of his or her
Unit. In those cases in which the assignee of, or the successor to, a Member
owning a Unit has been approved by the Members for admission to the Company as a
substitute Member, the power of attorney shall survive for the sole purpose of
enabling the Managing Board to execute, acknowledge and file any instrument
necessary to effect such substitution.
12.16 Arbitration. Any dispute arising out of or in connection with this
Agreement or the breach thereof shall be decided by arbitration in Seattle,
Washington in accordance with the then effective commercial arbitration rules of
the American Arbitration Association, and judgment thereof may be entered in any
court having jurisdiction thereof.
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IN WITNESS WHEREOF, the undersigned, being the Chairman of the Managing
Board and initial Members of the Company, have caused this Agreement to be duly
adopted by the Company as of the date first written above, and do hereby assume
and agree to be bound by and to perform all of the terms and provisions set
forth in this Agreement.
MANAGING BOARD:
By:
____________________________, Chairman
MEMBER:
SUN MEDICAL TECHNOLOGIES, INC.,
a California corporation
By:
Stan Johnson
President
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COUNTERPART SIGNATURE PAGE
By signing this Counterpart Signature Page, the undersigned acknowledges
his or her acceptance of that certain Operating Agreement of Washington
Urological Services, LLC, and his or her intention to be legally bound thereby.
Dated this _________ day of ___________________, 199__.
---------------------------
Signature
---------------------------
Printed Name
STATE OF _______________ )
)
COUNTY OF _____________ )
BEFORE ME, the undersigned Notary Public in and for the State and County
set forth above, on the _______ day of _____________________, 199__, personally
appeared ____________________________, and, being by me first duly sworn, stated
that (s)he signed this Counterpart Signature Page for the purpose set forth
above and that the statements contained therein are true.
---------------------------
Signature of Notary Public
---------------------------
Printed Name of Notary
My Commission Expires:
___________________________
[SEAL]
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OPERATING AGREEMENT OF WASHINGTON UROLOGICAL SERVICES, LLC
SCHEDULE I
Names and Address Initial Capital
of Members Contribution Guaranty(1) Percentage Interest
General Partner
Sun Medical
Technologies, Inc. $33,460 131,450 23.90%
Limited partners
as a whole 114,150 418,550 76.10%
TOTALS $ 147,610 $ 550,000 100.00%
(1) Represents the principal portion of each Member's guaranty obligation, as
each Member's obligation under the Guaranty includes not only principal, but
also (as provided in the Guaranty) accrued and unpaid interest, late payment
penalties and all costs incurred by the Bank in collecting any defaulted
obligations. The principal amount of the loan is $550,000. The Members will
guarantee 1% of the loan (up to a $5,500 principal guaranty) for each Unit
purchased as provided in the Memorandum.
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AGREEMENT OF LIMITED PARTNERSHIP
OF
WYOMING UROLOGICAL SERVICES
LIMITED PARTNERSHIP
<PAGE>
AGREEMENT
OF LIMITED PARTNERSHIP
OF
WYOMING UROLOGICAL SERVICES LIMITED PARTNERSHIP
TABLE OF CONTENTS
Page
1. FORMATION..................................................1
2. NAME.......................................................1
3. OFFICES....................................................1
4. PURPOSE....................................................2
5. TERM.......................................................2
6. CERTAIN DEFINED TERMS......................................2
7. CAPITAL CONTRIBUTIONS AND DILUTION OFFERINGS...............6
8. GUARANTIES.................................................7
9. CONDITIONS TO THE CAPITAL CONTRIBUTIONS OF CERTAIN LIMITED
PARTNERS...................................................7
10. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE GENERAL
PARTNER....................................................7
11. ADMISSION OF LIMITED PARTNERS..............................8
12. CAPITAL ACCOUNTS...........................................9
13. ALLOCATIONS...............................................10
14. DISTRIBUTIONS.............................................11
l5. RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS................11
16. LIMITED LIABILITY.........................................13
17. TRANSFER OF INTERESTS AND ADMISSION OF PARTNERS...........14
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18. OPTIONAL PURCHASE OF LIMITED PARTNERSHIP INTERESTS ON CERTAIN
EVENTS.....................................................18
19. SALE, ASSIGNMENT OR OTHER TRANSFER OF THE GENERAL PARTNER'S
INTEREST...................................................24
20. TERMINATION OF THE SERVICES OF THE GENERAL PARTNER.........24
21. MANAGEMENT AND OPERATION OF BUSINESS.......................25
22. RESERVES...................................................28
23. INDEMNIFICATION AND EXCULPATION OF THE GENERAL PARTNER.....28
24. DISSOLUTION OF THE PARTNERSHIP.............................28
25. DISTRIBUTION UPON DISSOLUTION..............................30
26. BOOKS OF ACCOUNT, RECORDS AND REPORTS......................30
27. NOTICES....................................................31
28. AMENDMENTS.................................................32
29. LIMITATIONS ON AMENDMENTS..................................32
30. MEETINGS, CONSENTS AND VOTING..............................32
31. SUBMISSIONS TO THE LIMITED PARTNERS........................33
32. ADDITIONAL DOCUMENTS.......................................33
33. SURVIVAL OF RIGHTS.........................................33
34. INTERPRETATION AND GOVERNING LAW...........................33
35. SEVERABILITY...............................................33
36. AGREEMENT IN COUNTERPARTS..................................34
37. THIRD PARTIES..............................................34
38. POWER OF ATTORNEY..........................................34
ii
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39. ARBITRATION................................................35
40. CREDITORS..................................................35
SCHEDULES
Schedule A - Schedule of Partnership Interests
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<PAGE>
THE LIMITED PARTNERSHIP INTERESTS REPRESENTED BY THIS LIMITED PARTNERSHIP
AGREEMENT HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, UNDER THE SECURITIES ACT OF
WYOMING, AS AMENDED, OR UNDER SIMILAR LAWS OR ACTS OF OTHER STATES IN RELIANCE
UPON EXEMPTIONS UNDER SUCH LAWS. IN ADDITION, NO TRANSFERS OF LIMITED
PARTNERSHIP INTERESTS MAY BE MADE WITHOUT COMPLIANCE WITH THE RESTRICTIONS SET
FORTH IN ARTICLE 17 BELOW.
AGREEMENT
OF LIMITED PARTNERSHIP
OF
WYOMING UROLOGICAL SERVICES
LIMITED PARTNERSHIP
THIS AGREEMENT OF LIMITED PARTNERSHIP (the "Agreement") is made as of
February 24, 1999, by and among SUN MEDICAL TECHNOLOGIES, INC., a California
corporation and a wholly-owned subsidiary of Prime Medical Services, Inc., a
Delaware corporation (the "General Partner"), and persons listed on Schedule A
attached hereto as the Limited Partners.
1. FORMATION.
The Partnership was formed pursuant to the filing in the Office of the
Secretary of State of Wyoming on or about November 10, 1998 of a Certificate of
Limited Partnership in accordance with the provisions of the Act.
2. NAME.
2.1 The name of the Partnership is "Wyoming Urological Services Limited
Partnership."
2.2 The Partnership business shall be conducted under such names as the
General Partner may from time to time deem necessary or advisable, provided that
appropriate amendments to this Agreement and all necessary filings under
applicable assumed or fictitious name statutes or the Act are first obtained.
3. OFFICES.
3.1 The principal office of the Partnership shall be at 1301 Capital of
Texas Highway, Suite C-300, Austin, Texas 78746, or at such other place as the
General Partner may be required to maintain within the State of Wyoming pursuant
to the Act or may otherwise, from time to time, designate by notice to the
Limited Partners (the "Records Office").
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3.2 The Partnership may have such additional offices as the General Partner
may, from time to time, deem necessary or advisable.
4. PURPOSE.
The purpose and business of the Partnership shall be: (i) to acquire and
operate one or more transportable lithotripters (or any other renal stone
treatment equipment) for the treatment of renal stones primarily in Wyoming or
in such other location(s) as the General Partner may determine, in its sole
discretion, to be in the best interests of the Partnership; (ii) to acquire and
operate in the future any other urological device or equipment; provided, that
such equipment as of the date of acquisition by the Partnership has received FDA
premarket approval; (iii) to acquire an interest in any business entity,
including, without limitation, a limited partnership, limited liability company
or corporation, that engages in any business activity described in this Article
4; and (iv) to engage in any and all activities incidental or related to the
foregoing, upon and subject to the terms and conditions of this Agreement.
5. TERM.
The Partnership shall terminate on December 31, 2048, unless sooner
terminated as herein provided.
6. CERTAIN DEFINED TERMS.
Certain terms used in this Agreement shall have the following meanings:
Act. The Act means the Wyoming Uniform Limited Partnership Act, as then in
effect.
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 interest 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.
Agreement. This Agreement of Limited Partnership, as the same may be
amended from time to time.
Bank. Firsts-Citizens Bank & Trust Company.
Capital Account. The Partnership capital account of a Partner as computed
pursuant to Article 12 of this Agreement.
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Capital Contributions. All capital contributions made by a Partner or his
or her predecessor in interest which shall include, without limitation,
contributions made pursuant to Article 7 of this Agreement.
Capital Transaction. Any transaction which, were it to generate proceeds,
would produce Partnership Sales Proceeds or Partnership Refinancing Proceeds.
Code. The Internal Revenue Code of 1986, as amended, or corresponding
provisions of subsequent, superseding revenue laws.
Dilution Offering. As provided in Article 7.4 of this Agreement, the future
offering of additional limited partnership interests in the Partnership as
determined by the General Partner. Except as otherwise provided in Article 7.4,
any successful Dilution Offering will proportionately reduce the Percentage
Interests of the then current Partners in the Partnership.
Domestic Proceeding. Any divorce, annulment, separation or similar domestic
proceeding between a married couple.
Equipment. The equipment used in the operation of the Lithotripter System,
including the mobile transport vehicle, the transportable lithotripter and
miscellaneous medical equipment and supplies, and any similar additional
equipment acquired by the Partnership in the future.
FDA. The United States Food and Drug Administration.
General Partner. The general partner of the Partnership, Sun Medical
Technologies, Inc., a California corporation and a wholly-owned subsidiary of
Prime Medical Services, Inc., a Delaware corporation.
Guaranty. The Guaranty Agreement pursuant to which each Limited Partner
will guarantee a portion of the Partnership's obligations to the Bank under the
Loan. The form of the Guaranty Agreement is included in the Subscription Packet
accompanying the Memorandum.
Initial Limited Partner. Stan Johnson, a resident of Arizona and an
Affiliate of the General Partner. The Initial Limited Partner is to be the only
limited partner of the Partnership until such time as the new Limited Partners
are admitted to the Partnership, at which time the Initial Limited Partner shall
withdraw from the Partnership.
