Name of Prospective Investor Memorandum Number
--------------------------------------------------------------------------------
FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP -
SOUTH CAROLINA II
A Limited Partnership Formed Under the Laws of South Carolina
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM
up to $500,880 in Cash
40 Units of Limited Partnership Interest
at $12,522 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
0-000-000-0000
The Date of this Memorandum is November 17, 1999
FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP -
SOUTH CAROLINA II
up to $500,880 in Cash
up to 40 Units of Limited Partnership Interest
at $12,522 Cash per Unit
Fayetteville Lithotripters Limited Partnership - South
Carolina II, a South Carolina 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 40 Units
(the "Units") of limited partnership interest in the Partnership, at a price per
Unit of $12,522 in cash. See "Terms of the Offering." Each Unit will represent
an initial 0.5% economic interest in the Partnership. See "Risk Factors - Other
Investment Risks - Dilution of Limited Partners' Interests." The Partnership
owns and operates a Lithostar(TM) second generation extracorporeal shock-wave
lithotripter for the lithotripsy of kidney stones. The Lithostar(TM) is
installed in a self-propelled Coach (collectively, the Coach with the installed
Lithostar(TM) is referred to herein as the "Mobile Lithotripsy System") enabling
the Partnership to provide lithotripsy services at various locations throughout
northwestern South Carolina and southwestern North Carolina (the "Service
Area").
The Partnership intends to use the net proceeds of this
Offering (after deduction of expenses payable by the Partnership) primarily to
make distributions to the persons who were Partners of the Partnership prior to
the commencement of the Offering. See "Sources and Applications of Funds." 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 1,
2000 (or earlier upon the sale of all 40 Units as provided herein), unless
extended at the discretion of the General Partner for a period not to exceed 180
days.
------------------------------
Purchase of Units involves risks and is suitable only for
persons of substantial means who have no need for liquidity in this investment.
Among other factors, prospective investors should note that the health care
industry is undergoing significant government regulatory reforms. See "Risk
Factors" and "Terms of the Offering - Suitability Standards."
------------------------------
Cash Selling Net Cash
Offering Price Commissions(1) Proceeds(2)
-------------- ----------- --------
Per Unit(3) $ 12,522 $ 100 $ 12,422
Total Maximum(4) $ 500,880 $ 4,000 $ 496,880
(See Footnotes on Back of Cover Page)
See Glossary for capitalized terms used herein
and not otherwise defined.
WINSTON 966198v1 vi
(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 $100 commission for
each Unit sold and will reimburse the Sales Agent for its Offering
costs (not to exceed $4,000). The Partnership has agreed to indemnify
the Sales Agent against certain liabilities, including liabilities
under the Securities Act of 1933 (the "Securities Act").
See "Plan of Distribution."
(2) Net Cash Proceeds do not reflect deduction of expenses payable by the
Partnership. See "Sources and Applications of Funds." The price per
Unit ($12,522) 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, which is headquartered in Raleigh, North Carolina, and has
approximately 370 offices throughout the southeastern United States
(the "Bank"). Therefore, in lieu of paying the entire purchase price in
cash at subscription, prospective Investors may execute and deliver to
the Sales Agent, together with their Subscription Packets, at least
$2,500 cash and a Limited Partner Note payable to the Bank in a maximum
principal amount of up to $10,022 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 Loan Commitment as Exhibits A, B and
C, respectively, which is attached hereto as Appendix C and the UCC-1's
attached as part of the Subscription Packet.
(3) Each Investor may purchase no less than one Unit. The General Partner,
however, reserves the right to sell less than one Unit as a minimum
investment on a limited basis, and to reject, in whole or in part, any
subscription. In the event the Offering is oversubscribed, Units will
be allocated first to Investors in such amounts that after the Closing
of the Offering each Investor will own up to a 2.5% interest in the
Partnership, and then any remaining Units will be allocated
proportionately among all Investors.
(4) Offering proceeds will first be used by the Partnership to pay
Offering costs and expenses (up to $33,000) and the remainder of the
proceeds will be distributed to the persons who were Partners of the
Partnership prior to the commencement of the Offering. See "Sources
and Applications of Funds." The Partnership seeks by this Offering to
sell up to 40 Units for an aggregate of up to $500,880 in cash
($496,880 net of Sales Agent's commissions). All subscription funds
and Loan Documents will be held in an interest bearing escrow account
with the Bank until the acceptance of the Investor's subscription (and
approval by the Bank if the Investor is financing a portion of the
Unit purchase price through a Limited Partner Loan), rejection of the
Investor's subscription or termination of 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 1,
2000, unless it is sooner terminated by the General Partner, or unless
extended for an additional period not to exceed 180 days. See "Terms
of the Offering."
[The remainder of this page is intentionally left blank.]
--------------------------------------------------------------------------------
o The Units are being offered pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as
amended, provided by Section 4(2) thereof and Rule 506 of
Regulation D promulgated thereunder, as amended, and an
exemption from state registration requirements provided by the
National Securities Markets Improvement Act of 1996. A
registration statement relating to these securities has not
been filed with the Securities and Exchange Commission or any
state securities commission.
o Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the Units
or determined that this Memorandum is truthful or complete.
Any representation to the contrary is a criminal offense.
o The Units are subject to restrictions on transferability and
resale and may not be transferred or resold without the
consent of the general partner and satisfaction of certain
other conditions including the availability of an exemption
under the Securities Act of 1933 and applicable state
securities laws. See "Risk Factors - Other Investment Risks -
Limited Transferability and Illiquidity of Units." No public
or other market exists or will develop for the Units.
Investors should proceed only on the assumption that they may
have to bear the economic risk of an investment in the Units
for an indefinite period of time.
o Prospective Investors should not construe the contents of this
Memorandum or any prior or subsequent communications, whether
written or oral, from the Partnership, its General Partner,
the Sales Agent or any of their agents or representatives as
investment, tax or legal advice. This Memorandum and the
appendices hereto, as well as the nature of the investment,
should be reviewed by each prospective Investor, such
Investor's investment, tax or other advisors, and accountants
and/or legal counsel.
o No offering literature in whatever form will or may be
employed in the offering of Units, except this Memorandum
(including amendments and supplements, if any) and documents
summarized herein. No person is authorized to give any
information or to make any representation not contained in
this Memorandum or in the appendices hereto, and, if given or
made, such other information or representation must not be
relied upon.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
RISK FACTORS..................................................................1
------------
Operating Risks......................................................1
---------------
Tax Risks............................................................7
---------
Other Investment Risks..............................................13
----------------------
THE PARTNERSHIP..............................................................16
---------------
TERMS OF THE OFFERING........................................................16
---------------------
The Units and Subscription Price....................................16
--------------------------------
Acceptance of Subscriptions.........................................17
---------------------------
Limited Partner Loans...............................................17
---------------------
Subscription Period; Closing........................................18
----------------------------
Offering Exemption..................................................18
------------------
Suitability Standards...............................................19
---------------------
How to Invest.......................................................20
-------------
Restrictions on Transfer of Units...................................20
---------------------------------
PLAN OF DISTRIBUTION.........................................................21
--------------------
BUSINESS ACTIVITIES..........................................................22
-------------------
General 22
-------
Treatment Methods for Kidney Stone Disease..........................22
------------------------------------------
The Lithostar(TM)...................................................22
-----------------
The Coach...........................................................23
---------
Acquisition of Additional Assets....................................23
--------------------------------
Hospital Contracts..................................................24
------------------
Operation of the Mobile Lithotripsy System..........................25
------------------------------------------
Management..........................................................25
----------
Employees and Benefits..............................................26
----------------------
THE GENERAL PARTNER..........................................................26
-------------------
COMPENSATION AND REIMBURSEMENT TO THE........................................28
-------------------------------------
GENERAL PARTNER AND ITS AFFILIATES...........................................28
----------------------------------
CONFLICTS OF INTEREST........................................................30
---------------------
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER..............................31
-----------------------------------------------
COMPETITION..................................................................31
-----------
Affiliated Competition..............................................31
----------------------
Other Competition...................................................32
-----------------
REGULATION...................................................................33
----------
Federal Regulation..................................................33
------------------
State Regulation....................................................40
----------------
PRIOR ACTIVITIES.............................................................42
----------------
SOURCES AND APPLICATIONS OF FUNDS............................................44
---------------------------------
FINANCIAL CONDITION OF THE PARTNERSHIP.......................................44
--------------------------------------
MANAGEMENT'S DISCUSSION AND..................................................45
---------------------------
ANALYSIS OF THE RESULTS OF OPERATIONS........................................45
-------------------------------------
Nine Months Ended September 30, 1999 and September 30, 1998.........45
-----------------------------------------------------------
Year Ended December 31, 1998 and December 31, 1997..................45
--------------------------------------------------
Year Ended December 31, 1997 and December 31, 1996..................45
--------------------------------------------------
SUMMARY OF THE PARTNERSHIP AGREEMENT.........................................46
------------------------------------
Nature of Limited Partnership Interest..............................46
--------------------------------------
Profits, Losses and Distributions...................................46
---------------------------------
Management of the Partnership.......................................48
-----------------------------
Powers of the General Partner.......................................48
-----------------------------
Rights and Liabilities of the Limited Partners......................49
----------------------------------------------
Restrictions on Transfer of Partnership Interests...................49
-------------------------------------------------
Dissolution and Liquidation.........................................50
---------------------------
Optional Purchase of Limited Partner Interests......................51
----------------------------------------------
Dilution Offerings..................................................51
------------------
Noncompetition Agreement and Protection of Confidential
Information.................................................52
Arbitration.........................................................52
-----------
Power of Attorney...................................................52
-----------------
Reports to Limited Partners.........................................53
---------------------------
Records 53
-------
LEGAL MATTERS................................................................53
-------------
ADDITIONAL INFORMATION.......................................................53
----------------------
GLOSSARY 54
APPENDICES
Appendix A AGREEMENT OF LIMITED PARTNERSHIP OF FAYETTEVILLE LITHOTRIPTERS
LIMITED PARTNERSHIP - SOUTH CAROLINA II Appendix B LOAN COMMITMENT (WITH
EXHIBITS) Appendix C FORM OF OPINION OF XXXXXX XXXXXXX XXXXXXXXX & XXXX, A
PROFESSIONAL LIMITED LIABILITY COMPANY Appendix D NOTES TO FINANCIAL STATEMENTS
WINSTON 966198v1 59
WINSTON 966198v1
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 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 System
less competitive or obsolete, and other matters. The Partnership may be
adversely affected by various changing local factors such as an increase in
local unemployment, a change in general economic conditions, changes in interest
rates and availability of financing, and other matters that may render the
operation of the Mobile Lithotripsy System difficult or unattractive. Other
factors that may adversely affect the operation of the Mobile Lithotripsy System
are unforeseen increased operating expenses, energy shortages and costs
attributable thereto, uninsured losses and the capabilities of the Partnership's
management personnel.
Uncertainties Related to Changing Healthcare Environment. The
healthcare industry has experienced substantial changes in recent years.
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 principal purpose
will be to continue to operate the Mobile Lithotripsy System. Because the
Partnership is dependent on only one line of business and one Mobile Lithotripsy
System, there will be greater risks from unexpected service interruptions,
equipment breakdowns, technological developments, kidney stone treatment medical
breakthroughs, economic problems and similar matters than would be the case with
a more diversified business.
Impact of Insurance Reimbursement. The prices the Partnership
will be able to charge its patients for the lithotripsy of kidney stones is
significantly dependent upon the amount of reimbursement private health care
insurers will allow for this procedure. Most of the Partnership's patients would
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. The increasing
influence of health maintenance organizations and other managed care companies
has resulted in pressure to reduce the reimbursement available for lithotripsy
procedures. The General Partner and some of its Affiliates have recently been
informed by several hospitals and commercial insurers that reimbursement rates
must be reduced, or the hospitals and commercial insurers would negotiate with
competing lithotripsy services. Additionally, the Health Care Financing
Administration ("HCFA"), which administers the Medicare program, has proposed
rules which would reduce the reimbursement available for lithotripsy procedures
provided at hospitals to $2,612. This rate is lower than the typical charge for
lithotripsy services historically charged by the Partnership. However, in some
cases, reimbursement rates payable to Affiliates of the General Partner are less
than the proposed HCFA rate. Because of the competitive pressures from managed
care companies as well as threatened reductions in Medicare reimbursement, the
General Partner anticipates reimbursement available for the lithotripsy
procedure may continue to decrease. Such decreases would have a material adverse
effect on Partnership revenues. Regarding the professional fees paid to
physicians who treat patients on the Mobile Lithotripsy System, the General
Partner anticipates that similar competitive pressures may result in lower
reimbursement paid to physicians, both by private insurers and by government
programs such as Medicare. See "Regulation."
Reliability and Efficacy of the Lithotripters. The
Lithostar(TM) has an eleven year United States operating history, having
received premarket approval from the FDA for renal lithotripsy on September 30,
1988. This approval followed a period of clinical testing beginning in February
1987 at four test sites in the United States, which was preceded by substantial
clinical testing of the Lithostar(TM) at the Urological Clinic of the Xxxxxxxx
Xxxxxxxxx University of Mainz, West Germany. The General Partner estimates that
more than 400 Lithostar(TM) systems are currently operating in over twenty
countries, and the General Partner and its Affiliates operate over 30
Lithostars(TM) in other ventures. In the General Partner's opinion, the
Lithostar(TM) has proven to be reliable and dependable medical equipment;
however, downtime periods necessitated for maintenance or repairs of the
Partnership's Mobile Lithotripsy System will adversely affect Partnership
revenues. In 1996, the FDA approved a new higher intensity shock-head system for
the Lithostar(TM), which the General Partner believes has shortened procedure
times. The Partnership's Lithostar(TM) has 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 Lithostar(TM) in all of the General Partner's
affiliated partnerships using both the original and newer shock-head systems,
the General Partner notes an 86% total success rate with an overall retreatment
rate of 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 ten and one-half years in its
affiliated limited partnerships, the General Partner is of the opinion that the
Lithostar(TM) 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 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 net
proceeds of this Offering will be distributed to the persons who were Partners
prior to the commencement of the Offering and, thus, will not be available to
fund Partnership expenses. In the event of unanticipated expenses, it may be
necessary to supplement Partnership funds with the proceeds of debt financing.