Limited Partners. The Limited Partners are those investors in the Units
admitted to the Partnership and any person admitted as a Limited Partner in
accordance with the provisions of this Agreement.
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Lithotripter. The extracorporeal shock-wave lithotripter to be acquired by
the Partnership and any replacements therefor or additional lithotripters to be
purchased by the Partnership.
Lithotripter System. The mobile transport vehicle and operational
Lithotripter.
Loan. The loan of up to $477,000 from the Bank to the Partnership. Loan
proceeds will be used by the Partnership to (i) acquire an extracorporeal
shockwave lithotripter with options (estimated at $400,000), (ii) acquire and
upfit a mobile van to transport the lithotripter (estimated at $50,000) and
(iii) pay sales taxes on the purchase of the Lithotripter System (estimated at
$27,000).
Losses. The net loss (including Net Losses from Capital Transactions) of
the Partnership for each Year of the Partnership as determined for federal
income tax purposes.
Majority in Interest of the Limited Partners. The Limited Partners who hold
more than 50% of the Percentage Interests in the Partnership held by the Limited
Partners.
Memorandum. The Confidential Private Placement Memorandum of the
Partnership dated January 5, 1999, as amended or as supplemented.
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.
Net Losses from Capital Transactions. The losses 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 shall include Code
Section 1231 assets) or as a result of or upon the damage or destruction of such
capital assets.
Offering. The offer to potential investors of 80 Units pursuant to the
Memorandum.
Partners. The General Partner and the Limited Partners, collectively, where
no distinction is required by the context in which the term is used herein.
Partnership. Wyoming Urological Services Limited Partnership, a Wyoming
limited partnership.
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
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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 this Agreement.
Partnership Refinancing Proceeds. The cash realized from the refinancing of
Partnership assets after retirement of any secured loans and less (i) payment of
all expenses relating to the transaction and (ii) establishment of such
reasonable reserves as the General Partner shall deem necessary or prudent to
set aside for future repairs, improvements, or equipment replacement or
additions, or to meet working capital requirements or foreseen or unforeseen
future liabilities or contingencies of the Partnership.
Partnership Sales Proceeds. The cash realized from the sale, exchange,
casualty or other disposition of all or a portion of Partnership assets after
the retirement of all secured loans and less (i) the payment of all expenses
related to the transaction and (ii) establishment of such reasonable reserves as
the General Partner shall deem necessary or prudent to set aside for future
repairs, improvements, or equipment replacement or additions, or to meet working
capital requirements or foreseen or unforeseen future liabilities or
contingencies of the Partnership.
Percentage Interest. The interest of each Partner in the Partnership, to be
determined initially in the case of a Limited Partner by reference to his or her
Unit ownership based upon the Limited Partners holding an aggregate 80%
Percentage Interest in the Partnership, with each initial Unit sold representing
an initial 1% interest. The General Partner will initially own a 20% Percentage
Interest in the Partnership. A Partner's Percentage Interest may be reduced by a
future Dilution Offering. The Partners' Percentage Interests in the Partnership
as of the date hereof are as set forth in Schedule A attached hereto. Any future
adjustments in the Partners' Percentage Interests, due to future Dilution
Offerings or otherwise, will also be reflected by amendments to Schedule A.
Profit. The net income of the Partnership (including Net Gains from Capital
Transactions) for each Year of the Partnership as determined 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 Interests
of the class of Partners to which reference is made.
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Sales Agency Agreement. The sales agency agreement through which MedTech
Investments, Inc., an Affiliate of the General Partner and a broker-dealer
company registered with the Securities and Exchange commission and a member of
the National Association of Securities Dealers, Inc. shall offer and sell the
limited partnership interest of the Partnership pursuant to the Memorandum.
Sales Commission. The $250 sales commission paid to MedTech Investments,
Inc. for each Unit sold.
Service. The Internal Revenue Service.
Units. The 80 equal limited partner interests in the Partnership offered
pursuant to the Memorandum for a price per Unit of $2,500 in cash, plus a
personal guaranty of 0.5% of the Partnership's obligations under the Loan (up to
$2,385 principal guaranty obligation).
Year. An annual accounting period ending on December 31 of each year during
the term of the Partnership.
7. CAPITAL CONTRIBUTIONS AND DILUTION OFFERINGS.
7.1 General Partner Contribution. On or before the date of this Agreement,
the General Partner will contribute to the capital of the Partnership cash in
the amount equal to 30% (up to $75,000) of the total cash contributed to the
Partnership by the Partners in the Offering made pursuant to the Memorandum.
7.2 Limited Partner Contribution. Each Limited Partner hereby agrees to
contribute and shall contribute to the capital of the Partnership on the date of
his or her admission to the Partnership the cash amount set forth opposite his
or her name on Schedule A attached hereto.
7.3 No Interest. Except as otherwise provided herein, no interest shall be
paid on any contribution to the capital of the Partnership.
7.4 Dilution Offerings. If the General Partner, in its sole discretion,
determines that it is in the best interest of the Partnership, the General
Partner may, from time to time, offer, sell and issue, for and on behalf of the
Partnership, additional limited partnership interests in the Partnership (a
"Dilution Offering") to investors who are not already Limited Partners
("Qualified Investors"). The primary purpose of any Dilution Offering would be
to raise additional capital for any legitimate Partnership purpose as set forth
in Article 4. Any limited partnership interests offered by the Partnership in a
Dilution Offering shall be sold in the manner and according to the terms
prescribed in the sole discretion of the General Partner; provided, however,
that 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 unless otherwise determined by a vote of the General Partner and
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a Majority in Interest of the Limited Partners. Any sale of additional limited
partnership interests will result in the proportionate dilution of the
Percentage Interests of the existing Partners. Notwithstanding the above, in the
event of a Dilution Offering, the General Partner may elect, in its sole
discretion, to prevent dilution of its Percentage Interest by either
contributing additional capital to the Partnership or purchasing additional
limited partnership interests in any Dilution Offering. Limited Partners shall
have no right to purchase additional limited partner interests in any Dilution
Offering or to make additional capital contributions or take any other action to
prevent dilution of their Percentage Interest. Any investor acquiring a limited
partnership interest in a Dilution Offering shall agree to be bound by the terms
of this Agreement, and shall be automatically admitted as a Limited Partner of
the Partnership. Any adjustment in the Partners' Percentage Interests resulting
from a Dilution Offering shall be set forth on an amended Schedule A to be
attached hereto.
8. GUARANTIES.
Each Partner agrees to execute and deliver to the Partnership on the date
of his or her admission to the Partnership a Guaranty in the amount set forth
opposite his or her name on Schedule A attached hereto.
9. CONDITIONS TO THE CAPITAL CONTRIBUTIONS OF CERTAIN LIMITED PARTNERS.
The obligations of any Limited Partners acquiring their Partnership
Interests in the Offering or a Dilution Offering to make cash Capital
Contributions hereunder are subject to the condition that the representations,
warranties, agreements and covenants of the General Partner set forth in
Article 10 of this Agreement are and shall be true and correct or have been and
will have been complied with in all material respects on the date such Capital
Contributions are required to be made, except to the extent that any such
representation or warranty expressly pertains to an earlier date.
10. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE GENERAL PARTNER.
10.1 The General Partner hereby represents and warrants to the Limited
Partners that:
(a) The Partnership is a limited partnership formed in accordance with and
validly existing under the Act and the other applicable laws of the State of
Wyoming;
(b) The interests in the Partnership of the Limited Partners will have been
duly authorized or created and validly issued and the Limited Partners shall
have no personal liability to contribute money to the Partnership other than the
amounts
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agreed to be contributed by them in the manner and on the terms set forth in
this Agreement, subject, however, to such limitations as may be imposed under
the Act;
(c) Except as disclosed in the Memorandum or documentation prepared in
connection with a Dilution Offering, no material breach or default adverse to
the Partnership exists under the terms of any other material agreement affecting
the Partnership; and
(d) The General Partner is a California corporation formed and existing
under the laws of the State of California.
10.2 The General Partner hereby covenants to the Limited Partners that:
(a) It will at all times act in a fiduciary manner with respect to the
Partnership and the Limited Partners;
(b) Except as provided in Article 19, it will serve as the General Partner
of the Partnership until the Partnership is terminated without reconstitution;
and
(c) It will cause the Partnership to carry adequate public liability,
property damage and other insurance as is customary in the business to be
engaged in by the Partnership.
11. ADMISSION OF LIMITED PARTNERS.
The General Partner may permit the offer and sale of limited partnership
interests on the terms and conditions provided in the Memorandum or future
Dilution Offerings and may admit persons subscribing for interests as Limited
Partners in the Partnership on the terms and conditions set forth in this
Article 11.
(a) The General Partner shall have approved of the admission of said person
in writing on such terms and conditions as the General Partner shall determine;
(b) Said person shall have executed such documents or instruments as the
General Partner may deem necessary or desirable to effect his or her admission
as a Limited Partner;
(c) Said person shall have accepted and adopted all of the terms and
provisions of this Agreement, as then amended;
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(d) Said person (if a corporation) shall deliver to the General Partner a
certified copy of a resolution of its Board of Directors authorizing it to
become a Limited Partner under the terms and conditions of this Agreement; and
(e) Said person, upon request by the General Partner, shall pay such
reasonable expenses as may be incurred in connection with its admission as a
Limited Partner.
12. CAPITAL ACCOUNTS.
A Capital Account shall be established for each Partner and shall at all
times be determined and maintained in accordance with the Final Treasury
Regulations under Section 704(b) of the Code, as the same may be amended. A
Partner shall not be entitled to withdraw any part of his or her Capital Account
or to receive any distribution from the Partnership, except as provided in
Articles 14 and 25.
(a) Each Partners' Capital Account shall be increased by:
(i) The amount of his or her Capital Contribution pursuant to Article 7;
and
(ii) The amount of Profits allocated to him or her pursuant to Article 13;
and
(iii) The Partner's pro rata share (determined in the same manner as such
Partner's share of Profits and Losses allocated pursuant to Article 13 hereof)
of any income or gain exempt from tax.
(b) Each Partner's Capital Account shall be decreased by:
(i) The amount of Losses allocated to him or her pursuant to Article 13;
and
(ii) The amount of Partnership Cash Flow, Partnership Sales Proceeds and
Partnership Refinancing Proceeds distributed to him or her pursuant to Article
14; and
(iii) The Partner's pro rata share of any other expenditures of the
Partnership which are not deductible in computing Partnership Profits or Losses
and which are not added to the tax basis of any Partnership property, including,
without limitation, expenditures described in Section 705(a)(2)(B) of the Code.