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. See "Summary of the Partnership Agreement - Powers of the General
Partner."
Competition. Several competing lithotripters are currently
operating in and near the Service Area in competition with the Partnership's
Mobile Lithotripsy System, including lithotripters owned by Affiliates of the
General Partner. There is no assurance that additional 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 otherwise 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 near the Service Area. See "Prior
Activities" and "Competition." Furthermore, the Partnership will be competing
with facilities and individual medical practitioners who offer conventional
treatment (e.g., surgery) for kidney stones.
Restrictions on Limited Partners. The Partnership Agreement severely
restricts the Limited Partners' ability to own interests in competing equipment
or ventures. See "Summary of the Partnership Agreement - Noncompetition
Agreement and Protection of Confidential Information." The enforceability of
these noncompetition agreements is generally a matter of state law. No assurance
can be given that one or more Limited Partners may not successfully compete with
the Partnership. See "Competition."
Government Regulation. All facets of the healthcare industry
are highly regulated and will become more so in the future. The ability of the
Partnership to continue to operate legally and be profitable may be adversely
affected by changes in governmental regulations, including expected changes in
reimbursement, Medicare and Medicaid certification requirements, federal and
state fraud and abuse laws, including the federal Anti-Kickback Statute, the
federal False Claims Act, federal and state self-referral laws, state
restrictions on fee splitting and other governmental regulation. See
"Regulation." These laws and regulations may adversely affect the economic
viability of the Partnership. The laws are broad in scope, and interpretations
by courts have been limited. Violations of these laws would subject the General
Partner and all Limited Partners to governmental scrutiny and/or prosecution for
felony charges and punishment in the form of large monetary fines, loss of
licensure, imprisonment and exclusion from Medicare and Medicaid. Certain
provisions of Medicare and Medicaid law limit provider ownership and control
over the various health care services to which physicians may make Medicare and
Medicaid referrals. The primary laws involved are the "Xxxxx 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 Xxxxx II, in January, 1998, HCFA, the federal agency
responsible for administering the Medicare program, published proposed Xxxxx 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 Xxxxx II regulations
as final, or if a reviewing court were to interpret the Xxxxx II statute using
the proposed regulations as guidance, then the Partnership and its physician
Limited Partners would be in violation of Xxxxx II. In such instance, the
Partnership and/or its physician Limited Partners may be required to refund any
amounts collected from Medicare and Medicaid patients in violation of the
statute, and they may be subject to civil monetary penalties and/or exclusion
from the Medicare and Medicaid programs.
The Anti-Kickback Statute prohibits paying or receiving any
remuneration in exchange for making a referral for healthcare services which may
be paid for by Medicare, Medicaid or CHAMPUS. The law has been broadly
interpreted to include any payments which may induce or influence a physician to
refer patients. One of the federal agencies that enforces the Anti-Kickback
Statute has issued several "safe harbors" which, if complied with, mean the
payment or transaction will be deemed not to violate the law. This Offering does
not comply with any "safe harbor." There is limited guidance from reviewing
courts regarding the application of the broad language of the Anti-Kickback
Statute to joint ventures similar to the one described in this Offering. In
order to prove violations of the Anti-Kickback law, the government must
establish that one or more parties offered, solicited or paid remuneration to
induce or reward referrals. The government has said that in certain situations
the mere offering of an opportunity to invest in a venture would constitute
illegal remuneration in violation of the Anti-Kickback Statute. Although the
General Partner believes the structure and purpose of the Partnership are in
compliance with the Anti-Kickback Statute, no assurances can be given that
government officials or a reviewing court would agree. Violation of the
Anti-Kickback Statute could subject the Partnership, the General Partner and the
physician Limited Partners to criminal penalties, imprisonment, fines and/or
exclusion from the Medicare and Medicaid programs.
The federal False Claims Act and similar laws generally
prohibit an individual or entity from knowingly and willfully presenting a claim
(or causing a claim to be presented) for payment from Medicare, Medicaid or
other third party payors that is false and fraudulent. In recent cases, False
Claims Act violations have been based on allegations that Xxxxx II or the
Anti-Kickback Statute have been violated.
In addition to Xxxxx II, the Anti-Kickback Statute and the
False Claims Act, an unfavorable interpretation of other existing laws, or
enactment of future laws or regulations, could potentially adversely affect the
operation of the Partnership.
State laws affect the operation of the Partnership as well.
South Carolina has a certificate of need ("CON") law relating to the purchase of
medical equipment with a cost in excess of $600,000, and North Carolina has a
CON law in connection with the purchase of a lithotripter specifically. However,
the Partnership commenced its services prior to the enactment of these CON laws.
Accordingly, the Partnership's services were not subject to CON review, and no
CON was or is required for the services at Contract Hospitals. However, if the
Partnership seeks to provide services at different facilities, then a CON may be
required. No assurance can be given that a CON would be obtained.
Both South Carolina and North Carolina have prohibitions on
physician ownership in entities to which they refer patients. The South Carolina
law has an exception to this prohibition if a physician treats his or her own
patients, and accordingly, South Carolina-licensed physicians who are Limited
Partners are required to treat their own patients. The North Carolina law has an
exception to this prohibition if the physician, or a member of the physician's
professional group, treats the patient, and, accordingly, North
Carolina-licensed physicians who are Limited Partners must either treat their
own patients or must arrange for a member of their practice group to treat their
patients. Both states prohibit the payment of kickbacks in exchange for
referrals, and the General Partnership does no believe these laws will be
violated. The South Carolina legislature recently enacted a law requiring that
radiologic technologists be certified, beginning in the year 2000. The General
Partner will ensure its radiologic technologists comply with this certification
requirement. Various inspection and registration requirements imposed by South
Carolina and North Carolina also apply to the Partnership's Mobile Lithotripsy
System. The General Partner will seek to comply with such requirements. See
"Regulation - State Regulation."
Contract Terms and Termination. The Partnership provides
lithotripsy services to 11 Contract Hospitals pursuant to 11 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
Hospital. Most of the Hospital Contracts provide for automatic renewal on a
year-to-year basis. All of the Hospital Contracts with automatic renewal
provisions are terminable without cause upon 60 days or less prior written
notice by either party prior to any renewal date. One of the Hospital Contracts
has no automatic renewal provision and will terminate within the next six months
unless renegotiated. It is expected that most new lithotripsy service contracts,
if any, would have one-year terms and be automatically renewed unless either
party elects to cancel prior to the end of the term. In addition, many of the
existing contracts have, and any new contracts are expected to have, provisions
permitting termination in the event certain laws or regulations are enacted or
applied to the contracting parties' business arrangements in a manner deemed
materially detrimental to either party. See "Government Regulation" above. The
General Partner believes it has a good relationship with the Contract Hospitals
and does not anticipate significant terminations. There is no assurance,
however, that terminations will either not occur or that the resulting impact to
the Partnership would not have a material adverse effect on Partnership
operations. In addition, competing vendors may attempt to cause certain Contract
Hospitals to contract with them instead of the Partnership. The loss of Contract
Hospitals to competition will adversely affect Partnership revenues and such
effect could be material. Thus, there is no assurance that Partnership
operations as conducted on the date of this Memorandum will continue as herein
described or contemplated, and the cancellation of a significant number of
service contracts or the Partnership's inability to secure new ones could have a
material negative impact on the financial condition and results of the
Partnership. See "Business Activities - Hospital Contracts"and "Risk Factors -
Competition."
Loss on Dissolution and Termination. Upon the dissolution and
termination of the Partnership, the proceeds realized from the liquidation of
its assets, if any, will be distributed to its partners only after satisfaction
of the claims of all creditors. 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 System 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 System 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 Lithostar(TM), has not assured Prime that its Lithostars(TM) 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 Partnership's 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 uses 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.
Tax Risks
Investors should note that the General Partner anticipates no
significant tax benefits associated with the operation of the Mobile Lithotripsy
System or the Partnership. No ruling will be sought from the Service on the
United States federal income tax consequences of any of the matters discussed in
this Memorandum or any other tax issues affecting the Partnership or the Limited
Partners. The Partnership is relying upon an opinion of Counsel with respect to
certain material United States federal income tax issues. Counsel's opinion is
not binding on the Service as to any issue, and there can be no assurance that
any deductions, or the period in which deductions may be claimed, will not be
challenged by the Service. Each Investor should carefully review the following
risk factors and consult his or her own tax advisor with respect to the federal,
state and local income tax consequences of an investment in the Partnership.
THE TAX RISKS SET FORTH IN THIS SECTION ARE NOT INTENDED TO BE
AN EXHAUSTIVE LIST OF THE GENERAL OR SPECIFIC TAX RISKS RELATING TO THE PURCHASE
OF UNITS IN THE PARTNERSHIP. EACH INVESTOR IS DIRECTED TO THE FULL OPINION OF
COUNSEL (APPENDIX C TO THE MEMORANDUM). IT IS STRONGLY RECOMMENDED THAT EACH
INVESTOR INDEPENDENTLY CONSULT HIS OR HER PERSONAL TAX COUNSEL CONCERNING THE
TAX CONSEQUENCES ASSOCIATED WITH HIS OR HER OWNERSHIP OF AN INTEREST IN THE
PARTNERSHIP. THE CONCLUSIONS REACHED IN COUNSEL'S OPINION ARE RENDERED WITHOUT
ASSURANCE THAT SUCH CONCLUSIONS HAVE BEEN OR WILL BE ACCEPTED BY THE SERVICE OR
THE COURTS.
THIS MEMORANDUM AND COUNSEL'S OPINION DO NOT DISCUSS, NOR WILL
COUNSEL BE RENDERING AN OPINION REGARDING, ANY ESTATE AND GIFT TAX OR STATE AND
LOCAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP. FURTHERMORE,
INVESTORS SHOULD NOTE THAT THE ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES OF AN
INVESTMENT IN THE PARTNERSHIP MAY BE ADVERSELY AFFECTED BY FUTURE CHANGES IN THE
FEDERAL INCOME TAX LAWS, WHETHER BY FUTURE ACTS OF CONGRESS OR FUTURE
ADMINISTRATIVE OR JUDICIAL INTERPRETATIONS OF APPLICABLE FEDERAL INCOME TAX
LAWS. ANY OF THE FOREGOING MAY BE GIVEN RETROACTIVE EFFECT.
INVESTORS SHOULD NOTE THAT THE UNITS ARE BEING MARKETED BY THE
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 SIGNIFICANT PARTNERSHIP
TAXABLE INCOME THROUGHOUT THE TERM OF THE PARTNERSHIP.
Possible Legislative or Other Actions Affecting Tax
Consequences. The federal income tax treatment of an investment in an
equipment/service oriented limited partnership such as the Partnership may be
modified by legislative, judicial or administrative action at any time, and any
such action may retroactively affect investments and commitments previously
made. The rules dealing with federal income taxation of limited partnerships are
constantly under review by the Service, resulting in revisions of its
regulations and revised interpretations of established concepts. In evaluating
an investment in the Partnership, each Investor should consult with his or her
personal tax advisor with respect to possible legislative, judicial and
administrative developments.
Disqualification of Employee Benefit Plans. Purchase of Units
in the Partnership may cause certain Limited Partners, certain hospitals and
healthcare treatment centers, the Partnership, and employees of the foregoing to
be treated under Section 414(m) of the Code as being employed in the aggregate
by a single employer or "affiliated service group" for purposes of minimum
coverage, participation and other employee benefit plan requirements imposed by
the Code. In contrast, an employer not affiliated under Section 414(m) need only
consider its own employees in determining whether its employee benefit plans
satisfy Code requirements. Aggregation of employees could cause the
disqualification of the retirement plans of certain Limited Partners and related
entities. Aggregation could also require the value of the vested retirement
benefit of a highly compensated employee who is a participant in a disqualified
plan to be included in his or her gross income, regardless of whether the
employee is a Limited Partner. These rules may adversely affect Investors who
are currently involved in a medical practice joint venture, regardless of their
purchase of Units in the Partnership. The General Partner and Counsel 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.
INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE APPLICABILITY OF THE AFFILIATED SERVICE GROUP RULES DESCRIBED
HEREIN TO THE EMPLOYEE BENEFIT PLANS MAINTAINED BY THEM OR THEIR MEDICAL
PRACTICES.
Partnership Allocations. The Partnership Agreement contains
certain allocations of profits and losses that could be reallocated by the
Service if it were determined that the allocations did not have "substantial
economic effect." On December 31, 1985, the Treasury Regulations dealing with
the propriety of partnership allocations were finalized. As a general rule,
allocations of profits and losses must have "substantial economic effect." Based
upon current law, Counsel is of the opinion that, if the question were
litigated, it is more probable than not that the allocation of profits and
losses set forth in the Partnership Agreement would be sustained for federal
income tax purposes. Investors are cautioned that the foregoing opinion is based
in part upon final Regulations which have not been extensively commented upon or
construed by the courts.
Income in Excess of Distributions. The Partnership Agreement
provides that in each year annual Distributions may be made to the Partners.
Excluded from the definition of cash available for distribution is the amount of
funds necessary to discharge Partnership debts and to maintain certain cash
reserves deemed necessary by the General Partner. If Partnership cash flow
declines, a Limited Partner could be subject to income taxes payable out of
personal funds to the extent of the Partnership's income, if any, attributed to
him without receiving from the Partnership sufficient Distributions to pay the
Limited Partner's tax with respect to such income.
Effect of Classification as Corporation. The Partnership 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.
Counsel's opinion discussed above relies upon recently
promulgated Treasury Regulations. Treasury Regulation Section 301.7701-2
provides that certain domestic eligible entities, including partnerships formed
pursuant to state law, will be taxed as partnerships so long as the entity has
not made an election to be taxed as a corporation. 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. 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.
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" below. 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
or her Partnership Interest, while the remainder would be treated as capital
gain, provided the Limited Partner's interest in the Partnership is a capital
asset.
The General Partner, in order to comply with applicable tax
law, will keep the Partnership's books and records and otherwise compute Profits
and Losses based on the accrual method, and not the cash basis method, of
accounting pursuant to Section 448 of the Code. The accrual method of accounting
generally records income and expenses when they are accrued or economically
incurred.
Passive Income and Losses. The General Partner expects that
the Partnership will continue to realize taxable income and not taxable losses
during the foreseeable future. Nevertheless, if it instead realizes taxable
losses, the use of such losses by the Limited Partners will generally be limited
by Code Section 469.