The Partner's pro rata share of such expenditures shall be determined in the
same manner as
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such Partner's share of Profits and Losses allocated pursuant to Article 13.
13. ALLOCATIONS
(a) Profits and Losses. The Profits and Losses of the Partnership shall be
allocated among the Partners in accordance with their respective Percentage
Interests. In allocating Profits and Losses, Net Gains and Losses from Capital
Transactions (a part of Profits and Losses), if any, shall be allocated first.
(b) Qualified Income Offset. If any Partner unexpectedly receives any
adjustment, allocation or distribution described in Treasury Regulations Section
1.704-1(b)(2)(ii)(d)(4) through (6) which causes or increases a deficit balance
in such Partner's Capital Account (adjusted for this purpose in the manner
provided in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)), items of
Partnership income and gain shall 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 Article 13(b) shall be made if and
only to the extent that such Partner would have a deficit Capital Account after
all other allocations provided for in this Article 13 have been tentatively made
as if this Article 13(b) were not in the Agreement. This provision is intended
to be a "qualified income offset," as defined in Treasury Regulations Section
1.704-1(b)(2)(ii)(d), such Regulation being specifically incorporated herein by
reference.
(c) Sales Commission. The Sales Commission shall be allocated to the Units
which are not held by the General Partner and its Affiliates and are acquired in
the Offering in proportion to the respective capital contributions represented
by such Units (i.e., $250 in Sales Commissions per each such Unit). The purpose
of this Article 13(c) is to allocate the Sales Commission to those Partners who
actually bore the burden of paying the Sales Commission.
(d) Allocations Between Transferor and Transferee. In the event of the
transfer (other than the pledges of the General Partner's interest permitted by
Article 19 or Permitted Pledges described in Article 17.2(b)) of all or any part
of a Partner's interest (in accordance with the provisions of this 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 terms of this Agreement), the transferring
Partner 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, shall 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;
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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 the
General Partner may elect, in its sole discretion, to treat the periods before
and after the date of the transfer or admission as separate Years and allocate
the Partnership's net income, gain, net loss, deductions and credits for each of
such deemed separate Years. Notwithstanding the foregoing, the Partnership's
"allocable cash basis items," as that term is used in Section 706(d)(2)(B) of
the Code, shall be allocated as required by Section 706(d)(2) of the Code and
the regulations thereunder.
(e) Tax Withholding. The Partnership shall be 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 other 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 shall be treated as a cash distribution to
such Partner and shall reduce the amount otherwise distributable to such
Partner.
14. DISTRIBUTIONS.
(a) Distribution of Partnership Cash Flow. Partnership Cash Flow shall be
distributed to the Partners within 60 days after the end of each Year, or
earlier in the discretion of the General Partner, in proportion to their
respective Percentage Interests at the time of distribution.
(b) Distribution of Partnership Refinancing Proceeds and Partnership Sales
Proceeds. Partnership Refinancing Proceeds and Partnership Sales Proceeds shall
be distributed to the Partners within 60 days of the Capital Transaction giving
rise to such proceeds, or earlier in the discretion of the General Partner, in
proportion to their respective Percentage Interests at the time of distribution.
(c) Distribution in Liquidation. Upon liquidation of the Partnership, all
of the Partnership's property shall be sold and Profits and Losses allocated
accordingly. Proceeds from the liquidation of the Partnership shall be
distributed in accordance with Article 25.
l5. RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS.
15.1 Management. The Limited Partners shall not take part in the management
of the business, nor transact any business for the Partnership, nor shall they
have power to sign for or to bind the Partnership. The Partnership may, however,
contract with one or more Limited Partners to act as the local medical
director(s) of the Lithotripter System. No Limited Partner may withdraw from the
Partnership except as expressly permitted herein.
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15.2 Operation of Lithotripter System. The Limited Partners shall not
operate or utilize the Partnership Lithotripter System or other Partnership
equipment except pursuant to (i) an agreement with the Partnership; or (ii) any
other arrangement specifically approved by the General Partner.
15.3 Outside Activities. The Limited Partners agree that they owe fiduciary
duties to the Partnership and, as a consequence, each Limited Partner (that is
not the General Partner or an Affiliate of the General Partner) agrees that
(s)he shall not engage in "Outside Activities" (as defined below) in the "Market
Area" (as defined below) while(s)he is a Limited Partner in the Partnership and
shall otherwise be subject to the provisions of this Article 15.3. The phrase
"Outside Activities" means directly or indirectly owning, leasing or subleasing
a lithotripter (or any similar equipment or competing devices used for treating
renal or biliary stone disease) or any other therapeutic equipment acquired by
the Partnership. Prohibited indirect ownership shall include without limitation
the direct or indirect ownership of any interest in a business venture (through
stock ownership, partnership interest ownership, ownership by or through a close
family member, or as otherwise determined in good faith by the General Partner)
involving the ownership, purchase, lease, sublease, promotion, management or
operation of a lithotripter (or similar equipment or competing devices used for
treating renal or biliary stone disease) or other competing device or equipment,
unless the General Partner determines that such activity by the Limited Partners
is not detrimental to the best interests of the Partnership. The ownership of
less than 1% of the capital stock (calculated on a fully diluted basis) of a
corporation whose stock is publicly owned or regularly traded on any public
exchange shall not constitute an Outside Activity.
Upon the termination or transfer of a Limited Partner's interest in the
Partnership for any reason, including a transfer pursuant to Article 18.3
hereof, the withdrawing Limited Partner shall not, for a period of two (2) years
following the date of withdrawal, engage in any Outside Activities in any
"Market Area" in which the Partnership is transacting business or within the
prior twelve months has transacted business (the "Restricted Facilities"). For
the purposes of this Article 15.3, the term "Market Area" shall mean (i) the
area within a fifty (50) mile radius of any Restricted Facility, but if such
area is determined by a court of competent jurisdiction to be too broad, then it
shall mean (ii) the area within a thirty (30) mile radius of any Restricted
Facility, but if such area is determined by a court of competent jurisdiction to
be too broad then it shall mean (iii) the area within a fifteen (15) mile radius
of any Restricted Facility.
In the event a Limited Partner wishes and intends to engage in an Outside
Activity in a Market Area, he or she must provide written notice of such intent
to the General Partner prior to engaging in the Outside Activity. The written
notice shall be deemed an election by the Limited Partner to withdraw from the
Partnership (the "Notice of Withdrawal"), and shall give the General Partner the
purchase rights as provided in Article 18.3 hereof. After the Notice of
Withdrawal, the former Limited Partner may engage in an Outside Activity in the
Market Area only after waiting the period of two years specified in this Article
15.3. In the event of breach of the waiting period, the Partnership shall be
entitled to any remedy at law or equity with respect to such breach, including
without limitation an injunction or suit for damages.
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If a Limited Partner during his or her participation in the Partnership
engages in an Outside Activity in a Market Area without first notifying the
General Partner in violation of this Article 15.3, the Limited Partner shall be
deemed to have given a Notice of Withdrawal on the date the General Partner
first becomes aware of the Limited Partner's Outside Activity in the Market
Area. Upon receiving a Limited Partner's Notice of Withdrawal or equivalent
thereof, the Partnership may invoke the purchase rights provided in Article 18.3
and shall be entitled to any other remedy at law or equity including without
limitation an injunction or suit for damages.
15.4 Disclosure of Confidential Information. Each Limited Partner
acknowledges and agrees that his or her participation in the Partnership under
this Agreement necessarily involves his or her understanding of and access to
certain trade secrets and other confidential information pertaining to the
business of the Partnership. Accordingly, each Limited Partner (other than the
General Partner and its Affiliates that may also hold Limited Partner
Partnership Interests) agrees that at all times during his or her participation
in the Partnership as a Limited Partner and thereafter, (s)he will not, directly
or indirectly, without the express written authority of the Partnership, unless
required by law or directed by a applicable legal authority having jurisdiction
over the Limited Partner, disclose or use for the benefit of any person,
corporation or other entity (other than the Partnership), or the Limited
Partner, (i) any trade, technical, operational, management or other secrets, any
patient or customer lists or other confidential or secret data, or any other
proprietary, confidential or secret information of the Partnership or (ii) any
confidential information concerning any of the financial arrangements, financial
condition, hospital or physician contracts, third party payor arrangements,
quality assurance and outcome analysis programs, competitive status, customer or
supplier matters, internal organizational matters, technical abilities, or other
business affairs of or relating to the Partnership. The Limited Partners (other
than the General Partner and its Affiliates that may also hold Limited Partner
Partnership Interests) acknowledge that all of the foregoing constitutes
proprietary information, which is the exclusive property of the Partnership. In
the event of breach of this Article 15.4 as determined by the General Partner,
the Partnership shall be entitled to any remedy at law or equity with respect to
such breach, including without limitation, an injunction or suit for damages.
16. LIMITED LIABILITY.
No Limited Partner shall be required to make any contribution to the
capital of the Partnership except as set forth in Article 7, nor shall any
Limited Partner in his or her capacity as such, be bound by, or personally
liable for, any expense, liability or obligation of the Partnership except to
the extent of his or her (i) interest in the Partnership; (ii) Guaranties of
Partnership obligations; and (iii) obligation to return distributions made to
him or her under certain circumstances as required by the Act.
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17. TRANSFER OF INTERESTS AND ADMISSION OF PARTNERS.
17.1 Transferability.
(a) The term "transfer" when used in this Agreement with respect to a
Partnership Interest includes a sale, assignment, gift, pledge, exchange or any
other disposition (but does not include the issuance of new Partnership
Interests pursuant to a Dilution Offering);
(b) Except as otherwise provided herein, the General Partner shall not at
any time transfer or assign its interest or obligation as General Partner;
(c) The Partnership Interest of any Limited Partner shall not be
transferred, in whole or in part, except in accordance with the conditions and
limitations set forth in Articles 17.2 or 18;
(d) The transferee of a Partnership Interest by assignment, operation of
law or otherwise, shall have only the rights, powers and privileges enumerated
in Article 17.3 or otherwise provided by law and may not be admitted to the
Partnership as a Limited Partner except as provided in Article 17.4 or as a
General Partner except as provided in Article 17.5;
(e) Notwithstanding any provision herein to the contrary, the Partnership
Agreement shall in no way restrict the issuance or transfers of stock of the
General Partner; and
(f) Notwithstanding any provision herein to the contrary, the issuance of
Partnership Interests pursuant to a Dilution Offering and the admission of new
Limited Partners pursuant to a Dilution Offering shall be governed by the
provisions of Article 7.4 of this Agreement.
17.2 Restrictions on Transfers by Limited Partners.
(a) All or part of a Partnership Interest may be transferred by a Limited
Partner only with the prior written approval of the General Partner, which
approval may be granted or denied in the sole discretion of the General Partner.
(b) The General Partner shall not approve any transfer of a Partnership
Interest, except a pledge of any Partnership Interest by the General Partner to
any bank, insurance company or other financial institution to secure payment of
indebtedness (a "Permitted Pledge"), or otherwise unless the proposed transferee
shall have furnished the General Partner with a sworn statement that:
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(i) The proposed transferee proposes to acquire his or her Partnership
Interest as a principal, for investment and not with a view to resale or
distribution;
(ii) The proposed transferee meets such requirements regarding
sophistication, income and net worth as required by applicable state and federal
securities laws;
(iii) The proposed transferee has met such net worth and income suitability
standards as have been established by the General Partner;
(iv) The proposed transferee recognizes that investment in the Partnership
involves certain risks and has taken full cognizance of and understands all of
the risk factors related to the purchase of a Partnership Interest; and
(v) The proposed transferee has met all other requirements of the General
Partner for the proposed transfer.
(c) Other than in the case of a Permitted Pledge, a transfer of a
Partnership Interest may be made only if, prior to the date thereof, the
Partnership upon request receives an opinion of counsel, satisfactory in form
and substance to the General Partner, that neither the offering nor the proposed
transfer will require registration under federal or applicable state securities
laws or regulations.
17.3 Rights of Transferee. Unless admitted to the Partnership in accordance
with Article 17.4, the transferee of a Partnership Interest or a part thereof or
any right, title or interest therein shall not be entitled to any of the rights,
powers, or privileges of his or her predecessor in interest, except that (s)he
shall be entitled to receive and be credited or debited with his or her
proportionate share of Partnership income, gains, Profits, Losses, deductions,
credits or distributions.
17.4 Admission of Limited Partners. Except as otherwise provided in Article
18, the General Partner, or the transferee of all or part of the Partnership
Interest of either a General Partner or a Limited Partner, may be admitted to
the Partnership as a Limited Partner upon furnishing to the General Partner all
of the following:
(a) The written approval of a Majority in Interest of all of the Limited
Partners (except the assignor Partner), or the assignor Partner alone, which
approval may be granted or denied in the sole discretion of such Partners or
Partner (as the case may be);
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(b) The written approval of the General Partner, which approval may be
granted or denied in the sole discretion of the General Partner;
(c) Acceptance, in a form satisfactory to the General Partner, of all the
terms and conditions of this Agreement and any other documents required in
connection with the operation of the Partnership pursuant to the terms of this
Agreement;
(d) A properly executed power of attorney substantially identical to that
contained in Article 38;
(e) Such other documents or instruments as may be required in order to
effect his or her admission as a Limited Partner; and
(f) Payment of such reasonable expenses as may be incurred in connection
with his or her admission as a Limited Partner.
17.5 Admission of General Partners. A Limited Partner, or the transferee of
all or part of the Partnership Interest of the General Partner, may be admitted
to the Partnership as a general partner upon furnishing to the General Partner
all of the following:
(a) The written consent of both the General Partner and a Majority in
Interest of the Limited Partners, which consent may be granted or denied in the
sole discretion of the Partners;
(b) Such financial statements, guarantees or other assurances as the
General Partner may require with regard to the ability of the proposed general
partner to fulfill the financial obligations of a general partner hereunder;
(c) Acceptance, in form satisfactory to the General Partner, of all the
terms and provisions of this Agreement and any other documents required in
connection with the operation of the Partnership pursuant to the terms of this
Agreement;
(d) A certified copy of a resolution of its Board of Directors (if it is a
corporation) authorizing it to become a general partner under the terms and
conditions of this Agreement;
(e) A power of attorney substantially identical to that contained in
Article 38;
(f) Such other documents or instruments as may be required in order to
effect its admission as a general partner; and
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(g) Payment of such reasonable expenses as may be incurred in connection
with its admission as a general partner.
Notwithstanding the above, a transferee that controls or is controlled by
the General Partner or one or more of its Affiliates that receives all or part
of the Partnership Interest of the General Partner may be admitted to the
Partnership as a general partner upon complying with all the provisions of
Article 17.5 except for subparagraph 17.5(a). As long as the transferee either
controls or is controlled by the General Partner or one or more of its
Affiliates, no Limited Partner consents will be required to admit such
transferee as a general partner to the Partnership, unless and then solely to
the extent expressly required by he Act.
17.6 Amendment of Certificate of Limited Partnership and Qualification. The
General Partner shall take all steps necessary and appropriate to prepare and
record any amendments to the Certificate of Limited Partnership, as may be
necessary or appropriate from time to time to comply with the requirements of
the Act, including, without limitation, upon the admission to the Partnership of
any general partner pursuant to the provisions of Article 17.5, and may for this
purpose exercise the power of attorney delivered to the General Partner pursuant
to Article 17.5 or 38. In addition, the General Partner shall take all steps
necessary and appropriate to prepare and record any and all documents necessary
to qualify the Partnership to do business in jurisdictions where the Partnership
is doing business, and may for this purpose exercise the power of attorney
delivered to the General Partner pursuant to Articles 17.4, 17.5 or 38.
17.7 Fundamental Changes. In the event a plan is approved by the General
Partner providing for the merger or consolidation of the Partnership with
another person or entity, or the sale of all or substantially all of the
Partnership Interests, including without limitation the exchange of Partnership
Interests for equity interests in another person or entity or for cash or other
consideration or combination thereof, then and in such event, the Limited
Partners shall be obligated 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 shall
reasonably request. Any plan described in this Article 17.7 may also effect an
amendment to the Partnership Agreement or the adoption of a new partnership
agreement in connection with the merger of the Partnership with another person
or entity. The plan may also provide that the General Partner and its Affiliates
shall 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 Partners
shall have any right by virtue of this Agreement in the income derived
therefrom. Any securities or other consideration to be distributed to the
Partners pursuant to the plan shall be distributed in the manner set forth in
Article 25(c) as though the Partnership were being liquidated. For this purpose
only, the fair market value of the securities or other consideration to be
received pursuant to the plan shall be treated as "Profits" and the capital
accounts of the Partners shall be increased in the manner provided in Article
12(a)(ii). No Partner shall be entitled to any dissent, appraisal or similar
rights in connection with a plan contemplated by this Article 17.7.
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17.8 Withdrawal of Initial Limited Partner. Upon the date the first Limited
Partner is admitted to the Partnership in accordance with Article 11 of this
Agreement, the Initial Limited Partner shall withdraw from the Partnership, and
thereupon his Capital Contribution shall be returned and his Partnership
Interest canceled and reallocated to the Limited Partners.
18. OPTIONAL PURCHASE OF LIMITED PARTNERSHIP INTERESTS ON CERTAIN EVENTS.
18.1 Death. Upon the death of a Limited Partner, the deceased Limited
Partner's executor, administrator, or other legal or personal representative
shall give written notice of that fact to the General Partner. The General
Partner shall have the option to purchase at the Closing (as defined below) the
Partnership Interest of the deceased Limited Partner (whose executor,
administrator or other legal or personal representative shall then become
obligated to sell such Partnership Interest) at the price determined in the
manner provided in Article 18.7 of this Agreement and on the terms and
conditions provided in Article 18.8 of this Agreement. The General Partner shall
have a period of thirty (30) days following the date of notice of the death of
the Limited Partner (the "Option Period") within which to notify in writing the
deceased Limited Partner's executor, administrator or other legal or personal
representative, whether the General Partner wishes to purchase all or a portion
of the Partnership Interest of the deceased Limited Partner. If the General
Partner does not elect to purchase the entire Partnership Interest of the
deceased Limited Partner before the expiration of the Option Period and in the
manner provided herein, the portion of the Partnership Interest not purchased
shall be held by the deceased Limited Partner's executor, administrator or other
legal representative pursuant to the terms of this Agreement. The General
Partner, in its sole discretion, may elect to assign its rights to purchase the
Partnership Interest of the deceased Limited Partner under this Article 18.1 to
the Partnership and, in such case, the Partnership shall have the same rights as
provided for the General Partner in this Article 18.1.
18.2 Bankruptcy, Insolvency or Assignment for Benefit of Creditors of a
Limited Partner. In the event that an involuntary or voluntary proceeding under
the Federal Bankruptcy Code, as amended, is filed for or against any Limited
Partner, or if any Limited Partner shall make an assignment for the benefit of
his creditors, or if any Limited Partner has a receiver or custodian appointed
for his assets, or any Limited Partner generally fails to pay his debts when
due, the insolvent Limited Partner shall give written notice (the "Notice of
Insolvency") to the General Partner of the commencement of any such proceeding
or the occurrence of such event within five days of the first notice to him of
such commencement or occurrence of such event. The General Partner shall have
the option to purchase at the Closing (as defined below) the Partnership
Interest of the insolvent Limited Partner (which the insolvent Limited Partner
or his trustee, custodian, receiver or other personal or legal representative,
as the case may be, shall then become obligated to sell) at the price determined
in the manner provided in Article 18.7 of this Agreement and on the terms and
conditions provided in Article 18.8 of this Agreement. The General Partner shall
have a period of thirty (30) days following the date of the Notice of Insolvency
(the "Option Period") within which to notify in writing the insolvent Limited
Partner or his trustee, custodian, receiver, or other legal or personal
representative, whether the General Partner wishes to purchase all or a portion
of
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the Partnership Interest of the insolvent Limited Partner. If the General
Partner does not elect to purchase the entire Partnership Interest of the
insolvent Limited Partner before the expiration of the Option Period and in the
manner provided herein, the portion of the Partnership Interest not purchased
shall be held by the insolvent Partner, his trustee, custodian, receiver or
other legal or personal representative pursuant to the terms of this Agreement.
The General Partner, in its sole discretion, may elect to assign its rights to
purchase the Partnership Interest of an insolvent Limited Partner under this
Article 18.2 to the Partnership and, in such case, the Partnership shall have
the same rights as provided for the General Partner in this Article 18.2.