Code Section 469 provides limitations for the use of taxable
losses attributable to "passive activities." Code Section 469 operates generally
to prohibit passive losses from being used against income from active
activities. The passive activity rules are extremely complex and Investors are
urged to consult their own tax advisors as to their applicability, particularly
as they relate to the ability to deduct any losses from the Partnership against
other income of the Investor.
THE PASSIVE ACTIVITY LOSS RULES WILL AFFECT EACH INVESTOR
DIFFERENTLY, DEPENDING ON HIS OR HER OWN TAX SITUATION. EACH INVESTOR SHOULD
CONSULT WITH HIS OR HER OWN TAX ADVISOR TO DETERMINE THE EFFECT OF THESE RULES
ON THE INVESTOR IN LIGHT OF THE INVESTOR'S INDIVIDUAL FACTS AND CIRCUMSTANCES.
Depreciation. It is expected that the Partnership will use the
Modified Accelerated Cost Recovery System ("MACRS") to depreciate the cost of
any equipment or improvements hereafter acquired. It is anticipated that any
additions or improvements to the Mobile Lithotripsy System will also be
depreciated over a five year term using the 200% declining balance method of
depreciation, switching to the straight-line method to maximize the depreciation
allowance. If purchases or improvements are made after the beginning of any
year, only a fraction of the depreciation deduction may be claimed in that year.
As under prior law, the 1986 Act provides that the full amount
of depreciation on personal property (such as the Mobile Lithotripsy System) is
recaptured upon disposition (i.e., is taxed as ordinary income) to the extent
gain is realized on the disposition. Investors should note that the 1986 Act
repealed the investment tax credit for all personal property.
Partnership Elections. The Code permits partnerships to make
elections for the purpose of adjusting the basis of partnership property on the
distribution of property by a partnership to a partner and on the transfer of an
interest in a partnership by sale or exchange or on the death of a partner. The
general effect of such elections is that transferees of Partnership Interests
will be treated, for the purposes of depreciation and gain, as though they had a
direct interest in the Partnership's assets, and the difference between their
adjusted bases for their Partnership Interests and their allocable portion of
the Partnership's bases for its assets will be allocated to such assets based
upon the fair market value of the assets at the times of transfers of the
Partnership Interests. Any such election, once made, cannot be revoked without
the consent of the Service. Under the terms of the Partnership Agreement, the
General Partner, in its discretion, may make the requisite election necessary to
effect such adjustment in basis.
Sale of Partnership Units. Xxxx 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 or her Partnership Interest. Investors should note that
the IRS Restructuring and Reform Act of 1998 generally imposes a maximum tax
rate of 20% on net long-term capital gains. To the extent the Partnership has
income attributable to depreciation recapture incurred on the sale of a capital
asset, such income will be taxed at a maximum rate of 25%. The Revenue
Reconciliation Act of 1993 imposed a maximum potential individual income tax
rate of 39.6% on ordinary income.
Tax Treatment Of Certain Fees and Expenses Paid By The
Partnership. Under the Code, a partnership expenditure will, as a general rule,
fall into one of the following categories: (1) deductible expenses --
expenditures such as interest, taxes, and ordinary and necessary business
expenses which the partnership is entitled to deduct in full when paid or
incurred; (2) amortizable expenses -- expenditures which the partnership is
entitled to amortize (i.e., deduct ratably) over a fixed period of time; (3)
capital expenditures -- expenditures which must be added to the amortization or
depreciation base of partnership property (or partnership loans) and deducted
over a period of time as the property (or partnership loan) is amortized or
depreciated; (4) organization expenses -- expenditures related to the
organization of the partnership, which under Section 709 of the Code are
amortized over a 60-month period, provided an election to do so is made; (5)
syndication expenses -- expenditures paid or incurred in promoting the sale of
interests in the partnership, which under Section 709 of the Code must be
capitalized but may be neither depreciated, amortized, nor otherwise deducted;
(6) partnership distributions -- payments to partners representing distributions
of partnership funds, which may be neither capitalized, amortized nor deducted;
(7) start-up expenses -- expenditures incurred by a partnership during an
initial period, which under Section 195 of the Code may be amortized over a
60-month period; and (8) guaranteed payments to partners -- payments to partners
for services or use of capital which are deductible or treated in the other
categories of expenditures listed above, provided they meet the applicable
requirements.
Several amendments to the Code enacted by the Tax Reform Act
of 1984 alter established tax accounting principles. One or more of these
amendments may affect the federal income tax treatment of fees and expenses,
particularly fees paid or incurred by a partnership for services. In particular,
new Code Section 461(h) now provides that an expense or fee paid to a service
provider may not be accrued for federal income tax purposes prior to the time
"economic performance" occurs. "Economic performance" occurs as (and no sooner
than) the service provider provides the required services.
All expenditures of the Partnership must constitute ordinary
and necessary business expenses in order to be deducted by the Partnership when
paid or incurred, unless the deduction of any such item is otherwise expressly
permitted by the Code (e.g., taxes). Expenditures must also be reasonable in
amount. The Service could challenge a fee deducted by the Partnership on the
ground that such fee is a capital expenditure, which must either be amortized
over an extended period or indefinitely deferred, rather than deducted as an
ordinary and necessary business expense. The Service could also challenge the
deduction of any fee on the basis that the amount of such fee exceeds the
reasonable value of the services performed, the goods acquired or the other
benefits to the Partnership.
Under Section 482 of the Code, the Service has broad
discretion to reallocate income, deductions, credits or allowances between
entities with common ownership or control if it is determined that such
reallocation is necessary to prevent the evasion of taxes or to reflect the
income of such entities. The Partnership and the General Partner are entities to
which Section 482 applies and it is possible that the Service could contend that
certain items should be reallocated in a manner that would change the
Partnership's proposed tax treatment of such items.
The General Partner believes the payments to it and its
Affiliates are customary and reasonable payments for the services rendered by
them to the Partnership; however, these fees were not determined by arm's length
negotiations. Nothing has come to the attention of Counsel which would give
Counsel reasonable cause to question the General Partner's determination. On
audit the Service may challenge such payments and contend that the amount paid
for the services exceeds the reasonable value of those services. Because of the
factual nature of the question of the reasonableness of any particular fee,
Counsel cannot express an opinion as to the outcome of the reasonableness of the
amount of any fee should the issue be litigated.
Syndication Expenses. Section 709 of the Code prohibits a
partnership from deducting or amortizing costs that are incurred to promote the
sale of partnership interests (i.e., syndication expenses). The Regulations
provide definitions for syndication expenses that must be capitalized.
Syndication expenses include brokerage fees, registration fees, legal fees for
securities advice, accounting fees for preparation of representations to be
included in the offering materials, and printing costs of the offering
materials. The Partnership intends to treat the entire amount payable to the
Sales Agent as a sales commission for selling the Units, as well as certain
other fees and expenses allocable to the preparation of this Memorandum and to
the offering of the Units in the Partnership, as nondeductible, nonamortizable
syndication expenses.
Investors will economically bear their respective
proportionate share of syndication expenses as these costs likely will be paid
out of proceeds from the Offering. These costs will be borne irrespective of
their amount, timing and ability of the Partnership to deduct these costs for
tax purposes.
Management Fee to General Partner. The Partnership pays the
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 is paid to the Management
Agreement for the time and attention to be devoted by it for supervising and
coordinating the management and administration of the Partnership's day-to-day
operations pursuant to the terms of the Management Agreement. The Partnership
will continue to deduct the management fee in full in the year paid. Assuming
the management fee to be paid to the General Partner is ordinary, necessary and
reasonable in relation to the services provided, Counsel is of the opinion that
the Partnership may deduct the management fee in full in the year paid.
State and Local Taxation. Each Investor should consult his or
her own attorney or tax advisor regarding the effect of state and other local
taxes on his or her personal situation.
Other Investment Risks
Conflicts of Interest. The activities of the Partnership
involve numerous existing and potential conflicts of interest between the
Partnership, the General Partner and their Affiliates. See "Compensation and
Reimbursement to the General Partner and its Affiliates," "The General Partner,"
"Competition" and "Conflicts of Interest."
No Participation in Management. The General Partner has full
authority to supervise the business and affairs of the Partnership pursuant to
the Partnership Agreement and the Management Agreement. 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 to organizing other ventures
throughout the United States that are similar to the Partnership. The General
Partner will continue to devote such time to the Partnership's business and
affairs as it deems necessary and appropriate in the exercise of reasonable
judgment. The participation by any Limited Partner in the management or control
of the Partnership's affairs could render him generally liable for the
liabilities of the Partnership that could not be satisfied by assets of the
Partnership. See the Form of Legal Opinion of Xxxxxx Xxxxxxx Xxxxxxxxx & Xxxx, 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 the amount of any Distribution received from
the Partnership to the extent that, after giving effect to the Distribution, all
liabilities of the Partnership, other than liabilities to parties on account of
their Partnership Interests, exceed the fair value of Partnership assets as
provided by the Act or other applicable law.
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 Limited Partners in the Partnership, 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 Partner Loan could result in the foreclosure of the
Investor's right to receive any Partnership Distributions as well as the loss of
other personal assets unrelated to his Partnership Interest. Prospective
Investors should review carefully all the provisions contained in the Loan
Commitment and the terms of the Limited Partner Note and Loan and Security
Agreement with their counsel and financial advisors. Neither the Partnership nor
the General Partner endorses or recommends to the prospective Investors the
desirability of obtaining financing from the Bank nor does the summary of the
Loan Documents provided herein constitute legal advice. A Limited Partner's
liability under a Limited Partner Note continues regardless of whether the
Limited Partner remains a limited partner in the Partnership. As a consequence,
such liability cannot be avoided by claims, defenses or set-offs the Limited
Partner may have against the Partnership, the General Partner or their
Affiliates. In addition to the suitability requirements discussed below, any
prospective Investor applying for a Bank loan to fund a portion of his Unit
purchase must be approved by the Bank for purposes of his delivery of the
Limited Partner Note. The Bank has established its own criteria for approving
the creditworthiness of a prospective Investor and has not established objective
minimum suitability standards. Instead, the Bank is empowered to accept or
reject prospective Investors.
Long-term Investment. The General Partner anticipates that the
Partnership will continue to operate the Mobile Lithotripsy System for an
indefinite period of time and that the Partnership will not liquidate prior to
its intended termination. Accordingly, Investors should consider their
investment in the Partnership as a long-term investment of indefinite duration.
Limited Transferability and 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 of the Partnership for errors in judgment
or other acts or omissions in connection with the Partnership as long as the
General Partner, in good faith, determined such course of conduct was in the
best interest of the Partnership, and such course of conduct did not constitute
willful misconduct or gross negligence. Therefore, the Limited Partners may have
a more limited right of action against the General Partner in the event of its
misfeasance or malfeasance than they would have absent the limitations in the
Partnership Agreement. The Partnership will indemnify the General Partner
against losses sustained by the General Partner in connection with the
Partnership, unless such losses are a result of the General Partner's gross
negligence or willful misconduct. In the opinion of the SEC, indemnification for
liabilities arising out of the Securities Act is contrary to public policy and
therefore is unenforceable.
Insurance. 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 the Partnership 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 (which the General Partner may assign in its sole discretion to the
Partnership) to purchase all the interest of a Limited Partner who (i) dies,
(ii) becomes insolvent, (iii) becomes incompetent or (iv) acquires a direct or
indirect ownership interest in a competing venture. Except in the case of the
death of a Limited Partner, 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 copy 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 - South
Carolina II, a South Carolina limited partnership (the "Partnership") was
organized and created under the South Carolina Uniform Limited Partnership Act
(the "Act") on March 18, 1989. 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 interest in the Partnership (including a
12.33% limited partner interest held by the General Partner). In the event that
all 40 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 approximately an aggregate 20% interest in the
Partnership. The Percentage Interests of the General Partner and the Initial
Limited Partners (aggregate) will decrease by 0.1% and 0.4%, respectively, for
each Unit sold. The principal address of the Partnership and the General Partner
is 0000 Xxxxx Xxxxx, Xxxxxxxxxxxx, Xxxxx Xxxxxxxx 00000. The telephone number of
the Partnership and the General Partner is (000) 000-0000.
TERMS OF THE OFFERING
The Units and Subscription Price
Fayetteville Lithotripters Limited Partnership - South
Carolina II, a limited partnership formed under the laws of the State of South
Carolina, hereby offers an aggregate of up to 40 Units of limited partner
interest in the Partnership (the "Units"). Each Unit represents an initial 0.5%
economic interest in the Partnership. See "Risk Factors - Other Investment Risks
- Dilution of Limited Partners' Interests." Each Investor may purchase not less
than one Unit. The General Partner may, however, in its sole discretion sell
less than one Unit as a minimum investment and reject in whole or in part any
subscription. The Partnership proposes to offer Units to the Initial Limited
Partners as well as to new investors. In the event the Offering is
oversubscribed, Units will be allocated first to Investors in such amounts that
after the Closing of the Offering each Investor will own up to a 2.5% interest
in the Partnership, and then any remaining Units will be allocated
proportionately among all Investors. The price for each Unit is $12,522 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. Proceeds will then be distributed to the persons who were Limited
Partners prior to the commencement of this Offering. See "Sources and
Applications of Funds."
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 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 rejects or reduces an Investor's
subscription as provided above, the Investor's cash Unit purchase price and the
principal amount of his Limited Partner Note will be proportionately refunded
and reduced, as the case may be. Notice of acceptance of an Investor's
subscription to purchase Units and his Percentage Interest in the Partnership
will be furnished promptly after acceptance of the Investor's Subscription.
Limited Partner Loans
The purchase price for the Units is payable in cash with the
prospective Investor's personal funds alone or in part with such funds and 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 forms of which are attached to the Subscription
Packet (collectively, the "Loan Documents"). In no event may the maximum amount
borrowed per Unit exceed $10,022. 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, 2000 (assuming the
Closing occurs in December 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 which is attached
hereto as Appendix B.