18.3 Breach of Article 15.3. In the event the General Partner either
receives a Notice of Withdrawal as provided in Article 15.3 or receives notice
of a breach of Article 15.3 by or with respect to a Limited Partner (the
"Competing Limited Partner"), the General Partner may elect, in its sole
discretion, to treat such event as a default under this Agreement and enforce
the provisions of this Article 18.3. If the General Partner elects to enforce
the provisions of this Article 18.3, the General Partner shall give written
notice of such election (the "Notice of Default") to the Competing Limited
Partner within 180 days of the date the General Partner first received the
Notice of Withdrawal or notice of the defaulting event. The General Partner
shall have the option to purchase at the Closing (as defined below) the
Partnership Interest of the Competing Limited Partner (which the Competing
Limited Partner shall then become obligated to sell) at the price determined in
the manner provided in Article 18.7 of this Agreement and on the terms and
conditions provided in Article 18.8 of this Agreement. The General Partner shall
have a period of thirty (30) days following the date it sends the Notice of
Default (the "Option Period") within which to notify in writing the Competing
Limited Partner, whether the Partnership wishes to purchase all or a portion of
the Partnership Interest of the Competing Limited Partner. If the General
Partner does not elect to purchase the entire Partnership Interest of the
Competing Limited Partner before the expiration of the Option Period and in the
manner provided herein, the portion of the Partnership Interest not purchased
shall be held by the Competing Limited Partner pursuant to the terms of this
Agreement. The General Partner, in its sole discretion, may elect to assign its
rights to purchase the Partnership Interest of a Competing Limited Partner under
this Article 18.3 to the Partnership and, in such case, the Partnership shall
have the same rights as provided for the General Partner in this Article 18.3.
18.4 Domestic Proceeding. In the event that a spouse of a Limited Partner
commences against a Limited Partner, or a Limited Partner is named in, a
Domestic Proceeding, the Limited Partner shall give written notice (the "Notice
of Domestic Proceeding") to the General Partner of the commencement of any such
proceeding within five days of the first notice to him of such commencement. The
General Partner shall have the option to purchase at the Closing (as defined
below) the Partnership Interest of the Limited Partner involved in the Domestic
Proceeding (which the Limited Partner shall then become obligated to sell), at
the price determined in the manner provided in Article 18.7 of this Agreement
and on the terms and conditions provided in Article 18.8 of this Agreement. The
General Partner shall have a period of thirty (30) days following the date of
the Notice of Domestic Proceeding (the "Option Period") within which to notify
in writing the Limited Partner involved in the Domestic Proceeding, whether the
General Partner wishes to purchase all or a portion of the Partnership Interest
of such Limited Partner. If the General
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Partner does not elect to purchase the Partnership Interest of the Limited
Partner involved in the Domestic Proceeding before the expiration of the Option
Period and in the manner provided herein, the portion of the Partnership
Interest not purchased shall be held by such Limited Partner pursuant to the
terms of this Agreement. The General Partner, in its sole discretion, may elect
to assign its rights to purchase the Partnership Interest of the Limited Partner
involved in the Domestic Proceeding under this Article 18.4 to the Partnership
and, in such case, the Partnership shall have the same rights as provided for
the General Partner in this Article 18.4.
18.5 Divestiture Option. 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 (e.g., the enactment or application of
prohibitory physician self-referral legislation against the Partnership or its
Partners), the General Partner shall promptly either, in its sole discretion,
(i) take the steps outlined in this Article 18.5 to divest the Limited Partners
of their Partnership Interests, or (ii) dissolve the Partnership as provided in
Article 24.1(e). If the General Partner chooses option (i), it shall deliver a
written notice to all of the Limited Partners (the "Notice of Election") and
purchase such Partnership Interests for its own account. The purchase price to
be paid for each Partnership Interest shall be determined in the manner as
provided in Article 18.7 and shall be on the terms and conditions as provided in
Article 18.8. The transfer of the Partnership Interests, the payment of the
purchase price and the assumption of the Limited Partners' obligations under
their respective Guaranties (as provided in Article 18.7) shall be made at such
time as determined by the General Partner to be in the best interests of the
Partnership and its Limited Partners. Each Limited Partner hereby makes,
constitutes and appoints the General Partner, with full power of substitution,
his true and lawful attorney-in-fact, to take such actions and execute such
documents on his behalf to effect the transfer of his Partnership Interest as
provided in this Article 18.5. The foregoing power of attorney shall not be
affected by the subsequent incapacity, mental incompetence, dissolution or
bankruptcy of any Limited Partner.
18.6 Default under Guaranties. Notwithstanding any other provision in this
Article 18 to the contrary, if any of the events outlined in Articles 18.1 or
18.2 or any other defaulting event outlined in the Guaranty (the "Defaulting
Events") should occur with respect to a Limited Partner (the "Defaulting Limited
Partner"), and the General Partner determines (in its sole discretion) that such
event may result in default and acceleration of an obligation secured by the
Guaranty unless another guarantor acceptable to the Lender can be substituted in
the place of the Defaulting Limited Partner, then the General Partner shall have
the right to immediately take the steps as outlined in this Article 18.6 to
prevent such default. Upon the General Partner receiving notice of a Defaulting
Event as provided above, the General Partner, in its sole discretion, shall
immediately have the right to either (i) sell the entire Partnership Interest of
the Defaulting Limited Partner to an investor approved of by the General
Partner, (ii) purchase for its own account the entire Partnership Interest of
the Defaulting Limited Partner, or (iii) sell the entire Partnership Interest of
the Defaulting Limited Partner to one or more of the other Limited Partners. The
Defaulting Limited Partner shall sell his or her Partnership Interest to the
purchaser at the purchase price determined in the manner as provided in
Article 18.7 and on the terms and conditions as provided in Article 18.8.
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The transfer of the Partnership Interest, the payment of the purchase price, and
the assumption of the Defaulting Limited Partner's obligations under his or her
Guaranty (as provided in Article 18.7), shall be made at such time as determined
by the General Partner in order to avoid the default and acceleration of the
obligation secured by the Guaranty. Each Limited Partner hereby makes,
constitutes and appoints the General Partner, with full power of substitution,
his or her true and lawful attorney-in-fact, to take such actions and execute
such documents on his or her behalf to effect the transfer of his or her
Partnership Interest as provided in this Article 18.6, in the event such Limited
Partner becomes a Defaulting Limited Partner.
18.7 Purchase Price. The purchase price to be paid for the Partnership
Interest of any Limited Partner whose interest is being purchased pursuant to
the provisions of Articles 18.1, 18.2, 18.3, 18.4, 18.5 or 18.6 (the "Selling
Limited Partner") shall be determined in the manner provided in this Article
18.7. The purchase price for a Partnership Interest purchased pursuant to the
provisions of Article 18.1 shall be an amount equal to the greater of (i) one
and one-half (1.5) times the aggregate distributions made with respect to such
Partnership Interest pursuant to Article 14(a) during the twelve-month period
ending on the Valuation Date (as defined below), or (ii) the Selling Limited
Partner's share of the Partnership's book value determined in the manner
described below. The purchase price for a Partnership Interest purchased
pursuant to the provisions of Articles 18.2, 18.3, 18.4, 18.5 or 18.6 shall be
an amount equal to the lesser of (i) the fair market value of the Selling
Limited Partner's Partnership Interest on the Valuation Date (prorated in the
event that only a portion of his or her Partnership Interest is being purchased)
as determined by an Appraiser (as defined below) selected by the General
Partner, or (ii) the Selling Limited Partner's share of the Partnership's book
value, if any (prorated in the event that only a portion of his or her
Partnership Interest is being purchased) as reflected by the Capital Account of
the Selling Limited Partner (unadjusted for any appreciation in Partnership
assets and as reduced by depreciation deductions claimed by the Partnership for
tax purposes) as of the Valuation Date (as defined below). The General Partner,
in its sole discretion, may pursue both of the above valuation methods and
choose the lesser value of the two as indicated above, or may designate and
follow only one of the methods in calculating the purchase price. For purposes
of this Article 18.7, the term "Appraiser" shall mean an independent appraiser
who is qualified in appraising limited partnership interests and who has at
least five years experience. In determining fair market value, the Appraiser
shall take into consideration any outstanding indebtedness, liabilities, liens
and obligations of the Partnership and the relative Partnership Interests and
capital accounts of all Partners, as well as applying any customary discounts
for lack of liquidity and control. Such appraisal shall be conducted in
accordance with professional appraisal standards. The valuation of the Appraiser
shall be conclusive and binding upon the Partnership, the purchaser and the
Selling Limited Partner and his or her representatives. The determination of the
Selling Limited Partner's Capital Account or aggregate distributable amount on
the Valuation Date (as defined below) shall be made by the Partnership's
internal accountant (the "Partnership Accountant") upon a review of the
Partnership books of account, and a formal audit is expressly waived. The
statement of the Partnership Accountant with respect to the Capital Account or
aggregate distributable amount of the Selling Limited Partner on the Valuation
Date shall be binding and conclusive upon the Partnership, the purchaser and the
Selling Limited Partner and his or her representatives. The Valuation Date means
the last day of the
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month immediately preceding the month in which occurs: (i) the death of a
Selling Limited Partner, in the case of a purchase by reason of death; (ii) the
bankruptcy or insolvency of a Selling Limited Partner, in the case of a purchase
by reason of such bankruptcy or insolvency; (iii) the Notice of Withdrawal or
breach of Article 15.3 as provided in Article 18.3 in the case of a purchase by
reason thereof; (iv) the commencement of the Domestic Proceeding, in the case of
a purchase by reason thereof; (v) the Notice of Election as provided in Article
18.5, in the case of a purchase by reason thereof; or (vi) the notice of
Defaulting Event as provided in Article 18.6, in the case of a purchase
occurring by reason of one of such events. Any Limited Partner whose Partnership
Interest is purchased pursuant to the provisions of Article 18.1, 18.2, 18.3,
18.4, 18.5 or 18.6 shall be entitled only to the purchase price which shall be
paid at the Closing in cash (or by certified or cashier's check) and shall not
be entitled to any Partnership distributions made after the Valuation Date. If
as of the date of the Closing the Selling Limited Partner still has an
outstanding personal obligation under the Guaranty (the "Obligation"), the
purchaser shall assume the portion of the Obligation as is equal to the portion
of the Partnership Interest being purchased, indemnify the Selling Limited
Partner from such portion of the Obligation, and take such steps deemed
necessary by the General Partner to formally evidence the assumption of such
portion of the Obligation, including without limitation, executing such
documents and providing such financial information to the Bank to evidence the
assumption of such portion of the Obligation, and obtain if possible, the
release of the Selling Limited Partner from such portion of the Obligation. The
transfer of a Partnership Interest of a Selling Limited Partner shall be deemed
to occur as of the Valuation Date and the Selling Limited Partner shall have no
voting or other rights as a Limited Partner after such date. The purchaser shall
be entitled to any distributions attributable to the transferred interest after
the Valuation Date and the Partnership shall have the right to deduct the amount
of any such distributions made to the Selling Limited Partner after the
Valuation Date from the purchase price. Notwithstanding the above, the
Partnership shall not be obligated to assume any outstanding personal obligation
of a Selling Limited Partner.
18.8 Closing.
18.8.1 Closing of Purchase and Sale. The Closing of any purchase and sale
of a Partnership Interest pursuant to Article 18.1, 18.2, 18.3, 18.4 or 18.5 of
this Agreement shall take place at the principal office of the Partnership, or
such other place designated by the General Partner, on the date determined as
follows (the "Closing"):
(a) In the case of a purchase and sale occurring by reason of the death of
a Limited Partner as provided in Article 18.1 of this Agreement, the Closing
shall be held on the thirtieth day (or if such thirtieth day is not a business
day, the next business day following the thirtieth day) next following the last
to occur of:
(i) Qualification of the executor or personal administrator of the deceased
Limited Partner's estate;
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(ii) The date on which any necessary determination of the purchase price of
the Partnership Interest to be purchased has been made; or
(iii) The date that coincides with the close of the Option Period.
(b) In the case of a purchase and sale occurring by reason of the
occurrence of one of the events described in Article 18.2, 18.3, 18.4 or 18.5 of
this Agreement, the Closing shall be held on the thirtieth day (or if such
thirtieth day is not a business day, the next business day following the
thirtieth day) next following the later to occur of:
(i) The date on which any necessary determination of the purchase price of
the Partnership Interest to be purchased has been made; or
(ii) The date that coincides with the close of the Option Period.
At the Closing, although not necessary to effect the transfer, the Selling
Limited Partner shall concurrently with tender and receipt of the applicable
purchase price, deliver to the purchaser duly executed instruments of transfer
and assignment, assigning good and marketable title to the portion or portions
of the Selling Limited Partner's entire Partnership Interest thus purchased,
free and clear from any liens or encumbrances or rights of others therein. The
parties acknowledge that occurrence of any of the triggering events described in
Article 18.1, 18.2, 18.3, 18.4, 18.5 or 18.6 and compliance with all the
Articles of this Agreement, except the execution of the transfer documents by
the Selling Limited Partner as provided above in this Article 18.8.1, are
sufficient to effect the complete transfer of the Selling Limited Partner's
Partnership Interest and the Selling Limited Partner shall be deemed to consent
to admission of the transferee as a substitute Limited Partner. Notwithstanding
the date of the Closing or whether a Closing is successfully held, the transfer
of a Partnership Interest of a Selling Limited Partner shall be deemed to occur
as of the Valuation Date as defined in Article 18.7. The deemed transfer is
effective regardless of whether the Selling Limited Partner performs the duties
set forth in this Article 18.8.1.
18.8.2 Terms and Conditions of Purchase. The Partnership Interest of a
Limited Partner shall not be transferred to any Partner unless the requirements
of Articles 17.2 and 17.4 (b) through (f) are satisfied with respect to it. The
purchaser shall be liable for all obligations and liabilities connected with
that portion of the Partnership Interest transferred to it unless otherwise
agreed in writing.
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19. SALE, ASSIGNMENT OR OTHER TRANSFER OF THE GENERAL PARTNER'S INTEREST.
19.1 The General Partner may not mortgage, pledge, hypothecate, transfer,
sell, assign or otherwise dispose of all or any part of its interest in the
Partnership, whether voluntarily, by operation of law or otherwise (the
foregoing actions being hereafter collectively referred to as "Transfers" or
singularly as a "Transfer") except as permitted by this Article.
19.2 If the General Partner makes a Transfer (other than a mortgage, pledge
or hypothecation) of its general partner interest in the Partnership pursuant to
this Article, it shall be liable for all obligations and liabilities incurred by
it as the general partner of the Partnership on or before the effective date of
such Transfer, but shall not be liable for any obligations or liabilities of the
Partnership arising after the effective date of the Transfer.
19.3 No Transfer by the General Partner shall be permitted unless:
(a) Counsel for the Partnership shall have rendered an opinion that none of
the actions taken in connection with such Transfer will cause the Partnership to
be classified other than as a partnership for federal income tax purposes or
will cause the termination or dissolution of the Partnership under state law;
and
(b) Such documents or instruments, in form and substance satisfactory to
counsel for the Partnership, shall have been executed and delivered as may be
required in the opinion of counsel for the Partnership to effect fully any such
Transfer.
Notwithstanding the foregoing provisions of this Article 19.3, the General
Partner may pledge its interest in the Partnership to any bank, insurance
company or other financial institution to secure payment of indebtedness.
20. TERMINATION OF THE SERVICES OF THE GENERAL PARTNER.
If the General Partner shall be finally adjudged by a court of competent
jurisdiction to be liable to the Limited Partners or the Partnership for any act
of gross negligence or willful misconduct in the performance of its duties under
the terms of this Agreement, the General Partner may be removed and another
substituted with the consent of all of the Limited Partners. Such consent shall
be evidenced by a certificate of removal signed by all of the Limited Partners.
In the event of removal, the new general partner shall succeed to all of the
powers, privileges and obligations of the General Partner, and the General
Partner's interest in the Partnership shall become that of a Limited Partner,
and the General Partner shall maintain its same Percentage Interest in the
Partnership notwithstanding anything contained in the Act to the contrary. In
addition, in the event of removal, the new general partner shall take all steps
necessary and appropriate to prepare and
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record an amendment to the Certificate of Limited Partnership to reflect the
removal of the General Partner and the admission of such new general partner.
21. MANAGEMENT AND OPERATION OF BUSINESS.
21.1 All decisions with respect to the management of the business and
affairs of the Partnership shall be made by the General Partner.
21.2 The General Partner shall be under no duty to devote all of its time
to the business of the Partnership, but shall devote only such time as it deems
necessary to conduct the Partnership business and to operate and manage the
Partnership in an efficient manner.
21.3 The General Partner may charge to the Partnership all ordinary and
necessary costs and expenses, direct and indirect, attributable to the
activities, conduct and management of the business of the Partnership. The costs
and expenses to be borne by the Partnership shall include, but are not limited
to, all expenditures incurred in acquiring and financing the Equipment or other
Partnership property, legal and accounting fees and expenses, salaries of
employees of the Partnership, consulting and quality assurance fees paid to
independent contractors, insurance premiums and interest.
21.4 In addition to, and not in limitation of, any rights and powers
covenanted by law or other provisions of this Agreement, and except as limited,
restricted or prohibited by the express provisions of this Agreement, the
General Partner shall have and may exercise on behalf of the Partnership all
powers and rights necessary, proper, convenient or advisable to effectuate and
carry out the purposes, business and objectives of the Partnership. Such powers
shall include, without limitation, the following:
(a) To conduct the Offering and any Dilution Offering on behalf of the
Partnership;
(b) To acquire on behalf of the Partnership (i) one or more fixed base or
transportable lithotripsy systems, including the Lithotripter System, (ii) any
other assets related to the provision of lithotripsy services, or (iii) any
other assets or equipment or an interest in another entity consistent with the
purposes of the Partnership as provided in Article 4 (collectively, the
"Additional Assets"), at such times and at such price and upon such terms, as
the General Partner deems to be in the best interest of the Partnership;
(c) To purchase, hold, manage, lease, license and dispose of Partnership
assets, including the purchase, exchange, trade or sale of the Partnership's
assets at such price, or amount, for cash, securities or other property and upon
such terms, as the General Partner deems to be in the best interest of the
Partnership; provided, that should the Partnership assets be exchanged or traded
for securities or other property
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(the "Replacement Property") the General Partner shall have the same powers with
regard to the Replacement Property as it does towards the traded property;
(d) To exercise the option of the General Partner or the Partnership to
purchase a Limited Partner's Partnership Interest pursuant to Article 18;
(e) To determine the travel itinerary and site locations for the
Lithotripter System or other Partnership technology;
(f) To borrow money for any Partnership purpose (including the acquisition
of the Additional Assets) and, if security is required therefor, to subject to
any security device any portion of the property for the Partnership, to obtain
replacements of any other security device, to prepay, in whole or in part,
refinance, increase, modify, consolidate or extend any encumbrance or other
security device;
(g) To deposit, withdraw, invest, pay, retain (including the establishment
of reserves in order to acquire the Additional Assets) and distribute the
Partnership's funds in any manner consistent with the provisions of this
Agreement;
(h) To institute and defend actions at law or in equity;
(i) To enter into and carry out contracts and agreements and any or all
documents and instruments and to do any and all such other things as may be in
furtherance of Partnership purposes or necessary or appropriate to the conduct
of the Partnership activities;
(j) To execute, acknowledge and deliver any and all instruments which may
be deemed necessary or convenient to effect the foregoing;
(k) To engage or retain one or more persons to perform acts or provide
materials as may be required by the Partnership, at the Partnership's expense,
and to compensate such person or persons at a rate to be set by the General
Partner, provided that the compensation is at the then prevailing rate for the
type of services and materials provided, or both. Any person, whether a Partner,
an Affiliate of a Partner or otherwise, including without limitation the General
Partner, may be employed or engaged by the Partnership to render services and
provide materials, including, but not limited to, management services,
professional services, accounting services, quality assessment services, legal
services, marketing services, maintenance services or provide materials; and if
such person is a Partner or an Affiliate of a Partner, (s)he shall be entitled
to, and shall be paid compensation for said services or materials, anything in
this Agreement to the contrary notwithstanding, provided that the compensation
to be received for such services or materials is competitive in price and terms
with then prevailing rate for the type of services and/or materials provided.
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The Partnership, pursuant to the terms of a Management Agreement, will contract
with the General Partner with respect to the supervision and coordination of the
management and administration of the day-to-day operations of the Partnership's
business for a monthly fee equal to 7.5% of net Partnership Cash Flow per month.
All costs incurred by the General Partner under the Management Agreement shall
be paid or reimbursed by the Partnership directly. The Partnership may also
contract with healthcare facilities and/or qualified physicians desiring to use
its Lithotripter System for the treatment of patients. Owning an interest in the
Partnership shall not be a condition to using the Lithotripter System. The
General Partner and its Affiliates may engage in or possess an interest in other
business ventures of any nature and description independently or with others,
including, but not limited to, the operation of a fixed-base or mobile
lithotripsy unit, whether or not such business ventures are in direct or
indirect competition with the Partnership, and neither the Partnership nor the
Partners shall have any right by virtue of this Agreement in and to said
independent ventures or to the income or profits derived therefrom.
21.5 In addition to other acts expressly prohibited or restricted by this
Agreement or by law, the General Partner shall have no authority to act on
behalf of the Partnership in:
(a) Doing any act in contravention of this Agreement or the Partnership's
Certificate of Limited Partnership;
(b) Doing any act which would make it impossible to carry on the ordinary
business of the Partnership;
(c) Possessing or in any manner dealing with the Partnership's property or
assigning the rights of the Partnership in the Partnership's property for other
than Partnership purposes;
(d) Admitting a person as a Limited Partner or a General Partner except as
provided in this Agreement; or
(e) Performing any act (other than an act required by this 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.
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22. RESERVES.