The Limited Partner Note will be secured by the cash flow
distributions payable with respect to the prospective Investor's Partnership
Interest as provided in the Loan and Security Agreement and the Security
Agreement and as evidenced by the UCC-1s. By executing the Loan and Security
Agreement, the prospective Investor requests the Bank to extend the Loan
Commitment to him if he is approved for a Limited Partner Loan. The Loan and
Security Agreement also authorizes (i) the Bank to pay the proceeds of the
Limited Partner Note directly to the Partnership and (ii) the Partnership to
remit funds directly to the Bank out of the prospective Investor's share of any
Distributions represented by the prospective Investor's percentage Partnership
Interest to fund installment payments due on the prospective Investor's Limited
Partner Note. See the form of the Loan and Security Agreement attached as
Exhibit B to the Loan Commitment which is attached hereto as Appendix B.
If the prospective Investor is approved by the Bank and is
acceptable to the General Partner, the Escrow Agent will, upon acceptance of the
Investor's subscription by the General Partner, release the Loan Documents to
the Bank and the Bank will pay the proceeds of the Limited Partner Note to the
Partnership to fund a portion of the Investor's Unit purchase. The prospective
Investor will have substantial exposure under the Limited Partner Note.
Regardless of the results of the Partnership's operations, a prospective
Investor will remain liable to the Bank under his Limited Partner Note according
to its terms. The Bank can accelerate the entire principal amount of the Limited
Partner Note in the event the Bank in good faith believes the prospect of timely
payment or performance by the prospective Investor is impaired or the Bank
otherwise in good xxxxx xxxxx itself or its collateral insecure and upon certain
other events, including, but not limited to, nonpayment of any installment. The
Bank may also request additional collateral in the event it deems the Limited
Partner Note insufficiently secured. A Limited Partner's liability under a
Limited Partner Note also continues regardless of whether the Limited Partner
remains a limited partner in the Partnership. A Limited Partner's liability
under a Limited Partner Note is directly with the Bank. As a consequence, such
liability cannot be avoided by claims, defenses or set-offs the Limited Partner
may have against the Partnership, the General Partner or their Affiliates. In
addition to the suitability requirements discussed below, the prospective
Investor must be approved by the Bank for purposes of his delivery of the
Limited Partner Note. The Bank has established its own criteria for approving
the creditworthiness of a prospective Investor and has not established objective
minimum suitability standards. Instead, the Bank is empowered to accept or
reject prospective Investors. See "Risk Factors - Other Investment Risks -
Liability Under Limited Partner Loan."
Subscription Period; Closing
The subscription period will commence on the date hereof and
will terminate at 5:00 p.m., Eastern time, on January 1, 2000 (the "Closing
Date"), unless sooner terminated by the General Partner or unless extended for
an additional period up to 180 days. See "Plan of Distribution."
Offering Exemption
The Units are being offered and will be sold in reliance on an
exemption from the registration requirements of the Securities Act of 1933, as
amended, provided by Section 4(2) thereof and Rule 506 of Regulation D
promulgated thereunder, as amended, and an exemption from state registration
provided by the National Securities Markets Improvement Act of 1996. The
suitability standards set forth below have been established in order to comply
with the terms of these offering exemptions.
Suitability Standards
In addition to the suitability requirements discussed below,
each Investor wishing to obtain a Limited Partner Loan must be approved by the
Bank. The Bank has established its own criteria for approving the
credit-worthiness of Investors and has not established objective minimum
suitability standards. The Bank has sole discretion to accept or reject any
Investor.
An investment in the Partnership involves a high degree of
financial risk and is suitable only for persons of substantial financial means
who have no need for liquidity in their investments and who can afford to lose
all of their investment. See "Risk Factors - Other Investment Risks - Limited
Transferability and Illiquidity of Units." An Investor should not purchase a
Unit if the Investor does not have resources sufficient to bear the loss of the
entire amount of the purchase price, including any portion financed. The General
Partner anticipates selling Units only to individual investors; however, the
General Partner reserves the right to sell Units to entities.
Because of the risks involved, the General Partner anticipates
selling the Units only to Investors residing in South Carolina and North
Carolina 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 is severely restricted
by the Partnership Agreement and the Subscription Agreement. See "Summary of the
Partnership Agreement - Restrictions on Transfer of Partnership Interests."
Investors who wish to subscribe for Units must represent to
the Partnership that they meet the foregoing standards by completing and
delivering to the Sales Agent a Purchaser Questionnaire in the form included in
the Subscription Packet. Each Purchaser Representative, if any, acting on behalf
of an Investor in connection with this Offering must complete and deliver to the
Sales Agent a Purchaser Representative Questionnaire (a copy of which is
available upon request to the General Partner).
How to Invest
Investors who meet the qualifications for investment in the
Partnership and who wish to subscribe for Units may do so by following the
instructions included in the Subscription Packet accompanying this Memorandum.
All information provided by Investors will be kept confidential and not
disclosed except to the Partnership, the General Partner, the Bank and their
respective counsel and Affiliates and, if required, to governmental and
regulatory authorities.
Restrictions on Transfer of Units
The Units have not been registered under the Securities Act or
under any state securities laws and holders of Units have no right to require
the registration of such Units or to require the Partnership to disclose
publicly information concerning the Partnership. Units can be transferred only
in accordance with the provisions of, and upon satisfaction of, the conditions
set forth in the Partnership Agreement. Among other things, the Partnership
Agreement provides that no assignment of Units may be made if such assignment
could not be effected without registration under the Securities Act or state
securities laws. Moreover, the assignment generally must be made to an
individual approved by the General Partner who meets the suitability
requirements described in this Memorandum.
Assignors of Units will be required to execute certain
documents, in form and substance satisfactory to the General Partner,
instructing it to effect the assignment. Assignees of Units may also, in the
discretion of the General Partner, be required to pay all costs and expenses of
the Partnership with respect to the assignment.
Any assignment of Units or the right to receive Partnership
distributions in respect of Units will not release the assignor from any
liabilities connected with the assigned Units, including liabilities under any
Limited Partner Loan. Such assignment may constitute an event of default under
such loan. An assignee, whether by sale or otherwise, will acquire only the
rights of the assignor in the profits and capital of the Partnership and not the
rights of a Limited Partner, unless such assignee becomes a substituted Limited
Partner. An assignee may not become a substituted Limited Partner without (i)
either the written consent of the assignor and the General Partner, or the
consent of all of the Limited Partners (except the assignor Limited Partner) and
the General Partner, (ii) the submission of certain documents and (iii) the
payment of expenses incurred by the Partnership in effecting the substitution.
An assignee, regardless of whether he becomes a substituted Limited Partner,
will be subject to and bound by all the terms and conditions of the Partnership
Agreement with respect to the assigned Units. See "Summary of the Partnership
Agreement - Restrictions on Transfer of Partnership Interests."
PLAN OF DISTRIBUTION
Subscriptions for Units will be solicited by MedTech
Investments, Inc., the Sales Agent, which is an Affiliate of the General
Partner. The Sales Agent has entered into a Sales Agency Agreement with the
Partnership pursuant to which the Sales Agent has agreed to act as exclusive
agent for the placement of the Units on a "best efforts" any or all basis. The
Sales Agent is not obligated to purchase any Units.
The Sales Agent is a North Carolina corporation that was
formed on December 23, 1987, and became a member of the National Association of
Securities Dealers on March 15, 1988. The Sales Agent will be engaged in other
similar offerings on behalf of the General Partner and its Affiliates during the
pendency of this Offering and in the future. The Sales Agent is a wholly owned
subsidiary of Prime, which also owns all the stock of the General Partner.
Investors should note the material relationship between the Sales Agent and the
General Partner, and are advised that the relationship creates conflicts in the
Sales Agent's performance of its due diligence responsibilities under the
Federal securities laws.
As compensation for its services, the Sales Agent will receive
a commission equal to $100 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
$4,000. 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., Eastern time, on January 1, 2000, (or earlier, in
the discretion of the General Partner), unless extended at the discretion of the
General Partner for an additional period not to exceed 180 days.
The Partnership seeks by this Offering to sell a maximum of 40
Units for a maximum of an aggregate of $500,880 in cash ($496,880 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 by the Partnership (and, if
applicable, the Bank), the Investor will be admitted to the Partnership as a
Limited Partner. In connection with his admissions as a Limited Partner, the
Investor's subscription funds will be released from escrow to the Partnership,
and the Loan Documents, if any, will be released to the Bank which will pay the
proceeds from the Limited Partner Note to the Partnership. In the event a
subscription is not accepted, all subscription funds (without interest), the
Loan Documents and other subscription documents held in escrow will be promptly
returned to the rejected Investor. A subscription may be rejected in part, in
which case a portion of the subscription funds (without interest) and any
Limited Partner Note will be returned to the Investor. The Offering will
terminate on January 1, 2000, unless it is sooner terminated by the General
Partner, or unless extended for an additional period not to exceed 180 days. See
"Terms of the Offering - Subscription Period; Closing."
BUSINESS ACTIVITIES
General
The Partnership was formed to (i) acquire the Mobile
Lithotripsy System and operate it in northwestern South Carolina and
southwestern North Carolina, (ii) improve the provision of health-care in the
Partnership's service area by taking advantage of both the technological
innovations inherent in the Lithostar(TM) 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 the Mobile Lithotripsy System in the
Service Area and has contracted with the 11 Contract Hospitals to provide
lithotripsy services.
Treatment Methods for Kidney Stone Disease
Urolithiasis, or kidney stone disease, affects an estimated
600,000 persons per year in the United States. The exact cause of kidney stone
formation is unclear, although it has been attributed to diet, climate,
metabolism and certain medications. Approximately 75% of all urinary stones pass
spontaneously, usually within one to two weeks, and require little or no
clinical or surgical intervention. All other kidney stones, however, require
some form of medical or surgical treatment. A number of methods are currently
used to treat kidney stones. These methods include drug therapy, 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 Lithostar(TM)
The Lithostar(TM) was developed as a cooperative venture
between Siemens and the Urological Clinic at Xxxxxxxx Xxxxxxxxx University in
Mainz, West Germany. As a part of this venture, a Lithostar(TM) prototype was
installed in March 1986 at the Urological Clinic at the University of Mainz with
successful results. On November 18, 1987 the Lithostar(TM) was unanimously
recommended for approval by the FDA's advisory panel of experts for urology
devices. On September 30, 1988 the Lithostar(TM) received FDA premarket approval
for use in the United States for renal lithotripsy. On April 18, 1989, the FDA
approved the Lithostar(TM) for mobile lithotripsy. The Partnership acquired its
Lithostar(TM) in 1989. See "The Partnership." On July 1, 1996, the FDA approved
a new higher intensity shock-head system for the Lithostar(TM) which has since
been installed in the Partnership's Lithostar(TM). Currently, the General
Partner estimates that more than 400 Lithostar(TM) systems are performing
lithotripsy procedures in over 20 countries throughout the world. All components
of the Lithostar(TM) are manufactured by Siemens, a diversified multinational
company.
The Lithostar(TM) was designed with a view towards
substantially improving early lithotripsy technology. See "Business Activities -
Treatment Methods for Kidney Stone Disease." Technological improvements
incorporated into the Lithostar(TM) include an improved work station, a
shock-wave component that has eliminated the need for both water bath treatment
and disposable electrodes, and an excellent stone localization and imaging
system. Based upon its experience with over 30 Lithostars(TM) in its affiliated
lithotripsy ventures, the General Partner has found that the Lithostar(TM) can
fragment most kidney stones without anesthesia, cystoscopy or the insertion of
ureteral catheters. The General Partner further believes that Lithostars(TM)
upfitted with the higher intensity shock-head system experience somewhat shorter
treatment durations. Because of the General Partner's belief in the superior
imaging of the Lithostar(TM), the General Partner believes that lithotripsy with
the Lithostar(TM) provides for treatment of lower ureteral stones, even impacted
stones, thereby rendering ureteroscopy practically obsolete as a treatment of
first choice.
The Coach
The Partnership's Coach, which houses a Lithostar(TM), was
acquired by the Partnership in 1989. The Coach has been completely upfitted for
the Lithostar(TM) and its clinical operations. Service for the Coach 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. In 1999, the Coach underwent a complete reconditioning, which
included removal and reinstallation of the lithotripter, replacement of the
interior floors, cabinets and wall covering, exterior body work, repainting and
re-decaling the exterior and service to the expanding wall slideouts.
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 the Partnership's 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 to provide
lithotripsy services at 7 hospitals in South Carolina, and at 4 hospitals in
North Carolina. The Contract Hospitals are:
Angel Community Hospital
Laurens County Hospital
Xxxxxxxx X. Xxxxxx Memorial Hospital
Xxxx Xxxxx Health System,
LLC (d/b/a Xxxx Xxxxx Memorial Hospital)
Oconee Memorial Hospital
Park Ridge Hospital
St. Xxxxxxx Hospital, Inc.
St. Luke's Hospital
Self Memorial Hospital Center
Spartanburg Regional Medical Center
Eight of the Hospital Contracts grant the Partnership the
exclusive right to deliver lithotripsy services to the relevant Contract
Hospital. The Hospital Contracts require the Partnership to make a lithotripter
available at the facilities as agreed to by the Contract Hospital and the
Partnership. The Partnership generally also provides a technician and certain
ancillary services such as scheduling and disposable medical products necessary
for the lithotripsy procedure. Nine of the Hospital Contracts provide that the
Partnership will bill and collect for services rendered to patients of
commercial insurance programs, while the Contract Hospital will bill and collect
for services rendered to patients of the Medicare, Medicaid and CHAMPUS
programs. Under two of the Hospital Contracts, the Contract Hospital instead
agrees to pay the Partnership a fixed amount to lease the Mobile Lithotripsy
System and related support staff and supplies.
Ten of the Hospital Contracts have initial terms of between
one and three years and automatically renew for successive one-year terms. One
of the Hospital Contracts has no automatic renewal provisions and will terminate
within the next six months. The Hospital Contracts with automatic renewal
provisions are all terminable upon 60 days prior written notice prior to any
renewal date. Many of the Hospital Contracts also have, and any new contracts
are expected to have, provisions permitting the 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
"Risk Factors - Operating Risks - Contract Terms and Termination." The General
Partner believes it has a good relationship with many of the Contract Hospitals.
There is no assurance, however, that one or more of the Contract Hospitals will
not terminate in the future. See "Risk Factors - Operating Risks - Contract
Terms and Termination."
Reimbursement Agreements. The General Partner has negotiated
third-party reimbursement agreements with certain national and local payors. The
national agreements are negotiated by the General Partner and apply to all the
lithotripsy partnerships with which the General Partner is affiliated. The
General Partner has also negotiated third-party reimbursement agreements with
local payors in the Service Area, including with Blue Cross/Blue Shield of South
Carolina, Blue Cross/Blue Shield of North Carolina, Doctors Health Plan,
Physicians Health Plan and Healthsource of South Carolina. Some of the national
and local payors have agreed to pay a fixed price for the lithotripsy services.
For others, the General Partner has agreed to accept a specified percentage
discount from the Partnership's normal fee (with the discount ranging nine to
twenty-five percent). Generally the agreements may be terminated by either party
on 90 days' notice. The national and local reimbursement agreements that have
been negotiated or renegotiated in the past two to four years almost entirely
provide for lower reimbursement rates for lithotripsy services than the older
agreements.
Operation of the Mobile Lithotripsy System
It is anticipated that the Partnership will continue to
provide services under the Hospital Contracts and similar arrangements. See
"Business Activities - Hospital Contracts" and "Risk Factors - Operating Risks -
Contract Terms and Termination." Qualified physicians who make appropriate
arrangements with Contract Hospitals receiving lithotripsy services pursuant to
the Hospital Contracts and other lithotripsy service agreements may treat their
own patients using the Mobile Lithotripsy System after they have received any
necessary training required by the rules of such Contract Hospital. The
Partnership may also make arrangements to make the Mobile Lithotripsy System
available to qualified physicians (including but not limited to qualified
physician Limited Partners) desiring to treat their own patients after they have
received any necessary training. In addition, the General Partner reserves the
right to request that physicians (or members of their practice groups) treat
only their own patients with the Mobile Lithotripsy System if it determines that
such practice is advisable under applicable law. See "Regulation." The treating
qualified physician will be solely responsible for billing and collecting on his
own behalf the professional service component of the treatment procedure. Owning
an interest in the Partnership is not a condition to using a Mobile Lithotripsy
System. Thus, local qualified physicians that are not Limited Partners will be
given the same opportunity to treat their patients using a Mobile Lithotripsy
System as provided above.
Management
The Partnership has entered into a management agreement (the
"Management Agreement") with the General Partner whereby the General Partner is
obligated to supervise and coordinate the management and administration of the
operation of the Mobile Lithotripsy System 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 making available any necessary
training of physicians in the proper use of the lithotripsy equipment,
monitoring technological developments in renal lithotripsy and advising the
Partnership of these developments, arranging continuing education programs for
qualified physicians who use the lithotripsy equipment and providing
advertising, billing, accounts collection, equipment maintenance, medical supply
inventory and other incidental services necessary for the efficient operation of
the Mobile Lithotripsy System. 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 second year renewal term. Thereafter, it will be
automatically renewed for one additional term unless terminated by the
Partnership or the General Partner. The General Partner has also appointed a
local Medical Director and a Physician Advisory Board made up of representative
local physicians. The General Partner consults with the Medical Director and
Physician Advisory Board from time to time, as needed, on matters including the
Partnership's Quality Assurance Program, utilization review, outcome analysis,
patient scheduling and certain Partnership expenditures.
Employees and Benefits
The Partnership employs as full time employees a total of two
registered technicians and two registered nurses. 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. The Partnership also provides paid
holidays, sick leave, and vacation benefits and other miscellaneous benefits
including bereavement, military reserves, jury duty and educational assistance
benefits.
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 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 0000 Xxxxx
Xxxxx, Xxxxxxxxxxxx, Xxxxx Xxxxxxxx 00000, 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
Xxxxxx Xxxxxxx, M.D. President, Chief Executive
Officer and Director
Xxxxxxx X. Xxxxxxx Director
X. Xxxx Xxxxx Vice President
Xxxxxx Xxxxxxxx Vice President and Director
Xxxxxx X. Xxxxxx, Ph.D. Vice President
Xxxx Xxxxxxx Vice President
Xxxxx Xxxx, M.D. Vice President
Xxxxxx X. Xxxxxxx Secretary and Treasurer
Xxxxx X. Xxxxx Assistant Secretary
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 Xx. Xxxxxxx,
Xx. Xxxxxxx and Xx. Xxxxxxxx. 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.
Xxxxxx Xxxxxxx, M.D. has been President and Chief Executive Officer of
Prime since April 1996. From May 1990 until December 1991, Xx. Xxxxxxx was a
Vice President of the General Partner and previously practiced urology in
Washington, North Carolina. Xx. Xxxxxxx has been President of the General
Partner since 1992 and was recently elected to its Board of Directors. He also
serves as the Chief Executive Officer of the General Partner. Xx. Xxxxxxx is a
board certified urologist and is a founding member, past-president and currently
a Director of the American Lithotripsy Society.
Xxxxxxx X. Xxxxxxx 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. Xx. Xxxxxxx 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.
X. Xxxx Xxxxx was recently appointed a Vice President of the
General Partner and served as Chief Financial Officer of the General Partner
from 1991 to 1998. In August, 1986, Xx. Xxxxx 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.
Xxxxxx Xxxxxxxx is a Director and Vice President of the General Partner.
Xx. Xxxxxxxx has been Chief Financial Officer, Vice President-Finance and
Secretary of Prime since October 1989. Xx. Xxxxxxxx was Controller of Xxxxxxxxx
Aircraft Corporation from August 1988 to October 1989. From 1985 to 1988, Xx.
Xxxxxxxx served as the Chief Financial Officer of APS Systems, Inc.
Xxxxxx X. Xxxxxx, Ph.D. was recently appointed a Vice President of the
General Partner. Xx. Xxxxxx 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, Xx. Xxxxxx 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. Xx. Xxxxxx 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. Xx. Xxxxxx received a
Ph.D. in Medical/Social Change Theory, Concentration: Ambulatory Medical
Delivery Systems from Xxxxxx University, Institute for Advanced Studies in
Minneapolis, Minnesota in 1984.
Xxxx Xxxxxxx was recently appointed a Vice President of the General
Partner. Xx. Xxxxxxx has been a Vice President of Prime and President of Sun
Medical Technologies, Inc., an Affiliate of the General Partner ("Sun") since
November 1995. Xx. Xxxxxxx was the Chief Financial Officer of Sun from 1990 to
1995.
Xxxxx Xxxx, M.D. was recently appointed a Vice President of the General
Partner. Xx. Xxxx received his medical degree in 1984. Xx. Xxxx developed and
operated various outpatient surgery centers throughout the United States from
1986 to 1995, and has served as the Regional Vice President of Prime for the
Central Region since February 1997.
Xxxxxx X. Xxxxxxx recently became the Secretary and Treasurer of the
General Partner, having previously served as a Vice President since 1989. Xx.
Xxxxxxx is a Certified Public Accountant licensed in the state of Pennsylvania.
From 1980 through February 1989, Xx. Xxxxxxx served as Plant Controller for the
Westinghouse Motor Control and Enclosed Control Product Lines. Xx. Xxxxxxx is
also a Director, the Vice President, the Treasurer and the Secretary of MedTech
Investments, Inc., the Sales Agent.
Xxxxx X. Xxxxx recently became Assistant Secretary of the General Partner.
Xx. Xxxxx has served as Tax Manager of Prime since January 1998 and is a
Certified Public Accountant in Texas. Prior to joining Prime, Xx. Xxxxx was
Controller for ERISA Administrative Services, Inc.
COMPENSATION AND REIMBURSEMENT TO THE
GENERAL PARTNER AND ITS AFFILIATES
The following summary describes the types and, where
determinable, the estimated amounts of reimbursements, compensation and other
benefits the General Partner and its Affiliates will receive in connection with
the continued operation and management of the Partnership and the Mobile
Lithotripsy System. None of such fees, compensation and other benefits has been
determined at arm's length. Except for the items set forth below, the General
Partner does not expect to receive any distribution, fee, compensation or other
remuneration from the Partnership. See "Business Activities - Management" and
"Plan of Distribution."
1. Management Fee. Pursuant to the Management Agreement, the
General Partner has contracted with the Partnership to supervise the management
and administration of the day-to-day operations of the Partnership's lithotripsy
business for a monthly fee equal to the greater of $8,000 or 7.5% of Partnership
Cash Flow per month. All costs incurred by the General Partner in performing its
duties under the Management Agreement are the responsibility of, and are paid
directly or reimbursed by, the Partnership. The General Partner is the
management agent for various affiliated lithotripsy ventures. As a consequence,
many of the General Partner's employees provide various management and
administrative services for numerous ventures, including the Partnership. In
order to properly allocate the costs of the General Partner's employees and
other overhead expenses among the entities for which they provide services, such
costs are divided among all the ventures based upon the relative number of
patients treated by each. The General Partner believes that the sharing of
personnel and overhead costs among various entities results in significant costs
savings for the Partnership. The management fee for any given month is payable
on or before the 30th day of the next succeeding month. The Management Agreement
is in its second five-year renewal term. The Management Agreement will be
automatically renewed for up to one additional successive five-year term 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
System, and the Partnership will pay or reimburse to the General Partner all
expenses related to this Offering. No other fees or compensation will be payable
to the General Partner 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 12.33% (before dilution) limited partner
interest in the Partnership. The General Partner is entitled to Distributions on
account of such interest. See "Summary of the Partnership Agreement - Profits,
Losses and Distributions" and the Partnership Agreement attached as Appendix A.
The General Partner will also receive its proportionate share of the Offering
proceeds distributed to existing Limited Partners. See "Sources and Applications
of Funds."
3. Sales Commissions. The Sales Agent, a wholly-owned
subsidiary of Prime, has entered into a Sales Agency Agreement with the
Partnership pursuant to which the Sales Agent has agreed to sell the Units on a
"best efforts" any or all basis. As compensation for its services, the Sales
Agent will receive a commission equal to $100 for each Unit sold (up to an
aggregate of $4,000). 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 $4,000. See "Plan of
Distribution" and "Conflicts of Interest."
4. Rental of Loaner Coach. In the event the Mobile Lithotripsy
System experiences significant down time for maintenance or repairs, it is
anticipated that the General Partner would cause the Partnership to contract
with the General Partner or its Affiliates to rent a "loaner" Mobile Lithotripsy
System during the time the Partnership's Mobile Lithotripsy System is not
available for use by the Partnership.
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 the Partnership's operations were at the
time expected to enable repayment of such loan in accordance with its terms,
lower than anticipated revenues and/or greater than anticipated expenses could
result in the Partnership's failure to make payments of principal or interest
when due under such a loan and the Partnership's equity being reduced or
eliminated. In such event, the Limited Partners could lose their entire
investment.
CONFLICTS OF INTEREST
The operation of the Partnership involves numerous conflicts
of interest between the Partnership and the General Partner and its Affiliates.
Because the Partnership is operated by the General Partner, such conflicts are
not resolved through arm's length negotiations, but through the exercise of the
judgment of the General Partner consistent with its fiduciary responsibility to
the Limited Partners and the Partnership's investment objectives and policies.
The General Partner, its Affiliates and employees of the General Partner will in
good faith continue to attempt to resolve potential conflicts of interest with
the Partnership, and the General Partner will act in a manner that it believes
to be in or not opposed to the best interests of the Partnership.
The General Partner and its Affiliates will receive management
fees and broker-dealer sales commissions, respectively, in connection with the
business operations of the Partnership and the sale of the Units that will be
paid regardless of whether any sums hereafter are distributed to Limited
Partners. None of such fees, compensation and benefits has been determined by
arm's length negotiations. In addition, the Partnership may contract with the
General Partner or its Affiliates to render other services or provide materials
to the Partnership provided that the compensation is at the then prevailing rate
for the type of services and/or materials provided. The General Partner will
also receive interest on loans, if any, it makes to the Partnership.
See "Compensation and Reimbursement to the General Partner and its Affiliates."
The General Partner and its Affiliates will devote as much of
their time to the business of the Partnership as in their judgment is reasonably
required. Principals of 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. 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 Partnership that arises out of any action or inaction
of the General Partner or its Affiliates if the General Partner or its
Affiliates, in good faith, determined that such course of conduct was in the
best interest of the Partnership and such course of conduct did not constitute
gross negligence or willful misconduct of the General Partner or its Affiliates.
Accordingly, Limited Partners have a more limited right of action than they
otherwise would absent the limitations set forth in the Partnership Agreement.
The General Partner and its Affiliates will be indemnified by the Partnership
against any losses, judgments, liabilities, expenses and amounts paid in
settlement of any claims sustained by them in connection with the Partnership,
provided that the same were not the result of gross negligence or willful
misconduct on the part of the General Partner or its Affiliates. Insofar as
indemnification for liabilities under the Securities Act may be permitted to
persons controlling the Partnership pursuant to the foregoing provisions, the
Partnership has been informed that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
therefore is unenforceable.
COMPETITION
Several competing 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 and near the Service Area, to the best knowledge of the
General Partner.
Affiliated Competition
The Partnership faces competition from lithotripters operating
in South Carolina and North Carolina, including lithotripters owned by
Affiliates of the General Partner. The General Partner has organized and
currently operates two limited partnerships in South Carolina and North
Carolina: Fayetteville Lithotripters Limited Partnership - South Carolina I,
which operates in the eastern and coastal areas of South Carolina; and Carolina
Lithotripsy, a limited partnership which operates in eastern North Carolina.
Other Affiliates of the General Partner operate in Tennessee and other nearby
states.
Other Competition
Hospitals and other facilities in and near the Service Area
have access to lithotripters which are in competition with the Partnership. To
the best knowledge of the General Partner, lithotripsy services are available at
Xxxxxxxx Area Medical Center in Anderson, South Carolina, at Palmetto Baptist
Medical Center in Easley, South Carolina, at Xxxxxxxxxx Hospital in
Rutherfordton, North Carolina, and at Xxxxxx Regional Hospital in Sylva, North
Carolina. In addition, the General Partner is aware of a Medstone unit which
operates in Spartanburg, South Carolina, as well as other lithotripters which
operate in Columbia, South Carolina and Asheville, North Carolina.
There may be other existing fixed-base or mobile lithotripsy
services in or near the Service Area which directly compete with the
Partnership's Mobile Lithotripsy System, but the General Partner is not familiar
with these competitors. It is possible that some or all of the Partnership's
competitors are physician-owned or include physicians among their owners. The
General Partner is generally unfamiliar with the cost of the lithotripsy
procedures offered by the Partnership's competitors. There is no assurance the
Partnership can successfully compete with existing providers, including
facilities that offer traditional methods of treatment for kidney stone disease.