The General Partner may cause the Partnership to create a reserve account
to be used exclusively for repairs and acquisition of Additional Assets and for
any other valid Partnership purpose. The General Partner shall, in its sole
discretion, determine the amount of payments to such reserve.
23. INDEMNIFICATION AND EXCULPATION OF THE GENERAL PARTNER.
23.1 The General Partner is accountable to the Partnership as a fiduciary
and consequently must exercise good faith and integrity in handling Partnership
affairs. The General Partner and its Affiliates shall have no liability to the
Partnership which arises out of any action or inaction of the General Partner or
its Affiliates if the General Partner or its Affiliates, in good faith,
determined that such course of conduct was in the best interest of the
Partnership and such course of conduct did not constitute gross negligence or
willful misconduct of the General Partner or its Affiliates. The General Partner
and its Affiliates shall 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.
23.2 The General Partner shall not be liable for the return of the Capital
Contributions of the Limited Partners, and upon dissolution, Limited Partners
shall look solely to the assets of the Partnership.
24. DISSOLUTION OF THE PARTNERSHIP.
24.1 The Partnership shall be dissolved and terminated and its business
wound up upon the occurrence of any one of the following events:
(a) The expiration of its term on December 31, 2048;
(b) The filing by, on behalf of, or against the General Partner of any
petition or pleading, voluntary or involuntary, to declare the General Partner
bankrupt under any bankruptcy law or act, or the commencement in any court of
any proceeding, voluntary or involuntary, to declare the General Partner
insolvent or unable to pay its debts, or the appointment by any court or
supervisory authority of a receiver, trustee or other custodian of the property,
assets or business of the General Partner or the assignment by it of all or any
part of its property or assets for the benefit of creditors, if said action,
proceeding or appointment is not dismissed, vacated or otherwise terminated
within ninety (90) days of its commencement;
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(c) The determination of the General Partner that the Partnership should be
dissolved;
(d) The occurrence of an event described in a plan approved by the General
Partner pursuant to Article 17.7 resulting in the dissolution of the
Partnership;
(e) The election of the General Partner to dissolve the Partnership
following the occurrence of an event described in Article 18.5;
(f) Except as otherwise provided in any plan approved by the General
Partner pursuant to Article 17.7, the sale, exchange or other disposition of all
or substantially all of the property of the Partnership without making provision
for the replacement thereof; and
(g) The dissolution, retirement, resignation, death, disability or legal
incapacity of a general partner, and any other event resulting in the
dissolution or termination of the Partnership under the laws of the State of
Wyoming; provided, that the events described in Sections 17-14-901(iv) and (v)
of the Act or any similar provisions of any successor statute, shall not work a
dissolution of the Partnership except as expressly provided in (b) above.
24.2 Notwithstanding the provisions of Article 24.1, the Partnership shall
not be dissolved and terminated upon the retirement, resignation, bankruptcy,
assignment for the benefit of creditors, dissolution, death, disability or legal
incapacity of a general partner, and its business shall continue pursuant to the
terms and conditions of this Agreement, if any general partner or general
partners remain following such event; provided that such remaining general
partner or general partners are hereby obligated to continue the business of the
Partnership. If no general partner remains after the occurrence of such event,
the business of the Partnership shall continue pursuant to the terms and
conditions of this Agreement, if, within ninety (90) days after the occurrence
of such event, a Majority in Interest of the Limited Partners agree in writing
to continue the business of the Partnership, and, if necessary, to the
appointment of one or more persons or entities to be substituted as the general
partner. In the event the Limited Partners agree as provided above to continue
the business of the Partnership, the new general partner or general partners
shall succeed to all of the powers, privileges and obligations of the General
Partner, and the General Partner's interest in the Partnership shall become a
Limited Partner's interest hereunder. Furthermore, in the event a remaining
general partner or the Limited Partners, as the case may be, agree to continue
the business of the Partnership as provided herein, the remaining general
partner or the newly appointed general partner or general partners, as the case
may be, shall take all steps necessary and appropriate to prepare and record an
amendment to the Certificate of Limited Partnership to reflect the continuation
of the business of the Partnership and the admission of a new general partner or
general partners, if any.
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25. 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, shall
cause the cancellation of the Partnership's Certificate of Limited Partnership,
shall liquidate the assets of the Partnership, and shall apply and distribute
the proceeds of such liquidation in the following order of priority:
(a) First, to the payment of the debts and liabilities of the Partnership,
and the expenses of liquidation;
(b) Second, to the creation of any reserves which the General Partner (or
such 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
(c) Third, the balance, if any, shall be distributed to the Partners in
accordance with the Partners' positive Capital Account balances after such
Capital Accounts are adjusted as provided by Article 13, and any other
adjustments required by the Final Treasury Regulations under Section 704(b) of
the Code. Any general partner with a negative Capital Account following the
distribution of liquidation proceeds or the liquidation of its interest must
contribute to the Partnership an amount equal to such negative Capital Account
on or before the end of the Partnership's taxable year (or, if later, within
ninety days after the date of liquidation). Any capital so contributed shall be
(i) distributed to those Partners with positive Capital Accounts until such
Capital Accounts are reduced to zero, and/or (ii) used to discharge recourse
liabilities.
26. BOOKS OF ACCOUNT, RECORDS AND REPORTS.
26.1 Proper and complete records and books of account shall be kept by the
General Partner in which shall be entered fully and accurately all transactions
and such other matters relating to the Partnership's business as are usually
entered into records and books of account maintained by persons engaged in
businesses of a like character. The books and records of the Partnership shall
be prepared according to the accounting method determined by the General
Partner. The Partnership's fiscal year shall be the calendar year. The books and
records shall at all times be maintained at the Partnership's Records Office and
shall be open to the reasonable inspection and examination of the Partners or
their duly authorized representatives during reasonable business hours.
26.2 Within ninety (90) days after the end of each Year, the General
Partner shall 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 shall be reasonably necessary for the
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preparation by such person of his federal income tax return. The General Partner
will also make available to the Limited Partners any other information required
by the Act.
26.3 The General Partner shall maintain at the Partnership's Records Office
copies of the Partnership's original Certificate of Limited Partnership and any
certificate of amendment, restated certificate or certificate of cancellation
with respect thereto and such other documents as the Act shall require. The
General Partner will furnish to any Limited Partner upon request or as otherwise
required by law a copy of the Partnership's original Certificate of Limited
Partnership and any certificate of amendment, restated certificate, or
certificate of cancellation, if any.
26.4 The General Partner shall, 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.
26.5 The General Partner is designated as the Tax Matters Partner (as
defined in Section 6231 of the Code) and to act in any similar capacity under
state or local law, and 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. The General Partner is authorized and required to notify
the federal, state or local tax authorities of the appointment of a Tax Matters
Partner in the manner provided in Treasury Regulations Section 301.6231(a)(7)-1,
as modified from time to time. In its capacity as Tax Matters Partner, the
General Partner shall oversee the Partnership's tax affairs in the manner which,
in its best judgment, is in the interests of the Partners.
27. NOTICES.
All notices under this Agreement shall be in writing and shall be deemed to
have been given when delivered personally, or mailed by certified or registered
mail, postage prepaid, return receipt requested. Notices to the General Partner
shall be delivered at, or mailed to, its principal office. Notices to the
Partnership shall be delivered at, or mailed to, its principal office with a
copy to each of its business offices. Notice to a Limited Partner shall be
delivered to such Limited Partner, or mailed to the last address furnished by
him for such purposes to the General Partner. Limited Partners shall give notice
of a change of address to the General Partner in the manner provided in this
Article.
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28. AMENDMENTS.
Subject to the provisions of Article 28, this Agreement is subject to
amendment only by written consent of the General Partner and a Majority in
Interest of the Limited Partners; provided, however, the consent of the Limited
Partners shall not be required if such amendments are ministerial in nature and
do not contravene the provisions of Article 29. Further, no Limited Partner
consent shall be required to amend Schedule A to reflect the admission of
Partners as contemplated by the Offering, any Dilution Offering or as otherwise
herein permitted.
29. LIMITATIONS ON AMENDMENTS.
Notwithstanding the provisions of Article 28, no amendment to this
Agreement shall:
(a) Enlarge the obligations of any Partner under this Agreement or convert
the interest in the Partnership of any Limited Partner into the interest of a
general partner or modify the limited liability of any Limited Partner, without
the consent of such Partner;
(b) Amend the provisions of Article 13, 14, 16 or 25 without the approval
of the General Partner and a Majority in Interest of the Limited Partners;
provided, however, that the General Partner may at any time amend such Articles
without the consent of the Limited Partners 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, in which case such amendments may only be made as provided in
this Article 29(b); or
(c) Amend this Article 29 without the consent of all Partners.
30. MEETINGS, CONSENTS AND VOTING.
30.1 A meeting of the Partnership to consider any matter with respect to
which the Partners may vote as set forth in this Agreement may be called by the
General Partner or by Limited Partners who hold more than twenty-five percent
(25%) of the aggregate interests in the Partnership held by all the Limited
Partners. Upon receipt of a notice requesting a meeting by such Partner or
Partners and stating the purpose of the meeting, the General Partner shall,
within ten (10) days thereafter, give notice to the Partners of a meeting of the
Partnership to be held at a time and place generally convenient to the Limited
Partners on a date not earlier than fifteen (15) days after receipt by the
General Partner of the notice requesting a meeting. The notice of the meeting
shall set forth the time, date, location and purpose of the meeting.
30.2 Any consent of a Partner required by this Agreement may be given as
follows:
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(a) By a written consent given by the consenting Partner and received by
the General Partner at or prior to the doing of the act or thing for which the
consent is solicited, or
(b) By the affirmative vote by the consenting Partner to the doing of the
act or thing for which the consent is solicited at any meeting called pursuant
to this Article to consider the doing of such act or thing.
30.3 When exercising voting rights expressly granted under the Articles of
this Agreement, each Partner shall have that number of votes as is equal to the
Percentage Interest of such Partner at the time of the vote, multiplied by 100.
31. SUBMISSIONS TO THE LIMITED PARTNERS.
The General Partner shall give the Limited Partners notice of any proposal
or other matter required by any provision of this Agreement or by law to be
submitted for consideration and approval of the Limited Partners. Such notice
shall include any information required by the relevant provision or by law.
32. ADDITIONAL DOCUMENTS.
Each party hereto agrees to execute and acknowledge all documents and
writings which the General Partner may deem necessary or expedient in the
creation of this Partnership and the achievement of its purpose.
33. SURVIVAL OF RIGHTS.
Except as herein otherwise provided to the contrary, this Agreement shall
be binding upon and inure to the benefit of the parties hereto, their successor
and assigns.