See "Business Activities - Treatment Methods of Kidney Stone Disease."
Other hospitals in and near the Service Area may operate
lithotripters which are not extracorporeal shock-wave lithotripters but rather
use lasers or are electrohydraulic lithotripters. The General Partner believes
these machines are qualitatively inferior to the Partnership's Mobile
Lithotripsy System 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 the Mobile Lithotripsy System can be used on stones in
locations other than the ureter and that anesthesia is generally not required.
See "Business Activities - Treatment Methods for Kidney Stone Disease."
The healthcare market in the Service Area is influenced by
managed care companies such as health maintenance organizations. Managed care
companies generally contract either directly with hospitals or specified
providers of lithotripsy services for beneficiaries of their plans. It is not
uncommon for managed care companies to have contracts already in place with
hospitals or specified providers, and the Partnership will not be able to
provide services to beneficiaries of those plans unless it convinces either the
managed care companies or the hospitals to switch to the Partnership's services.
Prior to providing the Mobile Lithotripsy System at a new facilities, a
certificate of need may be required in South Carolina or North Carolina. See
"Regulation - State Regulation." No assurances can be given that a certificate
of need would be granted.
There is no assurance that new competing lithotripsy
operations will not open in the future or that innovations in lithotripters or
other treatment methods of kidney stone disease will not make the Mobile
Lithotripsy System competitively obsolete. See "Risk Factors - Operating Risks -
Technological Obsolescence." The General Partner and its Affiliates are not
prohibited from engaging in any business arrangement that may compete with the
Partnership. There is no assurance the Partnership can successfully compete with
existing providers, including facilities that offer traditional methods of
treatment for kidney stone disease. See "Business Activities - Treatment Methods
for Kidney Stone Disease."
The manufacturer of the Mobile Lithotripsy System is under no
obligation to the General Partner or the Partnership to refrain from selling its
lithotripters to urologists, hospitals or other persons for use in or near the
Service Area. In addition, the availability of lower-priced lithotripters in the
United States could dramatically increase the number of lithotripters in the
United States, increase competition for lithotripsy procedures and create
downward pressure on the prices the Partnership can charge for its services.
Many 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, the General Partner and the Limited Partners
are subject to regulation at the federal, state and local level. An adverse
review or determination by certain regulatory organizations (federal, state or
private) may result in the Partnership, the General Partner and the Limited
Partners being subject to imprisonment, loss of reimbursement, fines or
exclusion from participation in Medicare or Medicaid. Adverse reviews of the
Partnership's operations at any of the various regulatory levels may adversely
affect the operations and profitability of the Partnership.
Reimbursement. The Partnership is 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. The Balanced Budget Act of 1997 required the Health Care
Financing Administration ("HCFA"), the agency that administers the Medicare
program, to establish a prospective payment system for outpatient procedures.
One of the goals of the prospective payment system was to lower medical costs
paid by the Medicare program. HCFA issued proposed regulations in September 1998
which would reduce the reimbursement rate currently paid for lithotripsy
procedures performed on Medicare patients at hospitals to a base rate of $2,612.
The base rates includes anesthesia and sedation, equipment and supplies
necessary for the procedure, but does not include the treating physician's
professional fee. The base rate is subject to adjustment for various
hospital-specific factors. The General Partner believes the lower reimbursement
rate will be implemented in the latter half of the year 2000. In some cases,
reimbursement rates payable to Affiliates of the General Partner are less than
the proposed HCFA rate.
The General Partner retains the discretion to, in the future,
make the Mobile Lithotripsy System available at ambulatory surgery centers.
Medicare does not currently reimburse for lithotripsy procedures provided at
ambulatory surgery centers. However, HCFA issued proposed rules in June, 1998
which include lithotripsy among those procedures provided at ambulatory surgery
centers 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. The June 1998
proposed rules assign a Medicare reimbursement rate of $2,107 if the lithotripsy
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 customary
charge for the procedure currently being charged by the Partnership. Medicare
reimbursement is not be expected to constitute a majority of the Partnership's
revenues. However, the Medicare program has historically influenced the setting
of reimbursement standards by commercial insurers. Therefore, reduced rates of
Medicare reimbursement for lithotripsy services may result in lower payments by
commercial insurers for the same services. As was discussed previously,
competitive pressures from health maintenance organizations and other managed
care companies has in some cases already resulted in decreasing reimbursement
rates from commercial insurers. See "Risk Factors - Operating Risks - Impact of
Insurance Reimbursement." No assurances can be given that HCFA will not seek to
reduce its proposed reimbursement rates even more to avoid paying more than
commercial insurers. The General Partner anticipates that reimbursement for
lithotripsy procedures, and therefore overall Partnership revenues, may continue
to decline.
The physician service (Part B) Medicare reimbursement for
renal lithotripsy is determined using Resource Based-Relative Value Scales
("RB-RVS"). The system includes limitations on future physician reimbursement
increases tied to annual expenditure targets legislated annually by Congress or
set based upon recommendation of the Secretary of the U.S. Department of Health
and Human Services. Medicare has in the past, with regard to other Part B
services such as cataract implant surgery, imposed significant reductions in
reimbursement based upon changes in technology. HCFA has produced a lengthy
report whose conclusion is that professional fees for lithotripsy are
overvalued. Thus, potential future decreases in reimbursement must be considered
probable.
The Medicaid programs in South Carolina and North Carolina 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 South Carolina and North
Carolina currently provide reimbursement for lithotripsy services. The federal
Personal Responsibility and Work Opportunity Reconciliation Act of 1996 requires
state health plans, such as the South Carolina and North Carolina Medicaid
programs, 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 Medicaid programs in
South Carolina or North Carolina have taken or will take such steps.
Self-Referral Restrictions. Health care entities which seek
reimbursement for services covered by Medicare or Medicaid are subject to
federal regulation restricting referrals by certain physicians or their family
members. Congress has passed legislation prohibiting physician self-referral of
patients for "designated health services," which include inpatient and
outpatient hospital services (42 U.S.C. ss. 1395nn) ("Xxxxx 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 Xxxxx II.
Following the passage of the Xxxxx II legislation effective
January 1, 1995, the General Partner determined that the statute would not apply
to the type of lithotripsy services provided by the Partnership. Xxxxx II
applies only to ownership interests directly or indirectly in the entity that
"furnishes" the designated health care service. The physician-investors and the
Partnership will not have an ownership interest in any provider hospitals which
offer the lithotripsy services to the patients on an inpatient or outpatient
basis. See 42 U.S.C. ss. 1395nn(a)(1)(A). Thus, by referring a patient to a
hospital offering the service, the physician-investors will not be making a
referral to an entity in which they maintain an ownership interest for purposes
of the application of Xxxxx II.
This interpretation adopted by the General Partner was
consistent with the informal view of those representatives of the Health Care
Financing Administration responsible for regulatory guidance concerning Xxxxx
II. Based upon this reasonable interpretation of Xxxxx II, by referring a
patient to a hospital furnishing the outpatient lithotripsy services "under
arrangements" with the Partnership, a physician investor in the Partnership is
not making a referral to an entity (the hospital) in which he or she has an
ownership interest.
On January 9, 1998, HCFA published proposed regulations
interpreting the Xxxxx II statute (the "Proposed Xxxxx II Regulations"). The
Proposed Xxxxx II Regulations and HCFA's accompanying commentary would apply the
physician referral prohibitions of Xxxxx II to the Partnership's contracts for
provision of the Mobile Lithotripsy System. Under the Proposed Xxxxx II
Regulations, physician Limited Partner referrals of Medicare and Medicaid
patients to hospitals contracting with the Partnership would be prohibited
because the Partnership is regarded as an entity that "furnishes" inpatient and
outpatient hospital services. The General Partner cannot predict when final
regulations will be issued or the substance of the final regulations, but the
interpretive provisions of the Proposed Xxxxx II Regulations may be viewed as
HCFA's interim position until final regulations are issued. If the Proposed
Xxxxx II Regulations are adopted as final (or, in the meantime, if a reviewing
court adopted their reasoning as the proper interpretations of the Xxxxx II
statute), then the Partnership's operations would not be in compliance with
Xxxxx II, as Limited Partners would have an ownership interest in an entity to
which they referred patients.
HCFA acknowledges in its commentary to the Proposed Xxxxx 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. The General Partner will continue to work
through the American Lithotripsy Society 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 Xxxxx II Regulations and accompanying HCFA commentary, and explore
other alternative plans of operations that would allow the Partnership to
operate in compliance with Xxxxx II and its final regulations.
HCFA's adoption of the current Proposed Xxxxx II Regulations
as final or a reviewing court's interpretation of the Xxxxx II statute in
reliance on the Proposed Xxxxx II Regulations and in a manner adverse to the
Partnership operations would mean that the Partnership and its physician Limited
Partners would be in violation of Xxxxx II. In such circumstance, it is possible
the Partnership may be given the opportunity to restructure its operations to
bring them into compliance. The Partnership and/or the physician Limited
Partners may not be permitted the opportunity to restructure operations and
thereby avoid an obligation to refund any amounts collected from Medicare and
Medicaid patients in violation of the statute. Further, under these
circumstances the Partnership and physician Limited Partners may be assessed
with substantial civil monetary penalties and/or exclusion from providing
services reimbursed by Medicare and Medicaid.
Two bills are currently pending in Congress which would modify
the reach of the Xxxxx II self-referral prohibition. One (H.R. 2650) was
introduced by Representative Xxxxx, the other (H.R. 2651) by House Ways and
Means health subcommittee chair Representative Xxxx Xxxxxx. The Xxxxx xxxx would
modify, and the Xxxxxx xxxx would repeal, the ban on physicians who have
compensation arrangements with entities to which they refer patients. However,
neither bill, nor any other bill pending in Congress, would substantively modify
the regulation of referrals of physicians with ownership interests. Thus,
neither bill would affect the Partnership's analysis of the potential impact of
Xxxxx II on this Offering discussed above.
Xxxxx 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 receive cash Distributions from the Partnership. Since
some of the Limited Partners are 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. x. Xxxxxx,
760 F.2d 68 (1985). The Xxxxxx case was followed by the United States Court of
Appeals for the Ninth Circuit, U.S. x. Xxxx, 871 F.2d 105 (9th Cir. 1989), and
cited favorably by the First Circuit in U.S. v. Bay State Ambulance and Hospital
Rental Service, Inc., 874 F.2d 20 (1st Cir. 1989).
The OIG has indicated that it is giving increased scrutiny to
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. This Offering and the business
of the Partnership do not comply with any Safe Harbor.
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 fee that are generated from the
referral may warrant protection. HCFA stated that its primary concern regarding
the above referral situation was the investing physician's ability to profit
from any diagnostic testing that is generated from the services he or she
performs. The General Partner believes the potential for overutilization posed
by referrals for diagnostic services is not present to the same degree with
therapeutic services such as lithotripsy where the necessity for the treatment
can be objectively determined; i.e., a renal stone can be definitely determined
before treatment.
The applicability of the Anti-Kickback Statute to physician
investments in health care businesses to which they refer patients and which do
not qualify for a Safe Harbor has not been the focus of many court decisions,
and therefore, judicial guidance is limited. In the only case in which the OIG
has attempted to exercise the civil exclusion remedy in the context of a
physician-owned joint venture, The Hanlester Network, et al. v. Shalala, the
Ninth Circuit for the United States Court of Appeals (the "Court") held that the
Anti-Kickback Statute is violated when a person or entity (a) knows that the
statute prohibits offering or paying remuneration to induce referrals and (b)
engages in prohibited conduct with the specific intent to violate the law.
Although the Court upheld a lower court ruling that the joint venture in
question violated the Anti-Kickback Statute vicariously through the knowing and
willful actions of one of its agents, who was acting outside the parameters of
the joint venture's offering documents, the Court concluded there was not
sufficient evidence indicating that a return on investment to physicians or
other investors in the joint venture could on its own constitute an "offer or
payment" of remuneration to make referrals. The Court also stated that since
profit distributions in Hanlester were made based on each investor's ownership
share and not on the volume of referrals, the fact that large referrals by
investors would result in potentially high investment returns did not, standing
alone, cause a violation of the Anti-Kickback Statute.
The Health Insurance Portability and Accessability Act of 1996
directed the OIG to respond to requests for advisory opinions regarding the
effect of the Anti-Kickback Statute on proposed business transactions. The
General Partner has not requested the OIG to review this Offering and, to the
best knowledge of the General Partner, the OIG has not been asked by anyone to
review offerings of this type. Federal regulatory authorities could take the
position in future advisory opinions that business transactions similar to this
Offering are a means to illegally influence the referral patterns of the
prospective physician Limited Partners. Because there is no legal precedent
interpreting circumstances identical to these facts, it is not possible to
predict how this issue would be resolved if litigated.
Whenever an offering of ownership interests is made available
to persons with the potential to refer patients for services, there is a
possibility that the OIG, HCFA or other government agencies or officials may
question whether the ownership interests are being provided in return for or to
induce referrals by the new owners. Remuneration, which government officials
have said can include the provision of an opportunity to invest in a facility to
which a person refers patients for services, 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 Limited Partners for any
referrals of patients (including the requirement that all distributions of
earnings to Limited Partners be made in proportion to their investment
interest), the Partnership's utilization review and quality assurance programs,
the fact that lithotripsy is a therapeutic treatment the need of which can be
objectively determined, and the existence in the General Partner's view of valid
business reasons to engage in this transaction, form the basis in part of the
General Partner's belief that this Offering is appropriate.
The General Partner of the Partnership intends for all
business activities and operations of the Partnership to conform in all respects
with all applicable anti-kickback statutes (federal or state). The General
Partner does not believe that the Partnership's proposed operations violate the
Anti-Kickback Statute. No assurance can be given, however, that the proposed
activities of the Partnership will not be reviewed and challenged by regulatory
authorities empowered to do so, or that if challenged, the Partnership will
prevail.
If the activities of the Partnership were determined to
violate these provisions, the Partnership, the General Partner, officers and
directors of the General Partner, and each Limited Partner could be subject,
individually, to substantial monetary liability, felony prison sentences and/or
exclusion from participation in Medicare, Medicaid and CHAMPUS. A prospective
Limited Partner with questions concerning these matters should seek advice from
his or her own legal counsel.
False Claims Statutes. Federal laws governing reimbursement
for medical services generally prohibit an individual or entity from knowingly
and willfully presenting a claim (or causing a claim to be presented) for
payment from Medicare, Medicaid or other third party payors that is false or
fraudulent. The standard for "knowing and willful" includes conduct that amounts
to a reckless disregard for whether accurate information is presented by claims
processors. Penalties under these statutes include substantial civil and
criminal fines, exclusion from the Medicare program and imprisonment. One of the
most prominent of these laws is the federal False Claims Act, which may be
enforced by the federal government directly, or by a qui tam private plaintiff
on the government's behalf. Under the federal False Claims Act, both the
government and the private plaintiff, if successful, are permitted to recover
substantial monetary penalties and judgments, as well as an amount equal to
three times actual damages. In recent cases, some qui tam plaintiffs have taken
the position that violations of the Anti-Kickback Statute (discussed above) and
Xxxxx II (discussed above) should also be prosecuted as violations of the
federal False Claims Act. The Partnership cannot assure that the government, or
a reviewing court, would not take the position that billing errors, employee
misconduct or violations of other federal statutes, should they occur, are
violations of the federal False Claims Act or similar statutes.
New Legislation. Two bills currently pending in Congress which
would amend or repeal the compensation provisions of the Xxxxx II law were
discussed above in the disclosures related to self-referral restrictions. The
General Partner is not aware of any other bill currently before Congress which,
if enacted into law, would have an adverse effect on the Partnership's
operations in a fashion similar to the Xxxxx II and the Anti-Kickback laws
discussed above. In the event that legislation is enacted which, in the opinion
of the General Partner, would adversely affect the operation of the
Partnership's business, the General Partner is obligated either to purchase the
Partnership Interests of all the Limited Partners or to dissolve the
Partnership. See "Summary of the Partnership Agreement - Optional Purchase of
Limited Partner Interests."
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
Affiliate, including the Partnership.
Ethical Considerations. The American Medical Association's
Code of Medical Ethics states that physicians should not refer patients to
facilities in which they have an ownership interest unless such physician
directly provides care or services to such patient at the facility. Because
physician investors will be providing lithotripsy services, the General Partner
believes that an investment by a physician will not be in violation of the
American Medical Association's Code of Medical Ethics. In the event that the
American Medical Association changes its ethical code to preclude such referrals
by physicians and such ethical requirements are applied to facilities or
services which, at the time of adoption, are owned in whole or in part by
referring physicians, the Partnership and the interests of the Limited Partners
may be adversely affected.
State Regulation
South Carolina. The South Carolina Certificate of Need and
Health Facility Licensure Act requires a certificate of need ("CON") to acquire
medical equipment if the total project cost exceeds $600,000. However, this
requirement did not take effect until 1993, and the Partnership's Mobile
Lithotripsy System was acquired and services at hospitals were initiated before
1993. Accordingly, to the best knowledge of the General Partner, the
Partnership's lithotripsy services are not subject to CON requirements, having
been "grandfathered in" under the existing law. If in the future the Partnership
enters into any new Hospital Contracts, a new CON would possibly be required. By
requiring a CON for the acquisition of medical equipment where the total project
cost exceeds $600,000, South Carolina's CON law favors existing providers such
as the Partnership. The General Partner can give no assurance that the South
Carolina CON law will continue to favor the Partnership's Mobile Lithotripsy
System in the Service Area. Any amendments, adjustments or modifications to the
CON law could adversely affect the Partnership. Other states have recently
repealed CON laws or permitted CON laws to expire, and the General Partner can
give no assurance that such South Carolina will not repeal its CON law or allow
its CON law to expire, which could adversely affect the Partnership.
A South Carolina statute requires licensure of freestanding or
mobile technology. However, the Division of Health Licensing of the South
Carolina Department of Health and Environmental Control has never enforced this
statutory licensure requirement, issued regulations or implemented the statute
in any way. The General Partner is monitoring the status of this issue, and if
the mobile technology licensure requirement should ever be implemented or
enforced, the General Partner will seek to ensure the Partnership's Mobile
Lithotripsy System becomes licensed if required.
South Carolina's Provider Self-Referral Act of 1993 generally
prohibits physicians from referring patients to entities in which the physician
has an ownership interest. However, there is an exception if the physician
"directly provides the health care services within the entity or will be
personally involved in the provision, supervision, or direction of care to the
referred patient." Accordingly, physician Limited Partners who are licensed in
South Carolina must treat their own patients.
The Provider Self-Referral Act of 1993 also contains an
anti-kickback prohibition. It prohibits paying or receiving kickbacks for
referring or soliciting patients, and is similar to the federal Anti-Kickback
Statute discussed above. For the same reasons the General Partner believes the
federal Anti-Kickback Statute is not violated by this Offering or by the
business of the Partnership, the General Partner believes the South Carolina
anti-kickback prohibition is not violated. South Carolina prohibits unlicensed
persons from practicing medicine, and prohibits licensed physicians from
assisting unlicensed persons to practice medicine. As all lithotripsy services
will be provided by or under the direction of licensed physicians, the General
Partner does not believe these prohibitions will be violated.
In 1999, the South Carolina legislature enacted the Medical
Radiation Health and Safety Act. Beginning in the year 2000, radiologic
technologists must be certified by a state regulatory agency (which as of the
date of this Offering has not been established). Radiologic technologists who
are certified by the American Registry of Radiologic Technologists will qualify
for state certification. The General Partner will ensure that radiologic
technologists who are employed by or provide services for the Partnership and
its patients meet the state certification requirement.
North Carolina. North Carolina requires a certificate of need
("CON") to acquire lithotripters and initiate lithotripsy services. However, the
CON requirement did not take effect until 1993, and the Partnership began
providing services at the four hospitals it serves in North Carolina before
1993. Therefore, the Partnership did not need a CON to commence or continue
providing lithotripsy services at these hospitals. If in the future the
Partnership enters into any new Hospital Contracts, a new CON would possible be
required. For the same reasons discussed above with regard to the South Carolina
CON law, any amendments, adjustments or modifications to the North Carolina CON
law could adversely affect the Partnership.
North Carolina law regulates referrals by physicians to
entities in which the physicians are investors. Such referrals are generally
prohibited. However, there is an exception if the patient is referred for a
service which is provided by, or under the personal supervision of, the
referring physician or by a member of the referring physician's group practice.
Therefore, physicians who are Limited Partners must treat their own patients, or
have a member of their group practice treat their patients.
Kickbacks are prohibited under North Carolina law. Licensed
health care providers (including physicians) are prohibited from paying or
receiving compensation for referring patients. For the same reasons the General
Partner believes the federal Anti-Kickback Statute (discussed above) is not
violated by this Offering or by the business of the Partnership, the General
Partner believes the North Carolina anti-kickback prohibition is not violated.
Among these reasons include the facts that the Partnership bills only for
technical and not professional fees (which are the responsibility of the
treating physician), and that the Partnership's distributions of profits are
based strictly on investors' ownership interests (and not on the basis of
referrals of services provided by the Partnership).
The North Carolina Medical Board has issued a policy statement
in which it condemns fee-splitting. Fee splitting, according to the North
Carolina Medical Board, is the receipt of money in return for referrals. The
General Partner believes the Partnership does not violate (and does not ask its
physician Limited Partners to violate) the Medical Board's policy statement.
Except for the initial capital contribution, there is no payment by a physician
to the General Partner or the Partnership. As discussed in the preceding
paragraph, payments by the Partnership to physician Limited Partners are based
solely on the percentage of investment interest they have in the Partnership. A
bill was introduced in the 1999 session of the North Carolina General Assembly
which would codify the Medical Board's policy against fee-splitting. The bill
did not pass, but it may be considered again in the 2000 session.
To the best knowledge of the General Partner, no licensure of
the Mobile Lithotripsy System as a health care facility is required in North
Carolina. Rather, the lithotripsy services are regulated under the state's
oversight of the relevant Contract Hospital. Registration of the x-ray unit in
the Mobile Lithotripsy System is required under North Carolina law.
The Partnership has been complying and will seek to continue
to comply with all applicable statutory and regulatory requirements. Further
regulations may be imposed in South Carolina or North Carolina 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 approximately 450 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 and contracting with payors, hospitals and
surgery centers, while medical care is rendered by urologists utilizing the
lithotripters. Prime has an economic interest in 55 mobile and seven 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
twelve acquisitions with interests in 62 lithotripters and development of five
lithotripters. In April 1996, Prime acquired the General Partner. The General
Partner and its Affiliates operate 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 37,000, or approximately 19.5%,
of the estimated 190,000 lithotripsy procedures performed in the United States
in 1998. Approximately 2,300 urologists utilized Prime and the General Partner's
lithotripters in 1998, representing approximately 30% of the estimated 7,700
urologists in the United States.
Prime manages the operations of 62 of its 67 lithotripters.
All of its lithotripters are operated in connection with hospitals or surgery
centers. Prime operates its lithotripters primarily through subsidiaries which
act as the general partner of a limited partnership, 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 48 of its 67 operations.
Prime's lithotripters generally range in age from one to
twelve years. Of its 67 lithotripters, 60 are mobile units mounted in
tractor-trailers or self-contained coaches serving locations in 34 states. Prime
also operates seven 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 150,000
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.
[The remainder of this page is intentionally left blank.]
SOURCES AND APPLICATIONS OF FUNDS
The following table sets forth the funds expected to be
available to the Partnership from this Offering if all 40 Units are sold and
other sources and their anticipated and estimated uses.
----------------------------- --------------------------------------------------
Sources of Funds Sale of 40 Units
Offering Proceeds(1) $ 500,880 (100.00%)
--------- ---------
TOTAL SOURCES $ 500,880 (100.00%)
========= =========
Application of Funds
Syndication Costs(2) $ 33,000 (6.59%)
Distributions(3) $ 467,880 (93.41%)
--------- - --------
TOTAL APPLICATIONS $ 500,880 (100.00%)
========= =========
----------------------------- --------------------- ----------------------------
Notes to Sources and Applications of Funds Table
(1) Assumes 40 Units are purchased by qualified investors.
(2) Includes $4,000 in commissions payable to the Sales Agent,
reimbursement of $4,000 to the Sales Agent for out-of-pocket expenses
incurred in selling the Units and $25,000 in legal and accounting costs
associated with the preparation of this Memorandum.
(3) After payment of Offering costs and expenses (up to $33,000), it is
anticipated that the Partnership will distribute the remaining proceeds
to the persons who were Limited Partners of the Partnership prior to
the commencement of this Offering.
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, 1996, December 31, 1997 and December 31, 1998 and the nine-month
period ended September 30, 1999, (ii) Balance Sheets as of December 31, 1996,
December 31, 1997, December 31, 1998 and September 30, 1999, (iii) Cash Flow
Statements for the years December 31, 1996, December 31, 1997 and December 31,
1998 and the nine-month period ended September 30, 1999 and (iv) Statements of
Partner's Equity for the years ended December 31, 1996, December 31, 1997 and
December 31, 1998 and the nine-month period ended September 30, 1999.
Past financial performance is not necessarily indicative of
future performance. There is no assurance that the Partnership will be able to
maintain its current revenues or earnings.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF THE RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999 and September 30, 1998
Revenues. Total revenues increased $521,073 (21%) for the nine
months ended September 30, 1999 compared to the same period in 1998 primarily
due to a 3% increase in the number of procedures performed and a decrease in the
estimate of the beginning of year allowance for contractual adjustments due to
the availability of improved information.
Operating Expenses. Operating expenses decreased by $148,819
(21%) for the nine months ended September 30,1999 compared to the same period in
1998. This decrease is due primarily to lower depreciation and amortization
expense, which declined by $134,575 due to the majority of the partnership's
equipment being fully depreciated in 1999.
Other Income (Expenses). Total other income (expense), net decreased by
$7,067 (40%) due to a decrease in interest income.
Year Ended December 31, 1998 and December 31, 1997
Revenues. Total revenues increased $52,481 (2%) for the year
ended December 31, 1998 compared to the same period in 1997 related to a 1%
decrease in the number of procedures performed, and a 2% increase in revenue per
case.
Operating Expenses. Operating expenses decreased by $63,731
(6%) for the year ended December 31, 1998 compared to the same period in 1997,
due to a decrease of $49,891 in overhead allocation related to the decline in
overhead costs incurred by Litho and a $19,984 decline in equipment maintenance
and repair, which declined due to the renegotiation of the equipment service
contracts.
Other Income (Expenses). Total other income (expense), net increased by
$2,313 (10%) due to the increase in interest income.
Year Ended December 31, 1997 and December 31, 1996
Revenues. Total revenues increased $96,846 (3%) for the year
ended December 31, 1997 compared to the same period in 1996 related to a 7%
increase in the number of procedures performed, and a 4% decrease in revenue per
case.
Operating Expenses. Operating expenses increased by $20,810
(2%) for the year ended December 31, 1997 compared to the same period in 1996,
due to an increase of $23,265 in depreciation and amortization expense related
to equipment acquired in December 1996.
Other Income (Expense). Total other income (expense), net decreased by
$11,389 (34%) due to the decrease 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 $12,522 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 Partner
Loans." No Limited Partner will have any liability for the debts and obligations
of the Partnership by reason of being a Limited Partner except to the extent of
(i) his 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 to the extent that, after giving effect to the Distribution, all
liabilities of the Partnership, other than liabilities to parties on account of
their Partnership Interests, exceed the fair value of the Partnership assets as
provided by the Act or other applicable law. See "Risk Factors - Other
Investment Risks - Limited Partners' Obligation to Return Certain
Distributions." See also Form of Legal Opinion of Xxxxxx Xxxxxxx Xxxxxxxxx &
Xxxx, a Professional Limited Liability Company, attached hereto as Appendix C.
Profits, Losses and Distributions
The following is a Summary of certain provisions of the
Partnership Agreement relating to the allocation and distribution of the
Profits, Losses, Partnership Cash Flow, Partnership Refinancing Proceeds,
Partnership Sales Proceeds, and cash upon dissolution of the Partnership.