34. INTERPRETATION AND GOVERNING LAW.
When the context in which words are used in this Agreement indicates that
such is the intent, words in the singular number shall include the plural and
vise versa; in addition, the masculine gender shall include the feminine and
neuter counterparts. The Article headings or titles and the table of contents
shall not define, limit, extend or interpret the scope of this Agreement or any
particular Article. This Agreement shall be governed and construed in accordance
with the laws of the State of Wyoming without giving effect to the conflicts of
laws provisions thereof.
35. SEVERABILITY.
If any provision, sentence, phrase or word of this Agreement or the
application thereof to any person or circumstance shall be held invalid, the
remainder of this Agreement, or the
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application of such provision, sentence, phrase, or word to persons or
circumstances, other than those as to which it is held invalid, shall not be
affected thereby.
36. AGREEMENT IN COUNTERPARTS.
This Agreement may be executed in several counterparts, each of which shall
be deemed an original, but all of which shall constitute one and the same
instrument. In addition, this Agreement may contain more than one counterpart of
the signature page and this Agreement may be executed by the affixing of the
signatures of each of the Partners to one of such counterpart signature pages;
all of such signature pages shall be read as though one, and they shall have the
same force and effect as though all of the signers had signed a single signature
page.
37. THIRD PARTIES.
The agreements, covenants and representations contained herein are for the
benefit of the parties hereto inter se and are not for the benefit of any third
parties including, without limitation, any creditors of the Partnership.
38. POWER OF ATTORNEY.
Each Limited Partner hereby makes, constitutes and appoints Stan Johnson
and Cheryl Williams, severally, with full power of substitution, his true and
lawful attorneys-in-fact, for him and in his name, place and stead and for his
use and benefit to sign and acknowledge, file and record, any amendments hereto
among the Partners for the further purpose of executing and filing on behalf of
each Limited Partner, any and all certificates of limited partnership or other
documents necessary to constitute the Partnership or to effect the continuation
of the Partnership, the admission or withdrawal of a general partner or a
limited partner, the qualification of the Partnership in a foreign jurisdiction
(or amendment to such qualification), the admission of substitute Limited
Partners or the dissolution or termination of the Partnership, provided such
continuation, admission, withdrawal, qualification, or dissolution and
termination are in accordance with the terms of this Agreement.
The foregoing power of attorney is a special power of attorney coupled with
an interest, is irrevocable and shall survive the death or legal incapacity of
each Limited Partner. It may be exercised by any one of said attorneys by
listing all of the Limited Partners executing any instrument over the signature
of the attorney-in-fact acting for all of them. The power of attorney shall
survive the delivery of an assignment by a Limited Partner of the whole or any
portion of his Unit. In those cases in which the assignee of, or the successor
to, a Limited Partner owning a Unit has been approved by the Partners for
admission to the Partnership as a substitute Limited Partner, the power of
attorney shall survive for the sole purpose of enabling the General Partner to
execute, acknowledge and file any instrument necessary to effect such
substitution.
-34-
<PAGE>
This power of attorney shall not be affected by the subsequent bankruptcy,
dissolution, incapacity or mental incompetence of any Limited Partner.
39. ARBITRATION.
Any dispute arising out of or in connection with this Agreement or the
breach thereof shall be decided by arbitration in Austin, Texas in accordance
with the then effective commercial arbitration rules of the American Arbitration
Association, and judgment thereof may be entered in any court having
jurisdiction thereof.
40. CREDITORS.
None of the provisions of this Agreement shall be for the benefit of or
enforceable by any creditors of the Partnership.
IN WITNESS WHEREOF, the parties have executed this Agreement of Limited
Partnership as of the day and year first above written.
GENERAL PARTNER:
SUN MEDICAL TECHNOLOGIES, INC.,
a California corporation
By: _________________________________
Stan Johnson, President
ATTEST:
_________________________ [CORPORATE SEAL]
Secretary
INITIAL LIMITED PARTNER:
__________________________________
Stan Johnson
-35-
<PAGE>
STATE OF ____________________)
)
COUNTY OF __________________ )
On this _______ day of ___________, 1998, before me, the undersigned Notary
Public in and for the County of _______________ in the State of ___________,
personally came Stan Johnson, who, being by me duly sworn, said that he is
President of Sun Medical Technologies, Inc., the sole general partner of Wyoming
Urological Services Limited Partnership, that the seal affixed to the foregoing
instrument in writing is the corporate seal of the corporation, and that said
writing was signed, sworn to, and sealed by him in behalf of said corporation by
its authority duly given. And the said Stan Johnson, further certified that the
facts set forth in said writing are true and correct, and acknowledged said
instrument to be the act and deed of said corporation.
WITNESS my hand and notarial seal.
------------------------------------------
Notary Public
My commission expires:
___________________________
STATE OF ________________ )
)
COUNTY OF ______________ )
I, _______________________________, a notary public in and for the State
and County set forth above, do hereby certify that Stan Johnson personally
appeared before me this _____ day of _________, 1998 and acknowledged and swore
to the due execution of the foregoing Limited Partnership Agreement in his
capacity as the initial limited partner.
-----------------------------------------
Notary Public
My commission expires:
___________________________
-36-
<PAGE>
COUNTERPART SIGNATURE PAGE
By signing this Counterpart Signature Page, the undersigned acknowledges
his or her acceptance of that certain Agreement of Limited Partnership of
Wyoming Urological Services Limited Partnership, and his or her intention to be
legally bound thereby.
Dated this _________ day of ___________________, 199__.
-------------------------------------------
Signature
-------------------------------------------
Printed Name
STATE OF _______________ )
)
COUNTY OF _____________ )
BEFORE ME, the undersigned Notary Public in and for the State and County
set forth above, on the _______ day of __________________, 199__, personally
appeared ___________________, and, being by me first duly sworn, stated that
(s)he signed this Counterpart Signature Page for the purpose set forth above and
that the statements contained therein are true.
-------------------------------------------
Signature of Notary Public
-------------------------------------------
Printed Name of Notary
My Commission Expires:
___________________________
[SEAL]
-37-
<PAGE>
SCHEDULE A
Schedule of Partnership Interests
WYOMING UROLOGICAL SERVICES LIMITED PARTNERSHIP
CONTRIBUTIONS OF CAPITAL TO THE PARTNERSHIP AND PERCENTAGE
INTERESTS
Cash Percentage
Contribution Guaranty(1) Interest
General Partner
Sun Medical Technologies, Inc. $50,000 $47,700 20%
1301 Capital of Texas Highway
Suite C-300
Austin, Texas 78746
Limited Partners as a whole $200,000 $190,800 80%
TOTAL: $250,000 $238,500 100%
(1) Represents the principal portion of each Partner's guaranty
obligation, as each Partner's obligation under the Guaranty includes
not only principal, but also (as provided in the Guaranty) accrued and
unpaid interest, late payment penalties and all costs incurred by the
Bank in collecting any defaulted obligations. The principal amount of
the loan is up to $477,000. The General Partner will guarantee 10% of
the Loan (up to a $47,700 principal guaranty). The Limited Partners
will individually guarantee 0.5% of the loan (up to a $2,385 principal
guaranty) for each unit purchased. The principal amount of the Loan
has not been determined as of the date of this Agreement.
-38-
EXHIBIT 12
----------
PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Years Ended December 31,
1998 1997 1996
---- ---- ----
Income before income taxes and
after minority interest $18,172 $ 20,651 $10,957
Undistributed equity income (102) (408) --
Minority interest income of
subsidiaries with fixed charges 1,823 6,074 7,000
----- ----- -------
Adjusted earnings 19,893 26,317 17,957
====== ====== =======
Interest on debt 8,469 7,477 5,977
Debt issuance costs 4,978 360 2,735
------ ---- ------
Total fixed charges 13,447 7,837 8,712
------ ----- ------
Total available earnings
before fixed charges 33,340 34,154 26,669
====== ====== ======
Ratio 2.5 4.4 3.1
=== === ======
EXHIBIT 21.1
SUBSIDIARIES OF PRIME MEDICAL SERVICES, INC.
AS OF MARCH 19, 1999
EXHIBIT 21.1
Name of Subsidiary State of Incorporation
------------------- --------------------
Prime Medical Operating, Inc. Delaware
Prime Management, Inc. Nevada
Prime Cardiac Rehabilitation Services, Inc. Delaware
Prime Diagnostic Services, Inc. Delaware
Prime Lithotripsy Services, Inc. New York
Prime Kidney Stone Treatment, Inc. New Jersey
Prime Diagnostic Corp. of Florida Delaware
Prime Lithotripter Operations, Inc. New York
Prime Practice Management, Inc. New York
R.R. Litho, Inc. Delaware
Ohio Litho, Inc. Delaware
Alabama Renal Stone Institute, Inc. Alabama
Sun Medical Technologies, Inc. California
Sun Acquisition, Inc. California
Lithotripters, Inc. North Carolina
FastStart, Inc. North Carolina
National Lithotripters Association, Inc. North Carolina
Prostatherapies, Inc Delaware
MedTech Investments, Inc. North Carolina
Executive Medical Enterprises, Inc. Delaware
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
----------------------------------------------------
We consent to incorporation by reference in the registration statements
(No. 33-70478 and 333-62245) on Form S-8 and (No. 333-12893 and 333-47621) on
Form S-3 of Prime Medical Services, Inc. of our report dated March 1, 1999,
relating to the consolidated balance sheets of Prime Medical Services, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1998, which report appears in the
Annual Report on Form 10-K of Prime Medical Services, Inc. for the year ended
December 31, 1998.
/s/ KPMG LLP
- - --------------------------
Austin, Texas
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
December 31, 1998 Form 10-K and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 40,146
<SECURITIES> 0
<RECEIVABLES> 22,321
<ALLOWANCES> 966
<INVENTORY> 0
<CURRENT-ASSETS> 69,799
<PP&E> 36,558
<DEPRECIATION> 18,471
<TOTAL-ASSETS> 241,119
<CURRENT-LIABILITIES> 28,100
<BONDS> 0
0
0
<COMMON> 194
<OTHER-SE> 89,556
<TOTAL-LIABILITY-AND-EQUITY> 241,119
<SALES> 0
<TOTAL-REVENUES> 104,636
<CGS> 0
<TOTAL-COSTS> 39,473
<OTHER-EXPENSES> 10,476
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,469
<INCOME-PRETAX> 18,171
<INCOME-TAX> 7,377
<INCOME-CONTINUING> 10,794
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,794
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.57
<FN>
NOTE: Due to the change in computing EPS per FASB No. 128, the tags per the
FDS schedule will correspond to FASB No. 128 as follows:
FDS tag FASB No. 128
EPS - Primary EPS - Basic
EPS - Diluted EPS - Diluted
</FN>
</TABLE>