Because an understanding of the defined financial terms is essential to an
evaluation of the information presented below, Investors should carefully review
the definitions of the terms appearing in the Glossary.
1. Allocations of Profits and Losses.
(a) General. Generally, Profits and Losses, if any, for each
Year of the Partnership will be allocated proportionately among the Partners
based on their respective Percentage Interests in the Partnership; provided that
New Limited Partners will be allocated only Profits and Losses that accrue after
the date of their admission to the Partnership as Limited Partners.
(b) Allocations. Net gains and net losses from Capital
Transactions (a part of Profits and Losses), if any, shall be allocated first.
Each Partner will receive his pro rata share of Profits and Losses based upon
the number of days such Partner was a member of the Partnership during the Year
of the Partnership. Notwithstanding the foregoing, the Partnership's "allocable
cash basis items," as that term is used in Section 706(d)(2)(B) of the Code,
will be allocated as required by Section 706(d)(2) of the Code and the treasury
regulations promulgated thereunder.
(c) Qualified Income Offset. If any Limited Partner
unexpectedly receives an adjustment, allocation or distribution as described in
Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4) through (6) that causes such
Limited Partner to have a deficit Capital Account balance, such Limited Partner
will be allocated items of income and gain in an amount and manner sufficient to
eliminate such deficit balance as quickly as possible. This provision is
intended to be a "qualified income offset" as defined in Regulation Section
1.704-1(b)(2)(ii)(d).
2. Distributions.
(a) Non-liquidation Distributions. Partnership Cash Flow for
each Year of the Partnership, to the extent available, will be distributed
within 60 days after the end of each Year of the Partnership, or earlier in the
discretion of the General Partner, proportionately among the Partners based on
their respective Percentage Interests in the Partnership at the time of
distribution. Partnership Sales Proceeds and Partnership Refinancing Proceeds
will be distributed within 60 days of the Capital Transaction giving rise to
such proceeds, or earlier in the discretion of the General Partner,
proportionately among the Partners based on their respective Percentage
Interests in the Partnership as of the date of the Capital Transaction giving
rise to such proceeds. The New Limited Partners have no rights to receive any
distributions in the future that are made out of the Initial Limited Partners'
and the General Partner's accrued but undistributed Partnership Cash Flow as of
the date the New Limited Partners are admitted to the Partnership. New Limited
Partners will be entitled only to Partnership Cash Flow that accrues after the
date of their admission to the Partnership as Limited Partners
(b) Distribution Upon Dissolution. Upon the dissolution and
termination of the Partnership, the General Partner or, if there is none, a
representative of the Limited Partners, will liquidate the assets of the
Partnership. The proceeds of such liquidation will be applied and distributed in
the following order of priority: (a) first, to the payment of the debts and
liabilities of the Partnership, and the expenses of liquidation; (b) second, to
the creation of any reserves which the General Partner or the representative of
the Limited Partners may deem reasonably necessary for the payment of any
contingent or unforeseen liabilities or obligations of the Partnership or of the
General Partner arising out of or in connection with the business and operation
of the Partnership; and (c) third, the balance, if any, will be distributed to
the Partners in accordance with the Partners' positive capital account balances.
Any General Partner with a negative capital account following the distribution
of liquidation proceeds or the liquidation of its interest must contribute to
the Partnership an amount equal to such negative capital account on or before
the end of the Partnership's taxable year (or, if later, within ninety days
after the date of liquidation). Any capital so contributed shall be (i)
distributed to those Partners with positive capital accounts until such capital
accounts are reduced to zero, and/or (ii) used to discharge recourse
liabilities.
(c) Tax and Other 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. In addition, the Loan Documents authorize the Partnership to
remit certain Distributions otherwise payable to a Limited Partner party to a
Limited Partner Note directly to the Bank. See "Terms of the Offering - Limited
Partner Loans." To the extent the Partnership pays any such amounts that it may
be required to pay on behalf of a Partner, such amounts will be treated as a
cash Distribution to such Partner and will reduce the amount otherwise
distributable to him.
Management of the Partnership
The General Partner has the sole right to manage the business
of the Partnership and at all times is required to exercise its responsibilities
in a fiduciary capacity. The consent of the Limited Partners is not required for
any sale or refinancing of the Mobile Lithotripsy System, 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
1. General. The General Partner may, in its absolute
discretion, borrow money, acquire, encumber, hold title to, pledge, sell,
release or otherwise dispose of, all or any part of the Partnership's assets,
when and upon such terms as it determines to be in the best interest of the
Partnership, 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 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 Partnership
Agreement or which would make it impossible to carry on the ordinary business of
the Partnership.
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 to the extent 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 Partnership assets as provided by the Act. See "Risk Factors -
Other Investment Risks - Limited Partners' Obligation to Return Certain
Distributions."
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 the 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 the
Partnership Interest who has not been admitted to the Partnership as a Partner
will 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, and the sale of his or her Limited Partnership
Interest may constitute an event of default under any outstanding Limited
Partner Loan.
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 South Carolina
would cause a dissolution.
The retirement, resignation, bankruptcy, assignment for the
benefit of creditors, dissolution, death, disability or legal incapacity of a
general partner will not, however, result in a termination of the Partnership if
the remaining general partner or general partners, if any, elect to continue the
business of the Partnership, or if no general partner remains, if within 90 days
of the occurrence of one of such events, all of the Limited Partners elect in
writing to continue the Partnership and, if necessary, designate a new general
partner.
Upon dissolution, the General Partner or, if there is none, a
representative of the Limited Partners, will liquidate the Partnership's assets
and distribute the proceeds thereof in accordance with the priorities set forth
in the Partnership Agreement. See "Profits, Losses and Distributions -
Distributions - Distribution upon Dissolution" above and "Optional Purchase of
Limited Partner Interests" below.
Optional Purchase of Limited Partner Interests
As provided in the Partnership Agreement, the General Partner
and the Limited Partners have an option (which the General Partner may, in its
sole discretion, assign to the Partnership) 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 (or the
Partnership) 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
(or the Partnership). Except in the case of death, 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).
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 the event of the death of a
Limited Partner, the option purchase price for that Limited Partner's
Partnership Interest is an amount equal to the greater of (x) one and one-half
times the aggregate distributions made with respect to the Partnership Interest
during the twelve-month period ending the last day of the month immediately
preceding the month in which the death occurs or (y) the Limited Partner's share
of the Partnership's book value, if any, as reflected by the Capital Account of
the Limited Partner (prorated in either case in the event that only a portion of
his Partnership Interest is being purchased. 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. 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 any outstanding Limited Partner Loan
incurred by the selling Limited Partner. See "Terms of the Offering - Limited
Partner Loans."
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 Carolina and North Carolina 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 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 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
economic interests of the General Partner and the Initial Limited Partners in
the Partnership, 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 the Dilution Offering.
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 (or the Partnership) or the
Limited Partners 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 Partnership Agreement
attached hereto as Appendix A.
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 Greenville, South
Carolina in accordance with the provisions of South Carolina law.
Power of Attorney
Each Investor, by executing the Subscription Agreement,
irrevocably appoints Xx. Xxxxxx Xxxxxxx and Xxxx Xxxxx, 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 Xx. Xxxxxx Xxxxxxx, 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 are kept by
the General Partner in which are 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 businesses of
a like character. The Partnership books and records are kept according to the
accrual method of accounting. The Partnership's fiscal year is the calendar
year. The books and records are located at the office of the General Partner,
and are open to the reasonable inspection and examination of the Limited
Partners or their duly authorized representatives during normal business hours.
LEGAL MATTERS
On the Closing Date, it is expected that Xxxxxx Xxxxxxx
Xxxxxxxxx & Xxxx, a Professional Limited Liability Company, of Winston-Salem,
North Carolina, will render an opinion as to the formation and existence of the
Partnership, the status of Investors as limited partners and certain federal tax
matters, the form of which is attached as Appendix C to this Memorandum. See
"Risk Factors - Tax Risks."
ADDITIONAL INFORMATION
The Partnership will make available to you the opportunity to
ask questions of its management and to obtain information to the extent it
possesses such information or can acquire it without an unreasonable effort or
expense, which is necessary to verify the accuracy of the information contained
herein or which you or your professional advisors desire in evaluating the
merits and risks of an investment in the Partnership. Copies of certain Hospital
Contracts and insurance reimbursement agreements may not, however, be available
due to confidentiality restrictions contained therein.
GLOSSARY
Certain terms in this Memorandum shall have the following meanings:
Act. The Act means the South Carolina 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.
Bank. First-Citizens Bank & Trust Company.
----
Capital Account. The Partnership capital account of a Partner as computed
pursuant to the Partnership Agreement.
Capital Contributions. All capital contributions made by a
Partner or his predecessor in interest which shall include, without limitation,
contributions made pursuant Article VII of the Partnership Agreement.
Capital Transaction. Any transaction which, were it to generate proceeds,
would produce Partnership Sales Proceeds or Partnership Refinancing Proceeds.
Closing Date. 5:00 p.m., Eastern Time, on January 1, 2000 (or earlier) in
the discretion of the General Partner. The Closing Date may be extended for a
period of up to 180 days in the discretion of the General Partner.
Coach. The Partnership's self-propelled mobile vehicle manufactured by the
Calumet Coach Company, Calumet City, Illinois, upfitted to house a
Lithostar(TM).
Code. The Internal Revenue Code of 1986, or corresponding provisions of
subsequent, superseding revenue laws.
Contract Hospitals. The 11 hospitals and medical centers to which the
Partnership provides lithotripsy services pursuant to 11 separate Hospital
Contracts.
Counsel. Xxxxxx Xxxxxxx Xxxxxxxxx & Xxxx, 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 11 separate lithotripsy services agreements the
Partnership has entered into with the Contract Hospitals.
Initial Limited Partners. The Individuals who were Limited Partners in the
Partnership 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 up to $10,022 per Unit, the proceeds of which will be paid directly to
the Partnership. The form of the Limited Partner Note (including the Note
Addendum attached thereto) is attached as Exhibit A to the Form of Loan
Commitment which is attached hereto as Appendix B.
Limited Partners. The Limited Partners are the Initial Limited Partners.
Lithostar(TM). The Lithostar(TM)model extracorporeal shock wave
lithotripter 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 Loan Commitment which is
attached hereto as Appendix B.
Loan Documents. The Loan Commitment, the Limited Partner Note, the Loan and
Security Agreement, the Security Agreement and UCC-1, 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 System. The Coach with the installed and
operational Lithostar(TM) owned and operated by the Partnership and any other
additional or replacement lithotripter and transport vehicle.
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 Partners. 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. Fayetteville Lithotripters Limited Partnership - South
Carolina II, a South Carolina limited partnership, which owns and operates the
Mobile Lithotripsy System.
Partnership Agreement. The Partnership's Agreement of Limited Partnership,
a copy of which is attached as Exhibit A, as such may be amended from time to
time.
Partnership Cash Flow. For the applicable period the excess,
if any, of (A) the sum of (i) all gross receipts from any source for such
period, other than the Partnership loans, Capital Transactions and Capital
Contributions, and (ii) any funds released by the Partnership from previously
established reserves, over (B) the sum of (i) all cash expenses paid by the
Partnership for such period, (ii) the amount of all payments of principal on
loans to such Partnership, (iii) capital expenditures of the Partnership, and
(iv) such reasonable reserves as the General Partner shall deem necessary or
prudent to set aside for future repairs, improvements, or equipment replacement
or additions, or to meet working capital requirements or foreseen or unforeseen
future liabilities and contingencies of the Partnership; provided, however, that
the amounts referred to in (B) (i), (ii) and (iii) above shall be taken into
account only to the extent not funded by Capital Contributions, loans or paid
out of previously established reserves. Such term shall also include all other
funds deemed available for distribution and designated as "Partnership Cash
Flow" by the General Partner.
Partnership Interest. The interest of a Partner in the Partnership as
defined by the Act and the Partnership Agreement.
Partnership Minimum Gain. Gain as defined in Treasury Regulations Section
1.704-2(d).
Partnership Refinancing Proceeds. The cash realized from the
refinancing of Partnership assets after retirement of any secured loans and less
(i) payment of all expenses relating to the transaction and (ii) establishment
of such reasonable reserves as the General Partner shall deem necessary or
prudent to set aside for future repairs, improvements, or equipment replacement
or additions, or to meet working capital requirements or foreseen or unforeseen
future liabilities or contingencies of the Partnership.
Partnership Sales Proceeds. The cash realized from the sale,
exchange, casualty or other disposition of all or a portion of Partnership
assets after the retirement of all secured loans and less (i) the payment of all
expenses related to the transaction and (ii) establishment of such reasonable
reserves as the General Partner shall deem necessary or prudent to set aside for
future repairs, improvements, or equipment replacement or additions, or to meet
working capital requirements or foreseen or unforeseen future liabilities or
contingencies of the Partnership.
Percentage Interest. The interest of each Partner in the
Partnership, to be determined in the case of each Investor by reference to the
percentage oppositive his or her name set forth in Exhibit A to the Partnership
Agreement. Each Unit sold pursuant to this Offering represents an initial 0.5%
economic interest in the Partnership. The Percentage Interest will be set forth
in 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 and the Sales Agent.
Prime Rate. The rate of interest periodically established by the Bank and
identified as such in literature published and circulated within the Bank's
offices.
Pro Rata Basis. In connection with an allocation or
distribution, an allocation or distribution in proportion to the respective
Percentage Interest of the class of Partners to which reference is made.
Profit. The net income of the Partnership for each year as determined by
the Partnership for federal income tax purposes.
Qualified Income Offset Item. An adjustment, allocation or
distribution described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5) or 1.704-1(b)(2)(ii)(d)(6) unexpectedly received by a
Partner.
Sales Agent. MedTech Investments, Inc., a registered broker-dealer, member
of the National Association of Securities Dealers, Inc. and an Affiliate of
certain members of the General Partner's management personnel.
SEC. The United States Securities and Exchange Commission.
---
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 Loan Commitment which is
attached hereto as Appendix B.
Service. The Internal Revenue Service.
-------
Service Area. Northwestern South Carolina and southwestern North Carolina.
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.
Units. The 40 equal limited partner interests in the Partnership offered
pursuant to this Memorandum for a price per Unit of $12,522 in cash.
Year of the Partnership. An annual accounting period ending on December 31
of each year during the term of the Partnership.
